19–006

108TH CONGRESS REPT. 108–178 " HOUSE OF REPRESENTATIVES ! 1st Session Part 2

MEDICARE PRESCRIPTION DRUG AND MODERNIZATION 

ACT OF 2003

JULY 15, 2003.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. THOMAS, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 2473]

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 2473) to amend title XVIII of the Social Security Act to 

provide for a voluntary program for prescription drug coverage 

under the Medicare Program, to modernize the Medicare Program, 

and for other purposes, having considered the same, report favorably thereon with an amendment and recommend that the bill as 

amended do pass.

CONTENTS 

Page 

I. Introduction .................................................................................................... 144

A. Purpose and Summary .................................................................... 144

B. Background and Need for Legislation ............................................ 144

C. Legislative History ........................................................................... 147

II. Explanation of Provisions ............................................................................. 150

A. Title I—Medicare Prescription Drug Benefit ................................. 150

B. Title II—Medicare Enhanced Fee-for-Service and Medicare Advantage Programs; Medicare Competition ................................... 174

C. Title III—Combatting Waste, Fraud and Abuse ........................... 189

D. Title IV—Rural Health Care Improvements ................................. 199

E. Title V—Provisions Relating to Part A .......................................... 215

F. Title VI—Provisions Relating to Part B ......................................... 222

G. Title VII—Provisions Relating to Parts A and B .......................... 239

H. Title VIII—Medicare Benefits Administration .............................. 250

I. Title IX—Regulatory Relief .............................................................. 253

III. Votes of the Committee ................................................................................. 288

IV. Budget Effects of the Bill .............................................................................. 293

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The Congressional Budget Office has not submitted a final score 

of the legislation at the time of the filing of this report (July 

15, 2003) ..........................................................................................

V. Other Matters Required To Be Discussed Under House Rules ................. 293

A. Committee Oversight Findings and Recommendations ................ 293

B. Summary of General Performance Goals and Objectives ............. 293

C. Constitutional Authority Statement ............................................... 293

VI. Changes in Existing Law Made by the Bill, as Reported ...........................

Legislative Counsel has not prepared a Ramseyer at the time 

of the filing of this report (July 15, 2003) .................................... 294

VII. Views ............................................................................................................... 295

The amendment is as follows: 

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; AMENDMENTS TO SOCIAL SECURITY ACT; REFERENCES TO BIPA 

AND SECRETARY; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Medicare Prescription Drug and 

Modernization Act of 2003’’. 

(b) AMENDMENTS TO SOCIAL SECURITY ACT.—Except as otherwise specifically provided, whenever in this Act an amendment is expressed in terms of an amendment 

to or repeal of a section or other provision, the reference shall be considered to be 

made to that section or other provision of the Social Security Act. 

(c) BIPA; SECRETARY.—In this Act: 

(1) BIPA.—The term ‘‘BIPA’’ means the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, as enacted into law by section 

1(a)(6) of Public Law 106–554. 

(2) SECRETARY.—The term ‘‘Secretary’’ means the Secretary of Health and 

Human Services. 

(d) TABLE OF CONTENTS.—The table of contents of this Act is as follows:

Sec. 1. Short title; amendments to Social Security Act; references to BIPA and Secretary; table of contents. 

TITLE I—MEDICARE PRESCRIPTION DRUG BENEFIT 

Sec. 101. Establishment of a medicare prescription drug benefit. 

‘‘PART D—VOLUNTARY PRESCRIPTION DRUG BENEFIT PROGRAM

‘‘Sec. 1860D–1. Benefits; eligibility; enrollment; and coverage period. 

‘‘Sec. 1860D–2. Requirements for qualified prescription drug coverage. 

‘‘Sec. 1860D–3. Beneficiary protections for qualified prescription drug coverage. 

‘‘Sec. 1860D–4. Requirements for and contracts with prescription drug plan (PDP) sponsors. 

‘‘Sec. 1860D–5. Process for beneficiaries to select qualified prescription drug coverage. 

‘‘Sec. 1860D–6. Submission of bids and premiums. 

‘‘Sec. 1860D–7. Premium and cost-sharing subsidies for low-income individuals. 

‘‘Sec. 1860D–8. Subsidies for all medicare beneficiaries for qualified prescription drug coverage. 

‘‘Sec. 1860D–9. Medicare Prescription Drug Trust Fund. 

‘‘Sec. 1860D–10. Definitions; application to medicare advantage and EFFS programs; treatment of references to provisions in part C. 

Sec. 102. Offering of qualified prescription drug coverage under Medicare Advantage and enhanced fee-for-service (EFFS) program. 

Sec. 103. Medicaid amendments. 

‘‘Sec. 1935. Special provisions relating to medicare prescription drug benefit. 

Sec. 104. Medigap transition. 

Sec. 105. Medicare prescription drug discount card endorsement program. 

Sec. 106. Disclosure of return information for purposes of carrying out medicare catastrophic prescription drug 

program. 

Sec. 107. State pharmaceutical assistance transition commission. 

TITLE II—MEDICARE ENHANCED FEE-FOR-SERVICE AND MEDICARE ADVANTAGE PROGRAMS; 

MEDICARE COMPETITION 

Sec. 200. Medicare modernization and revitalization. 

Subtitle A—Medicare Enhanced Fee-for-Service Program 

Sec. 201. Establishment of enhanced fee-for-service (EFFS) program under medicare. 

‘‘PART E—ENHANCED FEE-FOR-SERVICE PROGRAM

‘‘Sec. 1860E–1. Offering of enhanced fee-for-service plans throughout the United States. 

‘‘Sec. 1860E–2. Offering of enhanced fee-for-service (EFFS) plans. 

‘‘Sec. 1860E–3. Submission of bids; beneficiary savings; payment of plans. 

‘‘Sec. 1860E–4. Premiums; organizational and financial requirements; establishment of standards; contracts 

with EFFS organizations. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM

Sec. 211. Implementation of medicare advantage program. 

Sec. 212. Medicare advantage improvements. 

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CHAPTER 2—IMPLEMENTATION OF COMPETITION PROGRAM

Sec. 221. Competition program beginning in 2006. 

CHAPTER 3—ADDITIONAL REFORMS

Sec. 231. Making permanent change in medicare advantage reporting deadlines and annual, coordinated election period. 

Sec. 232. Avoiding duplicative State regulation. 

Sec. 233. Specialized medicare advantage plans for special needs beneficiaries. 

Sec. 234. Medicare MSAs. 

Sec. 235. Extension of reasonable cost contracts. 

Sec. 236. Extension of municipal health service demonstration projects. 

Subtitle C—Application of FEHBP-Style Competitive Reforms 

Sec. 241. Application of FEHBP-style competitive reform beginning in 2010. 

TITLE III—COMBATTING WASTE, FRAUD, AND ABUSE 

Sec. 301. Medicare secondary payor (MSP) provisions. 

Sec. 302. Competitive acquisition of certain items and services. 

Sec. 303. Competitive acquisition of covered outpatient drugs and biologicals. 

Sec. 304. Demonstration project for use of recovery audit contractors. 

TITLE IV—RURAL HEALTH CARE IMPROVEMENTS 

Sec. 401. Enhanced disproportionate share hospital (DSH) treatment for rural hospitals and urban hospitals 

with fewer than 100 beds. 

Sec. 402. Immediate establishment of uniform standardized amount in rural and small urban areas. 

Sec. 403. Establishment of essential rural hospital classification. 

Sec. 404. More frequent update in weights used in hospital market basket. 

Sec. 405. Improvements to critical access hospital program. 

Sec. 406. Redistribution of unused resident positions. 

Sec. 407. Two-year extension of hold harmless provisions for small rural hospitals and sole community hospitals 

under prospective payment system for hospital outpatient department services. 

Sec. 408. Exclusion of certain rural health clinic and federally qualified health center services from the prospective payment system for skilled nursing facilities. 

Sec. 409. Recognition of attending nurse practitioners as attending physicians to serve hospice patients. 

Sec. 410. Improvement in payments to retain emergency capacity for ambulance services in rural areas. 

Sec. 411. Two-year increase for home health services furnished in a rural area. 

Sec. 412. Providing safe harbor for certain collaborative efforts that benefit medically underserved populations. 

Sec. 413. GAO study of geographic differences in payments for physicians’ services. 

Sec. 414. Treatment of missing cost reporting periods for sole community hospitals. 

Sec. 415. Extension of telemedicine demonstration project. 

Sec. 416. Adjustment to the medicare inpatient hospital PPS wage index to revise the labor-related share of 

such index. 

Sec. 417. Medicare incentive payment program improvements for physician scarcity. 

TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

Sec. 501. Revision of acute care hospital payment updates. 

Sec. 502. Recognition of new medical technologies under inpatient hospital PPS. 

Sec. 503. Increase in Federal rate for hospitals in Puerto Rico. 

Sec. 504. Wage index adjustment reclassification reform . 

Sec. 505. MedPAC report on specialty hospitals. 

Subtitle B—Other Provisions 

Sec. 511. Payment for covered skilled nursing facility services. 

Sec. 512. Coverage of hospice consultation services. 

TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services 

Sec. 601. Revision of updates for physicians’ services. 

Sec. 602. Studies on access to physicians’ services. 

Sec. 603. MedPAC report on payment for physicians’ services. 

SUBTITLE B—PREVENTIVE SERVICES

Sec. 611. Coverage of an initial preventive physical examination. 

Sec. 612. Coverage of cholesterol and blood lipid screening. 

Sec. 613. Waiver of deductible for colorectal cancer screening tests. 

Sec. 614. Improved payment for certain mammography services. 

Subtitle C—Other Services 

Sec. 621. Hospital outpatient department (HOPD) payment reform. 

Sec. 622. Payment for ambulance services. 

Sec. 623. Renal dialysis services. 

Sec. 624. One-year moratorium on therapy caps; provisions relating to reports. 

Sec. 625. Adjustment to payments for services furnished in ambulatory surgical centers. 

Sec. 626. Payment for certain shoes and inserts under the fee schedule for orthotics and prosthetics. 

Sec. 627. Waiver of part B late enrollment penalty for certain military retirees; special enrollment period. 

Sec. 628. Part B deductible. 

Sec. 629. Extension of coverage of intravenous immune globulin (IVIG) for the treatment of primary immune 

deficiency diseases in the home. 

TITLE VII—PROVISIONS RELATING TO PARTS A AND B 

Subtitle A—Home Health Services 

Sec. 701. Update in home health services. 

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Sec. 702. Establishment of reduced copayment for a home health service episode of care for certain beneficiaries. 

Sec. 703. MedPAC study on medicare margins of home health agencies. 

Subtitle B—Direct Graduate Medical Education 

Sec. 711. Extension of update limitation on high cost programs. 

Subtitle C—Chronic Care Improvement 

Sec. 721. Voluntary chronic care improvement under traditional fee-for-service. 

Sec. 722. Chronic care improvement under medicare advantage and enhanced fee-for-service programs. 

Sec. 723. Institute of Medicine report. 

Sec. 724. MedPAC report. 

Subtitle D—Other Provisions 

Sec. 731. Modifications to medicare payment advisory commission (MedPAC). 

Sec. 732. Demonstration project for medical adult day care services. 

Sec. 733. Improvements in national and local coverage determination process to respond to changes in technology. 

Sec. 734. Treatment of certain physician pathology services. 

TITLE VIII—MEDICARE BENEFITS ADMINISTRATION 

Sec. 801. Establishment of Medicare Benefits Administration. 

TITLE IX—REGULATORY REDUCTION AND CONTRACTING REFORM 

Subtitle A—Regulatory Reform 

Sec. 901. Construction; definition of supplier. 

‘‘Supplier 

Sec. 902. Issuance of regulations. 

Sec. 903. Compliance with changes in regulations and policies. 

Sec. 904. Reports and studies relating to regulatory reform. 

Subtitle B—Contracting Reform 

Sec. 911. Increased flexibility in medicare administration. 

Sec. 912. Requirements for information security for medicare administrative contractors. 

Subtitle C—Education and Outreach 

Sec. 921. Provider education and technical assistance. 

‘‘Sec. 1889. Provider education and technical assistance. 

Sec. 922. Small provider technical assistance demonstration program. 

Sec. 923. Medicare Provider Ombudsman; Medicare Beneficiary Ombudsman. 

Sec. 924. Beneficiary outreach demonstration program. 

Sec. 925. Inclusion of additional information in notices to beneficiaries about skilled nursing facility benefits. 

Sec. 926. Information on medicare-certified skilled nursing facilities in hospital discharge plans. 

Subtitle D—Appeals and Recovery 

Sec. 931. Transfer of responsibility for medicare appeals. 

Sec. 932. Process for expedited access to review. 

Sec. 933. Revisions to medicare appeals process. 

Sec. 934. Prepayment review. 

Sec. 935. Recovery of overpayments. 

Sec. 936. Provider enrollment process; right of appeal. 

Sec. 937. Process for correction of minor errors and omissions without pursuing appeals process. 

Sec. 938. Prior determination process for certain items and services; advance beneficiary notices. 

Subtitle V—Miscellaneous Provisions 

Sec. 941. Policy development regarding evaluation and management (E & M) documentation guidelines. 

Sec. 942. Improvement in oversight of technology and coverage. 

Sec. 943. Treatment of hospitals for certain services under medicare secondary payor (MSP) provisions. 

Sec. 944. EMTALA improvements. 

Sec. 945. Emergency Medical Treatment and Active Labor Act (EMTALA) technical advisory group. 

Sec. 946. Authorizing use of arrangements to provide core hospice services in certain circumstances. 

Sec. 947. Application of osha bloodborne pathogens standard to certain hospitals. 

Sec. 948. BIPA-related technical amendments and corrections. 

Sec. 949. Conforming authority to waive a program exclusion. 

Sec. 950. Treatment of certain dental claims. 

Sec. 951. Furnishing hospitals with information to compute dsh formula. 

Sec. 952. Revisions to reassignment provisions. 

Sec. 953. Other provisions. 

Sec. 954. Temporary suspension of OASIS requirement for collection of data on non-medicare and non-medicaid 

patients.

TITLE I—MEDICARE PRESCRIPTION DRUG 

BENEFIT 

SEC. 101. ESTABLISHMENT OF A MEDICARE PRESCRIPTION DRUG BENEFIT. 

(a) IN GENERAL.—Title XVIII is amended—

(1) by redesignating part D as part F; and 

(2) by inserting after part C the following new part:

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‘‘PART D—VOLUNTARY PRESCRIPTION DRUG BENEFIT PROGRAM

‘‘SEC. 1860D–1. BENEFITS; ELIGIBILITY; ENROLLMENT; AND COVERAGE PERIOD. 

‘‘(a) PROVISION OF QUALIFIED PRESCRIPTION DRUG COVERAGE THROUGH ENROLLMENT IN PLANS.—Subject to the succeeding provisions of this part, each individual 

who is entitled to benefits under part A or is enrolled under part B is entitled to 

obtain qualified prescription drug coverage (described in section 1860D–2(a)) as follows:

‘‘(1) MEDICARE-RELATED PLANS.—

‘‘(A) MEDICARE ADVANTAGE.—If the individual is eligible to enroll in a 

Medicare Advantage plan that provides qualified prescription drug coverage 

under section 1851(j), the individual may enroll in such plan and obtain 

coverage through such plan. 

‘‘(B) EFFS PLANS.—If the individual is eligible to enroll in an EFFS plan 

that provides qualified prescription drug coverage under part E under section 1860E–2(d), the individual may enroll in such plan and obtain coverage 

through such plan. 

‘‘(C) MA-EFFS PLAN; MA-EFFS RX PLAN.—For purposes of this part, the 

term ‘MA-EFFS plan’ means a Medicare Advantage plan under part C and 

an EFFS plan under part E and the term ‘MA-EFFS Rx plan’ means a MAEFFS plan insofar as such plan provides qualified prescription drug coverage. 

‘‘(2) PRESCRIPTION DRUG PLAN.—If the individual is not enrolled in a MAEFFS plan , the individual may enroll under this part in a prescription drug 

plan (as defined in section 1860D–10(a)(5)). 

Such individuals shall have a choice of such plans under section 1860D–5(d). 

‘‘(b) GENERAL ELECTION PROCEDURES.—

‘‘(1) IN GENERAL.—An individual eligible to make an election under subsection 

(a) may elect to enroll in a prescription drug plan under this part, or elect the 

option of qualified prescription drug coverage under a MA-EFFS Rx plan under 

part C or part E, and to change such election only in such manner and form 

as may be prescribed by regulations of the Administrator of the Medicare Benefits Administration (appointed under section 1809(b)) (in this part referred to 

as the ‘Medicare Benefits Administrator’) and only during an election period 

prescribed in or under this subsection. 

‘‘(2) ELECTION PERIODS.—

‘‘(A) IN GENERAL.—Except as provided in this paragraph, the election periods under this subsection shall be the same as the coverage election periods under the Medicare Advantage and EFFS programs under section 

1851(e), including—

‘‘(i) annual coordinated election periods; and 

‘‘(ii) special election periods. 

In applying the last sentence of section 1851(e)(4) (relating to discontinuance of an election during the first year of eligibility) under this subparagraph, in the case of an election described in such section in which the individual had elected or is provided qualified prescription drug coverage at the 

time of such first enrollment, the individual shall be permitted to enroll in 

a prescription drug plan under this part at the time of the election of coverage under the original fee-for-service plan. 

‘‘(B) INITIAL ELECTION PERIODS.—

‘‘(i) INDIVIDUALS CURRENTLY COVERED.—In the case of an individual 

who is entitled to benefits under part A or enrolled under part B as 

of October 1, 2005, there shall be an initial election period of 6 months 

beginning on that date. 

‘‘(ii) INDIVIDUAL COVERED IN FUTURE.—In the case of an individual 

who is first entitled to benefits under part A or enrolled under part B 

after such date, there shall be an initial election period which is the 

same as the initial enrollment period under section 1837(d). 

‘‘(C) ADDITIONAL SPECIAL ELECTION PERIODS.—The Administrator shall establish special election periods—

‘‘(i) in cases of individuals who have and involuntarily lose prescription drug coverage described in subsection (c)(2)(C); 

‘‘(ii) in cases described in section 1837(h) (relating to errors in enrollment), in the same manner as such section applies to part B; 

‘‘(iii) in the case of an individual who meets such exceptional conditions (including conditions provided under section 1851(e)(4)(D)) as the 

Administrator may provide; and 

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‘‘(iv) in cases of individuals (as determined by the Administrator) who 

become eligible for prescription drug assistance under title XIX under 

section 1935(d). 

‘‘(3) INFORMATION ON PLANS.—Information described in section 1860D–3(b)(1) 

on prescription drug plans shall be made available during election periods. 

‘‘(c) GUARANTEED ISSUE; COMMUNITY RATING; AND NONDISCRIMINATION.—

‘‘(1) GUARANTEED ISSUE.—

‘‘(A) IN GENERAL.—An eligible individual who is eligible to elect qualified 

prescription drug coverage under a prescription drug plan or MA-EFFS Rx 

plan at a time during which elections are accepted under this part with respect to the plan shall not be denied enrollment based on any health statusrelated factor (described in section 2702(a)(1) of the Public Health Service 

Act) or any other factor. 

‘‘(B) MEDICARE ADVANTAGE LIMITATIONS PERMITTED.—The provisions of 

paragraphs (2) and (3) (other than subparagraph (C)(i), relating to default 

enrollment) of section 1851(g) (relating to priority and limitation on termination of election) shall apply to PDP sponsors under this subsection. 

‘‘(2) COMMUNITY-RATED PREMIUM.—

‘‘(A) IN GENERAL.—In the case of an individual who enrolls under a prescription drug plan or in a MA-EFFS Rx plan during the individual’s initial 

enrollment period under this part or maintains (as determined under subparagraph (C)) continuous prescription drug coverage since the date the individual first qualifies to elect prescription drug coverage under this part, 

a PDP sponsor or entity offering a prescription drug plan or MA-EFFS Rx 

plan and in which the individual is enrolled may not deny, limit, or condition the coverage or provision of covered prescription drug benefits or vary 

or increase the premium under the plan based on any health status-related 

factor described in section 2702(a)(1) of the Public Health Service Act or 

any other factor. 

‘‘(B) LATE ENROLLMENT PENALTY.—In the case of an individual who does 

not maintain such continuous prescription drug coverage (as described in 

subparagraph (C)), a PDP sponsor or an entity offering a MA-EFFS Rx plan 

may (notwithstanding any provision in this title) adjust the premium otherwise applicable or impose a pre-existing condition exclusion with respect to 

qualified prescription drug coverage in a manner that reflects additional actuarial risk involved. Such a risk shall be established through an appropriate actuarial opinion of the type described in subparagraphs (A) through 

(C) of section 2103(c)(4). 

‘‘(C) CONTINUOUS PRESCRIPTION DRUG COVERAGE.—An individual is considered for purposes of this part to be maintaining continuous prescription 

drug coverage on and after the date the individual first qualifies to elect 

prescription drug coverage under this part if the individual establishes that 

as of such date the individual is covered under any of the following prescription drug coverage and before the date that is the last day of the 63-

day period that begins on the date of termination of the particular prescription drug coverage involved (regardless of whether the individual subsequently obtains any of the following prescription drug coverage): 

‘‘(i) COVERAGE UNDER PRESCRIPTION DRUG PLAN OR MA-EFFS RX

PLAN.—Qualified prescription drug coverage under a prescription drug 

plan or under a MA-EFFS Rx plan. 

‘‘(ii) MEDICAID PRESCRIPTION DRUG COVERAGE.—Prescription drug coverage under a medicaid plan under title XIX, including through the 

Program of All-inclusive Care for the Elderly (PACE) under section 

1934, through a social health maintenance organization (referred to in 

section 4104(c) of the Balanced Budget Act of 1997), or through a demonstration project under part C that demonstrates the application of 

capitation payment rates for frail elderly medicare beneficiaries 

through the use of an interdisciplinary team and through the provision 

of primary care services to such beneficiaries by means of such a team 

at the nursing facility involved. 

‘‘(iii) PRESCRIPTION DRUG COVERAGE UNDER GROUP HEALTH PLAN.—

Any outpatient prescription drug coverage under a group health plan, 

including a health benefits plan under the Federal Employees Health 

Benefit Plan under chapter 89 of title 5, United States Code, and a 

qualified retiree prescription drug plan as defined in section 1860D–

8(f)(1), but only if (subject to subparagraph (E)(ii)) the coverage provides benefits at least equivalent to the benefits under a qualified prescription drug plan. 

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‘‘(iv) PRESCRIPTION DRUG COVERAGE UNDER CERTAIN MEDIGAP POLICIES.—Coverage under a medicare supplemental policy under section 

1882 that provides benefits for prescription drugs (whether or not such 

coverage conforms to the standards for packages of benefits under section 1882(p)(1)), but only if the policy was in effect on January 1, 2006, 

and if (subject to subparagraph (E)(ii)) the coverage provides benefits 

at least equivalent to the benefits under a qualified prescription drug 

plan. 

‘‘(v) STATE PHARMACEUTICAL ASSISTANCE PROGRAM.—Coverage of prescription drugs under a State pharmaceutical assistance program, but 

only if (subject to subparagraph (E)(ii)) the coverage provides benefits 

at least equivalent to the benefits under a qualified prescription drug 

plan. 

‘‘(vi) VETERANS’ COVERAGE OF PRESCRIPTION DRUGS.—Coverage of prescription drugs for veterans under chapter 17 of title 38, United States 

Code, but only if (subject to subparagraph (E)(ii)) the coverage provides 

benefits at least equivalent to the benefits under a qualified prescription drug plan. 

‘‘(D) CERTIFICATION.—For purposes of carrying out this paragraph, the 

certifications of the type described in sections 2701(e) of the Public Health 

Service Act and in section 9801(e) of the Internal Revenue Code shall also 

include a statement for the period of coverage of whether the individual involved had prescription drug coverage described in subparagraph (C). 

‘‘(E) DISCLOSURE.—

‘‘(i) IN GENERAL.—Each entity that offers coverage of the type described in clause (iii), (iv), (v), or (vi) of subparagraph (C) shall provide 

for disclosure, consistent with standards established by the Administrator, of whether such coverage provides benefits at least equivalent 

to the benefits under a qualified prescription drug plan. 

‘‘(ii) WAIVER OF LIMITATIONS.—An individual may apply to the Administrator to waive the requirement that coverage of such type provide benefits at least equivalent to the benefits under a qualified prescription drug plan, if the individual establishes that the individual 

was not adequately informed that such coverage did not provide such 

level of benefits. 

‘‘(F) CONSTRUCTION.—Nothing in this section shall be construed as preventing the disenrollment of an individual from a prescription drug plan or 

a MA-EFFS Rx plan based on the termination of an election described in 

section 1851(g)(3), including for non-payment of premiums or for other reasons specified in subsection (d)(3), which takes into account a grace period 

described in section 1851(g)(3)(B)(i). 

‘‘(3) NONDISCRIMINATION.—A PDP sponsor that offers a prescription drug plan 

in an area designated under section 1860D–4(b)(5) shall make such plan available to all eligible individuals residing in the area without regard to their 

health or economic status or their place of residence within the area. 

‘‘(d) EFFECTIVE DATE OF ELECTIONS.—

‘‘(1) IN GENERAL.—Except as provided in this section, the Administrator shall 

provide that elections under subsection (b) take effect at the same time as the 

Administrator provides that similar elections under section 1851(e) take effect 

under section 1851(f). 

‘‘(2) NO ELECTION EFFECTIVE BEFORE 2006.—In no case shall any election take 

effect before January 1, 2006. 

‘‘(3) TERMINATION.—The Administrator shall provide for the termination of an 

election in the case of—

‘‘(A) termination of coverage under both part A and part B; and 

‘‘(B) termination of elections described in section 1851(g)(3) (including 

failure to pay required premiums). 

‘‘SEC. 1860D–2. REQUIREMENTS FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) REQUIREMENTS.—

‘‘(1) IN GENERAL.—For purposes of this part and part C and part E, the term 

‘qualified prescription drug coverage’ means either of the following: 

‘‘(A) STANDARD COVERAGE WITH ACCESS TO NEGOTIATED PRICES.—Standard 

coverage (as defined in subsection (b)) and access to negotiated prices under 

subsection (d). 

‘‘(B) ACTUARIALLY EQUIVALENT COVERAGE WITH ACCESS TO NEGOTIATED

PRICES.—Coverage of covered outpatient drugs which meets the alternative 

coverage requirements of subsection (c) and access to negotiated prices 

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under subsection (d), but only if it is approved by the Administrator, as provided under subsection (c). 

‘‘(2) PERMITTING ADDITIONAL OUTPATIENT PRESCRIPTION DRUG COVERAGE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), nothing in this part shall 

be construed as preventing qualified prescription drug coverage from including coverage of covered outpatient drugs that exceeds the coverage required under paragraph (1), but any such additional coverage shall be limited to coverage of covered outpatient drugs. 

‘‘(B) DISAPPROVAL AUTHORITY.—The Administrator shall review the offering of qualified prescription drug coverage under this part or part C or E. 

If the Administrator finds, in the case of a qualified prescription drug coverage under a prescription drug plan or a MA-EFFS Rx plan, that the organization or sponsor offering the coverage is engaged in activities intended 

to discourage enrollment of classes of eligible medicare beneficiaries obtaining coverage through the plan on the basis of their higher likelihood of utilizing prescription drug coverage, the Administrator may terminate the contract with the sponsor or organization under this part or part C or E. 

‘‘(3) APPLICATION OF SECONDARY PAYOR PROVISIONS.—The provisions of section 

1852(a)(4) shall apply under this part in the same manner as they apply under 

part C. 

‘‘(b) STANDARD COVERAGE.—For purposes of this part, the ‘standard coverage’ is 

coverage of covered outpatient drugs (as defined in subsection (f)) that meets the 

following requirements: 

‘‘(1) DEDUCTIBLE.—The coverage has an annual deductible—

‘‘(A) for 2006, that is equal to $250; or 

‘‘(B) for a subsequent year, that is equal to the amount specified under 

this paragraph for the previous year increased by the percentage specified 

in paragraph (5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $10 

shall be rounded to the nearest multiple of $10. 

‘‘(2) 80:20 BENEFIT STRUCTURE.—

‘‘(A) 20 PERCENT COINSURANCE.—The coverage has cost-sharing (for costs 

above the annual deductible specified in paragraph (1) and up to the initial 

coverage limit under paragraph (3)) that is—

‘‘(i) equal to 20 percent; or 

‘‘(ii) is actuarially equivalent (using processes established under subsection (e)) to an average expected payment of 20 percent of such costs. 

‘‘(B) USE OF TIERS.—Nothing in this part shall be construed as preventing 

a PDP sponsor from applying tiered copayments, so long as such tiered copayments are consistent with subparagraph (A).

‘‘(3) INITIAL COVERAGE LIMIT.—Subject to paragraph (4), the coverage has an 

initial coverage limit on the maximum costs that may be recognized for payment purposes—

‘‘(A) for 2006, that is equal to $2,000; or 

‘‘(B) for a subsequent year, that is equal to the amount specified in this 

paragraph for the previous year, increased by the annual percentage increase described in paragraph (5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $25 

shall be rounded to the nearest multiple of $25.

‘‘(4) CATASTROPHIC PROTECTION.—

‘‘(A) IN GENERAL.—Notwithstanding paragraph (3), the coverage provides 

benefits with no cost-sharing after the individual has incurred costs (as described in subparagraph (C)) for covered outpatient drugs in a year equal 

to the annual out-of-pocket threshold specified in subparagraph (B). 

‘‘(B) ANNUAL OUT-OF-POCKET THRESHOLD.—

‘‘(i) IN GENERAL.—For purposes of this part, the ‘annual out-of-pocket 

threshold’ specified in this subparagraph is equal to $3,500 (subject to 

adjustment under clause (ii) and subparagraph (D)). 

‘‘(ii) INFLATION INCREASE.—For a year after 2006, the dollar amount 

specified in clause (i) shall be increased by the annual percentage increase described in paragraph (5) for the year involved. Any amount determined under the previous sentence that is not a multiple of $100 

shall be rounded to the nearest multiple of $100. 

‘‘(C) APPLICATION.—In applying subparagraph (A)—

‘‘(i) incurred costs shall only include costs incurred for the annual deductible (described in paragraph (1)), cost-sharing (described in paragraph (2)), and amounts for which benefits are not provided because of 

the application of the initial coverage limit described in paragraph (3); 

and 

9

‘‘(ii) such costs shall be treated as incurred only if they are paid by 

the individual (or by another individual, such as a family member, on 

behalf of the individual), under section 1860D–7, under title XIX, or 

under a State pharmaceutical assistance program and the individual 

(or other individual) is not reimbursed through insurance or otherwise, 

a group health plan, or other third-party payment arrangement (other 

than under such title or such program) for such costs. 

‘‘(D) ADJUSTMENT OF ANNUAL OUT-OF-POCKET THRESHOLDS.— ‘‘(i) IN GENERAL.—For each enrollee in a prescription drug plan or in 

a MA-EFFS Rx plan whose adjusted gross income exceeds the income 

threshold as defined in clause (ii) for a year, the annual out-of-pocket 

threshold otherwise determined under subparagraph (B) for such year 

shall be increased by an amount equal to the percentage specified in 

clause (iii), multiplied by the lesser of—

‘‘(I) the amount of such excess; or 

‘‘(II) the amount by which the income threshold limit exceeds the 

income threshold. 

Any amount determined under the previous sentence that is not a multiple of $100 shall be rounded to the nearest multiple of $100. 

‘‘(ii) INCOME THRESHOLD.—For purposes of clause (i)—

‘‘(I) IN GENERAL.—Subject to subclause (II), the term ‘income 

threshold’ means $60,000 and the term ‘income threshold limit’ 

means $200,000. 

‘‘(II) INCOME INFLATION ADJUSTMENT.—In the case of a year beginning after 2006, each of the dollar amounts in subclause (I) 

shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 

1(f)(3) of the Internal Revenue Code of 1986 for such year, determined by substituting ‘calendar year 2005’ for ‘calendar year 1992’. 

If any amount increased under the previous sentence is not a multiple of $100, such amount shall be rounded to the nearest multiple 

of $100. 

‘‘(iii) PERCENTAGE.—The percentage specified in this clause for a year 

is a fraction (expressed as a percentage) equal to—

‘‘(I) the annual out-of-pocket threshold for a year under subparagraph (B) (determined without regard to this subparagraph), divided by 

‘‘(II) the income threshold under clause (ii) for that year. 

If any percentage determined under the previous sentence that is not 

a multiple of 1⁄10th of 1 percentage point, such percentage shall be 

rounded to the nearest multiple of 1⁄10th of 1 percentage point. 

‘‘(iv) USE OF MOST RECENT RETURN INFORMATION.—For purposes of 

clause (i) for an enrollee for a year, except as provided in clause (v), 

the adjusted gross income of an individual shall be based on the most 

recent information disclosed to the Secretary under section 6109(l)(19) 

of the Internal Revenue Code of 1986 before the beginning of that year. 

‘‘(v) INDIVIDUAL ELECTION TO PRESENT MOST RECENT INFORMATION REGARDING INCOME.—The Secretary shall provide, in coordination with 

the Secretary of the Treasury, a procedure under which, for purposes 

of applying this subparagraph for a calendar year, instead of using the 

information described in clause (iv), an enrollee may elect to use more 

recent information, including information with respect to a taxable year 

ending in such calendar year. Such process shall—

‘‘(I) require the enrollee to provide the Secretary with a copy of 

the relevant portion of the more recent return to be used under 

this clause; 

‘‘(II) provide for the Medicare Beneficiary Ombudsman (under 

section 1810) offering assistance to such enrollees in presenting 

such information and the toll-free number under such section being 

a point of contact for beneficiaries to inquire as to how to present 

such information; 

‘‘(III) provide for the verification of the information in such return by the Secretary of the Treasury under section 6103(l)(19) of 

the Internal Revenue Code of 1986; and 

‘‘(IV) provide for the payment by the Secretary (in a manner 

specified by the Secretary) to the enrollee of an amount equal to 

the excess of the benefit payments that would have been payable 

under the plan if the more recent return information were used, 

over the benefit payments that were made under the plan. 

10

In the case of a payment under subclause (III) for an enrollee under 

a prescription drug plan, the PDP sponsor of the plan shall pay to the 

Secretary the amount so paid, less the applicable reinsurance amount 

that would have applied under section 1860D–8(c)(1)(B) if such payment had been treated as an allowable cost under such section. Such 

plan payment shall be deposited in the Treasury to the credit of the 

Medicare Prescription Drug Account in the Federal Supplementary 

Medical Insurance Trust Fund (under section 1841). 

‘‘(vi) DISSEMINATION OF INFORMATION ON PROCESS.—The Secretary 

shall provide, through the annual medicare handbook under section 

1804(a), for a general description of the adjustment of annual out-ofpocket thresholds provided under this subparagraph, including the 

process for adjustment based upon more recent information and the 

confidentiality provisions of subparagraph (F), and shall provide for dissemination of a table for each year that sets forth the amount of the 

adjustment that is made under clause (i) based on the amount of an 

enrollee’s adjusted gross income. 

‘‘(E) REQUESTING INFORMATION ON ENROLLEES.— ‘‘(i) IN GENERAL.—The Secretary shall, periodically as required to 

carry out subparagraph (D), transmit to the Secretary of the Treasury 

a list of the names and TINs of enrollees in prescription drug plans (or 

in MA-EFFS Rx plans) and request that such Secretary disclose to the 

Secretary information under subparagraph (A) of section 6103(l)(19) of 

the Internal Revenue Code of 1986 with respect to those enrollees for 

a specified taxable year for application in a particular calendar year. 

‘‘(ii) DISCLOSURE TO PLAN SPONSORS.—In the case of a specified taxpayer (as defined in section 6103(l)(19)(B) of the Internal Revenue Code 

of 1986) who is enrolled in a prescription drug plan or in an MA-EFFS 

Rx plan, the Secretary shall disclose to the entity that offers the plan 

the annual out-of-pocket threshold applicable to such individual under 

subparagraph (D). 

‘‘(F) MAINTAINING CONFIDENTIALITY OF INFORMATION.—

‘‘(i) IN GENERAL.—The amount of any increase in an annual out-ofpocket threshold under subparagraph (D) may not be disclosed by the 

Secretary except to a PDP sponsor or entity that offers a MA-EFFS Rx 

plan to the extent necessary to carry out this part. 

‘‘(ii) CRIMINAL AND CIVIL PENALTIES FOR UNAUTHORIZED DISCLOSURE.—A person who makes an unauthorized disclosure of information 

disclosed under section 6103(l)(19) of the Internal Revenue Code of 

1986 (including disclosure of any increase in an annual out-of-pocket 

threshold under subparagraph (D)) shall be subject to penalty to the extent provided under—

‘‘(I) section 7213 of such Code (relating to criminal penalty for 

unauthorized disclosure of information); 

‘‘(II) section 7213A of such Code (relating to criminal penalty for 

unauthorized inspection of returns or return information); 

‘‘(III) section 7431 of such Code (relating to civil damages for unauthorized inspection or disclosure of returns and return information); 

‘‘(IV) any other provision of the Internal Revenue Code of 1986; 

or 

‘‘(V) any other provision of law. 

‘‘(iii) APPLICATION OF ADDITIONAL CIVIL MONETARY PENALTY FOR UNAUTHORIZED DISCLOSURES.—In addition to any penalty otherwise provided under law, any person who makes an unauthorized disclosure of 

such information shall be subject to a civil monetary penalty of not to 

exceed $10,000 for each such unauthorized disclosure. The provisions of 

section 1128A (other than subsections (a) and (b)) shall apply to civil 

money penalties under this subparagraph in the same manner as they 

apply to a penalty or proceeding under section 1128A(a).

‘‘(5) ANNUAL PERCENTAGE INCREASE.—For purposes of this part, the annual 

percentage increase specified in this paragraph for a year is equal to the annual 

percentage increase in average per capita aggregate expenditures for covered 

outpatient drugs in the United States for medicare beneficiaries, as determined 

by the Administrator for the 12-month period ending in July of the previous 

year.

‘‘(c) ALTERNATIVE COVERAGE REQUIREMENTS.—A prescription drug plan or MAEFFS Rx plan may provide a different prescription drug benefit design from the 

standard coverage described in subsection (b) so long as the Administrator deterVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00010 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
11

mines (based on an actuarial analysis by the Administrator) that the following requirements are met and the plan applies for, and receives, the approval of the Administrator for such benefit design: 

‘‘(1) ASSURING AT LEAST ACTUARIALLY EQUIVALENT COVERAGE.— ‘‘(A) ASSURING EQUIVALENT VALUE OF TOTAL COVERAGE.—The actuarial 

value of the total coverage (as determined under subsection (e)) is at least 

equal to the actuarial value (as so determined) of standard coverage. 

‘‘(B) ASSURING EQUIVALENT UNSUBSIDIZED VALUE OF COVERAGE.—The unsubsidized value of the coverage is at least equal to the unsubsidized value 

of standard coverage. For purposes of this subparagraph, the unsubsidized 

value of coverage is the amount by which the actuarial value of the coverage (as determined under subsection (e)) exceeds the actuarial value of 

the subsidy payments under section 1860D–8 with respect to such coverage. 

‘‘(C) ASSURING STANDARD PAYMENT FOR COSTS AT INITIAL COVERAGE

LIMIT.—The coverage is designed, based upon an actuarially representative 

pattern of utilization (as determined under subsection (e)), to provide for 

the payment, with respect to costs incurred that are equal to the initial coverage limit under subsection (b)(3), of an amount equal to at least the product of—

‘‘(i) the amount by which the initial coverage limit described in subsection (b)(3) exceeds the deductible described in subsection (b)(1); and 

‘‘(ii) 100 percent minus the cost-sharing percentage specified in subsection (b)(2)(A)(i). 

‘‘(2) CATASTROPHIC PROTECTION.—The coverage provides for beneficiaries the 

catastrophic protection described in subsection (b)(4). 

‘‘(d) ACCESS TO NEGOTIATED PRICES.—

‘‘(1) IN GENERAL.—Under qualified prescription drug coverage offered by a 

PDP sponsor or an entity offering a MA-EFFS Rx plan, the sponsor or entity 

shall provide beneficiaries with access to negotiated prices (including applicable 

discounts) used for payment for covered outpatient drugs, regardless of the fact 

that no benefits may be payable under the coverage with respect to such drugs 

because of the application of cost-sharing or an initial coverage limit (described 

in subsection (b)(3)). Insofar as a State elects to provide medical assistance 

under title XIX to a beneficiary enrolled under such title and under a prescription drug plan or MA-EFFS Rx plan for a drug based on the prices negotiated 

by a prescription drug plan or MA-EFFS Rx plan under this part, the requirements of section 1927 shall not apply to such drugs. The prices negotiated by 

a prescription drug plan under this part, by a MA-EFFS Rx plan with respect 

to covered outpatient drugs, or by a qualified retiree prescription drug plan (as 

defined in section 1860D–8(f)(1)) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part B, shall (notwithstanding any other provision of law) not be taken into account for the purposes 

of establishing the best price under section 1927(c)(1)(C). 

‘‘(2) DISCLOSURE.—The PDP sponsor or entity offering a MA-EFFS Rx plan 

shall disclose to the Administrator (in a manner specified by the Administrator) 

the extent to which discounts or rebates or other remuneration or price concessions made available to the sponsor or organization by a manufacturer are 

passed through to enrollees through pharmacies and other dispensers or otherwise. The provisions of section 1927(b)(3)(D) shall apply to information disclosed 

to the Administrator under this paragraph in the same manner as such provisions apply to information disclosed under such section. 

‘‘(3) AUDITS AND REPORTS.—To protect against fraud and abuse and to ensure 

proper disclosures and accounting under this part, in addition to any protections 

against fraud and abuse provided under section 1860D–4(b)(3)(C), the Administrator may periodically audit the financial statements and records of PDP sponsor or entities offering a MA-EFFS Rx plan.

‘‘(e) ACTUARIAL VALUATION; DETERMINATION OF ANNUAL PERCENTAGE INCREASES.—

‘‘(1) PROCESSES.—For purposes of this section, the Administrator shall establish processes and methods—

‘‘(A) for determining the actuarial valuation of prescription drug coverage, 

including—

‘‘(i) an actuarial valuation of standard coverage and of the reinsurance subsidy payments under section 1860D–8; 

‘‘(ii) the use of generally accepted actuarial principles and methodologies; and 

‘‘(iii) applying the same methodology for determinations of alternative 

coverage under subsection (c) as is used with respect to determinations 

of standard coverage under subsection (b); and 

12

‘‘(B) for determining annual percentage increases described in subsection 

(b)(5). 

‘‘(2) USE OF OUTSIDE ACTUARIES.—Under the processes under paragraph 

(1)(A), PDP sponsors and entities offering MA-EFFS Rx plans may use actuarial 

opinions certified by independent, qualified actuaries to establish actuarial values, but the Administrator shall determine whether such actuarial values meet 

the requirements under subsection (c)(1). 

‘‘(f) COVERED OUTPATIENT DRUGS DEFINED.— ‘‘(1) IN GENERAL.—Except as provided in this subsection, for purposes of this 

part, the term ‘covered outpatient drug’ means—

‘‘(A) a drug that may be dispensed only upon a prescription and that is 

described in subparagraph (A)(i) or (A)(ii) of section 1927(k)(2); or 

‘‘(B) a biological product described in clauses (i) through (iii) of subparagraph (B) of such section or insulin described in subparagraph (C) of such 

section, 

and such term includes a vaccine licensed under section 351 of the Public 

Health Service Act and any use of a covered outpatient drug for a medically accepted indication (as defined in section 1927(k)(6)). 

‘‘(2) EXCLUSIONS.— ‘‘(A) IN GENERAL.—Such term does not include drugs or classes of drugs, 

or their medical uses, which may be excluded from coverage or otherwise 

restricted under section 1927(d)(2), other than subparagraph (E) thereof (relating to smoking cessation agents), or under section 1927(d)(3). 

‘‘(B) AVOIDANCE OF DUPLICATE COVERAGE.—A drug prescribed for an individual that would otherwise be a covered outpatient drug under this part 

shall not be so considered if payment for such drug is available under part 

A or B for an individual entitled to benefits under part A and enrolled 

under part B. 

‘‘(3) APPLICATION OF FORMULARY RESTRICTIONS.—A drug prescribed for an individual that would otherwise be a covered outpatient drug under this part 

shall not be so considered under a plan if the plan excludes the drug under a 

formulary and such exclusion is not successfully appealed under section 1860D–

3(f)(2). 

‘‘(4) APPLICATION OF GENERAL EXCLUSION PROVISIONS.—A prescription drug 

plan or MA-EFFS Rx plan may exclude from qualified prescription drug coverage any covered outpatient drug—

‘‘(A) for which payment would not be made if section 1862(a) applied to 

part D; or 

‘‘(B) which are not prescribed in accordance with the plan or this part. 

Such exclusions are determinations subject to reconsideration and appeal pursuant to section 1860D–3(f). 

‘‘SEC. 1860D–3. BENEFICIARY PROTECTIONS FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) GUARANTEED ISSUE, COMMUNITY-RATED PREMIUMS, ACCESS TO NEGOTIATED

PRICES, AND NONDISCRIMINATION.—For provisions requiring guaranteed issue, community-rated premiums, access to negotiated prices, and nondiscrimination, see sections 1860D–1(c)(1), 1860D–1(c)(2), 1860D–2(d), and 1860D–6(b), respectively. 

‘‘(b) DISSEMINATION OF INFORMATION.— ‘‘(1) GENERAL INFORMATION.—A PDP sponsor shall disclose, in a clear, accurate, and standardized form to each enrollee with a prescription drug plan offered by the sponsor under this part at the time of enrollment and at least annually thereafter, the information described in section 1852(c)(1) relating to 

such plan. Such information includes the following: 

‘‘(A) Access to specific covered outpatient drugs, including access through 

pharmacy networks. 

‘‘(B) How any formulary used by the sponsor functions, including the 

drugs included in the formulary. 

‘‘(C) Co-payments and deductible requirements, including the identification of the tiered or other co-payment level applicable to each drug (or class 

of drugs). 

‘‘(D) Grievance and appeals procedures. 

Such information shall also be made available upon request to prospective enrollees. 

‘‘(2) DISCLOSURE UPON REQUEST OF GENERAL COVERAGE, UTILIZATION, AND

GRIEVANCE INFORMATION.—Upon request of an individual eligible to enroll 

under a prescription drug plan, the PDP sponsor shall provide the information 

described in section 1852(c)(2) (other than subparagraph (D)) to such individual. 

‘‘(3) RESPONSE TO BENEFICIARY QUESTIONS.—Each PDP sponsor offering a prescription drug plan shall have a mechanism for providing specific information 

13

to enrollees upon request. The sponsor shall make available on a timely basis, 

through an Internet website and in writing upon request, information on specific changes in its formulary. 

‘‘(4) CLAIMS INFORMATION.—Each PDP sponsor offering a prescription drug 

plan must furnish to each enrollee in a form easily understandable to such enrollees an explanation of benefits (in accordance with section 1806(a) or in a 

comparable manner) and a notice of the benefits in relation to initial coverage 

limit and the annual out-of-pocket threshold applicable to such enrollee for the 

current year, whenever prescription drug benefits are provided under this part 

(except that such notice need not be provided more often than monthly).

‘‘(c) ACCESS TO COVERED BENEFITS.— ‘‘(1) ASSURING PHARMACY ACCESS.— ‘‘(A) PARTICIPATION OF ANY WILLING PHARMACY.—A PDP sponsor and an 

entity offering a MA-EFFS Rx plan shall permit the participation of any 

pharmacy that meets terms and conditions that the plan has established. 

‘‘(B) DISCOUNTS ALLOWED FOR NETWORK PHARMACIES.—A prescription 

drug plan and a MA-EFFS Rx plan may, notwithstanding subparagraph 

(A), reduce coinsurance or copayments for its enrolled beneficiaries below 

the level otherwise provided for covered outpatient drugs dispensed through 

in-network pharmacies, but in no case shall such a reduction result in an 

increase in payments made by the Administrator under section 1860D–8 to 

a plan. 

‘‘(C) CONVENIENT ACCESS FOR NETWORK PHARMACIES.—The PDP sponsor 

of the prescription drug plan and the entity offering a MA-EFFS Rx plan 

shall secure the participation in its network of a sufficient number of pharmacies that dispense (other than by mail order) drugs directly to patients 

to ensure convenient access (consistent with rules of the Administrator). 

The Administrator shall establish convenient access rules under this subparagraph that are no less favorable to enrollees than the rules for convenient access to pharmacies of the Secretary of Defense established as of June 

1, 2003, for purposes of the TRICARE Retail Pharmacy (TRRx) program. 

Such rules shall include adequate emergency access for enrolled beneficiaries. 

‘‘(D) LEVEL PLAYING FIELD.—Such a sponsor shall permit enrollees to receive benefits (which may include a 90-day supply of drugs or biologicals) 

through a community pharmacy, rather than through mail order, with any 

differential in cost paid by such enrollees. 

‘‘(E) NOT REQUIRED TO ACCEPT INSURANCE RISK.—The terms and conditions under subparagraph (A) may not require participating pharmacies to 

accept insurance risk as a condition of participation. 

‘‘(2) USE OF STANDARDIZED TECHNOLOGY.—

‘‘(A) IN GENERAL.—The PDP sponsor of a prescription drug plan and an 

entity offering a MA-EFFS Rx plan shall issue (and reissue, as appropriate) 

such a card (or other technology) that may be used by an enrollee to assure 

access to negotiated prices under section 1860D–2(d) for the purchase of 

prescription drugs for which coverage is not otherwise provided under the 

plan. 

‘‘(B) STANDARDS.—

‘‘(i) DEVELOPMENT.—The Administrator shall provide for the development or utilization of uniform standards relating to a standardized format for the card or other technology referred to in subparagraph (A). 

Such standards shall be compatible with standards established under 

part C of title XI. 

‘‘(ii) APPLICATION OF ADVISORY TASK FORCE.—The advisory task force 

established under subsection (d)(3)(B)(ii) shall provide recommendations to the Administrator under such subsection regarding the standards developed under clause (i). 

‘‘(3) REQUIREMENTS ON DEVELOPMENT AND APPLICATION OF FORMULARIES.—If 

a PDP sponsor of a prescription drug plan or an entity offering a MA-EFFS Rx 

plan uses a formulary, the following requirements must be met: 

‘‘(A) PHARMACY AND THERAPEUTIC (P&T) COMMITTEE.—The sponsor or entity must establish a pharmacy and therapeutic committee that develops and 

reviews the formulary. Such committee shall include at least one practicing 

physician and at least one practicing pharmacist independent and free of 

conflict with respect to the committee both with expertise in the care of elderly or disabled persons and a majority of its members shall consist of individuals who are practicing physicians or practicing pharmacists (or both). 

‘‘(B) FORMULARY DEVELOPMENT.—In developing and reviewing the formulary, the committee shall—

14

‘‘(i) base clinical decisions on the strength of scientific evidence and 

standards of practice, including assessing peer-reviewed medical literature, such as randomized clinical trials, pharmacoeconomic studies, 

outcomes research data, and such other information as the committee 

determines to be appropriate; and 

‘‘(ii) shall take into account whether including in the formulary particular covered outpatient drugs has therapeutic advantages in terms 

of safety and efficacy. 

‘‘(C) INCLUSION OF DRUGS IN ALL THERAPEUTIC CATEGORIES.—The formulary must include drugs within each therapeutic category and class of 

covered outpatient drugs (although not necessarily for all drugs within such 

categories and classes). In establishing such classes, the committee shall 

take into account the standards published in the United States Pharmacopeia-Drug Information. The committee shall make available to the enrollees under the plan through the Internet or otherwise the bases for the exclusion of coverage of any drug from the formulary. 

‘‘(D) PROVIDER AND PATIENT EDUCATION.—The committee shall establish 

policies and procedures to educate and inform health care providers and enrollees concerning the formulary. 

‘‘(E) NOTICE BEFORE REMOVING DRUG FROM FORMULARY FOR CHANGING

PREFERRED OR TIER STATUS OF DRUG.—Any removal of a covered outpatient 

drug from a formulary and any change in the preferred or tier cost-sharing 

status of such a drug shall take effect only after appropriate notice is made 

available to beneficiaries and physicians. 

‘‘(F) PERIODIC EVALUATION OF PROTOCOLS.—In connection with the formulary, a prescription drug plan shall provide for the periodic evaluation 

and analysis of treatment protocols and procedures. 

‘‘(G) GRIEVANCES AND APPEALS RELATING TO APPLICATION OF

FORMULARIES.—For provisions relating to grievances and appeals of coverage, see subsections (e) and (f). 

‘‘(d) COST AND UTILIZATION MANAGEMENT; QUALITY ASSURANCE; MEDICATION

THERAPY MANAGEMENT PROGRAM.—

‘‘(1) IN GENERAL.—The PDP sponsor or entity offering a MA-EFFS Rx plan 

shall have in place, directly or through appropriate arrangements, with respect 

to covered outpatient drugs—

‘‘(A) an effective cost and drug utilization management program, including medically appropriate incentives to use generic drugs and therapeutic 

interchange, when appropriate; 

‘‘(B) quality assurance measures and systems to reduce medical errors 

and adverse drug interactions, including side-effects, and improve medication use, including a medication therapy management program described in 

paragraph (2) and for years beginning with 2007, an electronic prescription 

program described in paragraph (3); and 

‘‘(C) a program to control fraud, abuse, and waste. 

Nothing in this section shall be construed as impairing a PDP sponsor or entity 

from utilizing cost management tools (including differential payments) under all 

methods of operation. 

‘‘(2) MEDICATION THERAPY MANAGEMENT PROGRAM.—

‘‘(A) IN GENERAL.—A medication therapy management program described 

in this paragraph is a program of drug therapy management and medication administration that may be furnished by a pharmacy provider and that 

is designed to assure, with respect to beneficiaries at risk for potential 

medication problems, such as beneficiaries with complex or chronic diseases 

(such as diabetes, asthma, hypertension, and congestive heart failure) or 

multiple prescriptions, that covered outpatient drugs under the prescription 

drug plan are appropriately used to optimize therapeutic outcomes through 

improved medication use and reduce the risk of adverse events, including 

adverse drug interactions. Such programs may distinguish between services 

in ambulatory and institutional settings. 

‘‘(B) ELEMENTS.—Such program may include—

‘‘(i) enhanced beneficiary understanding to promote the appropriate 

use of medications by beneficiaries and to reduce the risk of potential 

adverse events associated with medications, through beneficiary education, counseling, case management, disease state management programs, and other appropriate means; 

‘‘(ii) increased beneficiary adherence with prescription medication 

regimens through medication refill reminders, special packaging, and 

other compliance programs and other appropriate means; and 

15

‘‘(iii) detection of patterns of overuse and underuse of prescription 

drugs. 

‘‘(C) DEVELOPMENT OF PROGRAM IN COOPERATION WITH LICENSED PHAR- MACISTS.—The program shall be developed in cooperation with licensed and 

practicing pharmacists and physicians. 

‘‘(D) CONSIDERATIONS IN PHARMACY FEES.—The PDP sponsor of a prescription drug program and an entity offering a MA-EFFS Rx plan shall 

take into account, in establishing fees for pharmacists and others providing 

services under the medication therapy management program, the resources 

and time used in implementing the program. Each such sponsor or entity 

shall disclose to the Administrator upon request the amount of any such 

management or dispensing fees. 

‘‘(3) ELECTRONIC PRESCRIPTION PROGRAM.— ‘‘(A) IN GENERAL.—An electronic prescription drug program described in 

this paragraph is a program that includes at least the following components, consistent with uniform standards established under subparagraph 

(B): 

‘‘(i) ELECTRONIC TRANSMITTAL OF PRESCRIPTIONS.—Prescriptions must 

be written and transmitted electronically (other than by facsimile), except in emergency cases and other exceptional circumstances recognized by the Administrator. 

‘‘(ii) PROVISION OF INFORMATION TO PRESCRIBING HEALTH CARE PROFESSIONAL.—The program provides for the electronic transmittal to the 

prescribing health care professional of information that includes—

‘‘(I) information (to the extent available and feasible) on the drug 

or drugs being prescribed for that patient and other information relating to the medical history or condition of the patient that may 

be relevant to the appropriate prescription for that patient; 

‘‘(II) cost-effective alternatives (if any) for the use of the drug 

prescribed; and 

‘‘(III) information on the drugs included in the applicable formulary. 

To the extent feasible, such program shall permit the prescribing 

health care professional to provide (and be provided) related information on an interactive, real-time basis. 

‘‘(B) STANDARDS.—

‘‘(i) DEVELOPMENT.—The Administrator shall provide for the development of uniform standards relating to the electronic prescription drug 

program described in subparagraph (A). Such standards shall be compatible with standards established under part C of title XI. 

‘‘(ii) ADVISORY TASK FORCE.—In developing such standards and the 

standards described in subsection (c)(2)(B)(i) the Administrator shall 

establish a task force that includes representatives of physicians, hospitals, pharmacies, beneficiaries, pharmacy benefit managers, individuals with expertise in information technology, and pharmacy benefit 

experts of the Departments of Veterans Affairs and Defense and other 

appropriate Federal agencies to provide recommendations to the Administrator on such standards, including recommendations relating to 

the following: 

‘‘(I) The range of available computerized prescribing software and 

hardware and their costs to develop and implement. 

‘‘(II) The extent to which such standards and systems reduce 

medication errors and can be readily implemented by physicians, 

pharmacies, and hospitals. 

‘‘(III) Efforts to develop uniform standards and a common software platform for the secure electronic communication of medication history, eligibility, benefit, and prescription information. 

‘‘(IV) Efforts to develop and promote universal connectivity and 

interoperability for the secure electronic exchange of such information.

‘‘(V) The cost of implementing such systems in the range of hospital and physician office settings and pharmacies, including hardware, software, and training costs. 

‘‘(VI) Implementation issues as they relate to part C of title XI, 

and current Federal and State prescribing laws and regulations 

and their impact on implementation of computerized prescribing. 

‘‘(iii) DEADLINES.—

‘‘(I) The Administrator shall constitute the task force under 

clause (ii) by not later than April 1, 2004. 

16

‘‘(II) Such task force shall submit recommendations to Administrator by not later than January 1, 2005. 

‘‘(III) The Administrator shall provide for the development and 

promulgation, by not later than January 1, 2006, of national standards relating to the electronic prescription drug program described 

in clause (ii). Such standards shall be issued by a standards organization accredited by the American National Standards Institute 

(ANSI) and shall be compatible with standards established under 

part C of title XI. 

‘‘(4) TREATMENT OF ACCREDITATION.—Section 1852(e)(4) (relating to treatment 

of accreditation) shall apply to prescription drug plans under this part with respect to the following requirements, in the same manner as they apply to plans 

under part C with respect to the requirements described in a clause of section 

1852(e)(4)(B): 

‘‘(A) Paragraph (1) (including quality assurance), including medication 

therapy management program under paragraph (2). 

‘‘(B) Subsection (c)(1) (relating to access to covered benefits). 

‘‘(C) Subsection (g) (relating to confidentiality and accuracy of enrollee 

records). 

‘‘(5) PUBLIC DISCLOSURE OF PHARMACEUTICAL PRICES FOR EQUIVALENT

DRUGS.—Each PDP sponsor and each entity offering a MA-EFFS Rx plan shall 

provide that each pharmacy or other dispenser that arranges for the dispensing 

of a covered outpatient drug shall inform the beneficiary at the time of purchase 

of the drug of any differential between the price of the prescribed drug to the 

enrollee and the price of the lowest cost available generic drug covered under 

the plan that is therapeutically equivalent and bioequivalent.

‘‘(e) GRIEVANCE MECHANISM, COVERAGE DETERMINATIONS, AND RECONSIDERATIONS.—

‘‘(1) IN GENERAL.—Each PDP sponsor shall provide meaningful procedures for 

hearing and resolving grievances between the organization (including any entity 

or individual through which the sponsor provides covered benefits) and enrollees with prescription drug plans of the sponsor under this part in accordance 

with section 1852(f). 

‘‘(2) APPLICATION OF COVERAGE DETERMINATION AND RECONSIDERATION PROVISIONS.—A PDP sponsor shall meet the requirements of paragraphs (1) through 

(3) of section 1852(g) with respect to covered benefits under the prescription 

drug plan it offers under this part in the same manner as such requirements 

apply to an organization with respect to benefits it offers under a plan under 

part C. 

‘‘(3) REQUEST FOR REVIEW OF TIERED FORMULARY DETERMINATIONS.—In the 

case of a prescription drug plan offered by a PDP sponsor or a MA-EFFS Rx 

plan that provides for tiered cost-sharing for drugs included within a formulary 

and provides lower cost-sharing for preferred drugs included within the formulary, an individual who is enrolled in the plan may request coverage of a 

nonpreferred drug under the terms applicable for preferred drugs if the prescribing physician determines that the preferred drug for treatment of the same 

condition either would not be as effective for the individual or would have adverse effects for the individual or both.

‘‘(f) APPEALS.—

‘‘(1) IN GENERAL.—Subject to paragraph (2), a PDP sponsor shall meet the requirements of paragraphs (4) and (5) of section 1852(g) with respect to drugs 

(including a determination related to the application of tiered cost-sharing described in subsection (e)(3)) in the same manner as such requirements apply to 

an organization with respect to benefits it offers under a plan under part C. 

‘‘(2) FORMULARY DETERMINATIONS.—An individual who is enrolled in a prescription drug plan offered by a PDP sponsor or in a MA-EFFS Rx plan may 

appeal to obtain coverage for a covered outpatient drug that is not on a formulary of the sponsor or entity offering the plan if the prescribing physician 

determines that the formulary drug for treatment of the same condition either 

would not be as effective for the individual or would have adverse effects for 

the individual or both. 

‘‘(g) CONFIDENTIALITY AND ACCURACY OF ENROLLEE RECORDS.—A PDP sponsor 

that offers a prescription drug plan shall meet the requirements of section 1852(h) 

with respect to enrollees under the plan in the same manner as such requirements 

apply to an organization with respect to enrollees under part C. A PDP sponsor 

shall be treated as a business associate for purposes of the provisions of subpart E 

of part 164 of title 45, Code of Federal Regulations, adopted pursuant to the authority of the Secretary under section 264(c) of the Health Insurance Portability and Accountability Act of 1996 (42 U.S. C. 1320d-2 note). 

17

‘‘SEC. 1860D–4. REQUIREMENTS FOR AND CONTRACTS WITH PRESCRIPTION DRUG PLAN (PDP) 

SPONSORS. 

‘‘(a) GENERAL REQUIREMENTS.—Each PDP sponsor of a prescription drug plan 

shall meet the following requirements: 

‘‘(1) LICENSURE.—Subject to subsection (c), the sponsor is organized and licensed under State law as a risk-bearing entity eligible to offer health insurance or health benefits coverage in each State in which it offers a prescription 

drug plan. 

‘‘(2) ASSUMPTION OF FINANCIAL RISK FOR UNSUBSIDIZED COVERAGE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B) and section 1860D–

5(d)(2), the entity assumes full financial risk on a prospective basis for 

qualified prescription drug coverage that it offers under a prescription drug 

plan and that is not covered under section 1860D–8. 

‘‘(B) REINSURANCE PERMITTED.—The entity may obtain insurance or make 

other arrangements for the cost of coverage provided to any enrollee. 

‘‘(3) SOLVENCY FOR UNLICENSED SPONSORS.—In the case of a sponsor that is 

not described in paragraph (1), the sponsor shall meet solvency standards established by the Administrator under subsection (d).

‘‘(b) CONTRACT REQUIREMENTS.—

‘‘(1) IN GENERAL.—The Administrator shall not permit the election under section 1860D–1 of a prescription drug plan offered by a PDP sponsor under this 

part, and the sponsor shall not be eligible for payments under section 1860D–

7 or 1860D–8, unless the Administrator has entered into a contract under this 

subsection with the sponsor with respect to the offering of such plan. Such a 

contract with a sponsor may cover more than one prescription drug plan. Such 

contract shall provide that the sponsor agrees to comply with the applicable requirements and standards of this part and the terms and conditions of payment 

as provided for in this part. 

‘‘(2) NEGOTIATION REGARDING TERMS AND CONDITIONS.—The Administrator 

shall have the same authority to negotiate the terms and conditions of prescription drug plans under this part as the Director of the Office of Personnel Management has with respect to health benefits plans under chapter 89 of title 5, 

United States Code. In negotiating the terms and conditions regarding premiums for which information is submitted under section 1860D–6(a)(2), the Administrator shall take into account the subsidy payments under section 1860D–

8. 

‘‘(3) INCORPORATION OF CERTAIN MEDICARE ADVANTAGE CONTRACT REQUIREMENTS.—The following provisions of section 1857 shall apply, subject to subsection (c)(5), to contracts under this section in the same manner as they apply 

to contracts under section 1857(a): 

‘‘(A) MINIMUM ENROLLMENT.—Paragraphs (1) and (3) of section 1857(b). 

‘‘(B) CONTRACT PERIOD AND EFFECTIVENESS.—Paragraphs (1) through (3) 

and (5) of section 1857(c). 

‘‘(C) PROTECTIONS AGAINST FRAUD AND BENEFICIARY PROTECTIONS.—Section 1857(d). 

‘‘(D) ADDITIONAL CONTRACT TERMS.—Section 1857(e); except that in applying section 1857(e)(2) under this part—

‘‘(i) such section shall be applied separately to costs relating to this 

part (from costs under part C and part E); 

‘‘(ii) in no case shall the amount of the fee established under this subparagraph for a plan exceed 20 percent of the maximum amount of the 

fee that may be established under subparagraph (B) of such section; 

and 

‘‘(iii) no fees shall be applied under this subparagraph with respect 

to MA-EFFS Rx plans. 

‘‘(E) INTERMEDIATE SANCTIONS.—Section 1857(g). 

‘‘(F) PROCEDURES FOR TERMINATION.—Section 1857(h). 

‘‘(4) RULES OF APPLICATION FOR INTERMEDIATE SANCTIONS.—In applying paragraph (3)(E)—

‘‘(A) the reference in section 1857(g)(1)(B) to section 1854 is deemed a reference to this part; and 

‘‘(B) the reference in section 1857(g)(1)(F) to section 1852(k)(2)(A)(ii) shall 

not be applied. 

‘‘(5) SERVICE AREA REQUIREMENT.—For purposes of this part, the Administrator shall designate at least 10 areas covering the entire United States and 

shall be consistent with EFFS regions established under section 1860E–1(a)(2). 

‘‘(c) WAIVER OF CERTAIN REQUIREMENTS TO EXPAND CHOICE.—

‘‘(1) IN GENERAL.—In the case of an entity that seeks to offer a prescription 

drug plan in a State, the Administrator shall waive the requirement of subVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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section (a)(1) that the entity be licensed in that State if the Administrator determines, based on the application and other evidence presented to the Administrator, that any of the grounds for approval of the application described in paragraph (2) have been met. 

‘‘(2) GROUNDS FOR APPROVAL.—The grounds for approval under this paragraph are the grounds for approval described in subparagraph (B), (C), and (D) 

of section 1855(a)(2), and also include the application by a State of any grounds 

other than those required under Federal law. 

‘‘(3) APPLICATION OF WAIVER PROCEDURES.—With respect to an application for 

a waiver (or a waiver granted) under this subsection, the provisions of subparagraphs (E), (F), and (G) of section 1855(a)(2) shall apply. 

‘‘(4) LICENSURE DOES NOT SUBSTITUTE FOR OR CONSTITUTE CERTIFICATION.—

The fact that an entity is licensed in accordance with subsection (a)(1) does not 

deem the entity to meet other requirements imposed under this part for a PDP 

sponsor. 

‘‘(5) REFERENCES TO CERTAIN PROVISIONS.—For purposes of this subsection, in 

applying provisions of section 1855(a)(2) under this subsection to prescription 

drug plans and PDP sponsors—

‘‘(A) any reference to a waiver application under section 1855 shall be 

treated as a reference to a waiver application under paragraph (1); and 

‘‘(B) any reference to solvency standards shall be treated as a reference 

to solvency standards established under subsection (d). 

‘‘(d) SOLVENCY STANDARDS FOR NON-LICENSED SPONSORS.—

‘‘(1) ESTABLISHMENT.—The Administrator shall establish, by not later than 

October 1, 2004, financial solvency and capital adequacy standards that an entity that does not meet the requirements of subsection (a)(1) must meet to qualify 

as a PDP sponsor under this part. 

‘‘(2) COMPLIANCE WITH STANDARDS.—Each PDP sponsor that is not licensed by 

a State under subsection (a)(1) and for which a waiver application has been approved under subsection (c) shall meet solvency and capital adequacy standards 

established under paragraph (1). The Administrator shall establish certification 

procedures for such PDP sponsors with respect to such solvency standards in 

the manner described in section 1855(c)(2). 

‘‘(e) RELATION TO STATE LAWS.—

‘‘(1) IN GENERAL.—The standards established under this part shall supersede 

any State law or regulation (other than State licensing laws or State laws relating to plan solvency, except as provided in subsection (d)) with respect to prescription drug plans which are offered by PDP sponsors under this part. 

‘‘(2) PROHIBITION OF STATE IMPOSITION OF PREMIUM TAXES.—No State may impose a premium tax or similar tax with respect to premiums paid to PDP sponsors for prescription drug plans under this part, or with respect to any payments made to such a sponsor by the Administrator under this part. 

‘‘SEC. 1860D–5. PROCESS FOR BENEFICIARIES TO SELECT QUALIFIED PRESCRIPTION DRUG 

COVERAGE. 

‘‘(a) IN GENERAL.—The Administrator shall establish a process for the selection 

of the prescription drug plan or MA-EFFS Rx plan through which eligible individuals elect qualified prescription drug coverage under this part. 

‘‘(b) ELEMENTS.—Such process shall include the following: 

‘‘(1) Annual, coordinated election periods, in which such individuals can 

change the qualifying plans through which they obtain coverage, in accordance 

with section 1860D–1(b)(2). 

‘‘(2) Active dissemination of information to promote an informed selection 

among qualifying plans based upon price, quality, and other features, in the 

manner described in (and in coordination with) section 1851(d), including the 

provision of annual comparative information, maintenance of a toll-free hotline, 

and the use of non-Federal entities. 

‘‘(3) Coordination of elections through filing with the entity offering a MAEFFS Rx plan or a PDP sponsor, in the manner described in (and in coordination with) section 1851(c)(2). 

‘‘(4) Informing each enrollee before the beginning of each year of the annual 

out-of-pocket threshold applicable to the enrollee for that year under section 

1860D–2(b)(4) at such time. 

‘‘(c) MA-EFFS RX ENROLLEE MAY ONLY OBTAIN BENEFITS THROUGH THE PLAN.—

An individual who is enrolled under a MA-EFFS Rx plan may only elect to receive 

qualified prescription drug coverage under this part through such plan. 

‘‘(d) ASSURING ACCESS TO A CHOICE OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—

‘‘(1) CHOICE OF AT LEAST TWO PLANS IN EACH AREA.—

19

‘‘(A) IN GENERAL.—The Administrator shall assure that each individual 

who is entitled to benefits under part A or enrolled under part B and who 

is residing in an area in the United States has available, consistent with 

subparagraph (B), a choice of enrollment in at least two qualifying plans 

(as defined in paragraph (5)) in the area in which the individual resides, 

at least one of which is a prescription drug plan. 

‘‘(B) REQUIREMENT FOR DIFFERENT PLAN SPONSORS.—The requirement in 

subparagraph (A) is not satisfied with respect to an area if only one PDP 

sponsor or one entity that offers a MA-EFFS Rx plan offers all the qualifying plans in the area. 

‘‘(2) GUARANTEEING ACCESS TO COVERAGE.—In order to assure access under 

paragraph (1) and consistent with paragraph (3), the Administrator may provide partial underwriting of risk for a PDP sponsor to expand the service area 

under an existing prescription drug plan to adjoining or additional areas or to 

establish such a plan (including offering such a plan on a regional or nationwide 

basis), but only so long as (and to the extent) necessary to assure the access 

guaranteed under paragraph (1). 

‘‘(3) LIMITATION ON AUTHORITY.—In exercising authority under this subsection, the Administrator—

‘‘(A) shall not provide for the full underwriting of financial risk for any 

PDP sponsor; and 

‘‘(B) shall seek to maximize the assumption of financial risk by PDP sponsors or entities offering a MA-EFFS Rx plan. 

‘‘(4) REPORTS.—The Administrator shall, in each annual report to Congress 

under section 1809(f), include information on the exercise of authority under 

this subsection. The Administrator also shall include such recommendations as 

may be appropriate to minimize the exercise of such authority, including minimizing the assumption of financial risk. 

‘‘(5) QUALIFYING PLAN DEFINED.—For purposes of this subsection, the term 

‘qualifying plan’ means a prescription drug plan or a MA-EFFS Rx plan. 

‘‘SEC. 1860D–6. SUBMISSION OF BIDS AND PREMIUMS. 

‘‘(a) SUBMISSION OF BIDS, PREMIUMS, AND RELATED INFORMATION.—

‘‘(1) IN GENERAL.—Each PDP sponsor shall submit to the Administrator the 

information described in paragraph (2) in the same manner as information is 

submitted by an organization under section 1854(a)(1). 

‘‘(2) INFORMATION SUBMITTED.—The information described in this paragraph 

is the following: 

‘‘(A) COVERAGE PROVIDED.—Information on the qualified prescription drug 

coverage to be provided. 

‘‘(B) ACTUARIAL VALUE.—Information on the actuarial value of the coverage. 

‘‘(C) BID AND PREMIUM.—Information on the bid and the premium for the 

coverage, including an actuarial certification of—

‘‘(i) the actuarial basis for such bid and premium; 

‘‘(ii) the portion of such bid and premium attributable to benefits in 

excess of standard coverage; 

‘‘(iii) the reduction in such bid resulting from the reinsurance subsidy 

payments provided under section 1860D–8(a)(2); and 

‘‘(iv) the reduction in such premium resulting from the direct and reinsurance subsidy payments provided under section 1860D–8. 

‘‘(D) ADDITIONAL INFORMATION.—Such other information as the Administrator may require to carry out this part. 

‘‘(3) REVIEW OF INFORMATION; NEGOTIATION AND APPROVAL OF PREMIUMS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), the Administrator shall 

review the information filed under paragraph (2) for the purpose of conducting negotiations under section 1860D–4(b)(2) (relating to using OPMlike authority under the FEHBP). The Administrator, using the information 

provided (including the actuarial certification under paragraph (2)(C)) shall 

approve the premium submitted under this subsection only if the premium 

accurately reflects both (i) the actuarial value of the benefits provided, and 

(ii) the 73 percent average subsidy provided under section 1860D–8 for the 

standard benefit. The Administrator shall apply actuarial principles to approval of a premium under this part in a manner similar to the manner 

in which those principles are applied in establishing the monthly part B 

premium under section 1839. 

‘‘(B) EXCEPTION.—In the case of a plan described in section 1851(a)(2)(C), 

the provisions of subparagraph (A) shall not apply and the provisions of 

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approval of amounts described in such paragraph, shall apply to the negotiation and rejection of the monthly bid amounts and proportion referred to 

in subparagraph (A). 

‘‘(b) UNIFORM BID AND PREMIUM.—

‘‘(1) IN GENERAL.—The bid and premium for a prescription drug plan under 

this section may not vary among enrollees in the plan in the same service area. 

‘‘(2) CONSTRUCTION.—Nothing in paragraph (1) shall be construed as preventing the imposition of a late enrollment penalty under section 1860D–

1(c)(2)(B).

‘‘(c) COLLECTION.—

‘‘(1) BENEFICIARY’S OPTION OF PAYMENT THROUGH WITHHOLDING FROM SOCIAL

SECURITY PAYMENT OR USE OF ELECTRONIC FUNDS TRANSFER MECHANISM.—In accordance with regulations, a PDP sponsor shall permit each enrollee, at the enrollee’s option, to make payment of premiums under this part to the sponsor 

through withholding from benefit payments in the manner provided under section 1840 with respect to monthly premiums under section 1839 or through an 

electronic funds transfer mechanism (such as automatic charges of an account 

at a financial institution or a credit or debit card account) or otherwise. All premium payments that are withheld under this paragraph shall be credited to the 

Medicare Prescription Drug Trust Fund and shall be paid to the PDP sponsor 

involved. 

‘‘(2) OFFSETTING.—Reductions in premiums for coverage under parts A and B 

as a result of a selection of a MA-EFFS Rx plan may be used to reduce the premium otherwise imposed under paragraph (1). 

‘‘(d) ACCEPTANCE OF REFERENCE PREMIUM AMOUNT AS FULL PREMIUM FOR SUBSIDIZED LOW-INCOME INDIVIDUALS IF NO STANDARD (OR EQUIVALENT) COVERAGE IN

AN AREA.—

‘‘(1) IN GENERAL.—If there is no standard prescription drug coverage (as defined in paragraph (2)) offered in an area, in the case of an individual who is 

eligible for a premium subsidy under section 1860D–7 and resides in the area, 

the PDP sponsor of any prescription drug plan offered in the area (and any entity offering a MA-EFFS Rx plan in the area) shall accept the reference premium 

amount (under paragraph (3)) as payment in full for the premium charge for 

qualified prescription drug coverage. 

‘‘(2) STANDARD PRESCRIPTION DRUG COVERAGE DEFINED.—For purposes of this 

subsection, the term ‘standard prescription drug coverage’ means qualified prescription drug coverage that is standard coverage or that has an actuarial value 

equivalent to the actuarial value for standard coverage. 

‘‘(3) REFERENCE PREMIUM AMOUNT DEFINED.—For purposes of this subsection, 

the term ‘reference premium amount’ means, with respect to qualified prescription drug coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value is equivalent to that of standard coverage), 

the plan’s PDP premium; or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the plan’s 

PDP premium multiplied by the ratio of (I) the actuarial value of standard coverage, to (II) the actuarial value of the alternative coverage; 

‘‘(B) an EFFS plan, the EFFS monthly prescription drug beneficiary premium (as defined in section 1860E–4(a)(3)(B)); or 

‘‘(C) a Medicare Advantage, the Medicare Advantage monthly prescription 

drug beneficiary premium (as defined in section 1854(b)(2)(B)). 

For purposes of subparagraph (A), the term ‘PDP premium’ means, with respect 

to a prescription drug plan, the premium amount for enrollment under the plan 

under this part (determined without regard to any low-income subsidy under 

section 1860D–7 or any late enrollment penalty under section 1860D–1(c)(2)(B)). 

‘‘SEC. 1860D–7. PREMIUM AND COST-SHARING SUBSIDIES FOR LOW-INCOME INDIVIDUALS.

‘‘(a) INCOME-RELATED SUBSIDIES FOR INDIVIDUALS WITH INCOME BELOW 150 PERCENT OF FEDERAL POVERTY LEVEL.—

‘‘(1) FULL PREMIUM SUBSIDY AND REDUCTION OF COST-SHARING FOR INDIVIDUALS WITH INCOME BELOW 135 PERCENT OF FEDERAL POVERTY LEVEL.—In the 

case of a subsidy eligible individual (as defined in paragraph (4)) who is determined to have income that does not exceed 135 percent of the Federal poverty 

level, the individual is entitled under this section—

‘‘(A) to an income-related premium subsidy equal to 100 percent of the 

amount described in subsection (b)(1); and 

21

‘‘(B) subject to subsection (c), to the substitution for the beneficiary costsharing described in paragraphs (1) and (2) of section 1860D–2(b) (up to the 

initial coverage limit specified in paragraph (3) of such section) of amounts 

that do not exceed $2 for a multiple source or generic drug (as described 

in section 1927(k)(7)(A)) and $5 for a non-preferred drug.

‘‘(2) SLIDING SCALE PREMIUM SUBSIDY FOR INDIVIDUALS WITH INCOME ABOVE

135, BUT BELOW 150 PERCENT, OF FEDERAL POVERTY LEVEL.—In the case of a subsidy eligible individual who is determined to have income that exceeds 135 percent, but does not exceed 150 percent, of the Federal poverty level, the individual is entitled under this section to an income-related premium subsidy determined on a linear sliding scale ranging from 100 percent of the amount described in subsection (b)(1) for individuals with incomes at 135 percent of such 

level to 0 percent of such amount for individuals with incomes at 150 percent 

of such level. 

‘‘(3) CONSTRUCTION.—Nothing in this section shall be construed as preventing 

a PDP sponsor or entity offering a MA-EFFS Rx plan from reducing to 0 the 

cost-sharing otherwise applicable to generic drugs. 

‘‘(4) DETERMINATION OF ELIGIBILITY.— ‘‘(A) SUBSIDY ELIGIBLE INDIVIDUAL DEFINED.—For purposes of this section, 

subject to subparagraph (D), the term ‘subsidy eligible individual’ means an 

individual who—

‘‘(i) is eligible to elect, and has elected, to obtain qualified prescription drug coverage under this part; 

‘‘(ii) has income below 150 percent of the Federal poverty line; and 

‘‘(iii) meets the resources requirement described in subparagraph (D) 

. 

‘‘(B) DETERMINATIONS.—The determination of whether an individual residing in a State is a subsidy eligible individual and the amount of such 

individual’s income shall be determined under the State medicaid plan for 

the State under section 1935(a) or by the Social Security Administration. 

In the case of a State that does not operate such a medicaid plan (either 

under title XIX or under a statewide waiver granted under section 1115), 

such determination shall be made under arrangements made by the Administrator. There are authorized to be appropriated to the Social Security Administration such sums as may be necessary for the determination of eligibility under this subparagraph. 

‘‘(C) INCOME DETERMINATIONS.—For purposes of applying this section—

‘‘(i) income shall be determined in the manner described in section 

1905(p)(1)(B); and 

‘‘(ii) the term ‘Federal poverty line’ means the official poverty line (as 

defined by the Office of Management and Budget, and revised annually 

in accordance with section 673(2) of the Omnibus Budget Reconciliation 

Act of 1981) applicable to a family of the size involved. 

‘‘(D) RESOURCE STANDARD APPLIED TO BE BASED ON TWICE SSI RESOURCE

STANDARD.—The resource requirement of this subparagraph is that an individual’s resources (as determined under section 1613 for purposes of the 

supplemental security income program) do not exceed—

‘‘(i) for 2006 twice the maximum amount of resources that an individual may have and obtain benefits under that program; and 

‘‘(ii) for a subsequent year the resource limitation established under 

this clause for the previous year increased by the annual percentage increase in the consumer price index (all items; U.S. city average) as of 

September of such previous year. 

Any resource limitation established under clause (ii) that is not a multiple 

of $10 shall be rounded to the nearest multiple of $10. 

‘‘(E) TREATMENT OF TERRITORIAL RESIDENTS.—In the case of an individual 

who is not a resident of the 50 States or the District of Columbia, the individual is not eligible to be a subsidy eligible individual but may be eligible 

for financial assistance with prescription drug expenses under section 

1935(e). 

‘‘(F) TREATMENT OF CONFORMING MEDIGAP POLICIES.—For purposes of this 

section, the term ‘qualified prescription drug coverage’ includes a medicare 

supplemental policy described in section 1860D–8(b)(4). 

‘‘(5) INDEXING DOLLAR AMOUNTS.—

‘‘(A) FOR 2007.—The dollar amounts applied under paragraphs (1)(B) for 

2007 shall be the dollar amounts specified in such paragraph increased by 

the annual percentage increase described in section 1860D–2(b)(5) for 2007. 

‘‘(B) FOR SUBSEQUENT YEARS.—The dollar amounts applied under paragraph (1)(B) for a year after 2007 shall be the amounts (under this paraVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00021 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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graph) applied under paragraph (1)(B) for the preceding year increased by 

the annual percentage increase described in section 1860D–2(b)(5) (relating 

to growth in medicare prescription drug costs per beneficiary) for the year 

involved. 

‘‘(b) PREMIUM SUBSIDY AMOUNT.—

‘‘(1) IN GENERAL.—The premium subsidy amount described in this subsection 

for an individual residing in an area is the benchmark premium amount (as defined in paragraph (2)) for qualified prescription drug coverage offered by the 

prescription drug plan or the MA-EFFS Rx plan in which the individual is enrolled. 

‘‘(2) BENCHMARK PREMIUM AMOUNT DEFINED.—For purposes of this subsection, 

the term ‘benchmark premium amount’ means, with respect to qualified prescription drug coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value of which is equivalent to that of standard coverage), the premium amount for enrollment under the plan under this 

part (determined without regard to any subsidy under this section or 

any late enrollment penalty under section 1860D–1(c)(2)(B)); or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the premium 

amount described in clause (i) multiplied by the ratio of (I) the actuarial value of standard coverage, to (II) the actuarial value of the alternative coverage; or 

‘‘(B) a MA-EFFS Rx plan, the portion of the premium amount that is attributable to statutory drug benefits (described in section 

1853(a)(1)(A)(ii)(II)). 

‘‘(c) RULES IN APPLYING COST-SHARING SUBSIDIES.—

‘‘(1) IN GENERAL.—In applying subsection (a)(1)(B), nothing in this part shall 

be construed as preventing a plan or provider from waiving or reducing the 

amount of cost-sharing otherwise applicable. 

‘‘(2) LIMITATION ON CHARGES.—In the case of an individual receiving costsharing subsidies under subsection (a)(1)(B), the PDP sponsor or entity offering 

a MA-EFFS Rx plan may not charge more than $5 per prescription. 

‘‘(3) APPLICATION OF INDEXING RULES.—The provisions of subsection (a)(5) 

shall apply to the dollar amount specified in paragraph (2) in the same manner 

as they apply to the dollar amounts specified in subsections (a)(1)(B). 

‘‘(d) ADMINISTRATION OF SUBSIDY PROGRAM.—The Administrator shall provide a 

process whereby, in the case of an individual who is determined to be a subsidy eligible individual and who is enrolled in prescription drug plan or is enrolled in a MAEFFS Rx plan—

‘‘(1) the Administrator provides for a notification of the PDP sponsor or the 

entity offering the MA-EFFS Rx plan involved that the individual is eligible for 

a subsidy and the amount of the subsidy under subsection (a); 

‘‘(2) the sponsor or entity involved reduces the premiums or cost-sharing otherwise imposed by the amount of the applicable subsidy and submits to the Administrator information on the amount of such reduction; and 

‘‘(3) the Administrator periodically and on a timely basis reimburses the sponsor or entity for the amount of such reductions. 

The reimbursement under paragraph (3) with respect to cost-sharing subsidies may 

be computed on a capitated basis, taking into account the actuarial value of the subsidies and with appropriate adjustments to reflect differences in the risks actually 

involved. 

‘‘(e) RELATION TO MEDICAID PROGRAM.—

‘‘(1) IN GENERAL.—For provisions providing for eligibility determinations, and 

additional financing, under the medicaid program, see section 1935. 

‘‘(2) MEDICAID PROVIDING WRAP AROUND BENEFITS.—The coverage provided 

under this part is primary payor to benefits for prescribed drugs provided under 

the medicaid program under title XIX consistent with section 1935(d)(1). 

‘‘(3) COORDINATION.—The Administrator shall develop and implement a plan 

for the coordination of prescription drug benefits under this part with the benefits provided under the medicaid program under title XIX, with particular attention to insuring coordination of payments and prevention of fraud and abuse. 

In developing and implementing such plan, the Administrator shall involve the 

Secretary, the States, the data processing industry, pharmacists, and pharmaceutical manufacturers, and other experts.

23

‘‘SEC. 1860D–8. SUBSIDIES FOR ALL MEDICARE BENEFICIARIES FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) SUBSIDY PAYMENT.—In order to reduce premium levels applicable to qualified 

prescription drug coverage for all medicare beneficiaries consistent with an overall 

subsidy level of 73 percent, to reduce adverse selection among prescription drug 

plans and MA-EFFS Rx plans, and to promote the participation of PDP sponsors 

under this part, the Administrator shall provide in accordance with this section for 

payment to a qualifying entity (as defined in subsection (b)) of the following subsidies: 

‘‘(1) DIRECT SUBSIDY.—In the case of an enrollee enrolled for a month in a prescription drug plan or a MA-EFFS Rx plan, a direct subsidy equal to 43 percent 

of the national average monthly bid amount (computed under subsection (g)) for 

that month.

‘‘(2) SUBSIDY THROUGH REINSURANCE.—In the case of an enrollee enrolled for 

a month in a prescription drug plan or a MA-EFFS Rx plan, the reinsurance 

payment amount (as defined in subsection (c)), which in the aggregate is 30 percent of the total payments made by qualifying entities for standard coverage 

under the respective plan, for excess costs incurred in providing qualified prescription drug coverage—

‘‘(A) for enrollees with a prescription drug plan under this part; and 

‘‘(B) for enrollees with a MA-EFFS Rx plan. 

‘‘(3) EMPLOYER AND UNION FLEXIBILITY.—In the case of an individual who is 

a participant or beneficiary in a qualified retiree prescription drug plan (as defined in subsection (f)(1)) and who is not enrolled in a prescription drug plan 

or in a MA-EFFS Rx plan, the special subsidy payments under subsection (f)(3). 

This section constitutes budget authority in advance of appropriations Acts and represents the obligation of the Administrator to provide for the payment of amounts 

provided under this section. In applying the percentages under paragraphs (1) and 

(2), there shall be taken into account under the respective paragraphs the portion 

of the employer and union special subsidy payments under subsection (f)(3) that reflect payments that would have been made under the respective paragraphs if such 

paragraphs had applied to qualified retiree prescription drug plans instead of paragraph (3). 

‘‘(b) QUALIFYING ENTITY DEFINED.—For purposes of this section, the term ‘qualifying entity’ means any of the following that has entered into an agreement with 

the Administrator to provide the Administrator with such information as may be required to carry out this section: 

‘‘(1) A PDP sponsor offering a prescription drug plan under this part. 

‘‘(2) An entity that offers a MA-EFFS Rx plan. 

‘‘(3) The sponsor of a qualified retiree prescription drug plan (as defined in 

subsection (f)). 

‘‘(c) REINSURANCE PAYMENT AMOUNT.—

‘‘(1) IN GENERAL.—Subject to subsection (d)(1)(B) and paragraph (4), the reinsurance payment amount under this subsection for a qualifying covered individual (as defined in paragraph (5)) for a coverage year (as defined in subsection 

(h)(2)) is equal to the sum of the following: 

‘‘(A) REINSURANCE BETWEEN INITIAL REINSURANCE THRESHOLD AND THE

INITIAL COVERAGE LIMIT.—For the portion of the individual’s gross covered 

prescription drug costs (as defined in paragraph (3)) for the year that exceeds the initial reinsurance threshold specified in paragraph (4), but does 

not exceed the initial coverage limit specified in section 1860D–2(b)(3), an 

amount equal to 20 percent of the allowable costs (as defined in paragraph 

(2)) attributable to such gross covered prescription drug costs. 

‘‘(B) REINSURANCE ABOVE ANNUAL OUT-OF-POCKET THRESHOLD.—For the 

portion of the individual’s gross covered prescription drug costs for the year 

that exceeds the annual out-of-pocket threshold specified in 1860D–

2(b)(4)(B), an amount equal to 80 percent of the allowable costs attributable 

to such gross covered prescription drug costs. 

‘‘(2) ALLOWABLE COSTS.—For purposes of this section, the term ‘allowable 

costs’ means, with respect to gross covered prescription drug costs under a plan 

described in subsection (b) offered by a qualifying entity, the part of such costs 

that are actually paid (net of discounts, chargebacks, and average percentage 

rebates) under the plan, but in no case more than the part of such costs that 

would have been paid under the plan if the prescription drug coverage under 

the plan were standard coverage. 

‘‘(3) GROSS COVERED PRESCRIPTION DRUG COSTS.—For purposes of this section, 

the term ‘gross covered prescription drug costs’ means, with respect to an enrollee with a qualifying entity under a plan described in subsection (b) during 

a coverage year, the costs incurred under the plan (including costs attributable 

24

to administrative costs) for covered prescription drugs dispensed during the 

year, including costs relating to the deductible, whether paid by the enrollee or 

under the plan, regardless of whether the coverage under the plan exceeds 

standard coverage and regardless of when the payment for such drugs is made. 

‘‘(4) INITIAL REINSURANCE THRESHOLD.—The initial reinsurance threshold 

specified in this paragraph—

‘‘(A) for 2006, is equal to $1,000; or 

‘‘(B) for a subsequent year, is equal to the payment threshold specified 

in this paragraph for the previous year, increased by the annual percentage 

increase described in section 1860D–2(b)(5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $10 

shall be rounded to the nearest multiple of $10.

‘‘(5) QUALIFYING COVERED INDIVIDUAL DEFINED.—For purposes of this subsection, the term ‘qualifying covered individual’ means an individual who—

‘‘(A) is enrolled with a prescription drug plan under this part; or 

‘‘(B) is enrolled with a MA-EFFS Rx plan. 

‘‘(d) ADJUSTMENT OF PAYMENTS.—

‘‘(1) ADJUSTMENT OF REINSURANCE PAYMENTS TO ASSURE 30 PERCENT LEVEL OF

SUBSIDY THROUGH REINSURANCE.—

‘‘(A) ESTIMATION OF PAYMENTS.—The Administrator shall estimate—

‘‘(i) the total payments to be made (without regard to this subsection) 

during a year under subsections (a)(2) and (c); and 

‘‘(ii) the total payments to be made by qualifying entities for standard 

coverage under plans described in subsection (b) during the year. 

‘‘(B) ADJUSTMENT.—The Administrator shall proportionally adjust the 

payments made under subsections (a)(2) and (c) for a coverage year in such 

manner so that the total of the payments made under such subsections (and 

under subsection (f)(3) insofar as such payments reflect payments that 

would have been made under such subsections if such subsections had applied to qualified retiree prescription drug plans instead of subsections 

(a)(3) and (f)(3)) for the year is equal to 30 percent of the total payments 

described in subparagraph (A)(ii). 

‘‘(2) RISK ADJUSTMENT FOR DIRECT SUBSIDIES.—To the extent the Administrator determines it appropriate to avoid risk selection, the payments made for 

direct subsidies under subsection (a)(1) are subject to adjustment based upon 

risk factors specified by the Administrator. Any such risk adjustment shall be 

designed in a manner as to not result in a change in the aggregate payments 

made under such subsection. 

‘‘(e) PAYMENT METHODS.—

‘‘(1) IN GENERAL.—Payments under this section shall be based on such a 

method as the Administrator determines. The Administrator may establish a 

payment method by which interim payments of amounts under this section are 

made during a year based on the Administrator’s best estimate of amounts that 

will be payable after obtaining all of the information. 

‘‘(2) SOURCE OF PAYMENTS.—Payments under this section shall be made from 

the Medicare Prescription Drug Trust Fund. 

‘‘(f) RULES RELATING TO QUALIFIED RETIREE PRESCRIPTION DRUG PLAN.—

‘‘(1) DEFINITION.—For purposes of this section, the term ‘qualified retiree prescription drug plan’ means employment-based retiree health coverage (as defined in paragraph (4)(A)) if, with respect to an individual who is a participant 

or beneficiary under such coverage and is eligible to be enrolled in a prescription drug plan or a MA-EFFS Rx plan under this part, the following requirements are met: 

‘‘(A) ACTUARIAL EQUIVALENCE TO STANDARD COVERAGE.—The Administrator determines (based on an actuarial analysis by the Administrator) 

that coverage provides at least the same actuarial value as standard coverage. Such determination may be made on an annual basis. 

‘‘(B) AUDITS.—The sponsor (and the plan) shall maintain, and afford the 

Administrator access to, such records as the Administrator may require for 

purposes of audits and other oversight activities necessary to ensure the 

adequacy of prescription drug coverage and the accuracy of payments made. 

‘‘(C) PROVISION OF CERTIFICATION OF PRESCRIPTION DRUG COVERAGE.—The 

sponsor of the plan shall provide for issuance of certifications of the type 

described in section 1860D–1(c)(2)(D). 

‘‘(2) LIMITATION ON BENEFIT ELIGIBILITY.—No payment shall be provided 

under this section with respect to a participant or beneficiary in a qualified retiree prescription drug plan unless the individual is—

‘‘(A) is covered under the plan; and 

25

‘‘(B) is eligible to obtain qualified prescription drug coverage under section 1860D–1 but did not elect such coverage under this part (either 

through a prescription drug plan or through a MA-EFFS Rx plan). 

‘‘(3) EMPLOYER AND UNION SPECIAL SUBSIDY AMOUNTS.— ‘‘(A) IN GENERAL.—For purposes of subsection (a), the special subsidy payment amount under this paragraph for a qualifying covered retiree(as defined in paragraph (6)) for a coverage year (as defined in subsection (h)) enrolled in a qualifying entity described in subsection (b)(3) under a qualified 

retiree prescription drug plan is, for the portion of the individual’s gross 

covered prescription drug costs for the year that exceeds the deductible 

amount specified in subparagraph (B), an amount equal to, subject to subparagraph (D), 28 percent of the allowable costs attributable to such gross 

covered prescription drug costs, but only to the extent such costs exceed the 

deductible under subparagraph (B) and do not exceed the cost limit under 

such subparagraph in the case of any such individual for the plan year. 

‘‘(B) DEDUCTIBLE AND COST LIMIT APPLICABLE.—Subject to subparagraph 

(C)—

‘‘(i) the deductible under this subparagraph is equal to $250 for plan 

years that end in 2006; and ‘‘(ii) the cost limit under this subparagraph is equal to $5,000 for 

plan years that end in 2006. 

‘‘(C) INDEXING.—The deductible and cost limit amounts specified in subparagraphs (B) for a plan year that ends after 2006 shall be adjusted in 

the same manner as the annual deductible under section 1860D–2(b)(1) is 

annually adjusted under such section. 

‘‘(D) ADJUSTMENT CONTINGENCY.—The Secretary may adjust the percentage specified in subparagraph (A) with respect to plan years that end in a 

year in a manner so that the aggregate expenditures in the year under this 

section are the same as the aggregate expenditures that would have been 

made under this section (taking into account the effect of any adjustment 

under subsection (d)(1)(B)) if paragraphs (1) and (2) of subsection (a) had 

applied to qualified prescription drug coverage instead of this paragraph 

and subsection (a)(3).

‘‘(4) RELATED DEFINITIONS.—As used in this section: 

‘‘(A) EMPLOYMENT-BASED RETIREE HEALTH COVERAGE.—The term ‘employment-based retiree health coverage’ means health insurance or other coverage of health care costs for individuals eligible to enroll in a prescription 

drug plan or MA-EFFS Rx plan under this part (or for such individuals and 

their spouses and dependents) under a group health plan (including such 

a plan that is established or maintained under or pursuant to one or more 

collective bargaining agreements) based on their status as retired participants in such plan. 

‘‘(B) QUALIFYING COVERED RETIREE.—The term ‘qualifying covered retiree’ 

means an individual who is eligible to obtain qualified prescription drug 

coverage under section 1860D–1 but did not elect such coverage under this 

part (either through a prescription drug plan or through a MA-EFFS Rx 

plan) but is covered under a qualified retiree prescription drug plan. 

‘‘(C) SPONSOR.—The term ‘sponsor’ means a plan sponsor, as defined in 

section 3(16)(B) of the Employee Retirement Income Security Act of 1974, 

except that, in the case of a single-employer plan (as defined in section 

3(41) of such Act), such term means the employer of the plan participants 

if such employer has been designated as the plan sponsor in all prior summary plan descriptions and annual reports issued with respect to the plan 

under part 1 of subtitle B of title I of such Act. 

‘‘(5) CONSTRUCTION.—Nothing in this subsection shall be construed as—

‘‘(A) precluding an individual who is covered under employment-based retiree health coverage from enrolling in a prescription drug plan or in a MAEFFS plan; 

‘‘(B) precluding such employment-based retiree health coverage or an employer or other person from paying all or any portion of any premium required for coverage under such a prescription drug plan or MA-EFFS plan 

on behalf of such an individual; or 

‘‘(C) preventing such employment-based retiree health coverage from providing coverage for retirees—

‘‘(i) who are covered under a qualified retiree prescription plan that 

is better than standard coverage; or 

‘‘(ii) who are not covered under a qualified retiree prescription plan 

but who are enrolled in a prescription drug plan or a MA-EFFS Rx 

plan, that is supplemental to the benefits provided under such prescripVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00025 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
26

tion drug plan or MA-EFFS Rx plan, except that any such supplemental coverage (not including payment of any premium referred to in 

subparagraph (B)) shall be treated as primary coverage to which section 1862(b)(2)(A)(i) is deemed to apply. 

‘‘(g) COMPUTATION OF NATIONAL AVERAGE MONTHLY BID AMOUNT.—

‘‘(1) IN GENERAL.—For each year (beginning with 2006) the Administrator 

shall compute a national average monthly bid amount equal to the average of 

the benchmark bid amounts for each prescription drug plan and for each MAEFFS Rx plan (as computed under paragraph (2), but excluding plans described 

in section 1851(a)(2)(C))) adjusted under paragraph (4) to take into account reinsurance payments. 

‘‘(2) BENCHMARK BID AMOUNT DEFINED.—For purposes of this subsection, the 

term ‘benchmark bid amount’ means, with respect to qualified prescription drug 

coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value of which is equivalent to that of standard coverage), the PDP bid; or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the PDP bid 

multiplied by the ratio of (I) the actuarial value of standard coverage, 

to (II) the actuarial value of the alternative coverage; or 

‘‘(B) a MA-EFFS Rx plan, the portion of the bid amount that is attributable to statutory drug benefits (described in section 1853(a)(1)(A)(ii)(II)). 

For purposes of subparagraph (A), the term ‘PDP bid’ means, with respect to 

a prescription drug plan, the bid amount for enrollment under the plan under 

this part (determined without regard to any low-income subsidy under section 

1860D–7 or any late enrollment penalty under section 1860D–1(c)(2)(B)). 

‘‘(3) WEIGHTED AVERAGE.—

‘‘(A) IN GENERAL.—The monthly national average monthly bid amount 

computed under paragraph (1) shall be a weighted average, with the weight 

for each plan being equal to the average number of beneficiaries enrolled 

under such plan in the previous year. 

‘‘(B) SPECIAL RULE FOR 2006.—For purposes of applying this subsection 

for 2006, the Administrator shall establish procedures for determining the 

weighted average under subparagraph (A) for 2005. 

‘‘(4) ADJUSTMENT TO ADD BACK IN VALUE OF REINSURANCE SUBSIDIES.—The adjustment under this paragraph, to take into account reinsurance payments 

under subsection (c) making up 30 percent of total payments, is such an adjustment as will make the national average monthly bid amount represent represent 100 percent, instead of representing 70 percent, of average payments 

under this part.

‘‘(h) COVERAGE YEAR DEFINED.—For purposes of this section, the term ‘coverage 

year’ means a calendar year in which covered outpatient drugs are dispensed if a 

claim for payment is made under the plan for such drugs, regardless of when the 

claim is paid. 

‘‘SEC. 1860D–9. MEDICARE PRESCRIPTION DRUG TRUST FUND. 

‘‘(a) IN GENERAL.—There is created on the books of the Treasury of the United 

States a trust fund to be known as the ‘Medicare Prescription Drug Trust Fund’ (in 

this section referred to as the ‘Trust Fund’). The Trust Fund shall consist of such 

gifts and bequests as may be made as provided in section 201(i)(1), and such 

amounts as may be deposited in, or appropriated to, such fund as provided in this 

part. Except as otherwise provided in this section, the provisions of subsections (b) 

through (i) of section 1841 shall apply to the Trust Fund in the same manner as 

they apply to the Federal Supplementary Medical Insurance Trust Fund under such 

section. 

‘‘(b) PAYMENTS FROM TRUST FUND.—

‘‘(1) IN GENERAL.—The Managing Trustee shall pay from time to time from 

the Trust Fund such amounts as the Administrator certifies are necessary to 

make—

‘‘(A) payments under section 1860D–7 (relating to low-income subsidy 

payments); 

‘‘(B) payments under section 1860D–8 (relating to subsidy payments); and 

‘‘(C) payments with respect to administrative expenses under this part in 

accordance with section 201(g). 

‘‘(2) TRANSFERS TO MEDICAID ACCOUNT FOR INCREASED ADMINISTRATIVE

COSTS.—The Managing Trustee shall transfer from time to time from the Trust 

Fund to the Grants to States for Medicaid account amounts the Administrator 

27

certifies are attributable to increases in payment resulting from the application 

of a higher Federal matching percentage under section 1935(b). 

‘‘(c) DEPOSITS INTO TRUST FUND.—

‘‘(1) LOW-INCOME TRANSFER.—There is hereby transferred to the Trust Fund, 

from amounts appropriated for Grants to States for Medicaid, amounts equivalent to the aggregate amount of the reductions in payments under section 

1903(a)(1) attributable to the application of section 1935(c). 

‘‘(2) APPROPRIATIONS TO COVER GOVERNMENT CONTRIBUTIONS.—There are authorized to be appropriated from time to time, out of any moneys in the Treasury not otherwise appropriated, to the Trust Fund, an amount equivalent to the 

amount of payments made from the Trust Fund under subsection (b), reduced 

by the amount transferred to the Trust Fund under paragraph (1). 

‘‘(d) RELATION TO SOLVENCY REQUIREMENTS.—Any provision of law that relates to 

the solvency of the Trust Fund under this part shall take into account the Trust 

Fund and amounts receivable by, or payable from, the Trust Fund. 

‘‘SEC. 1860D–10. DEFINITIONS; APPLICATION TO MEDICARE ADVANTAGE AND EFFS PROGRAMS; TREATMENT OF REFERENCES TO PROVISIONS IN PART C. 

‘‘(a) DEFINITIONS.—For purposes of this part: 

‘‘(1) COVERED OUTPATIENT DRUGS.—The term ‘covered outpatient drugs’ is defined in section 1860D–2(f). 

‘‘(2) INITIAL COVERAGE LIMIT.—The term ‘initial coverage limit’ means such 

limit as established under section 1860D–2(b)(3), or, in the case of coverage that 

is not standard coverage, the comparable limit (if any) established under the 

coverage. 

‘‘(3) MEDICARE PRESCRIPTION DRUG TRUST FUND.—The term ‘Medicare Prescription Drug Trust Fund’ means the Trust Fund created under section 

1860D–9(a). 

‘‘(4) PDP SPONSOR.—The term ‘PDP sponsor’ means an entity that is certified 

under this part as meeting the requirements and standards of this part for such 

a sponsor. 

‘‘(5) PRESCRIPTION DRUG PLAN.—The term ‘prescription drug plan’ means 

health benefits coverage that—

‘‘(A) is offered under a policy, contract, or plan by a PDP sponsor pursuant to, and in accordance with, a contract between the Administrator and 

the sponsor under section 1860D–4(b); 

‘‘(B) provides qualified prescription drug coverage; and 

‘‘(C) meets the applicable requirements of the section 1860D–3 for a prescription drug plan. 

‘‘(6) QUALIFIED PRESCRIPTION DRUG COVERAGE.—The term ‘qualified prescription drug coverage’ is defined in section 1860D–2(a). 

‘‘(7) STANDARD COVERAGE.—The term ‘standard coverage’ is defined in section 

1860D–2(b). 

‘‘(b) OFFER OF QUALIFIED PRESCRIPTION DRUG COVERAGE UNDER MEDICARE ADVANTAGE AND EFFS PROGRAMS.—

‘‘(1) AS PART OF MEDICARE ADVANTAGE PLAN.—Medicare Advantage organizations are required to offer Medicare Advantage plans that include qualified prescription drug coverage under part C pursuant to section 1851(j). 

‘‘(2) AS PART OF EFFS PLAN.—EFFS organizations are required to offer EFFS 

plans that include qualified prescription drug coverage under part E pursuant 

to section 1860E–2(d). 

‘‘(c) APPLICATION OF PART C PROVISIONS UNDER THIS PART.—For purposes of applying provisions of part C under this part with respect to a prescription drug plan 

and a PDP sponsor, unless otherwise provided in this part such provisions shall be 

applied as if—

‘‘(1) any reference to a Medicare Advantage or other plan included a reference 

to a prescription drug plan; 

‘‘(2) any reference to a provider-sponsored organization included a reference 

to a PDP sponsor; 

‘‘(3) any reference to a contract under section 1857 included a reference to a 

contract under section 1860D–4(b); and 

‘‘(4) any reference to part C included a reference to this part. 

‘‘(d) REPORT ON PHARMACY SERVICES PROVIDED TO NURSING FACILITY PATIENTS.—

‘‘(1) REVIEW.—Within 6 months after the date of the enactment of this section, 

the Secretary shall review the current standards of practice for pharmacy services provided to patients in nursing facilities. 

‘‘(2) EVALUATIONS AND RECOMMENDATIONS.—Specifically in the review under 

paragraph (1), the Secretary shall—

28

‘‘(A) assess the current standards of practice, clinical services, and other 

service requirements generally utilized for pharmacy services in the longterm care setting; 

‘‘(B) evaluate the impact of those standards with respect to patient safety, 

reduction of medication errors and quality of care; and 

‘‘(C) recommend (in the Secretary’s report under paragraph (3)) necessary 

actions and appropriate reimbursement to ensure the provision of prescription drugs to medicare beneficiaries residing in nursing facilities in a manner consistent with existing patient safety and quality of care standards 

under applicable State and Federal laws. 

‘‘(3) REPORT.—The Secretary shall submit a report to the Congress on the Secretary’s findings and recommendations under this subsection, including a detailed description of the Secretary’s plans to implement this part in a manner 

consistent with applicable State and Federal laws designed to protect the safety 

and quality of care of nursing facility patients.’’. 

(b) ADDITIONAL CONFORMING CHANGES.— (1) CONFORMING REFERENCES TO PREVIOUS PART D.—Any reference in law (in 

effect before the date of the enactment of this Act) to part D of title XVIII of 

the Social Security Act is deemed a reference to part F of such title (as in effect 

after such date). 

(2) CONFORMING AMENDMENT PERMITTING WAIVER OF COST-SHARING.—Section 

1128B(b)(3) (42 U.S.C. 1320a–7b(b)(3)) is amended—

(A) by striking ‘‘and’’ at the end of subparagraph (E); 

(B) by striking the period at the end of subparagraph (F) and inserting 

‘‘; and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(G) the waiver or reduction of any cost-sharing imposed under part D of title 

XVIII.’’. 

(3) SUBMISSION OF LEGISLATIVE PROPOSAL.—Not later than 6 months after the 

date of the enactment of this Act, the Secretary of Health and Human Services 

shall submit to the appropriate committees of Congress a legislative proposal 

providing for such technical and conforming amendments in the law as are required by the provisions of this subtitle. 

(c) STUDY ON TRANSITIONING PART B PRESCRIPTION DRUG COVERAGE.—Not later 

than January 1, 2005, the Medicare Benefits Administrator shall submit a report 

to Congress that makes recommendations regarding methods for providing benefits 

under part D of title XVIII of the Social Security Act for outpatient prescription 

drugs for which benefits are provided under part B of such title. 

SEC. 102. OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE UNDER MEDICARE ADVANTAGE AND ENHANCED FEE-FOR-SERVICE (EFFS) PROGRAM. 

(a) MEDICARE ADVANTAGE.—Section 1851 (42 U.S.C. 1395w–21) is amended by 

adding at the end the following new subsection: 

‘‘(j) AVAILABILITY OF PRESCRIPTION DRUG BENEFITS AND SUBSIDIES.— ‘‘(1) OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—A Medicare Advantage organization on and after January 1, 2006—

‘‘(A) may not offer a Medicare Advantage plan described in section 

1851(a)(2)(A) in an area unless either that plan (or another Medicare Advantage plan offered by the organization in that area) includes qualified 

prescription drug coverage; and 

‘‘(B) may not offer the prescription drug coverage (other than that required under parts A and B) to an enrollee under a Medicare Advantage 

plan, unless such drug coverage is at least qualified prescription drug coverage and unless the requirements of this subsection with respect to such 

coverage are met. 

‘‘(2) REQUIREMENT FOR ELECTION OF PART D COVERAGE TO OBTAIN QUALIFIED

PRESCRIPTION DRUG COVERAGE.—For purposes of this part, an individual who 

has not elected qualified prescription drug coverage under section 1860D–1(b) 

shall be treated as being ineligible to enroll in a Medicare Advantage plan 

under this part that offers such coverage. 

‘‘(3) COMPLIANCE WITH CERTAIN ADDITIONAL BENEFICIARY PROTECTIONS FOR

PRESCRIPTION DRUG COVERAGE.—With respect to the offering of qualified prescription drug coverage by a Medicare Advantage organization under this part 

on and after January 1, 2006, the organization and plan shall meet the requirements of subsections (a) through (d) of section 1860D–3 in the same manner as 

they apply to a PDP sponsor and a prescription drug plan under part D and 

shall submit to the Administrator the information described in section 1860D–

6(a)(2). The Administrator shall waive such requirements to the extent the Administrator determines that such requirements duplicate requirements otherwise applicable to the organization or plan under this part. 

29

‘‘(4) AVAILABILITY OF PREMIUM AND COST-SHARING SUBSIDIES.—In the case of 

low-income individuals who are enrolled in a Medicare Advantage plan that provides qualified prescription drug coverage, premium and cost-sharing subsidies 

are provided for such coverage under section 1860D–7. 

‘‘(5) AVAILABILITY OF DIRECT AND REINSURANCE SUBSIDIES TO REDUCE BIDS

AND PREMIUMS.—Medicare Advantage organizations are provided direct and reinsurance subsidy payments for providing qualified prescription drug coverage 

under this part under section 1860D–8. 

‘‘(6) CONSOLIDATION OF DRUG AND NON-DRUG PREMIUMS.—In the case of a 

Medicare Advantage plan that includes qualified prescription drug coverage, 

with respect to an enrollee in such plan there shall be a single premium for 

both drug and non-drug coverage provided under the plan. 

‘‘(7) TRANSITION IN INITIAL ENROLLMENT PERIOD.—Notwithstanding any other 

provision of this part, the annual, coordinated election period under subsection 

(e)(3)(B) for 2006 shall be the 6-month period beginning with November 2005. 

‘‘(8) QUALIFIED PRESCRIPTION DRUG COVERAGE; STANDARD COVERAGE.—For 

purposes of this part, the terms ‘qualified prescription drug coverage’ and 

‘standard coverage’ have the meanings given such terms in section 1860D–2. 

‘‘(9) SPECIAL RULES FOR PRIVATE FEE-FOR-SERVICE PLANS.— With respect to a 

Medicare Advantage plan described in section 1851(a)(2)(C) that offers qualified 

prescription drug coverage—

‘‘(A) REQUIREMENTS REGARDING NEGOTIATED PRICES.—Subsections (a)(1) 

and (d)(1) of section 1860D–2 shall not be construed to require the plan to 

negotiate prices or discounts but shall apply to the extent the plan does so. 

‘‘(B) MODIFICATION OF PHARMACY PARTICIPATION REQUIREMENT.—If the 

plan provides access, without charging additional copayments, to all pharmacies without regard to whether they are participating pharmacies in a 

network, section 1860D-3(c)(1)(A)(iii) shall not apply to the plan. 

‘‘(C) DRUG UTILIZATION MANAGEMENT PROGRAM NOT REQUIRED.—The requirements of section 1860D-3(d)(1)(A) shall not apply to the plan. 

‘‘(D) NON-PARTICIPATING PHARMACY DISCLOSURE EXCEPTION.—If the plan 

provides coverage for drugs purchased from all pharmacies, without entering into contracts or agreements with pharmacies to provide drugs to enrollees covered by the plan, section 1860D-3(d)(5) shall not apply to the 

plan.’’. 

(b) APPLICATION TO EFFS PLANS.—Subsection (d) of section 1860E–2, as added by 

section 201(a), is amended to read as follows: 

‘‘(d) AVAILABILITY OF PRESCRIPTION DRUG BENEFITS AND SUBSIDIES.—

‘‘(1) OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—An EFFS organization—

‘‘(A) may not offer an EFFS plan in an area unless either that plan (or 

another EFFS plan offered by the organization in that area) includes qualified prescription drug coverage; and 

‘‘(B) may not offer the prescription drug coverage (other than that required under parts A and B) to an enrollee under an EFFS plan, unless 

such drug coverage is at least qualified prescription drug coverage and unless the requirements of this subsection with respect to such coverage are 

met. 

‘‘(2) REQUIREMENT FOR ELECTION OF PART D COVERAGE TO OBTAIN QUALIFIED

PRESCRIPTION DRUG COVERAGE.—For purposes of this part, an individual who 

has not elected qualified prescription drug coverage under section 1860D–1(b) 

shall be treated as being ineligible to enroll in an EFFS plan under this part 

that offers such coverage. 

‘‘(3) COMPLIANCE WITH CERTAIN ADDITIONAL BENEFICIARY PROTECTIONS FOR

PRESCRIPTION DRUG COVERAGE.—With respect to the offering of qualified prescription drug coverage by an EFFS organization under this part, the organization and plan shall meet the requirements of subsections (a) through (d) of section 1860D–3 in the same manner as they apply to a PDP sponsor and a prescription drug plan under part D and shall submit to the Administrator the information described in section 1860D–6(a)(2). The Administrator shall waive 

such requirements to the extent the Administrator determines that such requirements duplicate requirements otherwise applicable to the organization or 

plan under this part. 

‘‘(4) AVAILABILITY OF PREMIUM AND COST-SHARING SUBSIDIES.—In the case of 

low-income individuals who are enrolled in an EFFS plan that provides qualified prescription drug coverage, premium and cost-sharing subsidies are provided for such coverage under section 1860D–7. 

‘‘(5) AVAILABILITY OF DIRECT AND REINSURANCE SUBSIDIES TO REDUCE BIDS

AND PREMIUMS.—EFFS organizations are provided direct and reinsurance subVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
30

sidy payments for providing qualified prescription drug coverage under this part 

under section 1860D–8. 

‘‘(6) CONSOLIDATION OF DRUG AND NON-DRUG PREMIUMS.—In the case of an 

EFFS plan that includes qualified prescription drug coverage, with respect to 

an enrollee in such plan there shall be a single premium for both drug and nondrug coverage provided under the plan. 

‘‘(7) QUALIFIED PRESCRIPTION DRUG COVERAGE; STANDARD COVERAGE.—For 

purposes of this part, the terms ‘qualified prescription drug coverage’ and 

‘standard coverage’ have the meanings given such terms in section 1860D–2.’’. 

(c) CONFORMING AMENDMENTS.—Section 1851 (42 U.S.C. 1395w–21) is amended—

(1) in subsection (a)(1)—

(A) by inserting ‘‘(other than qualified prescription drug benefits)’’ after 

‘‘benefits’’; 

(B) by striking the period at the end of subparagraph (B) and inserting 

a comma; and 

(C) by adding after and below subparagraph (B) the following: 

‘‘and may elect qualified prescription drug coverage in accordance with section 

1860D–1.’’; and 

(2) in subsection (g)(1), by inserting ‘‘and section 1860D–1(c)(2)(B)’’ after ‘‘in 

this subsection’’. 

(d) EFFECTIVE DATE.—The amendments made by this section apply to coverage 

provided on or after January 1, 2006.

SEC. 103. MEDICAID AMENDMENTS. 

(a) DETERMINATIONS OF ELIGIBILITY FOR LOW-INCOME SUBSIDIES.—

(1) REQUIREMENT.—Section 1902(a) (42 U.S.C. 1396a(a)) is amended—

(A) by striking ‘‘and’’ at the end of paragraph (64); 

(B) by striking the period at the end of paragraph (65) and inserting ‘‘; 

and’’; and 

(C) by inserting after paragraph (65) the following new paragraph: 

‘‘(66) provide for making eligibility determinations under section 1935(a).’’. 

(2) NEW SECTION.—Title XIX is further amended—

(A) by redesignating section 1935 as section 1936; and 

(B) by inserting after section 1934 the following new section: 

‘‘SPECIAL PROVISIONS RELATING TO MEDICARE PRESCRIPTION DRUG BENEFIT

‘‘SEC. 1935. (a) REQUIREMENT FOR MAKING ELIGIBILITY DETERMINATIONS FOR LOWINCOME SUBSIDIES.—As a condition of its State plan under this title under section 

1902(a)(66) and receipt of any Federal financial assistance under section 1903(a), a 

State shall—

‘‘(1) make determinations of eligibility for premium and cost-sharing subsidies 

under (and in accordance with) section 1860D–7; 

‘‘(2) inform the Administrator of the Medicare Benefits Administration of such 

determinations in cases in which such eligibility is established; and 

‘‘(3) otherwise provide such Administrator with such information as may be 

required to carry out part D of title XVIII (including section 1860D–7). 

‘‘(b) PAYMENTS FOR ADDITIONAL ADMINISTRATIVE COSTS.—

‘‘(1) IN GENERAL.—The amounts expended by a State in carrying out subsection (a) are, subject to paragraph (2), expenditures reimbursable under the 

appropriate paragraph of section 1903(a); except that, notwithstanding any 

other provision of such section, the applicable Federal matching rates with respect to such expenditures under such section shall be increased as follows (but 

in no case shall the rate as so increased exceed 100 percent):

‘‘(A) For expenditures attributable to costs incurred during 2005, the otherwise applicable Federal matching rate shall be increased by 10 percent 

of the percentage otherwise payable (but for this subsection) by the State. 

‘‘(B)(i) For expenditures attributable to costs incurred during 2006 and 

each subsequent year through 2013, the otherwise applicable Federal 

matching rate shall be increased by the applicable percent (as defined in 

clause (ii)) of the percentage otherwise payable (but for this subsection) by 

the State. 

‘‘(ii) For purposes of clause (i), the ‘applicable percent’ for—

‘‘(I) 2006 is 20 percent; or 

‘‘(II) a subsequent year is the applicable percent under this clause for 

the previous year increased by 10 percentage points. 

‘‘(C) For expenditures attributable to costs incurred after 2013, the otherwise applicable Federal matching rate shall be increased to 100 percent.

‘‘(2) COORDINATION.—The State shall provide the Administrator with such information as may be necessary to properly allocate administrative expenditures 

31

described in paragraph (1) that may otherwise be made for similar eligibility 

determinations.’’. 

(b) PHASED-IN FEDERAL ASSUMPTION OF MEDICAID RESPONSIBILITY FOR PREMIUM

AND COST-SHARING SUBSIDIES FOR DUALLY ELIGIBLE INDIVIDUALS.— (1) IN GENERAL.—Section 1903(a)(1) (42 U.S.C. 1396b(a)(1)) is amended by inserting before the semicolon the following: ‘‘, reduced by the amount computed 

under section 1935(c)(1) for the State and the quarter’’. 

(2) AMOUNT DESCRIBED.—Section 1935, as inserted by subsection (a)(2), is 

amended by adding at the end the following new subsection: 

‘‘(c) FEDERAL ASSUMPTION OF MEDICAID PRESCRIPTION DRUG COSTS FOR DUALLY- ELIGIBLE BENEFICIARIES.— ‘‘(1) IN GENERAL.—For purposes of section 1903(a)(1), for a State that is one 

of the 50 States or the District of Columbia for a calendar quarter in a year 

(beginning with 2005) the amount computed under this subsection is equal to 

the product of the following: 

‘‘(A) MEDICARE SUBSIDIES.—The total amount of payments made in the 

quarter under section 1860D–7 (relating to premium and cost-sharing prescription drug subsidies for low-income medicare beneficiaries) that are attributable to individuals who are residents of the State and are entitled to 

benefits with respect to prescribed drugs under the State plan under this 

title (including such a plan operating under a waiver under section 1115). 

‘‘(B) STATE MATCHING RATE.—A proportion computed by subtracting from 

100 percent the Federal medical assistance percentage (as defined in section 1905(b)) applicable to the State and the quarter. 

‘‘(C) PHASE-OUT PROPORTION.—The phase-out proportion (as defined in 

paragraph (2)) for the quarter. 

‘‘(2) PHASE-OUT PROPORTION.—For purposes of paragraph (1)(C), the ‘phaseout proportion’ for a calendar quarter in—

‘‘(A) 2006 is 93-1⁄3 percent; 

‘‘(B) a subsequent year before 2021, is the phase-out proportion for calendar quarters in the previous year decreased by 6-2⁄3 percentage points; 

or 

‘‘(C) a year after 2020 is 0 percent.’’. 

(c) MEDICAID PROVIDING WRAP-AROUND BENEFITS.—Section 1935, as so inserted 

and amended, is further amended by adding at the end the following new subsection: 

‘‘(d) ADDITIONAL PROVISIONS.—

‘‘(1) MEDICAID AS SECONDARY PAYOR.—In the case of an individual who is entitled to qualified prescription drug coverage under a prescription drug plan 

under part D of title XVIII (or under a MA-EFFS Rx plan under part C or E 

of such title) and medical assistance for prescribed drugs under this title, medical assistance shall continue to be provided under this title (other than for copayment amounts specified in section 1860D–7(a)(1)(B), notwithstanding section 

1916) for prescribed drugs to the extent payment is not made under the prescription drug plan or MA-EFFS Rx plan selected by the individual. 

‘‘(2) CONDITION.—A State may require, as a condition for the receipt of medical assistance under this title with respect to prescription drug benefits for an 

individual eligible to obtain qualified prescription drug coverage described in 

paragraph (1), that the individual elect qualified prescription drug coverage 

under section 1860D–1.’’. 

(d) TREATMENT OF TERRITORIES.—

(1) IN GENERAL.—Section 1935, as so inserted and amended, is further 

amended—

(A) in subsection (a) in the matter preceding paragraph (1), by inserting 

‘‘subject to subsection (e)’’ after ‘‘section 1903(a)’’; 

(B) in subsection (c)(1), by inserting ‘‘subject to subsection (e)’’ after 

‘‘1903(a)(1)’’; and 

(C) by adding at the end the following new subsection: 

‘‘(e) TREATMENT OF TERRITORIES.—

‘‘(1) IN GENERAL.—In the case of a State, other than the 50 States and the 

District of Columbia—

‘‘(A) the previous provisions of this section shall not apply to residents of 

such State; and 

‘‘(B) if the State establishes a plan described in paragraph (2) (for providing medical assistance with respect to the provision of prescription drugs 

to medicare beneficiaries), the amount otherwise determined under section 

1108(f) (as increased under section 1108(g)) for the State shall be increased 

by the amount specified in paragraph (3). 

‘‘(2) PLAN.—The plan described in this paragraph is a plan that—

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‘‘(A) provides medical assistance with respect to the provision of covered 

outpatient drugs (as defined in section 1860D–2(f)) to low-income medicare 

beneficiaries; and 

‘‘(B) assures that additional amounts received by the State that are attributable to the operation of this subsection are used only for such assistance. 

‘‘(3) INCREASED AMOUNT.—

‘‘(A) IN GENERAL.—The amount specified in this paragraph for a State for 

a year is equal to the product of—

‘‘(i) the aggregate amount specified in subparagraph (B); and 

‘‘(ii) the amount specified in section 1108(g)(1) for that State, divided 

by the sum of the amounts specified in such section for all such States. 

‘‘(B) AGGREGATE AMOUNT.—The aggregate amount specified in this subparagraph for—

‘‘(i) 2006, is equal to $25,000,000; or 

‘‘(ii) a subsequent year, is equal to the aggregate amount specified in 

this subparagraph for the previous year increased by annual percentage increase specified in section 1860D–2(b)(5) for the year involved. 

‘‘(4) REPORT.—The Administrator shall submit to Congress a report on the application of this subsection and may include in the report such recommendations as the Administrator deems appropriate.’’. 

(2) CONFORMING AMENDMENT.—Section 1108(f) (42 U.S.C. 1308(f)) is amended 

by inserting ‘‘and section 1935(e)(1)(B)’’ after ‘‘Subject to subsection (g)’’. 

(e) AMENDMENT TO BEST PRICE.—Section 1927(c)(1)(C)(i) (42 U.S.C. 1396r–

8(c)(1)(C)(i)) is amended—

(1) by striking ‘‘and’’ at the end of subclause (III); 

(2) by striking the period at the end of subclause (IV) and inserting ‘‘; and’’; 

and 

(3) by adding at the end the following new subclause: 

‘‘(V) any prices charged which are negotiated by a prescription 

drug plan under part D of title XVIII, by a MA-EFFS Rx plan 

under part C or E of such title with respect to covered outpatient 

drugs, or by a qualified retiree prescription drug plan (as defined 

in section 1860D–8(f)(1)) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part 

B of such title.’’. 

SEC. 104. MEDIGAP TRANSITION. 

(a) IN GENERAL.—Section 1882 (42 U.S.C. 1395ss) is amended by adding at the 

end the following new subsection: 

‘‘(v) COVERAGE OF PRESCRIPTION DRUGS.—

‘‘(1) IN GENERAL.—Notwithstanding any other provision of law, except as provided in paragraph (3) no new medicare supplemental policy that provides coverage of expenses for prescription drugs may be issued under this section on or 

after January 1, 2006, to an individual unless it replaces a medicare supplemental policy that was issued to that individual and that provided some coverage of expenses for prescription drugs. Nothing in this subsection shall be 

construed as preventing the policy holder of a medicare supplemental policy 

issued before January 1, 2006, from continuing to receive benefits under such 

policy on and after such date. 

‘‘(2) ISSUANCE OF SUBSTITUTE POLICIES FOR BENEFICIARIES ENROLLED WITH A

PLAN UNDER PART D.—

‘‘(A) IN GENERAL.—The issuer of a medicare supplemental policy—

‘‘(i) may not deny or condition the issuance or effectiveness of a medicare supplemental policy that has a benefit package classified as ‘A’, 

‘B’, ‘C’, ‘D’, ‘E’, ‘F’, or ‘G’ (under the standards established under subsection (p)(2)) and that is offered and is available for issuance to new 

enrollees by such issuer; 

‘‘(ii) may not discriminate in the pricing of such policy, because of 

health status, claims experience, receipt of health care, or medical condition; and 

‘‘(iii) may not impose an exclusion of benefits based on a pre-existing 

condition under such policy, 

in the case of an individual described in subparagraph (B) who seeks to enroll under the policy not later than 63 days after the date of the termination of enrollment described in such paragraph and who submits evidence 

of the date of termination or disenrollment along with the application for 

such medicare supplemental policy. 

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‘‘(B) INDIVIDUAL COVERED.—An individual described in this subparagraph 

is an individual who—

‘‘(i) enrolls in a prescription drug plan under part D; and 

‘‘(ii) at the time of such enrollment was enrolled and terminates enrollment in a medicare supplemental policy which has a benefit package classified as ‘H’, ‘I’, or ‘J’ under the standards referred to in subparagraph (A)(i) or terminates enrollment in a policy to which such 

standards do not apply but which provides benefits for prescription 

drugs. 

‘‘(C) ENFORCEMENT.—The provisions of paragraph (4) of subsection (s) 

shall apply with respect to the requirements of this paragraph in the same 

manner as they apply to the requirements of such subsection. 

‘‘(3) NEW STANDARDS.—In applying subsection (p)(1)(E) (including permitting 

the NAIC to revise its model regulations in response to changes in law) with 

respect to the change in benefits resulting from title I of the Medicare Prescription Drug and Modernization Act of 2003, with respect to policies issued to individuals who are enrolled in a plan under part D, the changes in standards shall 

only provide for substituting (for the benefit packages described in paragraph 

(2)(B)(ii) that included coverage for prescription drugs) two benefit packages 

that may provide for coverage of cost-sharing (other than the prescription drug 

deductible) with respect to qualified prescription drug coverage under such part. 

The two benefit packages shall be consistent with the following: 

‘‘(A) FIRST NEW POLICY.—The policy described in this subparagraph has 

the following benefits, notwithstanding any other provision of this section 

relating to a core benefit package: 

‘‘(i) Coverage of 50 percent of the cost-sharing otherwise applicable 

under parts A and B, except coverage of 100 percent of any cost-sharing 

otherwise applicable for preventive benefits. 

‘‘(ii) No coverage of the part B deductible. 

‘‘(iii) Coverage for all hospital coinsurance for long stays (as in the 

current core benefit package). 

‘‘(iv) A limitation on annual out-of-pocket expenditures under parts A 

and B to $4,000 in 2005 (or, in a subsequent year, to such limitation 

for the previous year increased by an appropriate inflation adjustment 

specified by the Secretary). 

‘‘(B) SECOND NEW POLICY.—The policy described in this subparagraph has 

the same benefits as the policy described in subparagraph (A), except as follows: 

‘‘(i) Substitute ‘75 percent’ for ‘50 percent’ in clause (i) of such subparagraph. 

‘‘(ii) Substitute ‘$2,000’ for ‘$4,000’ in clause (iv) of such subparagraph. 

‘‘(4) CONSTRUCTION.—Any provision in this section or in a medicare supplemental policy relating to guaranteed renewability of coverage shall be deemed 

to have been met through the offering of other coverage under this subsection.’’. 

(b) NAIC REPORT TO CONGRESS ON MEDIGAP MODERNIZATION.—The Secretary 

shall request the National Association of Insurance Commissioners to submit to 

Congress, not later than 18 months after the date of the enactment of this Act, a 

report that includes recommendations on the modernization of coverage under the 

medigap program under section 1882 of the Social Security Act (42 U.S.C. 1395ss). 

SEC. 105. MEDICARE PRESCRIPTION DRUG DISCOUNT CARD ENDORSEMENT PROGRAM. 

(a) IN GENERAL.—Title XVIII is amended by inserting after section 1806 the following new sections: 

‘‘MEDICARE PRESCRIPTION DRUG DISCOUNT CARD ENDORSEMENT PROGRAM

‘‘SEC. 1807. (a) ESTABLISHMENT OF PROGRAM.—

‘‘(1) IN GENERAL.—The Secretary (or the Medicare Benefits Administrator pursuant to section 1809(c)(3)(C)) shall establish a program to endorse prescription 

drug discount card programs (each such program referred to as an ‘endorsed 

program’) that meet the requirements of this section in order to provide access 

to prescription drug discounts for medicare beneficiaries throughout the United 

States. The Secretary shall make available to medicare beneficiaries information regarding endorsed programs under this section. 

‘‘(2) LIMITED PERIOD OF OPERATION.—The Secretary shall begin the program 

under this section as soon as possible, but in no case later than 90 days after 

the date of the enactment of this section. The Secretary shall provide for an appropriate transition and discontinuation of such program at the time medicare 

prescription drug benefits first become available under part D. 

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‘‘(b) REQUIREMENTS FOR CARD ENDORSEMENT PROGRAM.—The Secretary may not 

endorse a prescription drug discount card program under this section unless the 

program meets the following requirements: 

‘‘(1) SAVINGS TO MEDICARE BENEFICIARIES.—The program passes on to medicare beneficiaries who enroll in the program discounts, rebates, and other price 

concessions on prescription drugs, including discounts negotiated with pharmacies and manufacturers. 

‘‘(2) PROHIBITION ON APPLICATION ONLY TO MAIL ORDER.—The program applies 

to drugs that are available other than solely through mail order. 

‘‘(3) BENEFICIARY SERVICES.—The program provides pharmaceutical support 

services, such as education and counseling, and services to prevent adverse drug 

interactions. 

‘‘(4) INFORMATION.—The program makes available to medicare beneficiaries 

through the Internet and otherwise information, including information on enrollment fees, prices charged to beneficiaries, and services offered under the 

program, that the Secretary identifies as being necessary to provide for informed choice by beneficiaries among endorsed programs. 

‘‘(5) DEMONSTRATED EXPERIENCE.—The program is operated directly, or 

through arrangements with affiliated organization, by an entity that has demonstrated experience and expertise in operating such a program or a similar 

program. 

‘‘(6) QUALITY ASSURANCE.—Such operating entity has in place adequate procedures for assuring quality service under the program. 

‘‘(7) ENROLLMENT FEES.—The program may charge an annual enrollment fee, 

but the amount of such annual fee may not exceed $30. A State may pay some 

or all of the fee for individuals residing in the State. 

‘‘(8) CONFIDENTIALITY PROTECTIONS.—The program implements policies and 

procedures to safeguard the use and disclosure of program beneficiaries’ individually identifiable health information in a manner consistent with the Federal 

regulations (concerning the privacy of individually identifiable health information) promulgated under section 264(c) of the Health Insurance Portability and 

Accountability Act of 1996. 

‘‘(9) PERIODIC REPORTS TO SECRETARY.—The entity operating the program 

shall submit to the Secretary periodic reports on performance, utilization, finances, and such other matters as the Secretary may specify. 

‘‘(10) ADDITIONAL BENEFICIARY PROTECTIONS.—The program meets such additional requirements as the Secretary identifies to protect and promote the interest of medicare beneficiaries, including requirements that ensure that beneficiaries are not charged more than the lower of the negotiated retail price or 

the usual and customary price. 

The prices negotiated by a prescription drug discount card program endorsed under 

this section shall (notwithstanding any other provision of law) not be taken into account for the purposes of establishing the best price under section 1927(c)(1)(C). 

‘‘(c) PROGRAM OPERATION.—The Secretary shall operate the program under this 

section consistent with the following: 

‘‘(1) PROMOTION OF INFORMED CHOICE.—In order to promote informed choice 

among endorsed prescription drug discount card programs, the Secretary shall 

provide for the dissemination of information which compares the prices and 

services of such programs in a manner coordinated with the dissemination of 

educational information on Medicare Advantage plans under part C. 

‘‘(2) OVERSIGHT.—The Secretary shall provide appropriate oversight to ensure 

compliance of endorsed programs with the requirements of this section, including verification and disclosure (upon request) of the discounts and services provided, the amount of dispensing fees recognized, and audits under section 

1860D–2(d)(3). 

‘‘(3) USE OF MEDICARE TOLL-FREE NUMBER.—The Secretary shall provide 

through the 1-800-medicare toll free telephone number for the receipt and response to inquiries and complaints concerning the program and programs endorsed under this section. 

‘‘(4) SANCTIONS FOR ABUSIVE PRACTICES.—The Secretary may implement intermediate sanctions or may revoke the endorsement of a program in the case of 

a program that the Secretary determines no longer meets the requirements of 

this section or that has engaged in false or misleading marketing practices. 

‘‘(5) ENROLLMENT PRACTICES.—A medicare beneficiary may not be enrolled in 

more than one endorsed program at any time. A medicare beneficiary may 

change the endorsed program in which the beneficiary is enrolled, but may not 

make such change until the beneficiary has been enrolled in a program for a 

minimum period of time specified by the Secretary. 

35

‘‘(d) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated such sums as may be necessary to carry out this section. 

‘‘(e) INTERIM, FINAL REGULATORY AUTHORITY.—In order to carry out this section 

in a timely manner, the Secretary may promulgate regulations that take effect on 

an interim basis, after notice and pending opportunity for public comment. 

‘‘TRANSITIONAL PRESCRIPTION DRUG ASSISTANCE PROGRAM FOR LOW-INCOME

BENEFICIARIES

‘‘SEC. 1807A. (a) PURPOSE.—The purpose of this section is to provide low-income 

medicare beneficiaries with incomes below 150 percent of the Federal poverty level 

immediate assistance in the purchase of covered outpatient prescription drugs during the period before the program under part D becomes effective. 

‘‘(b) APPROPRIATIONS.—For the purpose of carrying out this section, there is appropriated, out of any money in the Treasury not otherwise appropriated— ‘‘(1) for fiscal year 2004, $2,000,000,000; and 

‘‘(2) for fiscal year 2005, $3,000,000,000. 

‘‘(c) ELIGIBILITY.— ‘‘(1) IN GENERAL.—The Secretary shall establish eligibility standards consistent with this subsection. 

‘‘(2) SPECIFICS.—In no case shall an individual be eligible for assistance under 

this section unless the individual—

‘‘(A) is entitled to benefits under part A or enrolled under part B; 

‘‘(B) has income that is at or below 150 percent of the Federal poverty 

line; 

‘‘(C) meets the resources requirement described in section 1905(p)(1)(C); 

‘‘(D) is enrolled under a prescription drug discount card program under 

section 1807 (or under an alternative program authorized under subsection 

(d)(2)); and 

‘‘(E) is not eligible for coverage of, or assistance for, outpatient prescription drugs under any of the following: 

‘‘(i) A medicaid plan under title XIX (including under any waiver approved under section 1115). 

‘‘(ii) Enrollment under a group health plan or health insurance coverage. 

‘‘(iii) Enrollment under a medicare supplemental insurance policy. 

‘‘(iv) Chapter 55 of title 10, United States Code (relating to medical 

and dental care for members of the uniformed services). 

‘‘(v) Chapter 17 of title 38, United States Code (relating to Veterans’ 

medical care). 

‘‘(vi) Enrollment under a plan under chapter 89 of title 5, United 

States Code (relating to the Federal employees’ health benefits program). 

‘‘(vii) The Indian Health Care Improvement Act (25 U.S.C. 1601 et 

seq.). 

‘‘(d) FORM OF ASSISTANCE.— ‘‘(1) IN GENERAL.—Subject to paragraph (2), the assistance under this section 

to an eligible individual shall be in such form as the Secretary shall specify, 

including the use of a debit card mechanism to pay for drugs purchased through 

the use of the prescription drug discount card program to eligible individuals 

who are enrolled in such program. 

‘‘(2) THROUGH ALTERNATIVE STATE PROGRAM.—A State may apply to the Secretary for authorization to provide the assistance under this section to an eligible individual through a State pharmaceutical assistance program or private 

program of pharmaceutical assistance. The Secretary shall not authorize the 

use of such a program unless the Secretary finds that the program—

‘‘(A) was in existence before the date of the enactment of this section; and 

‘‘(B) is reasonably designed to provide for pharmaceutical assistance for 

a number of individuals, and in a scope, that is not less than the number 

of individuals, and minimum required amount, that would occur if the provisions of this paragraph had not applied in the State. 

‘‘(3) RELATIONSHIP TO DISCOUNTS.—The assistance provided under this section 

is in addition to the discount otherwise available to individuals enrolled in prescription drug discount card programs who are not eligible individuals. 

‘‘(4) LIMITATION ON ASSISTANCE.—

‘‘(A) IN GENERAL.—The assistance under this section for an eligible individual shall be limited to assistance—

‘‘(i) for covered outpatient drugs (as defined for purposes of part D) 

and for enrollment fees imposed under prescription drug discount card 

programs; and 

36

‘‘(ii) for expenses incurred—

‘‘(I) on and after the date the individual is both enrolled in the 

prescription drug discount card program and determined to be an 

eligible individual under this section; and 

‘‘(II) before the date benefits are first available under the program under part D. 

‘‘(B) AUTHORITY.—The Secretary shall take such steps as may be necessary to assure compliance with the expenditure limitations described in 

subsection (b). 

‘‘(e) PAYMENT OF FEDERAL SUBSIDY TO SPONSORS.— ‘‘(1) IN GENERAL.—Insofar as assistance is provided under this section through 

programs under section 1807, the Secretary shall make payment (within the 

amounts under subsection (b), less the administrative costs relating to determinations of eligibility) to the sponsor of the prescription drug discount card 

program (or to a State or other entity operating an alternative program under 

subsection (d)(2)) in which an eligible individual is enrolled of the amount of 

the assistance provided by the sponsor pursuant to this section. 

‘‘(2) PERIODIC PAYMENTS.—Payments under this subsection shall be made on 

a monthly or other periodic installment basis, based upon estimates of the Secretary and shall be reduced or increased to the extent of any overpayment or 

underpayment which the Secretary determines was made under this section for 

any prior period and with respect to which adjustment has not already been 

made under this paragraph. 

‘‘(f) DEFINITIONS.—For purposes of this section: 

‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible individual’ means an individual 

who is determined by a State to be eligible for assistance under this section. 

‘‘(2) PRESCRIPTION DRUG DISCOUNT CARD PROGRAM.—The term ‘prescription 

drug discount card program’ means such a program that is endorsed under section 1807. 

‘‘(3) SPONSOR.—The term ‘sponsor’ means the sponsor of a prescription drug 

discount card program, or, in the case of an alternative program authorized 

under subsection (d)(2), the State or other entity operating the program.’’. 

(b) CONFORMING AMENDMENT.—Section 1927(c)(1)(C)(i)(V) (42 U.S.C. 1396r–

8(c)(1)(C)(i)(V)), as added by section 103(e), is amended by striking ‘‘or by a qualified 

retiree prescription drug plan (as defined in section 1860D–8(f)(1))’’ and inserting 

‘‘by a qualified retiree prescription drug plan (as defined in section 1860D–8(f)(1)), 

or by a prescription drug discount card program endorsed under section 1807’’. 

SEC. 106. DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF CARRYING OUT MEDICARE CATASTROPHIC PRESCRIPTION DRUG PROGRAM. 

(a) IN GENERAL.—Subsection (l) of section 6103 of the Internal Revenue Code of 

1986 (relating to disclosure of returns and return information for purposes other 

than tax administration) is amended by adding at the end the following new paragraph: 

‘‘(19) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF CARRYING OUT

MEDICARE CATASTROPHIC PRESCRIPTION DRUG PROGRAM.— ‘‘(A) IN GENERAL.—The Secretary may, upon written request from the 

Secretary of Health and Human Services under section 1860D–2(b)(4)(E)(i) 

of the Social Security Act, disclose to officers and employees of the Department of Health and Human Services with respect to a specified taxpayer 

for the taxable year specified by the Secretary of Health and Human Services in such request—

‘‘(i) the taxpayer identity information with respect to such taxpayer, 

and 

‘‘(ii) the adjusted gross income of such taxpayer for the taxable year 

(or, if less, the income threshold limit specified in section 1860D–

2(b)(4)(D)(ii) for the calendar year specified by such Secretary in such 

request). 

‘‘(B) SPECIFIED TAXPAYER.—For purposes of this paragraph, the term 

‘specified taxpayer’ means any taxpayer who—

‘‘(i) is identified by the Secretary of Health and Human Services in 

the request referred to in subparagraph (A), and 

‘‘(ii) either—

‘‘(I) has an adjusted gross income for the taxable year referred 

to in subparagraph (A) in excess of the income threshold specified 

in section 1860D–2(b)(4)(D)(ii) of such Act for the calendar year referred to in such subparagraph, or 

‘‘(II) is identified by such Secretary under subparagraph (A) as 

being an individual who elected to use more recent information 

under section 1860D–2(b)(4)(D)(v) of such Act. 

37

‘‘(C) JOINT RETURNS.—In the case of a joint return, the Secretary shall, 

for purposes of applying this paragraph, treat each spouse as a separate 

taxpayer having an adjusted gross income equal to one-half of the adjusted 

gross income determined with respect to such return. 

‘‘(D) RESTRICTION ON USE OF DISCLOSED INFORMATION.—Return information disclosed under subparagraph (A) may be used by officers and employees of the Department of Health and Human Services only for the purpose 

of administering the prescription drug benefit under title XVIII of the Social Security Act. Such officers and employees may disclose the annual outof-pocket threshold which applies to an individual under such part to the 

entity that offers the plan referred to in section 1860D–2(b)(4)(E)(ii) of such 

Act in which such individual is enrolled. Such sponsor may use such information only for purposes of administering such benefit.’’. 

(b) CONFIDENTIALITY.—Paragraph (3) of section 6103(a) of such Code is amended 

by striking ‘‘or (16)’’ and inserting ‘‘(16), or (19)’’. 

(c) PROCEDURES AND RECORDKEEPING RELATED TO DISCLOSURES.—Subsection 

(p)(4) of section 6103 of such Code is amended by striking ‘‘any other person described in subsection (l)(16) or (17)’’ each place it appears and inserting ‘‘any other 

person described in subsection (l)(16), (17), or (19)’’. 

(d) UNAUTHORIZED DISCLOSURE.—Paragraph (2) of section 7213(a) of such Code is 

amended by striking ‘‘or (16)’’ and inserting ‘‘(16), or (19)’’. 

(e) UNAUTHORIZED INSPECTION.—Subparagraph (B) of section 7213A(a)(1) of such 

Code is amended by inserting ‘‘or (19)’’ after ‘‘subsection (l)(18)’’.

SEC. 107. STATE PHARMACEUTICAL ASSISTANCE TRANSITION COMMISSION. 

(a) ESTABLISHMENT.—

(1) IN GENERAL.—There is established, as of the first day of the third month 

beginning after the date of the enactment of this Act, a State Pharmaceutical 

Assistance Transition Commission (in this section referred to as the ‘‘Commission’’) to develop a proposal for addressing the unique transitional issues facing 

State pharmaceutical assistance programs, and program participants, due to the 

implementation of the medicare prescription drug program under part D of title 

XVIII of the Social Security Act. 

(2) DEFINITIONS.—For purposes of this section: 

(A) STATE PHARMACEUTICAL ASSISTANCE PROGRAM DEFINED.—The term 

‘‘State pharmaceutical assistance program’’ means a program (other than 

the medicaid program) operated by a State (or under contract with a State) 

that provides as of the date of the enactment of this Act assistance to lowincome medicare beneficiaries for the purchase of prescription drugs. 

(B) PROGRAM PARTICIPANT.—The term ‘‘program participant’’ means a 

low-income medicare beneficiary who is a participant in a State pharmaceutical assistance program. 

(b) COMPOSITION.—The Commission shall include the following: 

(1) A representative of each governor of each State that the Secretary identifies as operating on a statewide basis a State pharmaceutical assistance program that provides for eligibility and benefits that are comparable or more generous than the low-income assistance eligibility and benefits offered under part 

D of title XVIII of the Social Security Act. 

(2) Representatives from other States that the Secretary identifies have in operation other State pharmaceutical assistance programs, as appointed by the 

Secretary. 

(3) Representatives of organizations that have an inherent interest in program participants or the program itself, as appointed by the Secretary but not 

to exceed the number of representatives under paragraphs (1) and (2). 

(4) Representatives of Medicare Advantage organizations and other private 

health insurance plans, as appointed by the Secretary. 

(5) The Secretary (or the Secretary’s designee) and such other members as the 

Secretary may specify 

The Secretary shall designate a member to serve as chair of the Commission and 

the Commission shall meet at the call of the chair. 

(c) DEVELOPMENT OF PROPOSAL.—The Commission shall develop the proposal described in subsection (a) in a manner consistent with the following principles: 

(1) Protection of the interests of program participants in a manner that is the 

least disruptive to such participants and that includes a single point of contact 

for enrollment and processing of benefits. 

(2) Protection of the financial and flexibility interests of States so that States 

are not financially worse off as a result of the enactment of this title. 

(3) Principles of medicare modernization provided under title II of this Act. 

38

(d) REPORT.—By not later than January 1, 2005, the Commission shall submit to 

the President and the Congress a report that contains a detailed proposal (including 

specific legislative or administrative recommendations, if any) and such other recommendations as the Commission deems appropriate. 

(e) SUPPORT.—The Secretary shall provide the Commission with the administrative support services necessary for the Commission to carry out its responsibilities 

under this section. 

(f) TERMINATION.—The Commission shall terminate 30 days after the date of submission of the report under subsection (d).

TITLE II—MEDICARE ENHANCED FEE-FORSERVICE AND MEDICARE ADVANTAGE PROGRAMS; MEDICARE COMPETITION 

SEC. 200. MEDICARE MODERNIZATION AND REVITALIZATION. 

This title provides for—

(1) establishment of the medicare enhanced fee-for-service (EFFS) program 

under which medicare beneficiaries are provided access to a range of enhanced 

fee-for-service (EFFS) plans that may use preferred provider networks to offer 

an enhanced range of benefits; 

(2) establishment of a Medicare Advantage program that offers improved 

managed care plans with coordinated care; and 

(3) competitive bidding, in the style of the Federal Employees Health Benefits 

program (FEHBP), among enhanced fee-for-service plans and Medicare Advantage plans in order to promote greater efficiency and responsiveness to medicare 

beneficiaries.

Subtitle A—Medicare Enhanced Fee-for-Service 

Program 

SEC. 201. ESTABLISHMENT OF ENHANCED FEE-FOR-SERVICE (EFFS) PROGRAM UNDER MEDICARE. 

(a) IN GENERAL.—Title XVIII, as amended by section 101(a), is amended—

(1) by redesignating part E as part F; and 

(2) by inserting after part D the following new part:

‘‘PART E—ENHANCED FEE-FOR-SERVICE PROGRAM

‘‘OFFERING OF ENHANCED FEE-FOR-SERVICE PLANS THROUGHOUT THE UNITED STATES

‘‘SEC. 1860E–1. (a) ESTABLISHMENT OF PROGRAM.—

‘‘(1) IN GENERAL.—The Administrator shall establish under this part beginning January 1, 2006, an enhanced fee-for-service program under which enhanced fee-for-service plans (as defined in subsection (b)) are offered to EFFSeligible individuals (as so defined) in EFFS regions throughout the United 

States. 

‘‘(2) EFFS REGIONS.—For purposes of this part the Administrator shall establish EFFS regions throughout the United States by dividing the entire United 

States into at least 10 such regions. Before establishing such regions, the Administrator shall conduct a market survey and analysis, including an examination of current insurance markets, to determine how the regions should be established. The regions shall be established in a manner to take into consideration maximizing full access for all EFFS-eligible individuals, especially those 

residing in rural areas. 

‘‘(b) DEFINITIONS.—For purposes of this part: 

‘‘(1) EFFS ORGANIZATION.—The ‘EFFS organization’ means an entity that the 

Administrator certifies as meeting the requirements and standards applicable 

to such organization under this part. 

‘‘(2) ENHANCED FEE-FOR-SERVICE PLAN; EFFS PLAN.—The terms ‘enhanced feefor-service plan’ and ‘EFFS plan’ mean health benefits coverage offered under 

a policy, contract, or plan by an EFFS organization pursuant to and in accordance with a contract pursuant to section 1860E–4(c), but only if the plan provides either fee-for-service coverage described in the following subparagraph (A) 

or preferred provider coverage described in the following subparagraph (B): 

‘‘(A) FEE-FOR-SERVICE COVERAGE.—The plan—

39

‘‘(i) reimburses hospitals, physicians, and other providers at a rate 

determined by the plan on a fee-for-service basis without placing the 

provider at financial risk; 

‘‘(ii) does not vary such rates for such a provider based on utilization 

relating to such provider; and 

‘‘(iii) does not restrict the selection of providers among those who are 

lawfully authorized to provide the covered services and agree to accept 

the terms and conditions of payment established by the plan. 

‘‘(B) PREFERRED PROVIDER COVERAGE.—The plan—

‘‘(i) has a network of providers that have agreed to a contractually 

specified reimbursement for covered benefits with the organization offering the plan; and 

‘‘(ii) provides for reimbursement for all covered benefits regardless of 

whether such benefits are provided within such network of providers. 

‘‘(3) EFFS ELIGIBLE INDIVIDUAL.—The term ‘EFFS eligible individual’ means 

an eligible individual described in section 1851(a)(3). 

‘‘(4) EFFS REGION.—The term ‘EFFS region’ means a region established under 

subsection (a)(2). 

‘‘(c) APPLICATION OF CERTAIN ELIGIBILITY, ENROLLMENT, ETC. REQUIREMENTS.—

The provisions of section 1851 (other than subsection (h)(4)(A)) shall apply to EFFS 

plans offered by an EFFS organization in an EFFS region, including subsection (g) 

(relating to guaranteed issue and renewal). 

‘‘OFFERING OF ENHANCED FEE-FOR-SERVICE (EFFS) PLANS

‘‘SEC. 1860E–2. (a) PLAN REQUIREMENTS.—No EFFS plan may be offered under 

this part in an EFFS region unless the requirements of this part are met with respect to the plan and EFFS organization offering the plan. 

‘‘(b) AVAILABLE TO ALL EFFS BENEFICIARIES IN THE ENTIRE REGION.—With respect to an EFFS plan offered in an EFFS region—

‘‘(1) IN GENERAL.—The plan must be offered to all EFFS-eligible individuals 

residing in the region. 

‘‘(2) ASSURING ACCESS TO SERVICES.—The plan shall comply with the requirements of section 1852(d)(4). 

‘‘(c) BENEFITS.—

‘‘(1) IN GENERAL.—Each EFFS plan shall provide to members enrolled in the 

plan under this part benefits, through providers and other persons that meet 

the applicable requirements of this title and part A of title XI—

‘‘(A) for the items and services described in section 1852(a)(1); 

‘‘(B) that are uniform for the plan for all EFFS eligible individuals residing in the same EFFS region; 

‘‘(C) that include a single deductible applicable to benefits under parts A 

and B and include a catastrophic limit on out-of-pocket expenditures for 

such covered benefits; and 

‘‘(D) that include benefits for prescription drug coverage for each enrollee 

who elects under part D to be provided qualified prescription drug coverage 

through the plan.

‘‘(2) DISAPPROVAL AUTHORITY.—The Administrator shall not approve a plan of 

an EFFS organization if the Administrator determines (pursuant to the last 

sentence of section 1852(b)(1)(A)) that the benefits are designed to substantially 

discourage enrollment by certain EFFS eligible individuals with the organization. 

‘‘(d) OUTPATIENT PRESCRIPTION DRUG COVERAGE.—For rules concerning the offering of prescription drug coverage under EFFS plans, see the amendment made by 

section 102(b) of the Medicare Prescription Drug and Modernization Act of 2003. 

‘‘(e) OTHER ADDITIONAL PROVISIONS.—The provisions of section 1852 (other than 

subsection (a)(1)) shall apply under this part to EFFS plans. For the application of 

chronic care improvement provisions, see the amendment made by section 722(b). 

‘‘SUBMISSION OF BIDS; BENEFICIARY SAVINGS; PAYMENT OF PLANS

‘‘SEC. 1860E–3. (a) SUBMISSION OF BIDS.—

‘‘(1) REQUIREMENT.—

‘‘(A) EFFS MONTHLY BID AMOUNT.—For each year (beginning with 2006), 

an EFFS organization shall submit to the Administrator an EFFS monthly 

bid amount for each EFFS plan offered in each region. Each such bid is referred to in this section as the ‘EFFS monthly bid amount’. 

‘‘(B) FORM.—Such bid amounts shall be submitted for each such plan and 

region in a form and manner and time specified by the Administrator, and 

shall include information described in paragraph (3)(A).

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‘‘(2) UNIFORM BID AMOUNTS.—Each EFFS monthly bid amount submitted 

under paragraph (1) by an EFFS organization under this part for an EFFS plan 

in an EFFS region may not vary among EFFS eligible individuals residing in 

the EFFS region involved. 

‘‘(3) SUBMISSION OF BID AMOUNT INFORMATION BY EFFS ORGANIZATIONS.—

‘‘(A) INFORMATION TO BE SUBMITTED.—The information described in this 

subparagraph is as follows: 

‘‘(i) The EFFS monthly bid amount for provision of all items and 

services under this part, which amount shall be based on average costs 

for a typical beneficiary residing in the region, and the actuarial basis 

for determining such amount. 

‘‘(ii) The proportions of such bid amount that are attributable to—

‘‘(I) the provision of statutory non-drug benefits (such portion referred to in this part as the ‘unadjusted EFFS statutory non-drug 

monthly bid amount’); 

‘‘(II) the provision of statutory prescription drug benefits; and 

‘‘(III) the provision of non-statutory benefits; 

and the actuarial basis for determining such proportions. 

‘‘(iii) Such additional information as the Administrator may require 

to verify the actuarial bases described in clauses (i) and (ii). 

‘‘(B) STATUTORY BENEFITS DEFINED.—For purposes of this part: 

‘‘(i) The term ‘statutory non-drug benefits’ means benefits under section 1852(a)(1). 

‘‘(ii) The term ‘statutory prescription drug benefits’ means benefits 

under part D. 

‘‘(iii) The term ‘statutory benefits’ means statutory prescription drug 

benefits and statutory non-drug benefits.

‘‘(C) ACCEPTANCE AND NEGOTIATION OF BID AMOUNTS.—The Administrator 

has the authority to negotiate regarding monthly bid amounts submitted 

under subparagraph (A) (and the proportion described in subparagraph 

(A)(ii)), and for such purpose, the Administrator has negotiation authority 

that the Director of the Office of Personnel Management has with respect 

to health benefits plans under chapter 89 of title 5, United States Code. 

The Administrator may reject such a bid amount or proportion if the Administrator determines that such amount or proportion is not supported by 

the actuarial bases provided under subparagraph (A). 

‘‘(D) CONTRACT AUTHORITY.—The Administrator may, taking into account 

the unadjusted EFFS statutory non-drug monthly bid amounts accepted 

under subparagraph (C), enter into contracts for the offering of up to 3 

EFFS plans in any region.

‘‘(b) PROVISION OF BENEFICIARY SAVINGS FOR CERTAIN PLANS.—

‘‘(1) BENEFICIARY REBATE RULE.—

‘‘(A) REQUIREMENT.—The EFFS plan shall provide to the enrollee a 

monthly rebate equal to 75 percent of the average per capita savings (if 

any) described in paragraph (2) applicable to the plan and year involved. 

‘‘(B) FORM OF REBATE.—A rebate required under this paragraph shall be 

provided—

‘‘(i) through the crediting of the amount of the rebate towards the 

EFFS monthly prescription drug beneficiary premium (as defined in 

section 1860E–4(a)(3)(B)) and the EFFS monthly supplemental beneficiary premium (as defined in section 1860E–4(a)(3)(C)); 

‘‘(ii) through a direct monthly payment (through electronic funds 

transfer or otherwise); or 

‘‘(iii) through other means approved by the Medicare Benefits Administrator, 

or any combination thereof. 

‘‘(2) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—For purposes 

of paragraph (1)(A), the average per capita monthly savings referred to in such 

paragraph for an EFFS plan and year is computed as follows: 

‘‘(A) DETERMINATION OF REGION-WIDE AVERAGE RISK ADJUSTMENT.—

‘‘(i) IN GENERAL.—The Medicare Benefits Administrator shall determine, at the same time rates are promulgated under section 1853(b)(1) 

(beginning with 2006), for each EFFS region the average of the risk adjustment factors described in subsection (c)(3) to be applied to enrollees 

under this part in that region. In the case of an EFFS region in which 

an EFFS plan was offered in the previous year, the Administrator may 

compute such average based upon risk adjustment factors applied 

under subsection (c)(3) in that region in a previous year. 

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‘‘(ii) TREATMENT OF NEW REGIONS.—In the case of a region in which 

no EFFS plan was offered in the previous year, the Administrator shall 

estimate such average. In making such estimate, the Administrator 

may use average risk adjustment factors applied to comparable EFFS 

regions or applied on a national basis. 

‘‘(B) DETERMINATION OF RISK ADJUSTED BENCHMARK AND RISK-ADJUSTED

BID.—For each EFFS plan offered in an EFFS region, the Administrator 

shall—

‘‘(i) adjust the EFFS region-specific non-drug monthly benchmark 

amount (as defined in paragraph (3)) by the applicable average risk adjustment factor computed under subparagraph (A); and 

‘‘(ii) adjust the unadjusted EFFS statutory non-drug monthly bid 

amount by such applicable average risk adjustment factor. 

‘‘(C) DETERMINATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—The average per capita monthly savings described in this subparagraph is equal 

to the amount (if any) by which—

‘‘(i) the risk-adjusted benchmark amount computed under subparagraph (B)(i), exceeds 

‘‘(ii) the risk-adjusted bid computed under subparagraph (B)(ii). 

‘‘(3) COMPUTATION OF EFFS REGION-SPECIFIC NON-DRUG MONTHLY BENCHMARK

AMOUNT.—For purposes of this part, the term ‘EFFS region-specific non-drug 

monthly benchmark amount’ means, with respect to an EFFS region for a 

month in a year, an amount equal to 1⁄12 of the average (weighted by number 

of EFFS eligible individuals in each payment area described in section 1853(d)) 

of the annual capitation rate as calculated under section 1853(c)(1) for that 

area. 

‘‘(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—

‘‘(1) NON-DRUG BENEFITS.—Under a contract under section 1860E–4(c) and 

subject to section 1853(g) (as made applicable under subsection (d)), the Administrator shall make monthly payments under this subsection in advance to each 

EFFS organization, with respect to coverage of an individual under this part in 

an EFFS region for a month, in an amount determined as follows: 

‘‘(A) PLANS WITH BIDS BELOW BENCHMARK.—In the case of a plan for 

which there are average per capita monthly savings described in subsection 

(b)(2)(C), the payment under this subsection is equal to the unadjusted 

EFFS statutory non-drug monthly bid amount, adjusted under paragraphs 

(3) and (4), plus the amount of the monthly rebate computed under subsection (b)(1)(A) for that plan and year. 

‘‘(B) PLANS WITH BIDS AT OR ABOVE BENCHMARK.—In the case of a plan 

for which there are no average per capita monthly savings described in subsection (b)(2)(C), the payment amount under this subsection is equal to the 

EFFS region-specific non-drug monthly benchmark amount, adjusted under 

paragraphs (3) and (4). 

‘‘(2) FOR FEDERAL DRUG SUBSIDIES.—In the case in which an enrollee who 

elects under part D to be provided qualified prescription drug coverage through 

the plan, the EFFS organization offering such plan also is entitled—

‘‘(A) to direct subsidy payment under section 1860D–8(a)(1); 

‘‘(B) to reinsurance subsidy payments under section 1860D–8(a)(2); and 

‘‘(C) to reimbursement for premium and cost-sharing reductions for lowincome individuals under section 1860D–7(c)(3). 

‘‘(3) DEMOGRAPHIC RISK ADJUSTMENT, INCLUDING ADJUSTMENT FOR HEALTH

STATUS.—The Administrator shall adjust under paragraph (1)(A) the unadjusted 

EFFS statutory non-drug monthly bid amount and under paragraph (1)(B) the 

EFFS region-specific non-drug monthly benchmark amount for such risk factors 

as age, disability status, gender, institutional status, and such other factors as 

the Administrator determines to be appropriate, including adjustment for 

health status under section 1853(a)(3) (as applied under subsection (d)), so as 

to ensure actuarial equivalence. The Administrator may add to, modify, or substitute for such adjustment factors if such changes will improve the determination of actuarial equivalence. 

‘‘(4) ADJUSTMENT FOR INTRA-REGIONAL GEOGRAPHIC VARIATIONS.—The Administrator shall also adjust such amounts in a manner to take into account variations in payments rates under part C among the different payment areas 

under such part included in each EFFS region. 

‘‘(d) APPLICATION OF ADDITIONAL PAYMENT RULES.—The provisions of section 1853 

(other than subsections (a)(1)(A), (d), and (e)) shall apply to an EFFS plan under 

this part, except as otherwise provided in this section. 

42

‘‘PREMIUMS; ORGANIZATIONAL AND FINANCIAL REQUIREMENTS; ESTABLISHMENT OF

STANDARDS; CONTRACTS WITH EFFS ORGANIZATIONS

‘‘SEC. 1860E–4. (a) PREMIUMS.—

‘‘(1) IN GENERAL.—The provisions of section 1854 (other than subsections 

(a)(6)(C) and (h)), including subsection (b)(5) relating to the consolidation of 

drug and non-drug beneficiary premiums and subsection (c) relating to uniform 

bids and premiums, shall apply to an EFFS plan under this part, subject to 

paragraph (2). 

‘‘(2) CROSS-WALK.—In applying paragraph (1), any reference in section 

1854(b)(1)(A) or 1854(d) to—

‘‘(A) a Medicare Advantage monthly basic beneficiary premium is deemed 

a reference to the EFFS monthly basic beneficiary premium (as defined in 

paragraph (3)(A)); 

‘‘(B) a Medicare Advantage monthly prescription drug beneficiary premium is deemed a reference to the EFFS monthly prescription drug beneficiary premium (as defined in paragraph (3)(B)); and 

‘‘(C) a Medicare Advantage monthly supplemental beneficiary premium is 

deemed a reference to the EFFS monthly supplemental beneficiary premium (as defined in paragraph (3)(C)). 

‘‘(3) DEFINITIONS.—For purposes of this part: 

‘‘(A) EFFS MONTHLY BASIC BENEFICIARY PREMIUM.—The term ‘EFFS 

monthly basic beneficiary premium’ means, with respect to an EFFS plan—

‘‘(i) described in section 1860E–3(c)(1)(A) (relating to plans providing 

rebates), zero; or 

‘‘(ii) described in section 1860E–3(c)(1)(B), the amount (if any) by 

which the unadjusted EFFS statutory non-drug monthly bid amount 

exceeds the EFFS region-specific non-drug monthly benchmark amount 

(as defined in section 1860E–3(b)(3)). 

‘‘(B) EFFS MONTHLY PRESCRIPTION DRUG BENEFICIARY PREMIUM.—The 

term ‘EFFS monthly prescription drug beneficiary premium’ means, with 

respect to an EFFS plan, the portion of the aggregate monthly bid amount 

submitted under clause (i) of section 1860E–3(a)(3)(A) for the year that is 

attributable under such section to the provision of statutory prescription 

drug benefits. 

‘‘(C) EFFS MONTHLY SUPPLEMENTAL BENEFICIARY PREMIUM.—The term 

‘EFFS monthly supplemental beneficiary premium’ means, with respect to 

an EFFS plan, the portion of the aggregate monthly bid amount submitted 

under clause (i) of section 1860E–3(a)(3)(A) for the year that is attributable 

under such section to the provision of nonstatutory benefits.

‘‘(b) ORGANIZATIONAL AND FINANCIAL REQUIREMENTS.—The provisions of section 

1855 shall apply to an EFFS plan offered by an EFFS organization under this part. 

‘‘(c) CONTRACTS WITH EFFS ORGANIZATIONS.—The provisions of section 1857 shall 

apply to an EFFS plan offered by an EFFS organization under this part, except that 

any reference in such section to part C is deemed a reference to this part.’’. 

(b) PROHIBITION ON COVERAGE UNDER MEDIGAP PLANS OF DEDUCTIBLE IMPOSED

UNDER EFFS PLANS.—Section 1882 (42 U.S.C. 1395ss), as amended by section 

104(a), is amended by adding at the end the following new subsection: 

‘‘(w) PROHIBITION ON COVERAGE OF DEDUCTIBLE AND CERTAIN COST-SHARING IM- POSED UNDER EFFS PLANS.—Notwithstanding any other provision of law, no medicare supplemental policy (other than the 2 benefit packages described in subsection 

(v)(3)) may provide for coverage of the single deductible or more than 50 percent 

of other cost-sharing imposed under an EFFS plan under part E.’’. 

(c) CONFORMING PROVISIONS.—Section 1882 of the Social Security Act (42 U.S.C. 

1395ss) shall be administered as if any reference to a Medicare+Choice organization 

offering a Medicare+Choice plan under part C of title XVIII of such Act were a reference both to a Medicare Advantage organization offering a Medicare Advantage 

plan under such part and an EFFS organization offering an EFFS plan under part 

E of such title. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM 

SEC. 211. IMPLEMENTATION OF MEDICARE ADVANTAGE PROGRAM. 

(a) IN GENERAL.—There is hereby established the Medicare Advantage program. 

The Medicare Advantage program shall consist of the program under part C of title 

XVIII of the Social Security Act, as amended by this title. 

43

(b) REFERENCES.—Any reference to the program under part C of title XVIII of the 

Social Security Act shall be deemed a reference to the Medicare Advantage program 

and, with respect to such part, any reference to ‘‘Medicare+Choice’’ is deemed a reference to ‘‘Medicare Advantage’’. 

SEC. 212. MEDICARE ADVANTAGE IMPROVEMENTS. 

(a) EQUALIZING PAYMENTS WITH FEE-FOR-SERVICE.—

(1) IN GENERAL.—Section 1853(c)(1) (42 U.S.C. 1395w–23(c)(1)) is amended by 

adding at the end the following: 

‘‘(D) BASED ON 100 PERCENT OF FEE-FOR-SERVICE COSTS.—

‘‘(i) IN GENERAL.—For 2004, the adjusted average per capita cost for 

the year involved, determined under section 1876(a)(4) for the Medicare 

Advantage payment area for services covered under parts A and B for 

individuals entitled to benefits under part A and enrolled under part 

B who are not enrolled in a Medicare Advantage under this part for 

the year, but adjusted to exclude costs attributable to payments under 

section 1886(h). 

‘‘(ii) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES

TO MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average per capita cost under clause (i) for a year, such cost shall be adjusted to include the Secretary’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the area 

involved under this title if individuals entitled to benefits under this 

title had not received services from facilities of the Department of Veterans Affairs or the Department of Defense.’’.

(2) CONFORMING AMENDMENT.—Such section is further amended, in the matter before subparagraph (A), by striking ‘‘or (C)’’ and inserting ‘‘(C), or (D)’’. 

(b) CHANGE IN BUDGET NEUTRALITY FOR BLEND.—Section 1853(c) (42 U.S.C. 

1395w–23(c)) is amended—

(1) in paragraph (1)(A), by inserting ‘‘(for a year other than 2004)’’ after ‘‘multiplied’’; and 

(2) in paragraph (5), by inserting ‘‘(other than 2004)’’ after ‘‘for each year’’.

(c) INCREASING MINIMUM PERCENTAGE INCREASE TO NATIONAL GROWTH RATE.—

(1) IN GENERAL.—Section 1853(c)(1) (42 U.S.C. 1395w–23(c)(1)) is amended—

(A) in subparagraph (B)(iv), by striking ‘‘and each succeeding year’’ and 

inserting ‘‘, 2003, and 2004’’; 

(B) in subparagraph (C)(iv), by striking ‘‘and each succeeding year’’ and 

inserting ‘‘and 2003’’; and 

(C) by adding at the end of subparagraph (C) the following new clause: 

‘‘(v) For 2004 and each succeeding year, the greater of—

‘‘(I) 102 percent of the annual Medicare Advantage capitation 

rate under this paragraph for the area for the previous year; or 

‘‘(II) the annual Medicare Advantage capitation rate under this 

paragraph for the area for the previous year increased by the national per capita Medicare Advantage growth percentage, described 

in paragraph (6) for that succeeding year, but not taking into account any adjustment under paragraph (6)(C) for a year before 

2004.’’. 

(2) CONFORMING AMENDMENT.—Section 1853(c)(6)(C) (42 U.S.C. 1395w–

23(c)(6)(C)) is amended by inserting before the period at the end the following: 

‘‘, except that for purposes of paragraph (1)(C)(v)(II), no such adjustment shall 

be made for a year before 2004’’.

(d) INCLUSION OF COSTS OF DOD AND VA MILITARY FACILITY SERVICES TO MEDICARE-ELIGIBLE BENEFICIARIES IN CALCULATION OF MEDICARE+CHOICE PAYMENT

RATES.—Section 1853(c)(3) (42 U.S.C. 1395w–23(c)(3)) is amended—

(1) in subparagraph (A), by striking ‘‘subparagraph (B)’’ and inserting ‘‘subparagraphs (B) and (E)’’, and 

(2) by adding at the end the following new subparagraph: 

‘‘(E) INCLUSION OF COSTS OF DOD AND VA MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the area-specific 

Medicare+Choice capitation rate under subparagraph (A) for a year (beginning with 2004), the annual per capita rate of payment for 1997 determined 

under section 1876(a)(1)(C) shall be adjusted to include in the rate the Secretary’s estimate, on a per capita basis, of the amount of additional payments that would have been made in the area involved under this title if 

individuals entitled to benefits under this title had not received services 

from facilities of the Department of Defense or the Department of Veterans 

Affairs.’’. 

44

(e) EXTENDING SPECIAL RULE FOR CERTAIN INPATIENT HOSPITAL STAYS TO REHA- BILITATION HOSPITALS.— (1) IN GENERAL.—Section 1853(g) (42 U.S.C. 1395w–23(g)) is amended—

(A) by inserting ‘‘or from a rehabilitation facility (as defined in section 

1886(j)(1)(A))’’ after ‘‘1886(d)(1)(B))’’; and 

(B) in paragraph (2)(B), by inserting ‘‘or section 1886(j), as the case may 

be,’’ after ‘‘1886(d)’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

contract years beginning on or after January 1, 2004. 

(f) MEDPAC STUDY OF AAPCC.—

(1) STUDY.—The Medicare Payment Advisory Commission shall conduct a 

study that assesses the method used for determining the adjusted average per 

capita cost (AAPCC) under section 1876(a)(4) of the Social Security Act (42 

U.S.C. 1395mm(a)(4)) as applied under section 1853(c)(1)(A) of such Act (as 

amended by subsection (a)). Such study shall include an examination of—

(A) the bases for variation in such costs between different areas, including differences in input prices, utilization, and practice patterns; 

(B) the appropriate geographic area for payment under the Medicare Advantage program under part C of title XVIII of such Act; and 

(C) the accuracy of risk adjustment methods in reflecting differences in 

costs of providing care to different groups of beneficiaries served under such 

program. 

(2) REPORT.—Not later than 18 months after the date of the enactment of this 

Act, the Commission shall submit to Congress a report on the study conducted 

under paragraph (1). 

(g) REPORT ON IMPACT OF INCREASED FINANCIAL ASSISTANCE TO MEDICARE ADVAN- TAGE PLANS.—Not later than July 1, 2006, the Medicare Benefits Administrator 

shall submit to Congress a report that describes the impact of additional financing 

provided under this Act and other Acts (including the Medicare, Medicaid, and 

SCHIP Balanced Budget Refinement Act of 1999 and BIPA) on the availability of 

Medicare Advantage plans in different areas and its impact on lowering premiums 

and increasing benefits under such plans. 

CHAPTER 2—IMPLEMENTATION OF COMPETITION PROGRAM

SEC. 221. COMPETITION PROGRAM BEGINNING IN 2006. 

(a) SUBMISSION OF EFFS-LIKE BIDDING INFORMATION BEGINNING IN 2006.—Section 1854 (42 U.S.C. 1395w–24) is amended—

(1) by amending the section heading to read as follows: 

‘‘PREMIUMS AND BID AMOUNT’’; 

(2) in subsection (a)(1)(A)—

(A) by striking ‘‘(A)’’ and inserting ‘‘(A)(i) if the following year is before 

2006,’’; and 

(B) by inserting before the semicolon at the end the following: ‘‘or (ii) if 

the following year is 2006 or later, the information described in paragraph 

(3) or (6)(A) for the type of plan involved’’; and 

(3) by adding at the end of subsection (a) the following: 

‘‘(6) SUBMISSION OF BID AMOUNTS BY MEDICARE ADVANTAGE ORGANIZATIONS.—

‘‘(A) INFORMATION TO BE SUBMITTED.—The information described in this 

subparagraph is as follows: 

‘‘(i) The monthly aggregate bid amount for provision of all items and 

services under this part, which amount shall be based on average costs 

for a typical beneficiary residing in the area, and the actuarial basis 

for determining such amount. 

‘‘(ii) The proportions of such bid amount that are attributable to—

‘‘(I) the provision of statutory non-drug benefits (such portion referred to in this part as the ‘unadjusted Medicare Advantage statutory non-drug monthly bid amount’); 

‘‘(II) the provision of statutory prescription drug benefits; and 

‘‘(III) the provision of non-statutory benefits; 

and the actuarial basis for determining such proportions. 

‘‘(iii) Such additional information as the Administrator may require 

to verify the actuarial bases described in clauses (i) and (ii). 

‘‘(B) STATUTORY BENEFITS DEFINED.—For purposes of this part: 

‘‘(i) The term ‘statutory non-drug benefits’ means benefits under section 1852(a)(1). 

‘‘(ii) The term ‘statutory prescription drug benefits’ means benefits 

under part D. 

45

‘‘(iii) The term ‘statutory benefits’ means statutory prescription drug 

benefits and statutory non-drug benefits.

‘‘(C) ACCEPTANCE AND NEGOTIATION OF BID AMOUNTS.—

‘‘(i) IN GENERAL.—Subject to clause (ii)—

‘‘(I) the Administrator has the authority to negotiate regarding 

monthly bid amounts submitted under subparagraph (A) (and the 

proportion described in subparagraph (A)(ii)), and for such purpose 

and subject to such clause, the Administrator has negotiation authority that the Director of the Office of Personnel Management 

has with respect to health benefits plans under chapter 89 of title 

5, United States Code; and 

‘‘(II) the Administrator may reject such a bid amount or proportion if the Administrator determines that such amount or proportion is not supported by the actuarial bases provided under subparagraph (A). 

‘‘(ii) EXCEPTION.—In the case of a plan described in section 

1851(a)(2)(C), the provisions of clause (i) shall not apply and the provisions of paragraph (5)(B), prohibiting the review, approval, or disapproval of amounts described in such paragraph, shall apply to the negotiation and rejection of the monthly bid amounts and proportion referred to in subparagraph (A).’’. 

(b) PROVIDING FOR BENEFICIARY SAVINGS FOR CERTAIN PLANS.—

(1) IN GENERAL.—Section 1854(b) (42 U.S.C. 1395w–24(b)) is amended—

(A) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(C) BENEFICIARY REBATE RULE.—

‘‘(i) REQUIREMENT.—The Medicare Advantage plan shall provide to 

the enrollee a monthly rebate equal to 75 percent of the average per 

capita savings (if any) described in paragraph (3) applicable to the plan 

and year involved. 

‘‘(iii) FORM OF REBATE.—A rebate required under this subparagraph 

shall be provided—

‘‘(I) through the crediting of the amount of the rebate towards 

the Medicare Advantage monthly supplementary beneficiary premium or the premium imposed for prescription drug coverage 

under part D; 

‘‘(II) through a direct monthly payment (through electronic funds 

transfer or otherwise); or 

‘‘(III) through other means approved by the Medicare Benefits 

Administrator, 

or any combination thereof.’’; and 

(B) by adding at the end the following new paragraphs: 

‘‘(3) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—For purposes 

of paragraph (1)(C)(i), the average per capita monthly savings referred to in 

such paragraph for a Medicare Advantage plan and year is computed as follows: 

‘‘(A) DETERMINATION OF STATE-WIDE AVERAGE RISK ADJUSTMENT.—

‘‘(i) IN GENERAL.—The Medicare Benefits Administrator shall determine, at the same time rates are promulgated under section 1853(b)(1) 

(beginning with 2006), for each State the average of the risk adjustment factors to be applied under section 1853(a)(1)(A) to payment for 

enrollees in that State. In the case of a State in which a Medicare Advantage plan was offered in the previous year, the Administrator may 

compute such average based upon risk adjustment factors applied in 

that State in a previous year. 

‘‘(ii) TREATMENT OF NEW STATES.—In the case of a State in which no 

Medicare Advantage plan was offered in the previous year, the Administrator shall estimate such average. In making such estimate, the Administrator may use average risk adjustment factors applied to comparable States or applied on a national basis. 

‘‘(B) DETERMINATION OF RISK ADJUSTED BENCHMARK AND RISK-ADJUSTED

BID.—For each Medicare Advantage plan offered in a State, the Administrator shall—

‘‘(i) adjust the Medicare Advantage area-specific non-drug monthly 

benchmark amount (as defined in subsection (j)) by the applicable average risk adjustment factor computed under subparagraph (A); and 

‘‘(ii) adjust the unadjusted Medicare Advantage statutory non-drug 

monthly bid amount by such applicable average risk adjustment factor. 

46

‘‘(C) DETERMINATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—The average per capita monthly savings described in this subparagraph is equal 

to the amount (if any) by which—

‘‘(i) the risk-adjusted benchmark amount computed under subparagraph (B)(i), exceeds 

‘‘(ii) the risk-adjusted bid computed under subparagraph (B)(ii). 

‘‘(D) AUTHORITY TO DETERMINE RISK ADJUSTMENT FOR AREAS OTHER THAN

STATES.—The Administrator may provide for the determination and application of risk adjustment factors under this paragraph on the basis of areas 

other than States. 

‘‘(4) BENEFICIARY’S OPTION OF PAYMENT THROUGH WITHHOLDING FROM SOCIAL

SECURITY PAYMENT OR USE OF ELECTRONIC FUNDS TRANSFER MECHANISM.—In accordance with regulations, a Medicare Advantage organization shall permit 

each enrollee, at the enrollee’s option, to make payment of premiums under this 

part to the organization indirectly through withholding from benefit payments 

in the manner provided under section 1840 with respect to monthly premiums 

under section 1839 or through an electronic funds transfer mechanism (such as 

automatic charges of an account at a financial institution or a credit or debit 

card account) or otherwise. All premium payments that are withheld under this 

paragraph that are credited to the Federal Supplementary Medical Insurance 

Drug Trust Fund shall be paid to the Medicare Advantage organization involved.’’. 

(2) PROVISION OF SINGLE CONSOLIDATED PREMIUM.—Section 1854(b) (42 U.S.C. 

1395w–24(b)), as amended by paragraph (1), is further amended by adding at 

the end the following new paragraph: 

‘‘(5) SINGLE CONSOLIDATED PREMIUM.—In the case of an enrollee in a Medicare 

Advantage plan who elects under part D to be provided qualified prescription 

drug coverage through the plan, the Administrator shall provide a mechanism 

for the consolidation of the beneficiary premium amount for non-drug benefits 

under this part with the premium amount for prescription drug coverage under 

part D provided through the plan.’’. 

(3) COMPUTATION OF MEDICARE ADVANTAGE AREA-SPECIFIC NON-DRUG BENCHMARK.—Section 1853 (42 U.S.C. 1395w–23) is amended by adding at the end the 

following new subsection: 

‘‘(j) COMPUTATION OF MEDICARE ADVANTAGE AREA-SPECIFIC NON-DRUG MONTHLY

BENCHMARK AMOUNT.—For purposes of this part, the term ‘Medicare Advantage 

area-specific non-drug monthly benchmark amount’ means, with respect to a Medicare Advantage payment area for a month in a year, an amount equal to 1⁄12 of the 

annual Medicare Advantage capitation rate under section 1853(c)(1) for the area for 

the year.’’. 

(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—

(1) IN GENERAL.—Section 1853(a)(1)(A) (42 U.S.C. 1395w–23) is amended by 

striking ‘‘in an amount’’ and all that follows and inserting the following: ‘‘in an 

amount determined as follows: 

‘‘(i) PAYMENT BEFORE 2006.—For years before 2006, the payment 

amount shall be equal to 1⁄12 of the annual Medicare Advantage capitation rate (as calculated under subsection (c)(1)) with respect to that individual for that area, reduced by the amount of any reduction elected 

under section 1854(f )(1)(E) and adjusted under clause (iv). 

‘‘(ii) PAYMENT FOR STATUTORY NON-DRUG BENEFITS BEGINNING WITH

2006.—For years beginning with 2006—

‘‘(I) PLANS WITH BIDS BELOW BENCHMARK.—In the case of a plan 

for which there are average per capita monthly savings described 

in section 1854(b)(3)(C), the payment under this subsection is equal 

to the unadjusted Medicare Advantage statutory non-drug monthly 

bid amount, adjusted under clause (iv), plus the amount of the 

monthly rebate computed under section 1854(b)(1)(C)(i) for that 

plan and year. 

‘‘(II) PLANS WITH BIDS AT OR ABOVE BENCHMARK.—In the case of 

a plan for which there are no average per capita monthly savings 

described in section 1854(b)(3)(C), the payment amount under this 

subsection is equal to the Medicare Advantage area-specific nondrug monthly benchmark amount, adjusted under clause (iv). 

‘‘(iii) FOR FEDERAL DRUG SUBSIDIES.—In the case in which an enrollee 

who elects under part D to be provided qualified prescription drug coverage through the plan, the Medicare Advantage organization offering 

such plan also is entitled—

‘‘(I) to direct subsidy payment under section 1860D–8(a)(1); 

47

‘‘(II) to reinsurance subsidy payments under section 1860D–

8(a)(2); and 

‘‘(III) to reimbursement for premium and cost-sharing reductions 

for low-income individuals under section 1860D–7(c)(3). 

‘‘(iv) DEMOGRAPHIC ADJUSTMENT, INCLUDING ADJUSTMENT FOR

HEALTH STATUS.—The Administrator shall adjust the payment amount 

under clause (i), the unadjusted Medicare Advantage statutory nondrug monthly bid amount under clause (ii)(I), and the Medicare Advantage area-specific non-drug monthly benchmark amount under clause 

(ii)(II) for such risk factors as age, disability status, gender, institutional status, and such other factors as the Administrator determines 

to be appropriate, including adjustment for health status under paragraph (3), so as to ensure actuarial equivalence. The Administrator 

may add to, modify, or substitute for such adjustment factors if such 

changes will improve the determination of actuarial equivalence.’’. 

(d) CONFORMING AMENDMENTS.—

(1) PROTECTION AGAINST BENEFICIARY SELECTION.—Section 1852(b)(1)(A) (42 

U.S.C. 1395w–22(b)(1)(A)) is amended by adding at the end the following: ‘‘The 

Administrator shall not approve a plan of an organization if the Administrator 

determines that the benefits are designed to substantially discourage enrollment by certain Medicare Advantage eligible individuals with the organization.’’. 

(2) CONFORMING AMENDMENT TO PREMIUM TERMINOLOGY.—Section 1854(b)(2) 

(42 U.S.C. 1395w–24(b)(2)) is amended by redesignating subparagraph (C) as 

subparagraph (D) and by striking subparagraphs (A) and (B) and inserting the 

following: 

‘‘(A) MEDICARE ADVANTAGE MONTHLY BASIC BENEFICIARY PREMIUM.—The 

term ‘Medicare Advantage monthly basic beneficiary premium’ means, with 

respect to a Medicare Advantage plan—

‘‘(i) described in section 1853(a)(1)(A)(ii)(I) (relating to plans providing rebates), zero; or 

‘‘(ii) described in section 1853(a)(1)(A)(ii)(II), the amount (if any) by 

which the unadjusted Medicare Advantage statutory non-drug monthly 

bid amount exceeds the Medicare Advantage area-specific non-drug 

monthly benchmark amount. 

‘‘(B) MEDICARE ADVANTAGE MONTHLY PRESCRIPTION DRUG BENEFICIARY

PREMIUM.—The term ‘Medicare Advantage monthly prescription drug beneficiary premium’ means, with respect to a Medicare Advantage plan, that 

portion of the bid amount submitted under clause (i) of subsection (a)(6)(A) 

for the year that is attributable under such section to the provision of statutory prescription drug benefits. 

‘‘(C) MEDICARE ADVANTAGE MONTHLY SUPPLEMENTAL BENEFICIARY PREMIUM.—The term ‘Medicare Advantage monthly supplemental beneficiary 

premium’ means, with respect to a Medicare Advantage plan, the portion 

of the aggregate monthly bid amount submitted under clause (i) of subsection (a)(6)(A) for the year that is attributable under such section to the 

provision of nonstatutory benefits.’’. 

(3) REQUIREMENT FOR UNIFORM PREMIUM AND BID AMOUNTS.—Section 1854(c) 

(42 U.S.C. 1395w–24(c)) is amended to read as follows: 

‘‘(c) UNIFORM PREMIUM AND BID AMOUNTS.—The Medicare Advantage monthly bid 

amount submitted under subsection (a)(6), the Medicare Advantage monthly basic, 

prescription drug, and supplemental beneficiary premiums, and the Medicare Advantage monthly MSA premium charged under subsection (b) of a Medicare Advantage organization under this part may not vary among individuals enrolled in the 

plan.’’. 

(4) PERMITTING BENEFICIARY REBATES.—

(A) Section 1851(h)(4)(A) (42 U.S.C. 1395w–21(h)(4)(A)) is amended by inserting ‘‘except as provided under section 1854(b)(1)(C)’’ after ‘‘or otherwise’’. 

(B) Section 1854(d) (42 U.S.C. 1395w–24(d)) is amended by inserting ‘‘, 

except as provided under subsection (b)(1)(C),’’ after ‘‘and may not provide’’. 

(5) OTHER CONFORMING AMENDMENTS RELATING TO BIDS.—Section 1854 (42 

U.S.C. 1395w–24) is amended—

(A) in the heading of subsection (a), by inserting ‘‘AND BID AMOUNTS’’ 

after ‘‘PREMIUMS’’; and 

(B) in subsection (a)(5)(A), by inserting ‘‘paragraphs (2), (3), and (4) of’’ 

after ‘‘filed under’’. 

(e) ADDITIONAL CONFORMING AMENDMENTS.—

48

(1) ANNUAL DETERMINATION AND ANNOUNCEMENT OF CERTAIN FACTORS.—Section 1853(b)(1) (42 U.S.C. 1395w–23(b)(1)) is amended by striking ‘‘the respective calendar year’’ and all that follows and inserting the following: ‘‘the calendar year concerned with respect to each Medicare Advantage payment area, 

the following: 

‘‘(A) PRE-COMPETITION INFORMATION.—For years before 2006, the following: 

‘‘(i) MEDICARE ADVANTAGE CAPITATION RATES.—The annual Medicare 

Advantage capitation rate for each Medicare Advantage payment area 

for the year. 

‘‘(ii) ADJUSTMENT FACTORS.—The risk and other factors to be used in 

adjusting such rates under subsection (a)(1)(A) for payments for months 

in that year. 

‘‘(B) COMPETITION INFORMATION.—For years beginning with 2006, the following: 

‘‘(i) BENCHMARK.—The Medicare Advantage area-specific non-drug 

benchmark under section 1853(j). 

‘‘(ii) ADJUSTMENT FACTORS.—The adjustment factors applied under 

section 1853(a)(1)(A)(iv) (relating to demographic adjustment), section 

1853(a)(1)(B) (relating to adjustment for end-stage renal disease), and 

section 1853(a)(3) (relating to health status adjustment).’’. 

(2) REPEAL OF PROVISIONS RELATING TO ADJUSTED COMMUNITY RATE (ACR).—

(A) IN GENERAL.—Subsections (e) and (f) of section 1854 (42 U.S.C. 

1395w–24) are repealed. 

(B) CONFORMING AMENDMENTS.—(i) Section 1839(a)(2) (42 U.S.C. 

1395r(a)(2)) is amended by striking ‘‘, and to reflect’’ and all that follows 

and inserting a period. 

(ii) Section 1852(a)(1) (42 U.S.C. 1395w–22(a)(1)) is amended by striking 

‘‘title XI’’ and all that follows and inserting the following: ‘‘title XI those 

items and services (other than hospice care) for which benefits are available 

under parts A and B to individuals residing in the area served by the 

plan.’’. 

(iii) Section 1857(d)(1) (42 U.S.C. 1395w–27(d)(1)) is amended by striking 

‘‘, costs, and computation of the adjusted community rate’’ and inserting 

‘‘and costs’’. 

(f) REFERENCES UNDER PART E.—Section 1859 (42 U.S.C. 1395w–29) is amended 

by adding at the end the following new subsection: 

‘‘(f) APPLICATION UNDER PART E.—In the case of any reference under part E to 

a requirement or provision of this part in the relation to an EFFS plan or organization under such part, except as otherwise specified any such requirement or provision shall be applied to such organization or plan in the same manner as such requirement or provision applies to a Medicare Advantage private fee-for-service plan 

(and the Medicare Advantage organization that offers such plan) under this part.’’. 

(g) EFFECTIVE DATE.—The amendments made by this section shall apply to payments and premiums for months beginning with January 2006. 

CHAPTER 3—ADDITIONAL REFORMS

SEC. 231. MAKING PERMANENT CHANGE IN MEDICARE ADVANTAGE REPORTING DEADLINES 

AND ANNUAL, COORDINATED ELECTION PERIOD. 

(a) CHANGE IN REPORTING DEADLINE.—Section 1854(a)(1) (42 U.S.C. 1395w–

24(a)(1)), as amended by section 532(b)(1) of the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, is amended by striking ‘‘2002, 2003, 

and 2004 (or July 1 of each other year)’’ and inserting ‘‘2002 and each subsequent 

year’’. 

(b) DELAY IN ANNUAL, COORDINATED ELECTION PERIOD.—Section 1851(e)(3)(B) (42 

U.S.C. 1395w–21(e)(3)(B)), as amended by section 532(c)(1)(A) of the Public Health 

Security and Bioterrorism Preparedness and Response Act of 2002, is amended—

(1) by striking ‘‘and after 2005’’; and 

(2) by striking ‘‘, 2004, and 2005’’ and inserting ‘‘and any subsequent year’’. 

(c) ANNUAL ANNOUNCEMENT OF PAYMENT RATES.—Section 1853(b)(1) (42 U.S.C. 

1395w–23(b)(1)), as amended by section 532(d)(1) of the Public Health Security and 

Bioterrorism Preparedness and Response Act of 2002, is amended—

(1) by striking ‘‘and after 2005’’; and 

(2) by striking ‘‘and 2005’’ and inserting ‘‘and each subsequent year’’. 

(d) REQUIRING PROVISION OF AVAILABLE INFORMATION COMPARING PLAN OPTIONS.—The first sentence of section 1851(d)(2)(A)(ii) (42 U.S.C. 1395w–

21(d)(2)(A)(ii)) is amended by inserting before the period the following: ‘‘to the extent 

49

such information is available at the time of preparation of materials for the mailing’’. 

SEC. 232. AVOIDING DUPLICATIVE STATE REGULATION. 

(a) IN GENERAL.—Section 1856(b)(3) (42 U.S.C. 1395w–26(b)(3)) is amended to 

read as follows: 

‘‘(3) RELATION TO STATE LAWS.—The standards established under this subsection shall supersede any State law or regulation (other than State licensing 

laws or State laws relating to plan solvency) with respect to Medicare Advantage plans which are offered by Medicare Advantage organizations under this 

part.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect on 

the date of the enactment of this Act. 

SEC. 233. SPECIALIZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS BENEFICIARIES. 

(a) TREATMENT AS COORDINATED CARE PLAN.—Section 1851(a)(2)(A) (42 U.S.C. 

1395w–21(a)(2)(A)) is amended by adding at the end the following new sentence: 

‘‘Specialized Medicare Advantage plans for special needs beneficiaries (as defined in 

section 1859(b)(4)) may be any type of coordinated care plan.’’. 

(b) SPECIALIZED MEDICARE ADVANTAGE PLAN FOR SPECIAL NEEDS BENEFICIARIES

DEFINED.—Section 1859(b) (42 U.S.C. 1395w–29(b)) is amended by adding at the 

end the following new paragraph: 

‘‘(4) SPECIALIZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS BENEFICIARIES.—

‘‘(A) IN GENERAL.—The term ‘specialized Medicare Advantage plan for 

special needs beneficiaries’ means a Medicare Advantage plan that exclusively serves special needs beneficiaries (as defined in subparagraph (B)). 

‘‘(B) SPECIAL NEEDS BENEFICIARY.—The term ‘special needs beneficiary’ 

means a Medicare Advantage eligible individual who—

‘‘(i) is institutionalized (as defined by the Secretary); 

‘‘(ii) is entitled to medical assistance under a State plan under title 

XIX; or 

‘‘(iii) meets such requirements as the Secretary may determine would 

benefit from enrollment in such a specialized Medicare Advantage plan 

described in subparagraph (A) for individuals with severe or disabling 

chronic conditions.’’. 

(c) RESTRICTION ON ENROLLMENT PERMITTED.—Section 1859 (42 U.S.C. 1395w–29) 

is amended by adding at the end the following new subsection: 

‘‘(f) RESTRICTION ON ENROLLMENT FOR SPECIALIZED MEDICARE ADVANTAGE PLANS

FOR SPECIAL NEEDS BENEFICIARIES.—In the case of a specialized Medicare Advantage plan (as defined in subsection (b)(4)), notwithstanding any other provision of 

this part and in accordance with regulations of the Secretary and for periods before 

January 1, 2007, the plan may restrict the enrollment of individuals under the plan 

to individuals who are within one or more classes of special needs beneficiaries.’’. 

(d) REPORT TO CONGRESS.—Not later than December 31, 2005, the Medicare Benefits Administrator shall submit to Congress a report that assesses the impact of specialized Medicare Advantage plans for special needs beneficiaries on the cost and 

quality of services provided to enrollees. Such report shall include an assessment 

of the costs and savings to the medicare program as a result of amendments made 

by subsections (a), (b), and (c). 

(e) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by subsections (a), (b), and (c) shall 

take effect upon the date of the enactment of this Act. 

(2) DEADLINE FOR ISSUANCE OF REQUIREMENTS FOR SPECIAL NEEDS BENEFICIARIES; TRANSITION.—No later than 6 months after the date of the enactment 

of this Act, the Secretary shall issue interim final regulations to establish requirements for special needs beneficiaries under section 1859(b)(4)(B)(iii) of the 

Social Security Act, as added by subsection (b). 

SEC. 234. MEDICARE MSAS. 

(a) EXEMPTION FROM REPORTING ENROLLEE ENCOUNTER DATA.—

(1) IN GENERAL.—Section 1852(e)(1) (42 U.S.C. 1395w–22(e)(1)) is amended by 

inserting ‘‘(other than MSA plans)’’ after ‘‘plans’’. 

(2) CONFORMING AMENDMENTS.—Section 1852 (42 U.S.C. 1395w–22) is amended—

(A) in subsection (c)(1)(I), by inserting before the period at the end the 

following: ‘‘if required under such section’’; and 

(B) in subparagraphs (A) and (B) of subsection (e)(2), by striking ‘‘, a nonnetwork MSA plan,’’ and ‘‘, NON-NETWORK MSA PLANS,’’ each place it appears. 

50

(b) MAKING PROGRAM PERMANENT AND ELIMINATING CAP.—Section 1851(b)(4) (42 

U.S.C. 1395w–21(b)(4)) is amended—

(1) in the heading, by striking ‘‘ON A DEMONSTRATION BASIS’’; 

(2) by striking the first sentence of subparagraph (A); and 

(3) by striking the second sentence of subparagraph (C). 

(c) APPLYING LIMITATIONS ON BALANCE BILLING.—Section 1852(k)(1) (42 U.S.C. 

1395w–22(k)(1)) is amended by inserting ‘‘or with an organization offering a MSA 

plan’’ after ‘‘section 1851(a)(2)(A)’’. 

(d) ADDITIONAL AMENDMENT.—Section 1851(e)(5)(A) (42 U.S.C. 1395w–21(e)(5)(A)) 

is amended—

(1) by adding ‘‘or’’ at the end of clause (i); 

(2) by striking ‘‘, or’’ at the end of clause (ii) and inserting a semicolon; and 

(3) by striking clause (iii). 

SEC. 235. EXTENSION OF REASONABLE COST CONTRACTS. 

Subparagraph (C) of section 1876(h)(5) (42 U.S.C. 1395mm(h)(5)) is amended to 

read as follows: 

‘‘(C)(i) Subject to clause (ii), may be extended or renewed under this subsection 

indefinitely. 

‘‘(ii) For any period beginning on or after January 1, 2008, a reasonable cost reimbursement contract under this subsection may not be extended or renewed for a 

service area insofar as such area, during the entire previous year, was within the 

service area of 2 or more plans which were coordinated care Medicare Advantage 

plans under part C or 2 or more enhanced fee-for-service plans under part E and 

each of which plan for that previous year for the area involved meets the following 

minimum enrollment requirements: 

‘‘(I) With respect to any portion of the area involved that is within a Metropolitan Statistical Area with a population of more than 250,000 and counties 

contiguous to such Metropolitan Statistical Area, 5,000 individuals. 

‘‘(II) With respect to any other portion of such area, 1,500 individuals.’’. 

SEC. 236. EXTENSION OF MUNICIPAL HEALTH SERVICE DEMONSTRATION PROJECTS. 

Section 9215(a) of the Consolidated Omnibus Budget Reconciliation Act of 1985 

(42 U.S.C. 1395b–1 note), as amended by section 6135 of the Omnibus Budget Reconciliation Act of 1989, section 13557 of the Omnibus Budget Reconciliation Act of 

1993, section 4017 of BBA, section 534 of BBRA (113 Stat. 1501A–390), and section 

633 of BIPA, is amended by striking ‘‘December 31, 2004’’ and inserting ‘‘December 

31, 2009’’.

Subtitle C—Application of FEHBP-Style 

Competitive Reforms

SEC. 241. APPLICATION OF FEHBP-STYLE COMPETITIVE REFORM BEGINNING IN 2010.

(a) IDENTIFICATION OF COMPETITIVE EFFS REGIONS; COMPUTATION OF COMPETITIVE EFFS NON-DRUG BENCHMARKS UNDER EFFS PROGRAM.—

(1) IN GENERAL.—Section 1860E–3, as added by section 201(a), is amended by 

adding at the end the following new subsection: 

‘‘(e) APPLICATION OF COMPETITION.—

‘‘(1) DETERMINATION OF COMPETITIVE EFFS REGIONS.—

‘‘(A) IN GENERAL.—For purposes of this part, the term ‘competitive EFFS 

region’ means, for a year beginning with 2010, an EFFS region that the Administrator finds—

‘‘(i) there will be offered in the region during the annual, coordinated 

election period under section 1851(e)(3)(B) (as applied under section 

1860E–1(c)) before the beginning of the year at least 2 EFFS plans (in 

addition to the fee-for-service program under parts A and B), each offered by a different EFFS organization and each of which met the minimum enrollment requirements of paragraph (1) of section 1857(b) (as 

applied without regard to paragraph (3) thereof) as of March of the previous year; and 

‘‘(ii) during March of the previous year at least the percentage specified in subparagraph (C) of the number of EFFS eligible individuals 

who reside in the region were enrolled in an EFFS plan. 

‘‘(B) PERCENTAGE SPECIFIED.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A), subject to clause 

(ii), the percentage specified in this subparagraph for a year is equal 

the lesser of 20 percent or to the sum of—

51

‘‘(I) the percentage, as estimated by the Administrator, of EFFS 

eligible individuals in the United States who are enrolled in EFFS 

plans during March of the previous year; and 

‘‘(II) the percentage, as estimated by the Administrator, of Medicare Advantage eligible individuals in the United States who are 

enrolled in Medicare Advantage plans during March of the previous year. 

‘‘(ii) EXCEPTION.—In the case of an EFFS region that was a competitive EFFS region for the previous year, the Medicare Benefits Administrator may continue to treat the region as meeting the requirement of 

subparagraph (A)(ii) if the region would meet such requirement but for 

a de minimis reduction below the percentage specified in clause (i). 

‘‘(2) COMPETITIVE EFFS NON-DRUG MONTHLY BENCHMARK AMOUNT.—For purposes of this part, the term ‘competitive EFFS non-drug monthly benchmark 

amount’ means, with respect to an EFFS region for a month in a year and subject to paragraph (8), the sum of the 2 components described in paragraph (3) 

for the region and year. The Administrator shall compute such benchmark 

amount for each competitive EFFS region before the beginning of each annual, 

coordinated election period under section 1851(e)(3)(B) for each year (beginning 

with 2010) in which it is designated as such a region. 

‘‘(3) 2 COMPONENTS.—For purposes of paragraph (2), the 2 components described in this paragraph for an EFFS region and a year are the following: 

‘‘(A) EFFS COMPONENT.—The product of the following: 

‘‘(i) WEIGHTED AVERAGE OF PLAN BIDS IN REGION.—The weighted average of the EFFS plan bids for the region and year (as determined 

under paragraph (4)(A)). 

‘‘(ii) NON-FFS MARKET SHARE.—1 minus the fee-for-service market 

share percentage determined under paragraph (5) for the region and 

the year. 

‘‘(B) FEE-FOR-SERVICE COMPONENT.—The product of the following: 

‘‘(i) FEE-FOR-SERVICE REGION-SPECIFIC NON-DRUG AMOUNT.—The feefor-service region-specific non-drug amount (as defined in paragraph 

(6)) for the region and year. 

‘‘(ii) FEE-FOR-SERVICE MARKET SHARE.—The fee-for-service market 

share percentage (determined under paragraph (5)) for the region and 

the year. 

‘‘(4) DETERMINATION OF WEIGHTED AVERAGE EFFS PLAN BIDS FOR A REGION.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(A)(i), the weighted average of EFFS plan bids for an EFFS region and a year is the sum of the 

following products for EFFS plans described in subparagraph (C) in the region and year: 

‘‘(i) UNADJUSTED EFFS STATUTORY NON-DRUG MONTHLY BID AMOUNT.—

The unadjusted EFFS statutory non-drug monthly bid amount (as defined in subsection (a)(3)(A)(ii)(I)) for the region and year. 

‘‘(ii) PLAN’S SHARE OF EFFS ENROLLMENT IN REGION.—The number of 

individuals described in subparagraph (B), divided by the total number 

of such individuals for all EFFS plans described in subparagraph (C) 

for that region and year. 

‘‘(B) COUNTING OF INDIVIDUALS.—The Administrator shall count, for each 

EFFS plan described in subparagraph (C) for an EFFS region and year, the 

number of individuals who reside in the region and who were enrolled 

under such plan under this part during March of the previous year. 

‘‘(C) EXCLUSION OF PLANS NOT OFFERED IN PREVIOUS YEAR.—For an EFFS 

region and year, the EFFS plans described in this subparagraph are plans 

that are offered in the region and year and were offered in the region in 

March of the previous year. 

‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MARKET SHARE PERCENTAGE.—The Administrator shall determine, for a year and an EFFS region, the proportion (in 

this subsection referred to as the ‘fee-for-service market share percentage’) of 

the EFFS eligible individuals who are residents of the region during March of 

the previous year, of such individuals who were not enrolled in an EFFS plan 

or in a Medicare Advantage plan (or, if greater, such proportion determined for 

individuals nationally). 

‘‘(6) FEE-FOR-SERVICE REGION-SPECIFIC NON-DRUG AMOUNT.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(B)(i) and section 

1839(h)(2)(A), subject to subparagraph (B), the term ‘fee-for-service regionspecific non-drug amount’ means, for a competitive EFFS region and a year, 

the adjusted average per capita cost for the year involved, determined 

under section 1876(a)(4) for such region for services covered under parts A 

52

and B for individuals entitled to benefits under part A and enrolled under 

this part who are not enrolled in an EFFS plan under part E or a Medicare 

Advantage plan under part C for the year, but adjusted to exclude costs attributable to payments under section 1886(h). 

‘‘(B) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average 

per capita cost under subparagraph (A) for a year, such cost shall be adjusted to include the Administrator’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the region 

involved under this title if individuals entitled to benefits under this title 

had not received services from facilities of the Department of Veterans Affairs or the Department of Defense. 

‘‘(7) APPLICATION OF COMPETITION.—In the case of an EFFS region that is a 

competitive EFFS region for a year, for purposes of applying subsections (b) and 

(c)(1) and section 1860E–4(a), any reference to an EFFS region-specific non-drug 

monthly benchmark amount shall be treated as a reference to the competitive 

EFFS non-drug monthly benchmark amount under paragraph (2) for the region 

and year. 

‘‘(8) PHASE-IN OF BENCHMARK FOR EACH REGION.— ‘‘(A) USE OF BLENDED BENCHMARK.—In the case of a region that has not 

been a competitive EFFS region for each of the previous 4 years, the competitive EFFS non-drug monthly benchmark amount shall be equal to the 

sum of the following: 

‘‘(i) NEW COMPETITIVE COMPONENT.—The product of—

‘‘(I) the weighted average phase-in proportion for that area and 

year, as specified in subparagraph (B); and 

‘‘(II) the competitive EFFS non-drug monthly benchmark amount 

for the region and year, determined under paragraph (2) without 

regard to this paragraph. 

‘‘(ii) OLD COMPETITIVE COMPONENT.—The product of—

‘‘(I) 1 minus the weighted average phase-in proportion for that 

region and year; and 

‘‘(II) the EFFS region-specific non-drug benchmark amount for 

the region and the year. 

‘‘(B) COMPUTATION OF WEIGHTED AVERAGE PHASE-IN PROPORTION.—For 

purposes of this paragraph, the ‘weighted average phase-in proportion’ for 

an EFFS region for a year shall be determined as follows: 

‘‘(i) FIRST YEAR (AND REGION NOT COMPETITIVE REGION IN PREVIOUS

YEAR).—If the area was not a competitive EFFS region in the previous 

year, the weighted average phase-in proportion for the region for the 

year is equal to 1⁄5. 

‘‘(ii) COMPETITIVE REGION IN PREVIOUS YEAR.—If the region was a 

competitive EFFS region in the previous year, the weighted average 

phase-in proportion for the region for the year is equal to the weighted 

average phase-in proportion determined under this subparagraph for 

the region for the previous year plus 1⁄5, but in no case more than 1.’’. 

(2) CONFORMING AMENDMENTS.—

(A) Such section 1860E–3 is further amended—

(i) in subsection (b), by adding at the end the following new paragraph: 

‘‘(4) APPLICATION IN COMPETITIVE REGIONS.—For special rules applying 

this subsection in competitive EFFS regions, see subsection (e)(7).’’; 

(ii) in subsection (c)(1), by inserting ‘‘and subsection (e)(7)’’ after ‘‘(as 

made applicable under subsection (d))’’; and 

(iii) in subsection (d) , by striking ‘‘and (e)’’ and inserting ‘‘(e), and 

(k) ’’. 

(B) Section 1860E–4(a)(1), as inserted by section 201(a)(2), is amended by 

inserting ‘‘, except as provided in section 1860E–3(e)(7)’’ after ‘‘paragraph 

(2)’’.

(b) IDENTIFICATION OF COMPETITIVE MEDICARE ADVANTAGE AREAS; APPLICATION

OF COMPETITIVE MEDICARE ADVANTAGE NON-DRUG BENCHMARKS UNDER MEDICARE

ADVANTAGE PROGRAM.—

(1) IN GENERAL.—Section 1853, as amended by section 221(b)(3), is amended 

by adding at the end the following new subsection: 

‘‘(k) APPLICATION OF COMPETITION.—

‘‘(1) DETERMINATION OF COMPETITIVE MEDICARE ADVANTAGE AREAS.—

‘‘(A) IN GENERAL.—For purposes of this part, the terms ‘competitive Medicare Advantage area’ and ‘CMA area’ mean, for a year beginning with 2010, 

an area (which is a metropolitan statistical area or other area with a subVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00052 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
53

stantial number of Medicare Advantage enrollees) that the Administrator 

finds—

‘‘(i) there will be offered during the annual, coordinated election period under section 1851(e)(3)(B) under this part before the beginning of 

the year at least 2 Medicare Advantage plans (in addition to the feefor-service program under parts A and B), each offered by a different 

Medicare Advantage organization and each of which met the minimum 

enrollment requirements of paragraph (1) of section 1857(b) (as applied 

without regard to paragraph (3) thereof) as of March of the previous 

year with respect to the area; and 

‘‘(ii) during March of the previous year at least the percentage specified in subparagraph (B) of the number of Medicare Advantage eligible 

individuals who reside in the area were enrolled in a Medicare Advantage plan. 

‘‘(B) PERCENTAGE SPECIFIED.— ‘‘(i) IN GENERAL.—For purposes of subparagraph (A), subject to clause 

(ii), the percentage specified in this subparagraph for a year is equal 

the lesser of 20 percent or to the sum of—

‘‘(I) the percentage, as estimated by the Administrator, of EFFS 

eligible individuals in the United States who are enrolled in EFFS 

plans during March of the previous year; and 

‘‘(II) the percentage, as estimated by the Administrator, of Medicare Advantage eligible individuals in the United States who are 

enrolled in Medicare Advantage plans during March of the previous year. 

‘‘(ii) EXCEPTION.—In the case of an area that was a competitive area 

for the previous year, the Medicare Benefits Administrator may continue to treat the area as meeting the requirement of subparagraph 

(A)(ii) if the area would meet such requirement but for a de minimis 

reduction below the percentage specified in clause (i). 

‘‘(2) COMPETITIVE MEDICARE ADVANTAGE NON-DRUG MONTHLY BENCHMARK

AMOUNT.—For purposes of this part, the term ‘competitive Medicare Advantage 

non-drug monthly benchmark amount’ means, with respect to a competitive 

Medicare Advantage area for a month in a year subject to paragraph (8), the 

sum of the 2 components described in paragraph (3) for the area and year. The 

Administrator shall compute such benchmark amount for each competitive 

Medicare Advantage area before the beginning of each annual, coordinated election period under section 1851(e)(3)(B) for each year (beginning with 2010) in 

which it is designated as such an area. 

‘‘(3) 2 COMPONENTS.—For purposes of paragraph (2), the 2 components described in this paragraph for a competitive Medicare Advantage area and a year 

are the following: 

‘‘(A) MEDICARE ADVANTAGE COMPONENT.—The product of the following: 

‘‘(i) WEIGHTED AVERAGE OF MEDICARE ADVANTAGE PLAN BIDS IN

AREA.—The weighted average of the plan bids for the area and year (as 

determined under paragraph (4)(A)). 

‘‘(ii) NON-FFS MARKET SHARE.—1 minus the fee-for-service market 

share percentage, determined under paragraph (5) for the area and 

year. 

‘‘(B) FEE-FOR-SERVICE COMPONENT.—The product of the following: 

‘‘(i) FEE-FOR-SERVICE AREA-SPECIFIC NON-DRUG AMOUNT.—The fee-forservice area-specific non-drug amount (as defined in paragraph (6)) for 

the area and year. 

‘‘(ii) FEE-FOR-SERVICE MARKET SHARE.—The fee-for-service market 

share percentage, determined under paragraph (5) for the area and 

year. 

‘‘(4) DETERMINATION OF WEIGHTED AVERAGE MEDICARE ADVANTAGE BIDS FOR

AN AREA.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(A)(i), the weighted average of plan bids for an area and a year is the sum of the following products 

for Medicare Advantage plans described in subparagraph (C) in the area 

and year: 

‘‘(i) MONTHLY MEDICARE ADVANTAGE STATUTORY NON-DRUG BID

AMOUNT.—The unadjusted Medicare Advantage statutory non-drug 

monthly bid amount. 

‘‘(ii) PLAN’S SHARE OF MEDICARE ADVANTAGE ENROLLMENT IN AREA.—

The number of individuals described in subparagraph (B), divided by 

the total number of such individuals for all Medicare Advantage plans 

described in subparagraph (C) for that area and year. 

54

‘‘(B) COUNTING OF INDIVIDUALS.—The Administrator shall count, for each 

Medicare Advantage plan described in subparagraph (C) for an area and 

year, the number of individuals who reside in the area and who were enrolled under such plan under this part during March of the previous year. 

‘‘(C) EXCLUSION OF PLANS NOT OFFERED IN PREVIOUS YEAR.—For an area 

and year, the Medicare Advantage plans described in this subparagraph are 

plans described in the first sentence of section 1851(a)(2)(A) that are offered 

in the area and year and were offered in the area in March of the previous 

year. 

‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MARKET SHARE PERCENTAGE.—The Administrator shall determine, for a year and a competitive Medicare Advantage 

area, the proportion (in this subsection referred to as the ‘fee-for-service market 

share percentage’) of Medicare Advantage eligible individuals residing in the 

area who during March of the previous year were not enrolled in a Medicare 

Advantage plan or in an EFFS plan (or, if greater, such proportion determined 

for individuals nationally). 

‘‘(6) FEE-FOR-SERVICE AREA-SPECIFIC NON-DRUG AMOUNT.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(B)(i) and section 

1839(h)(1)(A), subject to subparagraph (B), the term ‘fee-for-service areaspecific non-drug amount’ means, for a competitive Medicare Advantage 

area and a year, the adjusted average per capita cost for the year involved, 

determined under section 1876(a)(4) for such area for services covered 

under parts A and B for individuals entitled to benefits under part A and 

enrolled under this part who are not enrolled in a Medicare Advantage plan 

under part C or an EFFS plan under part E for the year, but adjusted to 

exclude costs attributable to payments under section 1886(h). 

‘‘(B) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average 

per capita cost under subparagraph (A) for a year, such cost shall be adjusted to include the Administrator’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the area involved under this title if individuals entitled to benefits under this title had 

not received services from facilities of the Department of Veterans Affairs 

or the Department of Defense. 

‘‘(7) APPLICATION OF COMPETITION.—In the case of an area that is a competitive Medicare Advantage area for a year, for purposes of applying subsection 

(a)(1)(A)(ii) and sections 1854(b)(2)(A)(ii) and 1854(b)(3)(B)(i), any reference to 

a Medicare Advantage area-specific non-drug monthly benchmark amount shall 

be treated as a reference to the competitive Medicare Advantage non-drug 

monthly benchmark amount under paragraph (2) for the area and year. 

‘‘(8) PHASE-IN OF BENCHMARK FOR EACH AREA.—

‘‘(A) USE OF BLENDED BENCHMARK.—In the case of an area that has not 

been a competitive Medicare Advantage area for each of the previous 4 

years, the competitive Medicare Advantage non-drug monthly benchmark 

amount shall be equal to the sum of the following: 

‘‘(i) NEW COMPETITIVE COMPONENT.—The product of—

‘‘(I) the weighted average phase-in proportion for that area and 

year, as specified in subparagraph (B); and 

‘‘(II) the competitive Medicare Advantage non-drug monthly 

benchmark amount for the area and year, determined under paragraph (2) without regard to this paragraph. 

‘‘(ii) OLD COMPETITIVE COMPONENT.—The product of—

‘‘(I) 1 minus the weighted average phase-in proportion for that 

area and year; and 

‘‘(II) the Medicare Advantage area-wide non-drug benchmark 

amount for the area and the year. 

‘‘(B) COMPUTATION OF WEIGHTED AVERAGE PHASE-IN PROPORTION.—For 

purposes of this paragraph, the ‘weighted average phase-in proportion’ for 

a Medicare Advantage payment area for a year shall be determined as follows: 

‘‘(i) FIRST YEAR (AND AREA NOT COMPETITIVE AREA IN PREVIOUS

YEAR).—If the area was not a Medicare Advantage competitive area in 

the previous year, the weighted average phase-in proportion for the 

area for the year is equal to 1⁄5. 

‘‘(ii) COMPETITIVE AREA IN PREVIOUS YEAR.—If the area was a competitive Medicare Advantage area in the previous year, the weighted 

average phase-in proportion for the area for the year is equal to the 

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55

graph for the area for the previous year plus 1⁄5, but in no case more 

than 1. 

‘‘(C) MEDICARE ADVANTAGE AREA-WIDE NON-DRUG BENCHMARK AMOUNT.— For purposes of subparagraph (A)(ii)(II), the term ‘Medicare Advantage 

area-wide non-drug benchmark amount’ means, for an area and year, the 

weighted average of the amounts described in section 1853(j) for Medicare 

Advantage payment area or areas included in the area (based on the number of traditional fee-for-service enrollees in such payment area or areas) 

and year.’’. 

(2) APPLICATION.—Section 1854 (42 U.S.C. 1395w–24) is amended—

(A) in subsection (b)(1)(C)(i), as added by section 221(b)(1)(A), by striking 

‘‘(i) REQUIREMENT.—The’’ and inserting ‘‘(i) REQUIREMENT FOR NON-COM- PETITIVE AREAS.—In the case of a Medicare Advantage payment area that 

is not a competitive Medicare Advantage area designated under section 

1853(k)(1), the’’; 

(B) in subsection (b)(1)(C), as so added, by inserting after clause (i) the 

following new clause: 

‘‘(ii) REQUIREMENT FOR COMPETITIVE MEDICARE ADVANTAGE AREAS.— In the case of a Medicare Advantage payment area that is designated 

as a competitive Medicare Advantage area under section 1853(k)(1), if 

there are average per capita monthly savings described in paragraph 

(6) for a Medicare Advantage plan and year, the Medicare Advantage 

plan shall provide to the enrollee a monthly rebate equal to 75 percent 

of such savings.’’; and 

(C) by adding at the end of subsection (b), as amended by sections 

221(b)(1)(B) and 221(b)(2), the following new paragraph: 

‘‘(6) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS FOR COMPETITIVE MEDICARE ADVANTAGE AREAS.—For purposes of paragraph (1)(C)(ii), the average per capita monthly savings referred to in such paragraph for a Medicare 

Advantage plan and year shall be computed in the same manner as the average 

per capita monthly savings is computed under paragraph (3) except that the reference to the Medicare Advantage area-specific non-drug monthly benchmark 

amount in paragraph (3)(B)(i) (or to the benchmark amount as adjusted under 

paragraph (3)(C)(i)) is deemed to be a reference to the competitive Medicare Advantage non-drug monthly benchmark amount (or such amount as adjusted in 

the manner described in paragraph (3)(B)(i)).’’. 

(3) ADDITIONAL CONFORMING AMENDMENTS.—

(A) PAYMENT OF PLANS.—Section 1853(a)(1)(A)(ii), as amended by section 

221(c)(1), is amended—

(i) in subclauses (I) and (II), by inserting ‘‘(or, insofar as such payment area is a competitive Medicare Advantage area, described in section 1854(b)(6))’’ after ‘‘section 1854(b)(3)(C)’’; and 

(ii) in subclause (II), by inserting ‘‘(or, insofar as such payment area 

is a competitive Medicare Advantage area, the competitive Medicare 

Advantage non-drug monthly benchmark amount)’’ after ‘‘Medicare Advantage area-specific non-drug monthly benchmark amount’’; and 

(B) DISCLOSURE OF INFORMATION.—Section 1853(b)(1)(B), as amended by 

section 221(e)(1), is amended to read as follows: 

‘‘(B) COMPETITION INFORMATION.—For years beginning with 2006, the following: 

‘‘(i) BENCHMARKS.—The Medicare Advantage area-specific non-drug 

benchmark under section 1853(j) and, if applicable, the competitive 

Medicare Advantage non-drug benchmark under section 1853(k)(2), for 

the year and competitive Medicare Advantage area involved and the 

national fee-for-service market share percentage for the area and year. 

‘‘(ii) ADJUSTMENT FACTORS.—The adjustment factors applied under 

section 1853(a)(1)(A)(iv) (relating to demographic adjustment), section 

1853(a)(1)(B) (relating to adjustment for end-stage renal disease), and 

section 1853(a)(3) (relating to health status adjustment). 

‘‘(iii) CERTAIN BENCHMARKS AND AMOUNTS.—In the case of a competitive Medicare Advantage area, the Medicare Advantage area-wide nondrug benchmark amount (as defined in subsection (k)(8)(C)) and the 

fee-for-service area-specific non-drug amount (as defined in section 

1853(k)(6)) for the area. 

‘‘(iv) INDIVIDUALS.—The number of individuals counted under subsection (k)(4)(B) and enrolled in each Medicare Advantage plan in the 

area.’’. 

(C) DEFINITION OF MONTHLY BASIC PREMIUM.—Section 1854(b)(2)(A)(ii), as 

amended by section 221(d)(2), is amended by inserting ‘‘(or, in the case of 

56

a competitive Medicare Advantage area, the competitive Medicare Advantage non-drug monthly benchmark amount or, in applying this paragraph 

under part E in the case of a competitive EFFS region, the competitive 

EFFS non-drug monthly benchmark amount)’’ after ‘‘benchmark amount’’. 

(c) PREMIUM ADJUSTMENT.—

(1) IN GENERAL.—Section 1839 (42 U.S.C. 1395r) is amended by adding at the 

end the following new subsection: 

‘‘(h)(1)(A) In the case of an individual who resides in a competitive Medicare Advantage area under section 1853(k)(1) (regardless of whether such area is in a competitive EFFS region under section 1860E–3(e)) and who is not enrolled in a Medicare Advantage plan under part C or in an EFFS plan under part E, the monthly 

premium otherwise applied under this part (determined without regard to subsections (b) and (f) or any adjustment under this subsection) shall be adjusted as 

follows: If the fee-for-service area-specific non-drug amount (as defined in section 

1853(k)(6)) for the competitive Medicare Advantage area in which the individual resides for a month—

‘‘(i) does not exceed the competitive Medicare Advantage non-drug benchmark 

(as determined under paragraph (2) of section 1853(k), without regard to paragraph (8) thereof) for such area, the amount of the premium for the individual 

for the month shall be reduced by an amount equal to the product of the adjustment factor under subparagraph (C) and 75 percent of the amount by which 

such competitive benchmark exceeds such fee-for-service area-specific non-drug 

amount; or 

‘‘(ii) exceeds such competitive Medicare Advantage non-drug benchmark, the 

amount of the premium for the individual for the month shall be adjusted to 

ensure, subject to subparagraph (B), that—

‘‘(I) the sum of the amount of the adjusted premium and the competitive 

Medicare Advantage non-drug benchmark for the area, is equal to 

‘‘(II) the sum of the unadjusted premium plus amount of the fee-for-service area-specific non-drug amount for the area. 

‘‘(B) In no case shall the actual amount of an adjustment under subparagraph 

(A)(ii) exceed the product of the adjustment factor under subparagraph (C) and the 

amount of the adjustment otherwise computed under subparagraph (A)(ii) without 

regard to this subparagraph. 

‘‘(C) The adjustment factor under this subparagraph for an area for a year is 

equal to—

‘‘(i) the number of consecutive years (in the 5-year period ending with the 

year involved) in which such area was a competitive Medicare Advantage area; 

divided by 

‘‘(ii) 5. 

‘‘(2)(A) In the case of an individual who resides in an area that is within a competitive EFFS region under section 1860E–3(e) but is not within a competitive Medicare Advantage area under section 1853(k)(1) and who is not enrolled in a Medicare 

Advantage plan under part C or in an EFFS plan under part E, the monthly premium otherwise applied under this part (determined without regard to subsections 

(b) and (f) or any adjustment under this subsection) shall be adjusted as follows: 

If the fee-for-service region-specific non-drug amount (as defined in section 1860E–

3(e)(6)) for a region for a month—

‘‘(i) does not exceed the competitive EFFS non-drug monthly benchmark 

amount (as determined under paragraph (2) of section 1860E–3(e), without regard to paragraph (8) thereof) for such region, the amount of the premium for 

the individual for the month shall be reduced by an amount equal to the product of the adjustment factor under subparagraph (C) and 75 percent of the 

amount by which such competitive benchmark amount exceeds such fee-forservice region-specific non-drug benchmark amount; or 

‘‘(ii) exceeds such competitive EFFS non-drug monthly benchmark amount, 

the amount of the premium for the individual for the month shall be adjusted 

to ensure, subject to subparagraph (B), that—

‘‘(I) the sum of the amount of the adjusted premium and the competitive 

EFFS non-drug monthly benchmark amount for the region, is equal to 

‘‘(II) the sum of the unadjusted premium plus the amount of the EFFS 

region-specific non-drug monthly bidfor the region. 

‘‘(B) In no case shall the actual amount of an adjustment under subparagraph 

(A)(ii) exceed the product of the adjustment factor under subparagraph (C) and the 

amount of the adjustment otherwise computed under subparagraph (A)(ii) without 

regard to this subparagraph. 

‘‘(C) The adjustment factor under this subparagraph for an EFFS region for a year 

is equal to—

57

‘‘(i) the number of consecutive years (in the 5-year period ending with the 

year involved) in which such region was a competitive EFFS region; divided by 

‘‘(ii) 5. 

‘‘(3) Nothing in this subsection shall be construed as preventing a reduction under 

paragraph (1)(A) or paragraph (2)(A) in the premium otherwise applicable under 

this part to zero or from requiring the provision of a rebate to the extent such premium would otherwise be required to be less than zero. 

‘‘(4) The adjustment in the premium under this subsection shall be effected in 

such manner as the Medicare Benefits Administrator determines appropriate. 

‘‘(5) In order to carry out this subsection (insofar as it is effected through the manner of collection of premiums under 1840(a)), the Medicare Benefits Administrator 

shall transmit to the Commissioner of Social Security—

‘‘(A) at the beginning of each year, the name, social security account number, 

and the amount of the adjustment (if any) under this subsection for each individual enrolled under this part for each month during the year; and 

‘‘(B) periodically throughout the year, information to update the information 

previously transmitted under this paragraph for the year.’’. 

(2) CONFORMING AMENDMENT.—Section 1844(c) (42 U.S.C. 1395w(c)) is 

amended by inserting ‘‘and without regard to any premium adjustment effected 

under section 1839(h)’’ before the period at the end. 

(d) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

January 1, 2010.

TITLE III—COMBATTING WASTE, FRAUD, AND 

ABUSE 

SEC. 301. MEDICARE SECONDARY PAYOR (MSP) PROVISIONS. 

(a) TECHNICAL AMENDMENT CONCERNING SECRETARY’S AUTHORITY TO MAKE CONDITIONAL PAYMENT WHEN CERTAIN PRIMARY PLANS DO NOT PAY PROMPTLY.—

(1) IN GENERAL.—Section 1862(b)(2) (42 U.S.C. 1395y(b)(2)) is amended—

(A) in subparagraph (A)(ii), by striking ‘‘promptly (as determined in accordance with regulations)’’; 

(B) in subparagraph (B)—

(i) by redesignating clauses (i) through (iii) as clauses (ii) through 

(iv), respectively; and 

(ii) by inserting before clause (ii), as so redesignated, the following 

new clause: 

‘‘(i) AUTHORITY TO MAKE CONDITIONAL PAYMENT.—The Secretary may 

make payment under this title with respect to an item or service if a 

primary plan described in subparagraph (A)(ii) has not made or cannot 

reasonably be expected to make payment with respect to such item or 

service promptly (as determined in accordance with regulations). Any 

such payment by the Secretary shall be conditioned on reimbursement 

to the appropriate Trust Fund in accordance with the succeeding provisions of this subsection.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall be effective as if included in the enactment of title III of the Medicare and Medicaid 

Budget Reconciliation Amendments of 1984 (Public Law 98-369). 

(b) CLARIFYING AMENDMENTS TO CONDITIONAL PAYMENT PROVISIONS.—Section 

1862(b)(2) (42 U.S.C. 1395y(b)(2)) is further amended—

(1) in subparagraph (A), in the matter following clause (ii), by inserting the 

following sentence at the end: ‘‘An entity that engages in a business, trade, or 

profession shall be deemed to have a self-insured plan if it carries its own risk 

(whether by a failure to obtain insurance, or otherwise) in whole or in part.’’; 

(2) in subparagraph (B)(ii), as redesignated by subsection (a)(2)(B)—

(A) by striking the first sentence and inserting the following: ‘‘A primary 

plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the Secretary 

under this title with respect to an item or service if it is demonstrated that 

such primary plan has or had a responsibility to make payment with respect to such item or service. A primary plan’s responsibility for such payment may be demonstrated by a judgment, a payment conditioned upon the 

recipient’s compromise, waiver, or release (whether or not there is a determination or admission of liability) of payment for items or services included 

in a claim against the primary plan or the primary plan’s insured, or by 

other means.’’; and 

58

(B) in the final sentence, by striking ‘‘on the date such notice or other information is received’’ and inserting ‘‘on the date notice of, or information 

related to, a primary plan’s responsibility for such payment or other information is received’’; and 

(3) in subparagraph (B)(iii), , as redesignated by subsection (a)(2)(B), by striking the first sentence and inserting the following: ‘‘In order to recover payment 

made under this title for an item or service, the United States may bring an 

action against any or all entities that are or were required or responsible (directly, as an insurer or self-insurer, as a third-party administrator, as an employer that sponsors or contributes to a group health plan, or large group health 

plan, or otherwise) to make payment with respect to the same item or service 

(or any portion thereof) under a primary plan. The United States may, in accordance with paragraph (3)(A) collect double damages against any such entity. 

In addition, the United States may recover under this clause from any entity 

that has received payment from a primary plan or from the proceeds of a primary plan’s payment to any entity.’’. 

(c) CLERICAL AMENDMENTS.—Section 1862(b) (42 U.S.C. 1395y(b)) is amended—

(1) in paragraph (1)(A), by moving the indentation of clauses (ii) through (v) 

2 ems to the left; and 

(2) in paragraph (3)(A), by striking ‘‘such’’ before ‘‘paragraphs’’. 

SEC. 302. COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND SERVICES. 

(a) IN GENERAL.—Section 1847 (42 U.S.C. 1395w–3) is amended to read as follows:

‘‘COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND SERVICES

‘‘SEC. 1847. (a) ESTABLISHMENT OF COMPETITIVE ACQUISITION PROGRAMS.—

‘‘(1) IMPLEMENTATION OF PROGRAMS.—

‘‘(A) IN GENERAL.—The Secretary shall establish and implement programs 

under which competitive acquisition areas are established throughout the 

United States for contract award purposes for the furnishing under this 

part of competitively priced items and services (described in paragraph (2)) 

for which payment is made under this part. Such areas may differ for different items and services. 

‘‘(B) PHASED-IN IMPLEMENTATION.—The programs shall be phased-in—

‘‘(i) among competitive acquisition areas over a period of not longer 

than 3 years in a manner so that the competition under the programs 

occurs in—

‘‘(I) at least 1⁄3 of such areas in 2005; and 

‘‘(II) at least 2⁄3 of such areas in 2006; and 

‘‘(ii) among items and services in a manner such that the programs 

apply to the highest cost and highest volume items and services first. 

‘‘(C) WAIVER OF CERTAIN PROVISIONS.—In carrying out the programs, the 

Secretary may waive such provisions of the Federal Acquisition Regulation 

as are necessary for the efficient implementation of this section, other than 

provisions relating to confidentiality of information and such other provisions as the Secretary determines appropriate. 

‘‘(2) ITEMS AND SERVICES DESCRIBED.—The items and services referred to in 

paragraph (1) are the following: 

‘‘(A) DURABLE MEDICAL EQUIPMENT AND MEDICAL SUPPLIES.—Covered 

items (as defined in section 1834(a)(13)) for which payment is otherwise 

made under section 1834(a), including items used in infusion and drugs and 

supplies used in conjunction with durable medical equipment, but excluding 

class III devices under the Federal Food, Drug, and Cosmetic Act. 

‘‘(B) OTHER EQUIPMENT AND SUPPLIES.—Items, equipment, and supplies 

(as described in section 1842(s)(2)(D) other than enteral nutrients). 

‘‘(C) OFF-THE-SHELF ORTHOTICS.—Orthotics (described in section 

1861(s)(9)) for which payment is otherwise made under section 1834(h) 

which require minimal self-adjustment for appropriate use and does not require expertise in trimming, bending, molding, assembling, or customizing 

to fit to the patient. 

‘‘(3) EXCEPTION AUTHORITY.—In carrying out the programs under this section, 

the Secretary may exempt—

‘‘(A) rural areas and areas with low population density within urban 

areas that are not competitive, unless there is a significant national market 

through mail order for a particular item or service; and 

‘‘(B) items and services for which the application of competitive acquisition is not likely to result in significant savings. 

‘‘(4) SPECIAL RULE FOR CERTAIN RENTED ITEMS OF DURABLE MEDICAL EQUIPMENT.—In the case of a covered item for which payment is made on a rental 

59

basis under section 1834(a), the Secretary shall establish a process by which 

rental agreements for the covered items entered into before the application of 

the competitive acquisition program under this section for the item may be continued notwithstanding this section. In the case of any such continuation, the 

supplier involved shall provide for appropriate servicing and replacement, as required under section 1834(a). 

‘‘(5) PHYSICIAN AUTHORIZATION.—The Secretary may establish a process under 

which a physician may prescribe a particular brand or mode of delivery of an 

item or service if the item or service involved is clinically more appropriate than 

other similar items or services. 

‘‘(6) APPLICATION.—For each competitive acquisition area in which the program is implemented under this subsection with respect to items and services, 

the payment basis determined under the competition conducted under subsection (b) shall be substituted for the payment basis otherwise applied under 

section 1834(a). 

‘‘(b) PROGRAM REQUIREMENTS.—

‘‘(1) IN GENERAL.—The Secretary shall conduct a competition among entities 

supplying items and services described in subsection (a)(2) for each competitive 

acquisition area in which the program is implemented under subsection (a) with 

respect to such items and services. 

‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—

‘‘(A) IN GENERAL.—The Secretary may not award a contract to any entity 

under the competition conducted in an competitive acquisition area pursuant to paragraph (1) to furnish such items or services unless the Secretary 

finds all of the following: 

‘‘(i) The entity meets quality and financial standards specified by the 

Secretary or developed by the Program Advisory and Oversight Committee established under subsection (c). 

‘‘(ii) The total amounts to be paid under the contract (including costs 

associated with the administration of the contract) are expected to be 

less than the total amounts that would otherwise be paid. 

‘‘(iii) Beneficiary access to a choice of multiple suppliers in the area 

is maintained. 

‘‘(iv) Beneficiary liability is limited to 20 percent of the applicable 

contract award price, except in such cases where a supplier has furnished an upgraded item and has executed an advanced beneficiary notice. 

‘‘(B) DEVELOPMENT OF QUALITY STANDARDS FOR DME PRODUCTS.—

‘‘(i) IN GENERAL.—The quality standards specified under subparagraph (A)(i) shall not be less than the quality standards that would otherwise apply if this section did not apply and shall include consumer 

services standards. Not later than July 1, 2004, the Secretary shall establish new quality standards for products subject to competitive acquisition under this section. Such standards shall be applied prospectively 

and shall be published on the website of the Department of Health and 

Human Services. 

‘‘(ii) CONSULTATION WITH PROGRAM ADVISORY AND OVERSIGHT COMMITTEE.—The Secretary shall consult with the Program Advisory and 

Oversight Committee (established under subsection (c)) to review (and 

advise the Secretary concerning) the quality standards referred to in 

clause (i). 

‘‘(3) CONTENTS OF CONTRACT.—

‘‘(A) IN GENERAL.—A contract entered into with an entity under the competition conducted pursuant to paragraph (1) is subject to terms and conditions that the Secretary may specify. 

‘‘(B) TERM OF CONTRACTS.—The Secretary shall recompete contracts 

under this section not less often than once every 3 years. 

‘‘(4) LIMIT ON NUMBER OF CONTRACTORS.—

‘‘(A) IN GENERAL.—The Secretary may limit the number of contractors in 

a competitive acquisition area to the number needed to meet projected demand for items and services covered under the contracts. In awarding contracts, the Secretary shall take into account the ability of bidding entities 

to furnish items or services in sufficient quantities to meet the anticipated 

needs of beneficiaries for such items or services in the geographic area covered under the contract on a timely basis. 

‘‘(B) MULTIPLE WINNERS.—The Secretary shall award contracts to multiple entities submitting bids in each area for an item or service. 

60

‘‘(5) PAYMENT.—Payment under this part for competitively priced items and 

services described in subsection (a)(2) shall be based on the bids submitted and 

accepted under this section for such items and services. 

‘‘(6) PARTICIPATING CONTRACTORS.—Payment shall not be made for items and 

services described in subsection (a)(2) furnished by a contractor and for which 

competition is conducted under this section unless—

‘‘(A) the contractor has submitted a bid for such items and services under 

this section; and 

‘‘(B) the Secretary has awarded a contract to the contractor for such items 

and services under this section. 

In this section, the term ‘bid’ means a request for a proposal for an item or service that includes the cost of the item or service, and where appropriate, any 

services that are attendant to the provision of the item or service. 

‘‘(7) CONSIDERATION IN DETERMINING CATEGORIES FOR BIDS.—The Secretary 

shall consider the similarity of the clinical efficiency and value of specific codes 

and products, including products that may provide a therapeutic advantage to 

beneficiaries, before delineating the categories and products that will be subject 

to bidding. 

‘‘(8) AUTHORITY TO CONTRACT FOR EDUCATION, MONITORING, OUTREACH AND

COMPLAINT SERVICES.—The Secretary may enter into a contract with an appropriate entity to address complaints from beneficiaries who receive items and 

services from an entity with a contract under this section and to conduct appropriate education of and outreach to such beneficiaries and monitoring quality 

of services with respect to the program. 

‘‘(c) PROGRAM ADVISORY AND OVERSIGHT COMMITTEE.—

‘‘(1) ESTABLISHMENT.—There is established a Program Advisory and Oversight 

Committee (hereinafter in this section referred to as the ‘Committee’). 

‘‘(2) MEMBERSHIP; TERMS.—The Committee shall consist of such members as 

the Secretary may appoint who shall serve for such term as the Secretary may 

specify. 

‘‘(3) DUTIES.—

‘‘(A) TECHNICAL ASSISTANCE.—The Committee shall provide advice and 

technical assistance to the Secretary with respect to the following functions: 

‘‘(i) The implementation of the program under this section. 

‘‘(ii) The establishment of requirements for collection of data. 

‘‘(iii) The development of proposals for efficient interaction among 

manufacturers and distributors of the items and services and providers 

and beneficiaries. 

‘‘(B) ADDITIONAL DUTIES.—The Committee shall perform such additional 

functions to assist the Secretary in carrying out this section as the Secretary may specify. 

‘‘(4) INAPPLICABILITY OF FACA.—The provisions of the Federal Advisory Committee Act (5 U.S.C. App.) shall not apply. 

‘‘(d) ANNUAL REPORTS.—The Secretary shall submit to Congress an annual management report on the programs under this section. Each such report shall include 

information on savings, reductions in beneficiary cost-sharing, access to and quality 

of items and services, and beneficiary satisfaction. 

‘‘(e) DEMONSTRATION PROJECT FOR CLINICAL LABORATORY SERVICES.—

‘‘(1) IN GENERAL.—The Secretary shall conduct a demonstration project on the 

application of competitive acquisition under this section to clinical diagnostic 

laboratory tests—

‘‘(A) for which payment is otherwise made under section 1833(h) or 

1834(d)(1) (relating to colorectal cancer screening tests); and 

‘‘(B) which are furnished by entities that did not have a face-to-face encounter with the individual. 

‘‘(2) TERMS AND CONDITIONS.—Such project shall be under the same conditions 

as are applicable to items and services described in subsection (a)(2). 

‘‘(3) REPORT.—The Secretary shall submit to Congress—

‘‘(A) an initial report on the project not later than December 31, 2005; 

and 

‘‘(B) such progress and final reports on the project after such date as the 

Secretary determines appropriate.’’. 

(b) CONFORMING AMENDMENTS.—

(1) DURABLE MEDICAL EQUIPMENT; ELIMINATION OF INHERENT REASONABLENESS AUTHORITY.—Section 1834(a) (42 U.S.C. 1395m(a)) is amended—

(A) in paragraph (1)(B), by striking ‘‘The payment basis’’ and inserting 

‘‘Subject to subparagraph (E)(i), the payment basis’’; 

(B) in paragraph (1)(C), by striking ‘‘This subsection’’ and inserting ‘‘Subject to subparagraph (E)(ii), this subsection’’; 

61

(C) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(E) APPLICATION OF COMPETITIVE ACQUISITION; ELIMINATION OF INHERENT

REASONABLENESS AUTHORITY.—In the case of covered items and services 

that are included in a competitive acquisition program in a competitive acquisition area under section 1847(a)—

‘‘(i) the payment basis under this subsection for such items and services furnished in such area shall be the payment basis determined 

under such competitive acquisition program; and 

‘‘(ii) the Secretary may use information on the payment determined 

under such competitive acquisition programs to adjust the payment 

amount otherwise recognized under subparagraph (B)(ii) for an area 

that is not a competitive acquisition area under section 1847 and in the 

case of such adjustment, paragraph (10)(B) shall not be applied.’’; and 

(D) in paragraph (10)(B), by inserting ‘‘in an area and with respect to covered items and services for which the Secretary does not make a payment 

amount adjustment under paragraph (1)(E)’’ after ‘‘under this subsection’’. 

(2) OFF-THE-SHELF ORTHOTICS; ELIMINATION OF INHERENT REASONABLENESS

AUTHORITY.—Section 1834(h) (42 U.S.C. 1395m(h)) is amended—

(A) in paragraph (1)(B), by striking ‘‘and (E)’’ and inserting ‘‘, (E) , and 

(H)(i)’’; 

(B) in paragraph (1)(D), by striking ‘‘This subsection’’ and inserting ‘‘Subject to subparagraph (H)(ii), this subsection’’; 

(C) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(H) APPLICATION OF COMPETITIVE ACQUISITION TO ORTHOTICS; ELIMINATION OF INHERENT REASONABLENESS AUTHORITY.—In the case of orthotics 

described in paragraph (2)(B) of section 1847(a) that are included in a competitive acquisition program in a competitive acquisition area under such 

section—

‘‘(i) the payment basis under this subsection for such orthotics furnished in such area shall be the payment basis determined under such 

competitive acquisition program; and 

‘‘(ii) the Secretary may use information on the payment determined 

under such competitive acquisition programs to adjust the payment 

amount otherwise recognized under subparagraph (B)(ii) for an area 

that is not a competitive acquisition area under section 1847, and in 

the case of such adjustment, paragraphs (8) and (9) of section 1842(b) 

shall not be applied.’’. 

(c) REPORT ON ACTIVITIES OF SUPPLIERS.—The Secretary shall conduct a study to 

determine the extent to which (if any) suppliers of covered items of durable medical 

equipment that are subject to the competitive acquisition program under section 

1847 of the Social Security Act, as amended by subsection (a), are soliciting physicians to prescribe certain brands or modes of delivery of covered items based on 

profitability.

SEC. 303. COMPETITIVE ACQUISITION OF COVERED OUTPATIENT DRUGS AND BIOLOGICALS.

(a) ADJUSTMENT TO PHYSICIAN FEE SCHEDULE.—

(1) ADJUSTMENT IN PRACTICE EXPENSE RELATIVE VALUE UNITS.—Section 

1848(c)(2) (42 U.S.C. 1395w–4(c)(2)) is amended—

(A) in subparagraph (B)—

(i) in clause (ii)(II), by striking ‘‘The adjustments’’ and inserting ‘‘Subject to clause (iv), the adjustments’’; and 

(ii) by adding at the end of subparagraph (B), the following new 

clause: 

‘‘(iv) EXCEPTION TO BUDGET NEUTRALITY.—The additional expenditures attributable to clauses (ii) and (iii) of subparagraph (H) shall not 

be taken into account in applying clause (ii)(II) for 2005.’’; and 

(B) by adding at the end the following new subparagraph: 

‘‘(H) ADJUSTMENTS IN PRACTICE EXPENSE RELATIVE VALUE UNITS FOR

2004.—

‘‘(i) IN GENERAL.—As part of the annual process of establishing the 

physician fee schedule under subsection (b) for 2004, the Secretary 

shall increase the practice expense relative value units for 2004 consistent with clauses (ii) and (iii). 

‘‘(ii) USE OF SUPPLEMENTAL SURVEY DATA.—For 2004 for any specialty 

that submitted survey data that included expenses for the administration of drugs and biologicals for which payment is made under section 

1842(o) (or section 1847A), the Secretary shall use such supplemental 

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survey data in carrying out this subparagraph insofar as they are collected and provided by entities and organizations consistent with the 

criteria established by the Secretary pursuant to section 212(a) of the 

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 

1999 and insofar as such data are submitted to the Secretary by the 

date of the enactment of this subparagraph.

‘‘(iii) EXPEDITING CONSIDERATION OF CPT CODES FOR AFFECTED PHYSI- CIAN SPECIALTIES.—The Secretary shall, in cooperation with representatives of physician specialities affected by section 1847A, take such actions as are necessary to expedite considerations of CPT codes, or expand the ability to appropriately bill for physicians’ services under existing CPT codes, for costs associated with the administration of covered outpatient drugs. The Secretary shall consult with representatives 

of advisory physician groups in expediting such considerations. 

‘‘(iv) SUBSEQUENT, BUDGET NEUTRAL ADJUSTMENTS PERMITTED.— Nothing in this subparagraph shall be construed as preventing the Secretary from providing for adjustments in practice expense relative 

value units under (and consistent with) subparagraph (B) for years 

after 2004. 

‘‘(v) CONSULTATION.—Before publishing the notice of proposed rulemaking to carry out this subparagraph, the Secretary shall consult 

with the Comptroller General of the United States and with groups 

representing the physician specialties involved. 

‘‘(vi) TREATMENT AS CHANGE IN LAW AND REGULATION IN SUSTAINABLE

GROWTH RATE DETERMINATION.—The enactment of subparagraph (B)(iv) 

and this subparagraph shall be treated as a change in law for purposes 

of applying subsection (f)(2)(D).’’. 

(2) PROHIBITION OF ADMINISTRATIVE AND JUDICIAL REVIEW.—Section 1848(i)(1) 

(42 U.S.C. 1395w–4(i)(1)) is amended—

(A) by striking ‘‘and’’ at the end of subparagraph (D); 

(B) by striking the period at the end of subparagraph (E) and inserting ‘‘, 

and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(F) adjustments in practice expense relative value units for 2005 under 

subsection (c)(2)(H).’’. 

(3) TREATMENT OF OTHER SERVICES CURRENTLY IN THE NON-PHYSICIAN WORK

POOL.—The Secretary shall make adjustments to the non-physician work pool 

methodology (as such term is used in the regulations promulgated by the Secretary in the Federal Register as of December 31, 2002) for determination of 

practice expense relative value units under the physician fee schedule described 

in section 1848(c)(2)(C)(ii) of the Social Security Act so that the practice expense 

relative value units for services determined under such methodology are not disproportionately reduced relative to the practice expense relative value units of 

other services not determined under such non-physician work pool methodology, 

as the result of amendments made by paragraph (1). 

(4) SUBMISSION OF PRACTICE EXPENSE SURVEY DATA.—Any physician specialty 

may submit survey data related to practice expenses to the Secretary through 

Decmeber 31, 2004. Nothing in this paragraph shall be construed as waiving 

the application of budget neutrality under section 1848 of the Social Security 

Act.

(b) PAYMENT BASED ON COMPETITION.—Title XVIII is amended by inserting after 

section 1847 (42 U.S.C. 1395w–3), as amended by section 302, the following new sections: 

‘‘COMPETITIVE ACQUISITION OF COVERED OUTPATIENT DRUGS AND BIOLOGICALS

‘‘SEC. 1847A. (a) IMPLEMENTATION OF COMPETITIVE ACQUISITION.—

‘‘(1) IMPLEMENTATION OF PROGRAM.—

‘‘(A) IN GENERAL.—The Secretary shall establish and implement a competitive acquisition program under which—

‘‘(i) competitive acquisition areas are established throughout the 

United States for contract award purposes for acquisition of and payment for categories of covered outpatient drugs and biologicals (as defined in paragraph (2)) under this part; and 

‘‘(ii) each physician who does not elect section 1847B to apply makes 

an annual selection, under paragraph (5) of the contractor through 

which drugs and biologicals within a category of drugs and biologicals 

will be acquired and delivered to the physician under this part. 

‘‘(B) IMPLEMENTATION.—The Secretary shall implement the program so 

that the program applies to—

63

‘‘(i) the oncology category beginning in 2005; and 

‘‘(ii) the non-oncology category beginning in 2006. 

This section shall not apply in the case of a physician who elects section 

1847B to apply. 

‘‘(C) WAIVER OF CERTAIN PROVISIONS.—In order to promote competition, 

efficient service, and product quality, in carrying out the program the Secretary may waive such provisions of the Federal Acquisition Regulation as 

are necessary for the efficient implementation of this section, other than 

provisions relating to confidentiality of information and such other provisions as the Secretary determines appropriate. 

‘‘(D) EXCLUSION AUTHORITY.—The Secretary may exclude covered outpatient drugs and biologicals (including a class of such drugs and 

biologicals) from the competitive bidding system under this section if the 

drugs or biologicals (or class) are not appropriate for competitive bidding 

due to low volume of utilization by beneficiaries under this part or a unique 

mode or method of delivery or similar reasons.

‘‘(2) COVERED OUTPATIENT DRUGS AND BIOLOGICALS, CATEGORIES, PROGRAM DEFINED.—For purposes of this section—

‘‘(A) COVERED OUTPATIENT DRUGS AND BIOLOGICALS DEFINED.—The term 

‘covered outpatient drugs and biologicals’ means drugs and biologicals to 

which section 1842(o) applies and which are not covered under section 1847 

(relating to competitive acquisition for items of durable medical equipment). 

Such term does not include the following: 

‘‘(i) Blood clotting factors. 

‘‘(ii) Drugs and biologicals furnished to individuals in connection with 

the treatment of end stage renal disease. 

‘‘(iii) Radiopharmaceuticals. 

‘‘(B) 2 CATEGORIES.—Each of the following shall be a separate category of 

covered outpatient drugs and biologicals, as identified by the Secretary: 

‘‘(i) ONCOLOGY CATEGORY.—A category (in this section referred to as 

the ‘oncology category’) consisting of those covered outpatient drugs and 

biologicals that, as determined by the Secretary, are typically primarily 

billed by oncologists or are otherwise used to treat cancer. 

‘‘(ii) NON-ONCOLOGY CATEGORIES.—Such numbers of categories (in 

this section referred to as the ‘non-oncology categories’) consisting of 

covered outpatient drugs and biologicals not described in clause (i), and 

appropriate subcategories of such drugs and biologicals as the Secretary may specify. 

‘‘(C) PROGRAM.—The term ‘program’ means the competitive acquisition 

program under this section. 

‘‘(D) COMPETITIVE ACQUISITION AREA; AREA.—The terms ‘competitive acquisition area’ and ‘area’ mean an appropriate geographic region established by the Secretary under the program. 

‘‘(E) CONTRACTOR.—The term ‘contractor’ means an entity that has entered into a contract with the Secretary under this section. 

‘‘(3) APPLICATION OF PROGRAM PAYMENT METHODOLOGY.—With respect to covered outpatient drugs and biologicals which are supplied under the program in 

an area and which are prescribed by a physician who has not elected section 

1847B to apply—

‘‘(A) the claim for such drugs and biologicals shall be submitted by the 

contractor that supplied the drugs and biologicals; 

‘‘(B) collection of amounts of any deductible and coinsurance applicable 

with respect to such drugs and biologicals shall be the responsibility of such 

contractor and shall not be collected unless the drug or biological is administered to the beneficiary involved; and 

‘‘(C) the payment under this section (and related coinsurance amounts) 

for such drugs and biologicals—

‘‘(i) shall be made only to such contractor; 

‘‘(ii) shall be conditioned upon the administration of such drugs and 

biologicals; and 

‘‘(iii) shall be based on the average of the bid prices for such drugs 

and biologicals in the area, as computed under subsection (d). 

The Secretary shall provide a process for recoupment in the case in which 

payment is made for drugs and biologicals which were billed at the time 

of dispensing but which were not actually administered. 

‘‘(4) CONTRACT REQUIRED.—

‘‘(A) IN GENERAL.—Payment may not be made under this part for covered 

outpatient drugs and biologicals prescribed by a physician who has not 

64

elected section 1847B to apply within a category and a competitive acquisition area with respect to which the program applies unless—

‘‘(i) the drugs or biologicals are supplied by a contractor with a contract under this section for such category of drugs and biologicals and 

area; and 

‘‘(ii) the physician has elected such contractor under paragraph (5) for 

such category and area. 

‘‘(B) PHYSICIAN CHOICE.—Subparagraph (A) shall not apply for a category 

of drugs for an area if the physician prescribing the covered outpatient drug 

in such category and area has elected to apply section 1847B instead of this 

section.

‘‘(5) CONTRACTOR SELECTION PROCESS.— ‘‘(A) IN GENERAL.—The Secretary shall provide a process for the selection 

of a contractor, on an annual basis and in such exigent circumstances as 

the Secretary may provide and with respect to each category of covered outpatient drugs and biologicals for an area, by physicians prescribing such 

drugs and biologicals in the area of the contractor under this section that 

will supply the drugs and biologicals within that category and area. Such 

selection shall also include the election described in section 1847B(a). 

‘‘(B) INFORMATION ON CONTRACTORS.—The Secretary shall make available 

to physicians on an ongoing basis, through a directory posted on the Department’s Internet website or otherwise and upon request, a list of the 

contractors under this section in the different competitive acquisition areas. 

‘‘(C) SELECTING PHYSICIAN DEFINED.—For purposes of this section, the 

term ‘selecting physician’ means, with respect to a contractor and category 

and competitive acquisition area, a physician who has not elected section 

1847B to apply and has selected to apply under this section such contractor 

for such category and area. 

‘‘(b) PROGRAM REQUIREMENTS.—

‘‘(1) CONTRACT FOR COVERED OUTPATIENT DRUGS AND BIOLOGICALS.—The Secretary shall conduct a competition among entities for the acquisition of a covered outpatient drug or biological within each HCPCS code within each category 

for each competitive acquisition area. 

‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—

‘‘(A) IN GENERAL.—The Secretary may not award a contract to any entity 

under the competition conducted in a competitive acquisition area pursuant 

to paragraph (1) with respect to the acquisition of covered outpatient drugs 

and biologicals within a category unless the Secretary finds that the entity 

meets all of the following with respect to the contract period involved: 

‘‘(i) CAPACITY TO SUPPLY COVERED OUTPATIENT DRUG OR BIOLOGICAL

WITHIN CATEGORY.—

‘‘(I) IN GENERAL.—The entity has sufficient arrangements to acquire and to deliver covered outpatient drugs and biologicals within 

such category in the area specified in the contract at the bid price 

specified in the contract for all physicians that may elect such entity. 

‘‘(II) SHIPMENT METHODOLOGY.—The entity has arrangements in 

effect for the shipment at least 5 days each week of covered outpatient drugs and biologicals under the contract and for the timely 

delivery (including for emergency situations) of such drugs and 

biologicals in the area under the contract. 

‘‘(ii) QUALITY, SERVICE, FINANCIAL PERFORMANCE AND SOLVENCY

STANDARDS.—The entity meets quality, service, financial performance, 

and solvency standards specified by the Secretary, including—

‘‘(I) the establishment of procedures for the prompt response and 

resolution of physician and beneficiary complaints and inquiries regarding the shipment of covered outpatient drugs and biologicals; 

and 

‘‘(II) a grievance process for the resolution of disputes. 

‘‘(B) ADDITIONAL CONSIDERATIONS.—The Secretary may refuse to award a 

contract under this section, and may terminate such a contract, with an entity based upon—

‘‘(i) the suspension or revocation, by the Federal Government or a 

State government, of the entity’s license for the distribution of drugs 

or biologicals (including controlled substances); or 

‘‘(ii) the exclusion of the entity under section 1128 from participation 

under this title. 

‘‘(C) APPLICATION OF MEDICARE PROVIDER OMBUDSMAN.—For provision 

providing for a program-wide Medicare Provider Ombudsman to review 

65

complaints, see section 1868(b), as added by section 923 of the Medicare 

Prescription Drug and Modernization Act of 2003. 

‘‘(3) AWARDING MULTIPLE CONTRACTS FOR A CATEGORY AND AREA.—In order to 

provide a choice of at least 2 contractors in each competitive acquisition area 

for a category of drugs and biologicals, the Secretary may limit (but not below 

2) the number of qualified entities that are awarded such contracts for any category and area. The Secretary shall select among qualified entities based on the 

following: 

‘‘(A) The bid prices for covered outpatient drugs and biologicals within the 

category and area. 

‘‘(B) Bid price for distribution of such drugs and biologicals. 

‘‘(C) Ability to ensure product integrity. 

‘‘(D) Customer service. 

‘‘(E) Past experience in the distribution of drugs and biologicals, including 

controlled substances. 

‘‘(F) Such other factors as the Secretary may specify. 

‘‘(4) TERMS OF CONTRACTS.—

‘‘(A) IN GENERAL.—A contract entered into with an entity under the competition conducted pursuant to paragraph (1) is subject to terms and conditions that the Secretary may specify consistent with this section. 

‘‘(B) PERIOD OF CONTRACTS.—A contract under this section shall be for a 

term of 2 years, but may be terminated by the Secretary or the entity with 

appropriate, advance notice. 

‘‘(C) INTEGRITY OF DRUG AND BIOLOGICAL DISTRIBUTION SYSTEM.—The Secretary—

‘‘(i) shall require that for all drug and biological products distributed 

by a contractor under this section be acquired directly from the manufacturer or from a distributor that has acquired the products directly 

from the manufacturer; and 

‘‘(ii) may require, in the case of such products that are particularly 

susceptible to counterfeit or diversion, that the contractor comply with 

such additional product integrity safeguards as may be determined to 

be necessary. 

‘‘(D) IMPLEMENTATION OF ANTI-COUNTERFEITING, QUALITY, SAFETY, AND

RECORD KEEPING REQUIREMENTS.—The Secretary shall require each contractor to implement (through its officers, agents, representatives, and employees) requirements relating to the storage and handling of covered outpatient drugs and biologicals and for the establishment and maintenance 

of distribution records for such drugs and biologicals. A contract under this 

section may include requirements relating to the following: 

‘‘(i) Secure facilities. 

‘‘(ii) Safe and appropriate storage of drugs and biologicals. 

‘‘(iii) Examination of drugs and biologicals received and dispensed. 

‘‘(iv) Disposition of damaged and outdated drugs and biologicals. 

‘‘(v) Record keeping and written policies and procedures. 

‘‘(vi) Compliance personnel. 

‘‘(E) COMPLIANCE WITH CODE OF CONDUCT AND FRAUD AND ABUSE RULES.—

Under the contract—

‘‘(i) the contractor shall comply with a code of conduct, specified or 

recognized by the Secretary, that includes standards relating to conflicts of interest; and 

‘‘(ii) the contractor shall comply with all applicable provisions relating to prevention of fraud and abuse, including compliance with applicable guidelines of the Department of Justice and the Inspector General of the Department of Health and Human Services. 

‘‘(F) DIRECT DELIVERY OF DRUGS AND BIOLOGICALS TO PHYSICIANS.—Under 

the contract the contractor shall only supply covered outpatient drugs and 

biologicals directly to the selecting physicians and not directly to beneficiaries, except under circumstances and settings where a beneficiary currently receives a drug or biological in the beneficiary’s home or other nonphysician office setting as the Secretary may provide. The contractor shall 

not deliver drugs and biologicals to a selecting physician except upon receipt of a prescription for such drugs and biologicals, and such necessary 

data as may be required by the Secretary to carry out this section. This section does not require a physician to submit a prescription for each individual treatment and does not change the physician’s flexibility in terms of 

writing a prescription for drugs for a single treatment or a course of treatment. 

66

‘‘(5) PERMITTING ACCESS TO DRUGS AND BIOLOGICALS.—The Secretary shall establish rules under this section under which drugs and biologicals which are acquired through a contractor under this section may be used to resupply inventories of such drugs and biologicals which are administered consistent with safe 

drug practices and with adequate safeguards against fraud and abuse. The previous sentence shall apply—

‘‘(A) in cases in which the drugs or biologicals are immediately required; 

‘‘(B) in cases in which the physician could not have reasonably anticipated the immediate requirement for the drugs or biologicals; 

‘‘(C) in cases in which the contractor could not deliver to the physician 

the drugs or biologicals in a timely manner; and 

‘‘(D) in emergency situations. 

‘‘(6) CONSTRUCTION.—Nothing in this section shall be construed as waiving 

applicable State requirements relating to licensing of pharmacies.

‘‘(c) BIDDING PROCESS.— ‘‘(1) IN GENERAL.—In awarding a contract for a category of drugs and 

biologicals in an area under the program, the Secretary shall consider with respect to each entity seeking to be awarded a contract the prices bid to acquire 

and supply the covered outpatient drugs and biologicals for that category and 

area and the other factors referred to in subsection (b)(3). 

‘‘(2) PRICES BID.—The prices bid by an entity under paragraph (1) shall be the 

prices in effect and available for the supply of contracted drugs and biologicals 

in the area through the entity for the contract period.

‘‘(3) REJECTION OF CONTRACT OFFER.—The Secretary shall reject the contract 

offer of an entity with respect to a category of drugs and biologicals for an area 

if the Secretary estimates that the prices bid, in the aggregate on average, 

would exceed 120 percent of the average sales price (as determined under section 1847B).

‘‘(4) BIDDING ON A NATIONAL OR REGIONAL BASIS.—Nothing in this section 

shall be construed as precluding a bidder from bidding for contracts in all areas 

of the United States or as requiring a bidder to submit a bid for all areas of 

the United States. 

‘‘(5) UNIFORMITY OF BIDS WITHIN AREA.—The amount of the bid submitted 

under a contract offer for any covered outpatient drug or biological for an area 

shall be the same for that drug or biological for all portions of that area. 

‘‘(6) CONFIDENTIALITY OF BIDS.—The provisions of subparagraph (D) of section 

1927(b)(3) shall apply to a bid submitted in a contract offer for a covered outpatient drug or biological under this section in the same manner as it applies 

to information disclosed under such section, except that any reference—

‘‘(A) in that subparagraph to a ‘manufacturer or wholesaler’ is deemed a 

reference to a ‘bidder’ under this section; 

‘‘(B) in that section to ‘prices charged for drugs’ is deemed a reference to 

a ‘bid’ submitted under this section; and 

‘‘(C) in clause (i) of that section to ‘this section’, is deemed a reference to 

‘part B of title XVIII’. 

‘‘(7) INCLUSION OF COSTS.—The bid price submitted in a contract offer for a 

covered outpatient drug or biological shall—

‘‘(A) include all costs related to the delivery of the drug or biological to 

the selecting physician (or other point of delivery); and 

‘‘(B) include the costs of dispensing (including shipping) of such drug or 

biological and management fees, but shall not include any costs related to 

the administration of the drug or biological, or wastage, spillage, or spoilage. 

‘‘(8) PRICE ADJUSTMENTS DURING CONTRACT PERIOD; DISCLOSURE OF COSTS.—

Each contract awarded shall provide for—

‘‘(A) disclosure to the Secretary the contractor’s reasonable, net acquisition costs for periods specified by the Secretary, not more often than quarterly, of the contract; and 

‘‘(B) appropriate price adjustments over the period of the contract to reflect significant increases or decreases in a contractor’s reasonable, net acquisition costs, as so disclosed.

‘‘(d) COMPUTATION OF AVERAGE BID PRICES FOR A CATEGORY AND AREA.—

‘‘(1) IN GENERAL.—For each year or other contract period for each covered outpatient drug or biological and area with respect to which a competition is conducted under the program, the Secretary shall compute an area average of the 

bid prices submitted, in contract offers accepted for the category and area, for 

that year or other contract period. 

‘‘(2) SPECIAL RULES.—The Secretary shall establish rules regarding the use 

under this section of the alternative payment amount provided under section 

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1847B to the use of a price for specific covered outpatient drugs and biologicals 

in the following cases: 

‘‘(A) NEW DRUGS AND BIOLOGICALS.—A covered outpatient drug or biological for which an average bid price has not been previously determined. 

‘‘(B) OTHER CASES.—Such other exceptional cases as the Secretary may 

specify in regulations. 

Such alternative payment amount shall be based upon actual market price information and in no case shall it exceed the average sales price (as determined 

under section 1847B). 

‘‘(e) COINSURANCE.— ‘‘(1) IN GENERAL.—Coinsurance under this part with respect to a covered outpatient drug or biological for which payment is payable under this section shall 

be based on 20 percent of the payment basis under this section. 

‘‘(2) COLLECTION.—Such coinsurance shall be collected by the contractor that 

supplies the drug or biological involved and, subject to subsection (a)(3)(B), in 

the same manner as coinsurance is collected for durable medical equipment 

under this part. 

‘‘(f) SPECIAL PAYMENT RULES.— ‘‘(1) IN GENERAL.—The Secretary may not provide for an adjustment to reimbursement for covered outpatient drugs and biologicals unless adjustments to 

the practice expense payment adjustment are made on the basis of supplemental surveys under section 1848(c)(2)(H)(ii) of the Social Security Act, as 

added by subsection (a)(1)(B). 

‘‘(B) USE IN EXCLUSION CASES.—If the Secretary excludes a drug or biological (or class of drugs or biologicals) under subsection (a)(1)(D), the Secretary may provide for reimbursement to be made under this part for such 

drugs and biologicals (or class) using the payment methodology under section 1847B or other market based pricing system. 

‘‘(2) COORDINATION RULES.—The provisions of section 1842(h)(3) shall apply to 

a contractor with respect to covered outpatients drugs and biologicals supplied 

by that contractor in the same manner as they apply to a participating supplier. 

In order to administer this section, the Secretary may condition payment under 

this part to a person for the administration of a drug or biological supplied 

under this section upon person’s provision of information on such administration. 

‘‘(3) APPLICATION OF REQUIREMENT FOR ASSIGNMENT.—For provision requiring 

assignment of claims for covered outpatient drugs and biologicals, see section 

1842(o)(3). 

‘‘(4) PROTECTION FOR BENEFICIARY IN CASE OF MEDICAL NECESSITY DENIAL.— For protection of beneficiaries against liability in the case of medical necessity 

determinations, see section 1842(b)(3)(B)(ii)(III). 

‘‘(5) PHYSICIAN ROLE IN APPEALS PROCESS.—The Secretary shall establish a 

procedure under which a physician who prescribes a drug or biological for which 

payment is made under this section has appeal rights that are similar to those 

provided to a physician who prescribes durable medical equipment or a laboratory test. 

‘‘(g) ADVISORY COMMITTEE.—The Secretary shall establish an advisory committee 

that includes representatives of parties affected by the program under this section, 

including physicians, specialty pharmacies, distributors, manufacturers, and beneficiaries. The committee shall advise the Secretary on issues relating to the effective 

implementation of this section. 

‘‘(h) ANNUAL REPORTS.—The Secretary shall submit to Congress an annual report 

in each of 2004, 2005, and 2006, on the program. Each such report shall include 

information on savings, reductions in cost-sharing, access to covered outpatient 

drugs and biologicals, the range of choices of contractors available to providers, and 

beneficiary and provider satisfaction. 

‘‘OPTIONAL USE OF AVERAGE SALES PRICE PAYMENT METHODOLOGY

‘‘SEC. 1847B. (a) IN GENERAL.—In connection with the election made by a physician under section 1847A(a)(5), the physician may elect to apply this section to the 

payment for covered outpatient drugs instead of the payment methodology under 

section 1847A. For purposes of this section, the term ‘covered outpatient drug’ has 

the meaning given such term in section 1847A(a)(2)(A). 

‘‘(b) COMPUTATION OF PAYMENT AMOUNT.—

‘‘(1) IN GENERAL.—If this section applies with respect to a covered outpatient 

drug, the amount payable for the drug (based on a minimum dosage unit) is, 

subject to applicable deductible and coinsurance—

‘‘(A) in the case of a multiple source drug (as defined in subsection 

(c)(6)(C)), the amount determined under paragraph (3); or 

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‘‘(B) in the case of a single source drug (as defined in subsection (c)(6)(D)), 

the amount determined under paragraph (4). 

‘‘(2) SPECIFICATION OF UNIT.—

‘‘(A) SPECIFICATION BY MANUFACTURER.—The manufacturer of a covered 

outpatient drug shall specify the unit associated with each National Drug 

Code as part of the submission of data under section 1927(b)(3)(A)(iii). 

‘‘(B) UNIT DEFINED.—In this section, the term ‘unit’ means, with respect 

to a covered outpatient drug, the lowest identifiable quantity (such as a 

capsule or tablet, milligram of molecules, or grams) of the drug that is dispensed, exclusive of any diluent without reference to volume measures pertaining to liquids. 

‘‘(3) MULTIPLE SOURCE DRUG.—For all drug products included within the same 

multiple source drug, the amount specified in this paragraph is the volumeweighted average of the average sales prices reported under section 

1927(b)(3)(A)(iii) computed as follows: 

‘‘(A) Compute the sum of the products (for each national drug code assigned to such drug products) of—

‘‘(i) the manufacturer’s average sales price (as defined in subsection 

(c)); and 

‘‘(ii) the total number of units specified under paragraph (2) sold, as 

reported under section 1927(b)(3)(A)(iii). 

‘‘(B) Divide the sum computed under subparagraph (A) by the sum of the 

total number of units under subparagraph (A)(ii) for all national drug codes 

assigned to such drug products. 

‘‘(4) SINGLE SOURCE DRUG.—The amount specified in this paragraph for a single source drug is the lesser of the following: 

‘‘(A) MANUFACTURER’S AVERAGE SALES PRICE.—The manufacturer’s average sales price for a national drug code, as computed using the methodology 

applied under paragraph (3). 

‘‘(B) WHOLESALE ACQUISITION COST (WAC).—The wholesale acquisition cost 

(as defined in subsection (c)(6)(B)) reported for the single source drug. 

‘‘(5) BASIS FOR DETERMINATION.—The payment amount shall be determined 

under this subsection based on information reported under subsection (e) and 

without regard to any special packaging, labeling, or identifiers on the dosage 

form or product or package. 

‘‘(c) MANUFACTURER’S AVERAGE SALES PRICE.—

‘‘(1) IN GENERAL.—For purposes of this subsection, subject to paragraphs (2) 

and (3), the manufacturer’s ‘average sales price’ means, of a covered outpatient 

drug for a NDC code for a calendar quarter for a manufacturer for a unit—

‘‘(A) the manufacturer’s total sales (as defined by the Secretary in regulations for purposes of section 1927(c)(1)) in the United States for such drug 

in the calendar quarter; divided by 

‘‘(B) the total number of such units of such drug sold by the manufacturer 

in such quarter. 

‘‘(2) CERTAIN SALES EXEMPTED FROM COMPUTATION.—In calculating the manufacturer’s average sales price under this subsection, the following sales shall be 

excluded: 

‘‘(A) SALES EXEMPT FROM BEST PRICE.—Sales exempt from the inclusion 

in the determination of ‘best price’ under section 1927(c)(1)(C)(i). 

‘‘(B) SALES AT NOMINAL CHARGE.—Such other sales as the Secretary identifies by regulation as sales to an entity that are nominal in price or do not 

reflect a market price paid by an entity to which payment is made under 

this section. 

‘‘(3) SALE PRICE NET OF DISCOUNTS.—In calculating the manufacturer’s average sales price under this subsection, such price shall be determined taking into 

account volume discounts, prompt pay discounts, cash discounts, the free goods 

that are contingent on any purchase requirement, chargebacks, and rebates 

(other than rebates under section 1927), that result in a reduction of the cost 

to the purchaser. A rebate to a payor or other entity that does not take title 

to a covered outpatient drug shall not be taken into account in determining 

such price unless the manufacturer has an agreement with the payor or other 

entity under which the purchaser’s price for the drug is reduced as a consequence of such rebate. 

‘‘(4) AUTHORITY TO DISREGARD AVERAGE SALES PRICE DURING FIRST QUARTER

OF SALES.—In the case of a covered outpatient drug during an initial period (not 

to exceed a full calendar quarter) in which data on the prices for sales for the 

drug is not sufficiently available from the manufacturer to compute an average 

sales price for the drug, the Secretary may determine the amount payable 

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under this section for the drug without considering the manufacturer’s average 

sales price of that manufacturer for that drug. 

‘‘(5) FREQUENCY OF DETERMINATIONS.— ‘‘(A) IN GENERAL ON A QUARTERLY BASIS.—The manufacturer’s average 

sales price, for a covered outpatient drug of a manufacturer, shall be determined by such manufacturer under this subsection on a quarterly basis. In 

making such determination insofar as there is a lag in the reporting of the 

information on rebates and chargebacks under paragraph (3) so that adequate data are not available on a timely basis, the manufacturer shall 

apply a methodology established by the Secretary based on a 12-month rolling average for the manufacturer to estimate costs attributable to rebates 

and chargebacks. 

‘‘(B) UPDATES IN RATES.—The payment rates under subsection (b)(1) and 

(b)(2)(A) shall be updated by the Secretary on a quarterly basis and shall 

be applied based upon the manufacturer’s average sales price determined 

for the most recent calendar quarter. 

‘‘(C) USE OF CONTRACTORS; IMPLEMENTATION.—The Secretary may use a 

carrier, fiscal intermediary, or other contractor to determine the payment 

amount under subsection (b). Notwithstanding any other provision of law, 

the Secretary may implement, by program memorandum or otherwise, any 

of the provisions of this section. 

‘‘(6) DEFINITIONS AND OTHER RULES.—In this section: 

‘‘(A) MANUFACTURER.—The term ‘manufacturer’ means, with respect to a 

covered outpatient drug, the manufacturer (as defined in section 1927(k)(5)) 

whose national drug code appears on such drug. 

‘‘(ii) WHOLESALE ACQUISITION COST.—The term ‘wholesale acquisition cost’ 

means, with respect to a covered outpatient drug, the manufacturer’s list 

price for the drug to wholesalers or direct purchasers in the United States, 

not including prompt pay or other discounts, rebates or reductions in price, 

for the most recent month for which the information is available, as reported in wholesale price guides or other publications of drug pricing data. 

‘‘(C) MULTIPLE SOURCE DRUG.—The term ‘multiple source drug’ means, for 

a calendar quarter, a covered outpatient drug for which there are 2 or more 

drug products which—

‘‘(i) are rated as therapeutically equivalent (under the Food and Drug 

Administration’s most recent publication of ‘Approved Drug Products 

with Therapeutic Equivalence Evaluations’), 

‘‘(ii) except as provided in subparagraph (E), are pharmaceutically 

equivalent and bioequivalent, as determined under subparagraph (F) 

and as determined by the Food and Drug Administration, and 

‘‘(iii) are sold or marketed in the United States during the quarter. 

‘‘(D) SINGLE SOURCE DRUG.—The term ‘single source drug’ means a covered outpatient drug which is not a multiple source drug and which is produced or distributed under an original new drug application approved by 

the Food and Drug Administration, including a drug product marketed by 

any cross-licensed producers or distributors operating under the new drug 

application, or which is a biological. 

‘‘(E) EXCEPTION FROM PHARMACEUTICAL EQUIVALENCE AND BIOEQUIVALENCE REQUIREMENT.—Subparagraph (C)(ii) shall not apply if the Food and 

Drug Administration changes by regulation the requirement that, for purposes of the publication described in subparagraph (C)(i), in order for drug 

products to be rated as therapeutically equivalent, they must be pharmaceutically equivalent and bioequivalent, as defined in subparagraph (F). 

‘‘(F) DETERMINATION OF PHARMACEUTICAL EQUIVALENCE AND BIOEQUIVALENCE.—For purposes of this paragraph—

‘‘(i) drug products are pharmaceutically equivalent if the products 

contain identical amounts of the same active drug ingredient in the 

same dosage form and meet compendial or other applicable standards 

of strength, quality, purity, and identity; and 

‘‘(ii) drugs are bioequivalent if they do not present a known or potential bioequivalence problem, or, if they do present such a problem, they 

are shown to meet an appropriate standard of bioequivalence. 

‘‘(G) INCLUSION OF VACCINES.—In applying provisions of section 1927 

under this section, ‘other than a vaccine’ is deemed deleted from section 

1927(k)(2)(B). 

‘‘(d) MONITORING PRICE INFORMATION.—

‘‘(1) IN GENERAL.—The Secretary shall monitor available pricing information, 

including information on average sales price and average manufacturer price. 

‘‘(2) RESPONSE TO SIGNIFICANT DISCREPANCIES.—

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‘‘(A) REPORT TO CONGRESS.—If the Secretary finds that there are significant discrepancies among such prices and that the manufacturer’s average 

sales price does not reflect a broad-based market price or a reasonable approximation of the acquisition cost of the covered outpatient drug involved 

to purchasers reimbursed under this section, the Secretary shall submit to 

Congress a report. 

‘‘(B) CONFIDENTIALITY OF INFORMATION REPORTED.—Consistent with requirements relating to maintaining the confidentiality of information reported on manufacturer’s average prices under section 1927(b)(3)(D), such 

report shall include details regarding such discrepancies and recommendations on how to best address such discrepancies. Such report shall not disclose average manufacturer prices or average sales prices. 

‘‘(C) RECOMMENDATIONS.—Such recommendations may include other 

changes in payment methodology. 

‘‘(D) AUTHORITY TO MODIFY PAYMENT METHODOLOGY BY RULE.—Upon submission of such report, the Secretary may commence a rulemaking to 

change such percent or payment methodologies under paragraph (1)(D) and 

(2) as applied to the covered outpatient drug involved under this section. 

‘‘(3) RESPONSE TO PUBLIC HEALTH EMERGENCY.—In the case of a public health 

emergency under section 319 of the Public Health Service Act in which there 

is a documented inability to access covered outpatient drugs, and a concomitant 

increase in the price, of a drug which is not reflected in the manufacturer’s average sales price for one or more quarters, the Secretary may use the wholesale 

acquisition cost (or other reasonable measure of drug price) instead of the manufacturer’s average sales price for such quarters and for subsequent quarters 

until the price and availability of the drug has stabilized and is substantially 

reflected in the applicable manufacturer’s average sales price. 

‘‘(4) ANNUAL REPORT TO CONGRESS.—The Secretary shall submit to the Committees on Energy and Commerce and Ways and Means of the House of Representatives and the Committee on Finance of the Senate an annual report on 

the operation of this section. Such report shall be submitted in coordination 

with the submission of reports under section 1927(i). Such report shall include 

information on the following: 

‘‘(A) Trends in average sales price under subsection (b). 

‘‘(B) Administrative costs associated with compliance with this section. 

‘‘(C) Total value of payments made under this section. 

‘‘(D) Comparison of the average manufacturer price as applied under section 1927 for a covered outpatient drug with the manufacturer’s average 

sales price for the drug under this section. 

‘‘(e) REPORTS ON PRICING INFORMATION.—

‘‘(1) REFERENCE TO REPORTING REQUIREMENT ON AVERAGE SALES PRICE.—For 

requirements for reporting the manufacturer’s average sales price (and, if required to make payment, the manufacturer’s wholesale acquisition cost) for the 

covered outpatient drug, see section 1927(b)(3). 

‘‘(2) MEDPAC REVIEW.—The Medicare Payment Advisory Commission shall 

periodically review the payment methodology established under this section and 

submit to Congress such recommendations on such methodology as it deems appropriate as part of its annual reports to Congress. 

‘‘(3) CONSTRUCTION.—Nothing in this subsection shall be construed as authorizing the Secretary to review for purposes of this section information reported 

only under section 1927(b)(3). 

‘‘(f) RESTRICTION ON ADMINISTRATIVE AND JUDICIAL REVIEW.—There shall be no administrative or judicial review under section 1869, section 1878, or otherwise, of determinations of manufacturer’s average sales price under subsection (c).’’. 

(c) CONTINUATION OF PAYMENT METHODOLOGY FOR RADIOPHARMACEUTICALS.—

Nothing in the amendments made by this section shall be construed as changing 

the payment methodology under part B of title XVIII of the Social Security Act for 

radiopharmaceuticals, including the use by carriers of invoice pricing methodology.

(d) CONFORMING AMENDMENTS.—

(1) IN GENERAL.—Section 1842(o) (42 U.S.C. 1395u(o)) is amended—

(A) in paragraph (1), by inserting ‘‘, subject to section 1847A and 1847B,’’ 

before ‘‘the amount payable for the drug or biological’’; and 

(B) by adding at the end of paragraph (2) the following: ‘‘This paragraph 

shall not apply in the case of payment under section 1847A or 1847B.’’. 

(2) NO CHANGE IN COVERAGE BASIS.—Section 1861(s)(2)(A) (42 U.S.C. 

1395x(s)(2)(A)) is amended by inserting ‘‘(or would have been so included but 

for the application of section 1847A or 1847B)’’ after ‘‘included in the physicians’ 

bills’’. 

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(3) PAYMENT.—Section 1833(a)(1)(S) (42 U.S.C. 1395l(a)(1)(S)) is amended by 

inserting ‘‘(or, if applicable, under section 1847A or 1847B)’’ after ‘‘1842(o)’’. 

(4) CONSOLIDATED REPORTING OF PRICING INFORMATION.—Section 1927 (42 

U.S.C. 1396r–8) is amended—

(A) in subsection (a)(1), by inserting ‘‘or under part B of title XVIII’’ after 

‘‘section 1903(a)’’; 

(B) in subsection (b)(3)(A)—

(i) in clause (i), by striking ‘‘and’’ at the end; 

(ii) in clause (ii), by striking the period and inserting ‘‘; and’’; and 

(iii) by adding at the end the following new clause: 

‘‘(iii) for calendar quarters beginning on or after April 1, 2004, in conjunction with reporting required under clause (i) and by national drug 

code (NDC)—

‘‘(I) the manufacturer’s average sales price (as defined in section 

1847B(c)) and the total number of units specified under section 

1847B(b)(2)(A); 

‘‘(II) if required to make payment under section 1847B, the manufacturer’s wholesale acquisition cost, as defined in subsection 

(c)(6) of such section; and 

‘‘(III) information on those sales that were made at a nominal 

price or otherwise described in section 1847B(c)(2)(B), which information is subject to audit by the Inspector General of the Department of Health and Human Services; 

for a covered outpatient drug for which payment is made under section 

1847B.’’; 

(C) in subsection (b)(3)(B)—

(i) in the heading, by inserting ‘‘AND MANUFACTURER’S AVERAGE SALES

PRICE’’ after ‘‘PRICE’’; and 

(ii) by inserting ‘‘and manufacturer’s average sales prices (including 

wholesale acquisition cost) if required to make payment’’ after ‘‘manufacturer prices’’; and 

(D) in subsection (b)(3)(D)(i), by inserting ‘‘and section 1847B’’ after ‘‘this 

section’’. 

(e) GAO STUDY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to assess the impact of the amendments made by this section on the delivery of services, including their impact on—

(A) beneficiary access to drugs and biologicals for which payment is made 

under part B of title XVIII of the Social Security Act; and 

(B) the site of delivery of such services. 

(2) REPORT.—Not later than 2 years after the year in which the amendment 

made by subsection (a)(1) first takes effect, the Comptroller General shall submit to Congress a report on the study conducted under paragraph (1). 

(f) MEDPAC RECOMMENDATIONS ON BLOOD CLOTTING FACTORS.—The Medicare 

Payment Advisory Commission shall submit to Congress, in its annual report in 

2004, specific recommendations regarding a payment amount (or amounts) for blood 

clotting factors and its administration under the medicare program. 

(g) ESTABLISHMENT OF PHARMACEUTICAL MANAGEMENT FEE WHERE DRUGS PROVIDED THROUGH A CONTRACTOR.—Section 1848(a) (42 U.S.C. 1395w–4(a)) is amended by adding at the end the following new paragraph: 

‘‘(5) RECOGNITION OF PHARMACEUTICAL MANAGEMENT FEE IN CERTAIN CASES.—

In establishing the fee schedule under this section, the Secretary shall provide 

for a separate payment with respect to physicians’ services consisting of the 

unique administrative and management costs associated with covered drugs 

and biologicals which are furnished to physicians through a contractor under 

section 1847A (compared with such costs if such drugs and biologicals were acquired directly by such physicians).’’. 

SEC. 304. DEMONSTRATION PROJECT FOR USE OF RECOVERY AUDIT CONTRACTORS. 

(a) IN GENERAL.—The Secretary of Health and Human Services shall conduct a 

demonstration project under this section (in this section referred to as the ‘‘project’’) 

to demonstrate the use of recovery audit contractors under the Medicare Integrity 

Program in identifying underpayments and overpayments and recouping overpayments under the medicare program for services for which payment is made under 

part A or part B of title XVIII of the Social Security Act. Under the project—

(1) payment may be made to such a contractor on a contingent basis; 

(2) a percentage of the amount recovered may be retained by the Secretary 

and shall be available to the program management account of the Centers for 

Medicare & Medicaid Services; and 

72

(3) the Secretary shall examine the efficacy of such use with respect to duplicative payments, accuracy of coding, and other payment policies in which inaccurate payments arise. 

(b) SCOPE AND DURATION.—

(1) SCOPE.—The project shall cover at least 2 States that are among the 

States with—

(A) the highest per capita utilization rates of medicare services, and 

(B) at least 3 contractors. 

(2) DURATION.—The project shall last for not longer than 3 years. 

(c) WAIVER.—The Secretary of Health and Human Services shall waive such provisions of title XVIII of the Social Security Act as may be necessary to provide for 

payment for services under the project in accordance with subsection (a). 

(d) QUALIFICATIONS OF CONTRACTORS.—

(1) IN GENERAL.—The Secretary shall enter into a recovery audit contract 

under this section with an entity only if the entity has staff that has the appropriate clinical knowledge of and experience with the payment rules and regulations under the medicare program or the entity has or will contract with another entity that has such knowledgeable and experienced staff. 

(2) INELIGIBILITY OF CERTAIN CONTRACTORS.—The Secretary may not enter 

into a recovery audit contract under this section with an entity to the extent 

that the entity is a fiscal intermediary under section 1816 of the Social Security 

Act (42 U.S.C. 1395h), a carrier under section 1842 of such Act (42 U.S.C. 

1395u), or a Medicare Administrative Contractor under section 1874A of such 

Act. 

(3) PREFERENCE FOR ENTITIES WITH DEMONSTRATED PROFICIENCY WITH PRIVATE INSURERS.—In awarding contracts to recovery audit contractors under this 

section, the Secretary shall give preference to those risk entities that the Secretary determines have demonstrated more than 3 years direct management experience and a proficiency in recovery audits with private insurers or under the 

medicaid program under title XIX of such Act. 

(e) CONSTRUCTION RELATING TO CONDUCT OF INVESTIGATION OF FRAUD.—A recovery of an overpayment to a provider by a recovery audit contractor shall not be construed to prohibit the Secretary or the Attorney General from investigating and 

prosecuting, if appropriate, allegations of fraud or abuse arising from such overpayment. 

(f) REPORT.—The Secretary of Health and Human Services shall submit to Congress a report on the project not later than 6 months after the date of its completion. Such reports shall include information on the impact of the project on savings 

to the medicare program and recommendations on the cost-effectiveness of extending or expanding the project.

TITLE IV—RURAL HEALTH CARE 

IMPROVEMENTS 

SEC. 401. ENHANCED DISPROPORTIONATE SHARE HOSPITAL (DSH) TREATMENT FOR RURAL 

HOSPITALS AND URBAN HOSPITALS WITH FEWER THAN 100 BEDS. 

(a) DOUBLING THE CAP.—

(1) IN GENERAL.—Section 1886(d)(5)(F) (42 U.S.C. 1395ww(d)(5)(F)) is amended by adding at the end the following new clause: 

‘‘(xiv)(I) In the case of discharges in a fiscal year beginning on or after October 

1, 2003, subject to subclause (II), there shall be substituted for the disproportionate 

share adjustment percentage otherwise determined under clause (iv) (other than 

subclause (I)) or under clause (viii), (x), (xi), (xii), or (xiii), the disproportionate share 

adjustment percentage determined under clause (vii) (relating to large, urban hospitals). 

‘‘(II) Under subclause (I), the disproportionate share adjustment percentage shall 

not exceed 10 percent for a hospital that is not classified as a rural referral center 

under subparagraph (C).’’. 

(2) CONFORMING AMENDMENTS.—Section 1886(d)(5)(F) (42 U.S.C. 

1395ww(d)(5)(F)) is amended—

(A) in each of subclauses (II), (III), (IV), (V), and (VI) of clause (iv), by 

inserting ‘‘subject to clause (xiv) and’’ before ‘‘for discharges occurring’’; 

(B) in clause (viii), by striking ‘‘The formula’’ and inserting ‘‘Subject to 

clause (xiv), the formula’’; and 

(C) in each of clauses (x), (xi), (xii), and (xiii), by striking ‘‘For purposes’’ 

and inserting ‘‘Subject to clause (xiv), for purposes’’. 

73

(b) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to discharges occurring on or after October 1, 2003.

SEC. 402. IMMEDIATE ESTABLISHMENT OF UNIFORM STANDARDIZED AMOUNT IN RURAL AND 

SMALL URBAN AREAS. 

(a) IN GENERAL.—Section 1886(d)(3)(A) (42 U.S.C. 1395ww(d)(3)(A)) is amended—

(1) in clause (iv), by inserting ‘‘and ending on or before September 30, 2003,’’ 

after ‘‘October 1, 1995,’’; and 

(2) by redesignating clauses (v) and (vi) as clauses (vii) and (viii), respectively, 

and inserting after clause (iv) the following new clauses: 

‘‘(v) For discharges occurring in the fiscal year beginning on October 1, 2003, 

the average standardized amount for hospitals located in areas other than a 

large urban area shall be equal to the average standardized amount for hospitals located in a large urban area.’’. 

(b) CONFORMING AMENDMENTS.—

(1) COMPUTING DRG-SPECIFIC RATES.—Section 1886(d)(3)(D) (42 U.S.C. 

1395ww(d)(3)(D)) is amended—

(A) in the heading, by striking ‘‘IN DIFFERENT AREAS’’; 

(B) in the matter preceding clause (i), by striking ‘‘, each of’’; 

(C) in clause (i)—

(i) in the matter preceding subclause (I), by inserting ‘‘for fiscal years 

before fiscal year 2004,’’ before ‘‘for hospitals’’; and 

(ii) in subclause (II), by striking ‘‘and’’ after the semicolon at the end; 

(D) in clause (ii)—

(i) in the matter preceding subclause (I), by inserting ‘‘for fiscal years 

before fiscal year 2004,’’ before ‘‘for hospitals’’; and 

(ii) in subclause (II), by striking the period at the end and inserting 

‘‘; and’’; and 

(E) by adding at the end the following new clause: 

‘‘(iii) for a fiscal year beginning after fiscal year 2003, for hospitals located in all areas, to the product of—

‘‘(I) the applicable standardized amount (computed under subparagraph (A)), reduced under subparagraph (B), and adjusted or reduced 

under subparagraph (C) for the fiscal year; and 

‘‘(II) the weighting factor (determined under paragraph (4)(B)) for 

that diagnosis-related group.’’. 

(2) TECHNICAL CONFORMING SUNSET.—Section 1886(d)(3) (42 U.S.C. 

1395ww(d)(3)) is amended—

(A) in the matter preceding subparagraph (A), by inserting ‘‘, for fiscal 

years before fiscal year 1997,’’ before ‘‘a regional adjusted DRG prospective 

payment rate’’; and 

(B) in subparagraph (D), in the matter preceding clause (i), by inserting 

‘‘, for fiscal years before fiscal year 1997,’’ before ‘‘a regional DRG prospective payment rate for each region,’’.

SEC. 403. ESTABLISHMENT OF ESSENTIAL RURAL HOSPITAL CLASSIFICATION. 

(a) CLASSIFICATION.—Section 1861(mm) (42 U.S.C. 1395x(mm)) is amended—

(1) in the heading by adding ‘‘ESSENTIAL RURAL HOSPITALS’’ at the end; and 

(2) by adding at the end the following new paragraphs: 

‘‘(4)(A) The term ‘essential rural hospital’ means a subsection (d) hospital (as defined in section 1886(d)(1)(B)) that is located in a rural area (as defined for purposes 

of section 1886(d)), has more than 25 licensed acute care inpatient beds, has applied 

to the Secretary for classification as such a hospital, and with respect to which the 

Secretary has determined that the closure of the hospital would significantly diminish the ability of medicare beneficiaries to obtain essential health care services. 

‘‘(B) The determination under subparagraph (A) shall be based on the following 

criteria: 

‘‘(i) HIGH PROPORTION OF MEDICARE BENEFICIARIES RECEIVING CARE FROM HOSPITAL.—(I) A high percentage of such beneficiaries residing in the area of the 

hospital who are hospitalized (during the most recent year for which complete 

data are available) receive basic inpatient medical care at the hospital. 

‘‘(II) For a hospital with more than 200 licensed beds, a high percentage of 

such beneficiaries residing in such area who are hospitalized (during such recent year) receive specialized surgical inpatient care at the hospital. 

‘‘(III) Almost all physicians described in section 1861(r)(1) in such area have 

privileges at the hospital and provide their inpatient services primarily at the 

hospital. 

‘‘(ii) SIGNIFICANT ADVERSE IMPACT IN ABSENCE OF HOSPITAL.—If the hospital 

were to close—

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‘‘(I) there would be a significant amount of time needed for residents to 

reach emergency treatment, resulting in a potential significant harm to 

beneficiaries with critical illnesses or injuries; 

‘‘(II) there would be an inability in the community to stablize emergency 

cases for transfers to another acute care setting, resulting in a potential for 

significant harm to medicare beneficiaries; and 

‘‘(III) any other nearby hospital lacks the physical and clinical capacity 

to take over the hospital’s typical admissions. 

‘‘(C) In making such determination, the Secretary may also consider the following: 

‘‘(i) Free-standing ambulatory surgery centers, office-based oncology care, and 

imaging center services are insufficient in the hospital’s area to handle the outpatient care of the hospital. 

‘‘(ii) Beneficiaries in nearby areas would be adversely affected if the hospital 

were to close as the hospital provides specialized knowledge and services to a 

network of smaller hospitals and critical access hospitals. 

‘‘(iii) Medicare beneficiaries would have difficulty in accessing care if the hospital were to close as the hospital provides significant subsidies to support ambulatory care in local clinics, including mental health clinics and to support post 

acute care. 

‘‘(iv) The hospital has a committment to provide graduate medical education 

in a rural area. 

‘‘(C) QUALITY CARE.—The hospital inpatient score for quality of care is not 

less than the median hospital score for qualify of care for hospitals in the State, 

as established under standards of the utilization and quality control peer review 

organization under part B of title XI or other quality standards recognized by 

the Secretary. 

A hospital classified as an essential rural hospital may not change such classification and a hospital so classified shall not be treated as a sole community hospital, 

medicare dependent hospital, or rural referral center for purposes of section 1886.’’. 

(b) PAYMENT BASED ON 102 PERCENT OF ALLOWED COSTS.—

(1) INPATIENT HOSPITAL SERVICES.—Section 1886(d) (42 U.S.C. 1395ww(d)) is 

amended by adding at the end the following: 

‘‘(11) In the case of a hospital classified as an essential rural hospital under section 1861(mm)(4) for a cost reporting period, the payment under this subsection for 

inpatient hospital services for discharges occurring during the period shall be based 

on 102 percent of the reasonable costs for such services. Nothing in this paragraph 

shall be construed as affecting the application or amount of deductibles or copayments otherwise applicable to such services under part A or as waiving any requirement for billing for such services.’’. 

(2) HOSPITAL OUTPATIENT SERVICES.—Section 1833(t)(13) (42 U.S.C. 

1395l(t)(13)) is amended by adding at the end the following new subparagraph: 

‘‘(B) SPECIAL RULE FOR ESSENTIAL RURAL HOSPITALS.—In the case of a 

hospital classified as an essential rural hospital under section 1861(mm)(4) 

for a cost reporting period, the payment under this subsection for covered 

OPD services during the period shall be based on 102 percent of the reasonable costs for such services. Nothing in this subparagraph shall be construed as affecting the application or amount of deductibles or copayments 

otherwise applicable to such services under this part or as waiving any requirement for billing for such services.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to cost 

reporting periods beginning on or after October 1, 2004. 

SEC. 404. MORE FREQUENT UPDATE IN WEIGHTS USED IN HOSPITAL MARKET BASKET. 

(a) MORE FREQUENT UPDATES IN WEIGHTS.—After revising the weights used in 

the hospital market basket under section 1886(b)(3)(B)(iii) of the Social Security Act 

(42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the most current data available, the Secretary shall establish a frequency for revising such weights, including the labor 

share, in such market basket to reflect the most current data available more frequently than once every 5 years. 

(b) REPORT.—Not later than October 1, 2004, the Secretary shall submit a report 

to Congress on the frequency established under subsection (a), including an explanation of the reasons for, and options considered, in determining such frequency. 

SEC. 405. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL PROGRAM. 

(a) INCREASE IN PAYMENT AMOUNTS.—

(1) IN GENERAL.—Sections 1814(l), 1834(g)(1), and 1883(a)(3) (42 U.S.C. 

1395f(l); 1395m(g)(1); 42 U.S.C. 1395tt(a)(3)) are each amended by inserting 

‘‘equal to 102 percent of’’ before ‘‘the reasonable costs’’. 

75

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

payments for services furnished during cost reporting periods beginning on or 

after October 1, 2003. 

(b) COVERAGE OF COSTS FOR CERTAIN EMERGENCY ROOM ON-CALL PROVIDERS.—

(1) IN GENERAL.—Section 1834(g)(5) (42 U.S.C. 1395m(g)(5)) is amended—

(A) in the heading—

(i) by inserting ‘‘CERTAIN’’ before ‘‘EMERGENCY’’; and 

(ii) by striking ‘‘PHYSICIANS’’ and inserting ‘‘PROVIDERS’’; 

(B) by striking ‘‘emergency room physicians who are on-call (as defined 

by the Secretary)’’ and inserting ‘‘physicians, physician assistants, nurse 

practitioners, and clinical nurse specialists who are on-call (as defined by 

the Secretary) to provide emergency services’’; and 

(C) by striking ‘‘physicians’ services’’ and inserting ‘‘services covered 

under this title’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply 

with respect to costs incurred for services provided on or after January 1, 2004. 

(c) MODIFICATION OF THE ISOLATION TEST FOR COST-BASED CAH AMBULANCE

SERVICES.—

(1) IN GENERAL.—Section 1834(l)(8) (42 U.S.C. 1395m(l)), as added by section 

205(a) of BIPA (114 Stat. 2763A–482), is amended by adding at the end the following: ‘‘The limitation described in the matter following subparagraph (B) in 

the previous sentence shall not apply if the ambulance services are furnished 

by such a provider or supplier of ambulance services who is a first responder 

to emergencies (as determined by the Secretary).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

ambulances services furnished on or after the first cost reporting period that begins after the date of the enactment of this Act. 

(d) REINSTATEMENT OF PERIODIC INTERIM PAYMENT (PIP).—

(1) IN GENERAL.—Section 1815(e)(2) (42 U.S.C. 1395g(e)(2)) is amended—

(A) in the matter before subparagraph (A), by inserting ‘‘, in the cases described in subparagraphs (A) through (D)’’ after ‘‘1986’’; and 

(B) by striking ‘‘and’’ at the end of subparagraph (C); 

(C) by adding ‘‘and’’ at the end of subparagraph (D); and 

(D) by inserting after subparagraph (D) the following new subparagraph: 

‘‘(E) inpatient critical access hospital services;’’. 

(2) DEVELOPMENT OF ALTERNATIVE METHODS OF PERIODIC INTERIM PAYMENTS.—With respect to periodic interim payments to critical access hospitals 

for inpatient critical access hospital services under section 1815(e)(2)(E) of the 

Social Security Act, as added by paragraph (1), the Secretary shall develop alternative methods for such payments that are based on expenditures of the hospital. 

(3) REINSTATEMENT OF PIP.—The amendments made by paragraph (1) shall 

apply to payments made on or after January 1, 2004. 

(e) CONDITION FOR APPLICATION OF SPECIAL PHYSICIAN PAYMENT ADJUSTMENT.—

(1) IN GENERAL.—Section 1834(g)(2) (42 U.S.C. 1395m(g)(2)) is amended by 

adding after and below subparagraph (B) the following: 

‘‘The Secretary may not require, as a condition for applying subparagraph (B) 

with respect to a critical access hospital, that each physician providing professional services in the hospital must assign billing rights with respect to such 

services, except that such subparagraph shall not apply to those physicians who 

have not assigned such billing rights.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall be effective as if included in the enactment of section 403(d) of the Medicare, Medicaid, 

and SCHIP Balanced Budget Refinement Act of 1999 (113 Stat. 1501A–371). 

(f) FLEXIBILITY IN BED LIMITATION FOR HOSPITALS.—Section 1820 (42 U.S.C. 

1395i–4) is amended—

(1) in subsection (c)(2)(B)(iii), by inserting ‘‘subject to paragraph (3)’’ after 

‘‘(iii) provides’’; 

(2) by adding at the end of subsection (c) the following new paragraph: 

‘‘(3) INCREASE IN MAXIMUM NUMBER OF BEDS FOR HOSPITALS WITH STRONG SEASONAL CENSUS FLUCTUATIONS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (C), in the case of a hospital 

that demonstrates that it meets the standards established under subparagraph (B) and has not made the election described in subsection (f)(2)(A), 

the bed limitations otherwise applicable under paragraph (2)(B)(iii) and 

subsection (f) shall be increased by 5 beds. 

‘‘(B) STANDARDS.—The Secretary shall specify standards for determining 

whether a critical access hospital has sufficiently strong seasonal variations 

76

in patient admissions to justify the increase in bed limitation provided 

under subparagraph (A).’’; and 

(3) in subsection (f)—

(A) by inserting ‘‘(1)’’ after ‘‘(f)’’; and 

(B) by adding at the end the following new paragraph: 

‘‘(2)(A) A hospital may elect to treat the reference in paragraph (1) to ‘15 beds’ 

as a reference to ‘25 beds’, but only if no more than 10 beds in the hospital are at 

any time used for non-acute care services. A hospital that makes such an election 

is not eligible for the increase provided under subsection (c)(3)(A). 

‘‘(B) The limitations in numbers of beds under the first sentence of paragraph (1) 

are subject to adjustment under subsection (c)(3).’’. 

(4) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to designations made before, on, or after January 1, 2004. 

(g) ADDITIONAL 5-YEAR PERIOD OF FUNDING FOR GRANT PROGRAM.—

(1) IN GENERAL.—Section 1820(g) (42 U.S.C. 1395i–4(g)) is amended by adding 

at the end the following new paragraph: 

‘‘(4) FUNDING.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), payment for grants made 

under this subsection during fiscal years 2004 through 2008 shall be made 

from the Federal Hospital Insurance Trust Fund. 

‘‘(B) ANNUAL AGGREGATE LIMITATION.—In no case may the amount of payment provided for under subparagraph (A) for a fiscal year exceed 

$25,000,000.’’. 

(2) CONFORMING AMENDMENT.—Section 1820 (42 U.S.C. 1395i–4) is amended 

by striking subsection (j).

SEC. 406. REDISTRIBUTION OF UNUSED RESIDENT POSITIONS. 

(a) IN GENERAL.—Section 1886(h)(4) (42 U.S.C. 1395ww(h)(4)) is amended—

(1) in subparagraph (F)(i), by inserting ‘‘subject to subparagraph (I),’’ after 

‘‘October 1, 1997,’’; 

(2) in subparagraph (H)(i), by inserting ‘‘subject to subparagraph (I),’’ after 

‘‘subparagraphs (F) and (G),’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(I) REDISTRIBUTION OF UNUSED RESIDENT POSITIONS.—

‘‘(i) REDUCTION IN LIMIT BASED ON UNUSED POSITIONS.—

‘‘(I) IN GENERAL.—If a hospital’s resident level (as defined in 

clause (iii)(I)) is less than the otherwise applicable resident limit 

(as defined in clause (iii)(II)) for each of the reference periods (as 

defined in subclause (II)), effective for cost reporting periods beginning on or after January 1, 2004, the otherwise applicable resident 

limit shall be reduced by 75 percent of the difference between such 

limit and the reference resident level specified in subclause (III) (or 

subclause (IV) if applicable). 

‘‘(II) REFERENCE PERIODS DEFINED.—In this clause, the term ‘reference periods’ means, for a hospital, the 3 most recent consecutive 

cost reporting periods of the hospital for which cost reports have 

been settled (or, if not, submitted) on or before September 30, 2002. 

‘‘(III) REFERENCE RESIDENT LEVEL.—Subject to subclause (IV), 

the reference resident level specified in this subclause for a hospital is the highest resident level for the hospital during any of the 

reference periods. 

‘‘(IV) ADJUSTMENT PROCESS.—Upon the timely request of a hospital, the Secretary may adjust the reference resident level for a 

hospital to be the resident level for the hospital for the cost reporting period that includes July 1, 2003. 

‘‘(V) AFFILIATION.—With respect to hospitals which are members 

of the same affiliated group (as defined by the Secretary under subparagraph (H)(ii)), the provisions of this section shall be applied 

with respect to such an affiliated group by deeming the affiliated 

group to be a single hospital. 

‘‘(ii) REDISTRIBUTION.—

‘‘(I) IN GENERAL.—The Secretary is authorized to increase the 

otherwise applicable resident limits for hospitals by an aggregate 

number estimated by the Secretary that does not exceed the aggregate reduction in such limits attributable to clause (i) (without taking into account any adjustment under subclause (IV) of such 

clause). 

‘‘(II) EFFECTIVE DATE.—No increase under subclause (I) shall be 

permitted or taken into account for a hospital for any portion of a 

77

cost reporting period that occurs before July 1, 2004, or before the 

date of the hospital’s application for an increase under this clause. 

No such increase shall be permitted for a hospital unless the hospital has applied to the Secretary for such increase by December 

31, 2005. 

‘‘(III) CONSIDERATIONS IN REDISTRIBUTION.—In determining for 

which hospitals the increase in the otherwise applicable resident 

limit is provided under subclause (I), the Secretary shall take into 

account the need for such an increase by specialty and location involved, consistent with subclause (IV). 

‘‘(IV) PRIORITY FOR RURAL AND SMALL URBAN AREAS.—In determining for which hospitals and residency training programs an increase in the otherwise applicable resident limit is provided under 

subclause (I), the Secretary shall first distribute the increase to 

programs of hospitals located in rural areas or in urban areas that 

are not large urban areas (as defined for purposes of subsection (d)) 

on a first-come-first-served basis (as determined by the Secretary) 

based on a demonstration that the hospital will fill the positions 

made available under this clause and not to exceed an increase of 

25 full-time equivalent positions with respect to any hospital. 

‘‘(V) APPLICATION OF LOCALITY ADJUSTED NATIONAL AVERAGE PER

RESIDENT AMOUNT.—With respect to additional residency positions 

in a hospital attributable to the increase provided under this 

clause, notwithstanding any other provision of this subsection, the 

approved FTE resident amount is deemed to be equal to the locality adjusted national average per resident amount computed under 

subparagraph (E) for that hospital. 

‘‘(VI) CONSTRUCTION.—Nothing in this clause shall be construed 

as permitting the redistribution of reductions in residency positions 

attributable to voluntary reduction programs under paragraph (6) 

or as affecting the ability of a hospital to establish new medical 

residency training programs under subparagraph (H). 

‘‘(iii) RESIDENT LEVEL AND LIMIT DEFINED.—In this subparagraph: 

‘‘(I) RESIDENT LEVEL.—The term ‘resident level’ means, with respect to a hospital, the total number of full-time equivalent residents, before the application of weighting factors (as determined 

under this paragraph), in the fields of allopathic and osteopathic 

medicine for the hospital. 

‘‘(II) OTHERWISE APPLICABLE RESIDENT LIMIT.—The term ‘otherwise applicable resident limit’ means, with respect to a hospital, 

the limit otherwise applicable under subparagraphs (F)(i) and (H) 

on the resident level for the hospital determined without regard to 

this subparagraph.’’. 

(b) CONFORMING AMENDMENT TO IME.—Section 1886(d)(5)(B)(v) (42 U.S.C. 

1395ww(d)(5)(B)(v)) is amended by adding at the end the following: ‘‘The provisions 

of subparagraph (I) of subsection (h)(4) shall apply with respect to the first sentece 

of this clause in the same manner as it applies with respect to subparagraph (F) 

of such subsection.’’. 

(c) REPORT ON EXTENSION OF APPLICATIONS UNDER REDISTRIBUTION PROGRAM.— Not later than July 1, 2005, the Secretary shall submit to Congress a report containing recommendations regarding whether to extend the deadline for applications 

for an increase in resident limits under section 1886(h)(4)(I)(ii)(II) of the Social Security Act (as added by subsection (a)). 

SEC. 407. TWO-YEAR EXTENSION OF HOLD HARMLESS PROVISIONS FOR SMALL RURAL HOSPITALS AND SOLE COMMUNITY HOSPITALS UNDER PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT DEPARTMENT SERVICES. 

(a) HOLD HARMLESS PROVISIONS.—

(1) IN GENERAL.—Section 1833(t)(7)(D)(i) (42 U.S.C. 1395l(t)(7)(D)(i)) is 

amended—

(A) in the heading, by striking ‘‘SMALL’’ and inserting ‘‘CERTAIN’’; 

(B) by inserting ‘‘or a sole community hospital (as defined in section 

1886(d)(5)(D)(iii)) located in a rural area’’ after ‘‘100 beds’’; and 

(C) by striking ‘‘2004’’ and inserting ‘‘2006’’. 

(2) EFFECTIVE DATE.—The amendment made by subsection (a)(2) shall apply 

with respect to payment for OPD services furnished on and after January 1, 

2004. 

(b) STUDY; ADJUSTMENT.—

(1) STUDY.—The Secretary shall conduct a study to determine if, under the 

prospective payment system for hospital outpatient department services under 

78

section 1833(t) of the Social Security Act (42 U.S.C. 1395l(t)), costs incurred by 

rural providers of services by ambulatory payment classification groups (APCs) 

exceed those costs incurred by urban providers of services. 

(2) ADJUSTMENT.—Insofar as the Secretary determines under paragraph (1) 

that costs incurred by rural providers exceed those costs incurred by urban providers of services, the Secretary shall provide for an appropriate adjustment 

under such section 1833(t) to reflect those higher costs by January 1, 2005. 

SEC. 408. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND FEDERALLY QUALIFIED 

HEALTH CENTER SERVICES FROM THE PROSPECTIVE PAYMENT SYSTEM FOR 

SKILLED NURSING FACILITIES. 

(a) IN GENERAL.—Section 1888(e)(2)(A) (42 U.S.C. 1395yy(e)(2)(A)) is amended—

(1) in clause (i)(II), by striking ‘‘clauses (ii) and (iii)’’ and inserting ‘‘clauses 

(ii), (iii), and (iv)’’; and 

(2) by adding at the end the following new clause: 

‘‘(iv) EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND FEDERALLY

QUALIFIED HEALTH CENTER SERVICES.—Services described in this clause 

are—

‘‘(I) rural health clinic services (as defined in paragraph (1) of 

section 1861(aa)); and 

‘‘(II) Federally qualified health center services (as defined in 

paragraph (3) of such section); 

that would be described in clause (ii) if such services were not furnished by an individual affiliated with a rural health clinic or a Federally qualified health center.’’. 

(b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to 

services furnished on or after January 1, 2004. 

SEC. 409. RECOGNITION OF ATTENDING NURSE PRACTITIONERS AS ATTENDING PHYSICIANS 

TO SERVE HOSPICE PATIENTS. 

(a) IN GENERAL.—Section 1861(dd)(3)(B) (42 U.S.C. 1395x(dd)(3)(B)) is amended 

by inserting ‘‘or nurse practitioner (as defined in subsection (aa)(5))’’ after ‘‘the physician (as defined in subsection (r)(1))’’. 

(b) PROHIBITION ON NURSE PRACTITIONER CERTIFYING NEED FOR HOSPICE.—Section 1814(a)(7)(A)(i)(I) (42 U.S.C. 1395f(a)(7)(A)(i)(I)) is amended by inserting 

‘‘(which for purposes of this subparagraph does not include a nurse practitioner)’’ 

after ‘‘attending physician (as defined in section 1861(dd)(3)(B))’’. 

SEC. 410. IMPROVEMENT IN PAYMENTS TO RETAIN EMERGENCY CAPACITY FOR AMBULANCE 

SERVICES IN RURAL AREAS. 

Section 1834(l) (42 U.S.C. 1395m(l)) is amended—

(1) by redesignating paragraph (8), as added by section 221(a) of BIPA (114 

Stat. 2763A–486), as paragraph (9); and 

(2) by adding at the end the following new paragraph: 

‘‘(10) ASSISTANCE FOR RURAL PROVIDERS FURNISHING SERVICES IN LOW MEDICARE POPULATION DENSITY AREAS.—

‘‘(A) IN GENERAL.—In the case of ground ambulance services furnished on 

or after January 1, 2004, for which the transportation originates in a qualified rural area (as defined in subparagraph (B)), the Secretary shall provide 

for an increase in the base rate of the fee schedule for mileage for a trip 

established under this subsection. In establishing such increase, the Secretary shall, based on the relationship of cost and volume, estimate the average increase in cost per trip for such services as compared with the cost 

per trip for the average ambulance service. 

‘‘(B) QUALIFIED RURAL AREA DEFINED.—For purposes of subparagraph (A), 

the term ‘qualified rural area’ is a rural area (as defined in section 

1886(d)(2)(D)) with a population density of medicare beneficiaries residing 

in the area that is in the lowest quartile of all rural county populations.’’. 

SEC. 411. TWO-YEAR INCREASE FOR HOME HEALTH SERVICES FURNISHED IN A RURAL AREA. 

(a) IN GENERAL.—In the case of home health services furnished in a rural area 

(as defined in section 1886(d)(2)(D) of the Social Security Act (42 U.S.C. 

1395ww(d)(2)(D))) during 2004 and 2005, the Secretary shall increase the payment 

amount otherwise made under section 1895 of such Act (42 U.S.C. 1395fff ) for such 

services by 5 percent. 

(b) WAIVING BUDGET NEUTRALITY.—The Secretary shall not reduce the standard 

prospective payment amount (or amounts) under section 1895 of the Social Security 

Act (42 U.S.C. 1395fff ) applicable to home health services furnished during a period 

to offset the increase in payments resulting from the application of subsection (a). 

79

SEC. 412. PROVIDING SAFE HARBOR FOR CERTAIN COLLABORATIVE EFFORTS THAT BENEFIT 

MEDICALLY UNDERSERVED POPULATIONS. 

(a) IN GENERAL.—Section 1128B(b)(3) (42 U.S.C. 1320a–7(b)(3)), as amended by 

section 101(b)(2), is amended—

(1) in subparagraph (F), by striking ‘‘and’’ after the semicolon at the end; 

(2) in subparagraph (G), by striking the period at the end and inserting ‘‘; 

and’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(H) any remuneration between a public or nonprofit private health center entity described under clause (i) or (ii) of section 1905(l)(2)(B) and any 

individual or entity providing goods, items, services, donations or loans, or 

a combination thereof, to such health center entity pursuant to a contract, 

lease, grant, loan, or other agreement, if such agreement contributes to the 

ability of the health center entity to maintain or increase the availability, 

or enhance the quality, of services provided to a medically underserved population served by the health center entity.’’. 

(b) RULEMAKING FOR EXCEPTION FOR HEALTH CENTER ENTITY ARRANGEMENTS.—

(1) ESTABLISHMENT.—

(A) IN GENERAL.—The Secretary of Health and Human Services (in this 

subsection referred to as the ‘‘Secretary’’) shall establish, on an expedited 

basis, standards relating to the exception described in section 

1128B(b)(3)(H) of the Social Security Act, as added by subsection (a), for 

health center entity arrangements to the antikickback penalties. 

(B) FACTORS TO CONSIDER.—The Secretary shall consider the following 

factors, among others, in establishing standards relating to the exception 

for health center entity arrangements under subparagraph (A): 

(i) Whether the arrangement between the health center entity and 

the other party results in savings of Federal grant funds or increased 

revenues to the health center entity. 

(ii) Whether the arrangement between the health center entity and 

the other party restricts or limits a patient’s freedom of choice. 

(iii) Whether the arrangement between the health center entity and 

the other party protects a health care professional’s independent medical judgment regarding medically appropriate treatment. 

The Secretary may also include other standards and criteria that are consistent with the intent of Congress in enacting the exception established 

under this section. 

(2) INTERIM FINAL EFFECT.—No later than 180 days after the date of enactment of this Act, the Secretary shall publish a rule in the Federal Register consistent with the factors under paragraph (1)(B). Such rule shall be effective and 

final immediately on an interim basis, subject to such change and revision, after 

public notice and opportunity (for a period of not more than 60 days) for public 

comment, as is consistent with this subsection. 

SEC. 413. GAO STUDY OF GEOGRAPHIC DIFFERENCES IN PAYMENTS FOR PHYSICIANS’ SERVICES. 

(a) STUDY.—The Comptroller General of the United States shall conduct a study 

of differences in payment amounts under the physician fee schedule under section 

1848 of the Social Security Act (42 U.S.C. 1395w–4) for physicians’ services in different geographic areas. Such study shall include—

(1) an assessment of the validity of the geographic adjustment factors used 

for each component of the fee schedule; 

(2) an evaluation of the measures used for such adjustment, including the frequency of revisions; and 

(3) an evaluation of the methods used to determine professional liability insurance costs used in computing the malpractice component, including a review 

of increases in professional liability insurance premiums and variation in such 

increases by State and physician specialty and methods used to update the geographic cost of practice index and relative weights for the malpractice component. 

(b) REPORT.—Not later than 1 year after the date of the enactment of this Act, 

the Comptroller General shall submit to Congress a report on the study conducted 

under subsection (a). The report shall include recommendations regarding the use 

of more current data in computing geographic cost of practice indices as well as the 

use of data directly representative of physicians’ costs (rather than proxy measures 

of such costs). 

80

SEC. 414. TREATMENT OF MISSING COST REPORTING PERIODS FOR SOLE COMMUNITY HOSPITALS. 

(a) IN GENERAL.—Section 1886(b)(3)(I) (42 U.S.C. 1395ww(b)(3)(I)) is amended by 

adding at the end the following new clause: 

‘‘(iii) In no case shall a hospital be denied treatment as a sole community hospital 

or payment (on the basis of a target rate as such as a hospital) because data are 

unavailable for any cost reporting period due to changes in ownership, changes in 

fiscal intermediaries, or other extraordinary circumstances, so long as data for at 

least one applicable base cost reporting period is available.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to cost 

reporting periods beginning on or after January 1, 2004. 

SEC. 415. EXTENSION OF TELEMEDICINE DEMONSTRATION PROJECT. 

Section 4207 of Balanced Budget Act of 1997 (Public Law 105–33) is amended—

(1) in subsection (a)(4), by striking ‘‘4-year’’ and inserting ‘‘8-year’’; and 

(2) in subsection (d)(3), by striking ‘‘$30,000,000’’ and inserting ‘‘$60,000,000’’. 

SEC. 416. ADJUSTMENT TO THE MEDICARE INPATIENT HOSPITAL PPS WAGE INDEX TO REVISE THE LABOR-RELATED SHARE OF SUCH INDEX. 

(a) IN GENERAL.—Section 1886(d)(3)(E) (42 U.S.C. 1395ww(d)(3)(E)) is amended—

(1) by striking ‘‘WAGE LEVELS.—The Secretary’’ and inserting ‘‘WAGE LEVELS.—

‘‘(i) IN GENERAL.—Except as provided in clause (ii), the Secretary’’; and 

(2) by adding at the end the following new clause: 

‘‘(ii) ALTERNATIVE PROPORTION TO BE ADJUSTED BEGINNING IN FISCAL YEAR

2004.—

‘‘(I) IN GENERAL.—Except as provided in subclause (II), for discharges 

occurring on or after October 1, 2003, the Secretary shall substitute the 

‘62 percent’ for the proportion described in the first sentence of clause 

(i). 

‘‘(II) HOLD HARMLESS FOR CERTAIN HOSPITALS.—If the application of 

subclause (I) would result in lower payments to a hospital than would 

otherwise be made, then this subparagraph shall be applied as if this 

clause had not been enacted.’’. 

(b) WAIVING BUDGET NEUTRALITY.—Section 1886(d)(3)(E) (42 U.S.C. 

1395ww(d)(3)(E)), as amended by subsection (a), is amended by adding at the end 

of clause (i) the following new sentence: ‘‘The Secretary shall apply the previous sentence for any period as if the amendments made by section 402(a) of the Medicare 

Prescription Drug and Modernization Act of 2003 had not been enacted.’’. 

SEC. 417. MEDICARE INCENTIVE PAYMENT PROGRAM IMPROVEMENTS FOR PHYSICIAN SCARCITY. 

(a) ADDITIONAL BONUS PAYMENT FOR CERTAIN PHYSICIAN SCARCITY AREAS.—

(1) IN GENERAL.—Section 1833 (42 U.S.C. 1395l) is amended by adding at the 

end the following new subsection: 

‘‘(u) INCENTIVE PAYMENTS FOR PHYSICIAN SCARCITY AREAS.—

‘‘(1) IN GENERAL.—In the case of physicians’ services furnished in a year—

‘‘(A) by a primary care physician in a primary care scarcity county (identified under paragraph (4)); or 

‘‘(B) by a physician who is not a primary care physician in a specialist 

care scarcity county (as so identified), 

in addition to the amount of payment that would otherwise be made for such 

services under this part, there also shall be paid an amount equal to 5 percent 

of the payment amount for the service under this part. 

‘‘(2) DETERMINATION OF RATIOS OF PHYSICIANS TO MEDICARE BENEFICIARIES IN

AREA.—Based upon available data, the Secretary shall periodically determine, 

for each county or equivalent area in the United States, the following: 

‘‘(A) NUMBER OF PHYSICIANS PRACTICING IN THE AREA.—The number of 

physicians who furnish physicians’ services in the active practice of medicine or osteopathy in that county or area, other than physicians whose practice is exclusively for the Federal Government, physicians who are retired, 

or physicians who only provide administrative services. Of such number, 

the number of such physicians who are—

‘‘(i) primary care physicians; or 

‘‘(ii) physicians who are not primary care physicians. 

‘‘(B) NUMBER OF MEDICARE BENEFICIARIES RESIDING IN THE AREA.—The 

number of individuals who are residing in the county and are entitled to 

benefits under part A or enrolled under this part, or both. 

‘‘(C) DETERMINATION OF RATIOS.—

‘‘(i) PRIMARY CARE RATIO.—The ratio (in this paragraph referred to as 

the ‘primary care ratio’) of the number of primary care physicians (deVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00080 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
81

termined under subparagraph (A)(i)), to number of medicare beneficiaries determined under subparagraph (B). 

‘‘(ii) SPECIALIST CARE RATIO.—The ratio (in this paragraph referred to 

as the ‘specialist care ratio’) of the number of other physicians (determined under subparagraph (A)(ii)), to number of medicare beneficiaries 

determined under subparagraph (B). 

‘‘(3) RANKING OF COUNTIES.—The Secretary shall rank each such county or 

area based separately on its primary care ratio and its specialist care ratio. 

‘‘(4) IDENTIFICATION OF COUNTIES.—The Secretary shall identify—

‘‘(A) those counties and areas (in this paragraph referred to as ‘primary 

care scarcity counties’) with the lowest primary care ratios that represent, 

if each such county or area were weighted by the number of medicare beneficiaries determined under paragraph (2)(B), an aggregate total of 20 percent of the total of the medicare beneficiaries determined under such paragraph; and 

‘‘(B) those counties and areas (in this subsection referred to as ‘specialist 

care scarcity counties’) with the lowest specialist care ratios that represent, 

if each such county or area were weighted by the number of medicare beneficiaries determined under paragraph (2)(B), an aggregate total of 20 percent of the total of the medicare beneficiaries determined under such paragraph. 

There is no administrative or judicial review respecting the identification of a 

county or area or the assignment of a specialty of any physician under this 

paragraph. 

‘‘(5) RURAL CENSUS TRACKS.—To the extent feasible, the Secretary shall treat 

a rural census tract of a metropolitan statistical area (as determined under the 

most recent modification of the Goldsmith Modification, originally published in 

the Federal Register on February 27, 1992 (57 Fed. Reg. 6725) as an equivalent 

area for purposes of qualifying as a primary care scarcity county or specialist 

care scarcity county under this subsection. 

‘‘(6) PHYSICIAN DEFINED.—For purposes of this paragraph, the term ‘physician’ means a physician described in section 1861(r)(1) and the term ‘primary 

care physician’ means a physician who is identified in the available data as a 

general practitioner, family practice practitioner, general internist, or obstetrician or gynecologist. 

‘‘(7) PUBLICATION OF LIST OF COUNTIES.—In carrying out this subsection for 

a year, the Secretary shall include, as part of the proposed and final rule to implement the physician fee schedule under section 1848 for the year, a list of all 

areas which will qualify as a primary care scarcity county or specialist care 

scarcity county under this subsection for the year involved.’’. 

(2) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to 

physicians’ services furnished or after January 1, 2004. 

(b) IMPROVEMENT TO MEDICARE INCENTIVE PAYMENT PROGRAM.—

(1) IN GENERAL.—Section 1833(m) (42 U.S.C. 1395l(m)) is amended—

(A) by inserting ‘‘(1)’’ after ‘‘(m)’’; and 

(B) by adding at the end the following new paragraphs: 

‘‘(2) The Secretary shall establish procedures under which the Secretary, and not 

the physician furnishing the service, is responsible for determining when a payment 

is required to be made under paragraph (1). 

‘‘(3) In carrying out paragraph (1) for a year, the Secretary shall include, as part 

of the proposed and final rule to implement the physician fee schedule under section 

1848 for the year, a list of all areas which will qualify as a health professional shortage area under paragraph (1) for the year involved.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

physicians’ services furnished or after January 1, 2004.

TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

SEC. 501. REVISION OF ACUTE CARE HOSPITAL PAYMENT UPDATES. 

Section 1886(b)(3)(B)(i) (42 U.S.C. 1395ww(b)(3)(B)(i)) is amended—

(1) by striking ‘‘and’’ at the end of subclause (XVIII); 

(2) by striking subclause (XIX); and 

(3) by inserting after subclause (XVIII) the following new subclauses: 

‘‘(XIX) for each of fiscal years 2004 through 2006, the market basket percentage increase minus 0.4 percentage points for hospitals in all areas; and 

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‘‘(XX) for fiscal year 2007 and each subsequent fiscal year, the market basket 

percentage increase for hospitals in all areas.’’.

SEC. 502. RECOGNITION OF NEW MEDICAL TECHNOLOGIES UNDER INPATIENT HOSPITAL PPS. 

(a) IMPROVING TIMELINESS OF DATA COLLECTION.—Section 1886(d)(5)(K) (42 

U.S.C. 1395ww(d)(5)(K)) is amended by adding at the end the following new clause: 

‘‘(vii) Under the mechanism under this subparagraph, the Secretary shall provide 

for the addition of new diagnosis and procedure codes in April 1 of each year, but 

the addition of such codes shall not require the Secretary to adjust the payment (or 

diagnosis-related group classification) under this subsection until the fiscal year 

that begins after such date.’’. 

(b) ELIGIBILITY STANDARD FOR TECHNOLOGY OUTLIERS.—

(1) MINIMUM PERIOD FOR RECOGNITION OF NEW TECHNOLOGIES.—Section 

1886(d)(5)(K)(vi) (42 U.S.C. 1395ww(d)(5)(K)(vi)) is amended—

(A) by inserting ‘‘(I)’’ after ‘‘(vi)’’; and 

(B) by adding at the end the following new subclause: 

‘‘(II) Under such criteria, a service or technology shall not be denied treatment 

as a new service or technology on the basis of the period of time in which the service 

or technology has been in use if such period ends before the end of the 2-to-3-year 

period that begins on the effective date of implementation of a code under ICD–9–

CM (or a successor coding methodology) that enables the identification of specific 

discharges in which the service or technology has been used.’’. 

(2) ADJUSTMENT OF THRESHOLD.—Section 1886(d)(5)(K)(ii)(I) (42 U.S.C. 

1395ww(d)(5)(K)(ii)(I)) is amended by inserting ‘‘(applying a threshold specified 

by the Secretary that is 75 percent of one standard deviation for the diagnosisrelated group involved)’’ after ‘‘is inadequate’’. 

(3) CRITERION FOR SUBSTANTIAL IMPROVEMENT.—Section 1886(d)(5)(K)(vi) (42 

U.S.C. 1395ww(d)(5)(K)(vi)), as amended by paragraph (1), is further amended 

by adding at the end the following subclause: 

‘‘(III) The Secretary shall by regulation provide for further clarification of the criteria applied to determine whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment 

of beneficiaries. Under such criteria, in determining whether a new service or technology represents an advance in medical technology that substantially improves the 

diagnosis or treatment of beneficiaries, the Secretary shall deem a service or technology as meeting such requirement if the service or technology is a drug or biological that is designated under section 506 of the Federal Food, Drug, and Cosmetic 

Act, approved under section 314.510 or 601.41 of title 21, Code of Federal Regulations, or designated for priority review when the marketing application for such 

drug or biological was filed or is a medical device for which an exemption has been 

granted under section 520(m) of such Act, or for which priority review has been provided under section 515(d)(5) of such Act. Nothing in this subclause shall be construed as effecting the authority of the Secretary to determine whether items and 

services are medically necessary and appropriate under section 1862(a)(1).’’. 

(4) PROCESS FOR PUBLIC INPUT.—Section 1886(d)(5)(K) (42 U.S.C. 

1395ww(d)(5)(K)), as amended by paragraph (1), is amended—

(A) in clause (i), by adding at the end the following: ‘‘Such mechanism 

shall be modified to meet the requirements of clause (viii).’’; and 

(B) by adding at the end the following new clause: 

‘‘(viii) The mechanism established pursuant to clause (i) shall be adjusted to provide, before publication of a proposed rule, for public input regarding whether a new 

service or technology not described in the second sentence of clause (vi)(III) represents an advance in medical technology that substantially improves the diagnosis 

or treatment of beneficiaries as follows: 

‘‘(I) The Secretary shall make public and periodically update a list of all the 

services and technologies for which an application for additional payment under 

this subparagraph is pending. 

‘‘(II) The Secretary shall accept comments, recommendations, and data from 

the public regarding whether the service or technology represents a substantial 

improvement. 

‘‘(III) The Secretary shall provide for a meeting at which organizations representing hospitals, physicians, medicare beneficiaries, manufacturers, and any 

other interested party may present comments, recommendations, and data to 

the clinical staff of the Centers for Medicare & Medicaid Services before publication of a notice of proposed rulemaking regarding whether service or technology represents a substantial improvement.’’. 

(c) PREFERENCE FOR USE OF DRG ADJUSTMENT.—Section 1886(d)(5)(K) (42 U.S.C. 

1395ww(d)(5)(K)) is further amended by adding at the end the following new clause: 

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‘‘(ix) Before establishing any add-on payment under this subparagraph with respect to a new technology, the Secretary shall seek to identify one or more diagnosis-related groups associated with such technology, based on similar clinical or anatomical characteristics and the cost of the technology. Within such groups the Secretary shall assign an eligible new technology into a diagnosis-related group where 

the average costs of care most closely approximate the costs of care of using the new 

technology. In such case, the new technology would no longer meet the threshold 

of exceeding 75 percent of the standard deviation for the diagnosis-related group involved under clause (ii)(I). No add-on payment under this subparagraph shall be 

made with respect to such new technology and this clause shall not affect the application of paragraph (4)(C)(iii).’’. 

(d) IMPROVEMENT IN PAYMENT FOR NEW TECHNOLOGY.—Section 

1886(d)(5)(K)(ii)(III) (42 U.S.C. 1395ww(d)(5)(K)(ii)(III)) is amended by inserting 

after ‘‘the estimated average cost of such service or technology’’ the following: 

‘‘(based on the marginal rate applied to costs under subparagraph (A))’’. 

(e) ESTABLISHMENT OF NEW FUNDING FOR HOSPITAL INPATIENT TECHNOLOGY.— Section 1886(d)(5)(K)(ii)(III) (42 U.S.C. 1395ww(d)(5)(K)(ii)(III)) is amended by striking ‘‘subject to paragraph (4)(C)(iii),’’. 

(f) EFFECTIVE DATE.— (1) IN GENERAL.—The Secretary shall implement the amendments made by 

this section so that they apply to classification for fiscal years beginning with 

fiscal year 2005. 

(2) RECONSIDERATIONS OF APPLICATIONS FOR FISCAL YEAR 2003 THAT ARE DE- NIED.—In the case of an application for a classification of a medical service or 

technology as a new medical service or technology under section 1886(d)(5)(K) 

of the Social Security Act (42 U.S.C. 1395ww(d)(5)(K)) that was filed for fiscal 

year 2004 and that is denied—

(A) the Secretary shall automatically reconsider the application as an application for fiscal year 2005 under the amendments made by this section; 

and 

(B) the maximum time period otherwise permitted for such classification 

of the service or technology shall be extended by 12 months. 

SEC. 503. INCREASE IN FEDERAL RATE FOR HOSPITALS IN PUERTO RICO. 

Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is amended—

(1) in subparagraph (A)—

(A) in clause (i), by striking ‘‘for discharges beginning on or after October 

1, 1997, 50 percent (and for discharges between October 1, 1987, and September 30, 1997, 75 percent)’’ and inserting ‘‘the applicable Puerto Rico percentage (specified in subparagraph (E))’’; and 

(B) in clause (ii), by striking ‘‘for discharges beginning in a fiscal year beginning on or after October 1, 1997, 50 percent (and for discharges between 

October 1, 1987, and September 30, 1997, 25 percent)’’ and inserting ‘‘the 

applicable Federal percentage (specified in subparagraph (E))’’; and 

(2) by adding at the end the following new subparagraph: 

‘‘(E) For purposes of subparagraph (A), for discharges occurring—

‘‘(i) on or after October 1, 1987, and before October 1, 1997, the applicable 

Puerto Rico percentage is 75 percent and the applicable Federal percentage is 

25 percent; 

‘‘(ii) on or after October 1, 1997, and before October 1, 2003, the applicable 

Puerto Rico percentage is 50 percent and the applicable Federal percentage is 

50 percent; 

‘‘(iii) during fiscal year 2004, the applicable Puerto Rico percentage is 41 percent and the applicable Federal percentage is 59 percent; 

‘‘(iv) during fiscal year 2005, the applicable Puerto Rico percentage is 33 percent and the applicable Federal percentage is 67 percent; and 

‘‘(v) on or after October 1, 2005, the applicable Puerto Rico percentage is 25 

percent and the applicable Federal percentage is 75 percent.’’. 

SEC. 504. WAGE INDEX ADJUSTMENT RECLASSIFICATION REFORM . 

(a) IN GENERAL.—Section 1886(d) (42 U.S.C. 1395ww(d)) is amended by adding at 

the end the following: 

‘‘(11)(A) In order to recognize commuting patterns among Metropolitan Statistical 

Areas and between such Areas and rural areas, the Secretary shall establish a process, upon application of a subsection (d) hospital that establishes that it is a qualifying hospital described in subparagraph (B), for an increase of the wage index applied under paragraph (3)(E) for the hospital in the amount computed under subparagraph (D). 

‘‘(B) A qualifying hospital described in this subparagraph is a subsection (d) hospital—

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‘‘(i) the average wages of which exceed the average wages for the area in 

which the hospital is located; and 

‘‘(ii) which has at least 10 percent of its employees who reside in one or more 

higher wage index areas. 

‘‘(C) For purposes of this paragraph, the term ‘higher wage index area’ means, 

with respect to a hospital, an area with a wage index that exceeds that of the area 

in which the hospital is located. 

‘‘(D) The increase in the wage index under subparagraph (A) for a hospital shall 

be equal to the percentage of the employees of the hospital that resides in any higher wage index area multiplied by the sum of the products, for each higher wage 

index area of—

‘‘(i) the difference between (I) the wage index for such area, and (II) the wage 

index of the area in which the hospital is located (before the application of this 

paragraph); and 

‘‘(ii) the number of employees of the hospital that reside in such higher wage 

index area divided by the total number of such employees that reside in all high 

wage index areas. 

‘‘(E) The process under this paragraph shall be based upon the process used by 

the Medicare Geographic Classification Review Board under paragraph (10) with respect to data submitted by hospitals to the Board on the location of residence of hospital employees and wages under the applicable schedule established for geographic 

reclassification. 

‘‘(F) A reclassification under this paragraph shall be effective for a period of 3 fiscal years, except that the Secretary shall establish procedures under which a subsection (d) hospital may elect to terminate such reclassification before the end of 

such period. 

‘‘(G) A hospital that is reclassified under this paragraph for a period is not eligible 

for reclassification under paragraphs (8) or (10) during that period. 

‘‘(H) Any increase in a wage index under this paragraph for a hospital shall not 

be taken into account for purposes of—

‘‘(i) computing the wage index for the area in which the hospital is located 

or any other area; or 

‘‘(ii) applying any budget neutrality adjustment with respect to such index 

under paragraph (8)(D).’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall first apply to 

the wage index for cost reporting period beginning on or after October 1, 2004. 

SEC. 505. MEDPAC REPORT ON SPECIALTY HOSPITALS. 

(a) MEDPAC STUDY.—The Medicare Payment Advisory Commission shall conduct 

a study of specialty hospitals compared with other similar general acute care hospitals under the medicare program. Such study shall examine—

(1) whether there are excessive self-referrals; 

(2) quality of care furnished; 

(3) the impact of specialty hospitals on such general acute care hospitals; and 

(4) differences in the scope of services, medicaid utilization, and uncompensated care furnished. 

(b) REPORT.—Not later than 1 year after the date of the enactment of this Act, 

the Secretary shall submit to Congress a report on the study conducted under subsection (a), and shall include any recommendations for legislation or administrative 

change as the Secretary determines appropriate. 

Subtitle B—Other Provisions 

SEC. 511. PAYMENT FOR COVERED SKILLED NURSING FACILITY SERVICES. 

(a) ADJUSTMENT TO RUGS FOR AIDS RESIDENTS.—Paragraph (12) of section 

1888(e) (42 U.S.C. 1395yy(e)) is amended to read as follows: 

‘‘(12) ADJUSTMENT FOR RESIDENTS WITH AIDS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), in the case of a resident 

of a skilled nursing facility who is afflicted with acquired immune deficiency syndrome (AIDS), the per diem amount of payment otherwise applicable shall be increased by 128 percent to reflect increased costs associated 

with such residents. 

‘‘(B) SUNSET.—Subparagraph (A) shall not apply on and after such date 

as the Secretary certifies that there is an appropriate adjustment in the 

case mix under paragraph (4)(G)(i) to compensate for the increased costs associated with residents described in such subparagraph.’’. 

(b) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to services furnished on or after October 1, 2003. 

85

SEC. 512. COVERAGE OF HOSPICE CONSULTATION SERVICES. 

(a) COVERAGE OF HOSPICE CONSULTATION SERVICES.—Section 1812(a) (42 U.S.C. 

1395d(a)) is amended—

(1) by striking ‘‘and’’ at the end of paragraph (3); 

(2) by striking the period at the end of paragraph (4) and inserting ‘‘; and’’; 

and 

(3) by inserting after paragraph (4) the following new paragraph: 

‘‘(5) for individuals who are terminally ill, have not made an election under 

subsection (d)(1), and have not previously received services under this paragraph, services that are furnished by a physician who is either the medical director or an employee of a hospice program and that consist of—

‘‘(A) an evaluation of the individual’s need for pain and symptom management; 

‘‘(B) counseling the individual with respect to end-of-life issues and care 

options; and 

‘‘(C) advising the individual regarding advanced care planning.’’. 

(b) PAYMENT.—Section 1814(i) (42 U.S.C. l395f(i)) is amended by adding at the 

end the following new paragraph: 

‘‘(4) The amount paid to a hospice program with respect to the services under section 1812(a)(5) for which payment may be made under this part shall be equal to 

an amount equivalent to the amount established for an office or other outpatient 

visit for evaluation and management associated with presenting problems of moderate severity under the fee schedule established under section 1848(b), other than 

the portion of such amount attributable to the practice expense component.’’. 

(c) CONFORMING AMENDMENT.—Section 1861(dd)(2)(A)(i) (42 U.S.C. 

1395x(dd)(2)(A)(i)) is amended by inserting before the comma at the end the following: ‘‘and services described in section 1812(a)(5)’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to services provided by a hospice program on or after January 1, 2004.

TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services

SEC. 601. REVISION OF UPDATES FOR PHYSICIANS’ SERVICES. 

(a) UPDATE FOR 2004 AND 2005.—

(1) IN GENERAL.—Section 1848(d) (42 U.S.C. 1395w–4(d)) is amended by adding at the end the following new paragraph: 

‘‘(5) UPDATE FOR 2004 AND 2005.—The update to the single conversion factor 

established in paragraph (1)(C) for each of 2004 and 2005 shall be not less than 

1.5 percent.’’. 

(2) CONFORMING AMENDMENT.—Paragraph (4)(B) of such section is amended, 

in the matter before clause (i), by inserting ‘‘and paragraph (5)’’ after ‘‘subparagraph (D)’’. 

(3) NOT TREATED AS CHANGE IN LAW AND REGULATION IN SUSTAINABLE

GROWTH RATE DETERMINATION.—The amendments made by this subsection shall 

not be treated as a change in law for purposes of applying section 1848(f)(2)(D) 

of the Social Security Act (42 U.S.C. 1395w–4(f)(2)(D)). 

(b) USE OF 10-YEAR ROLLING AVERAGE IN COMPUTING GROSS DOMESTIC PRODUCT.—

(1) IN GENERAL.—Section 1848(f)(2)(C) (42 U.S.C. 1395w–4(f)(2)(C)) is amended—

(A) by striking ‘‘projected’’ and inserting ‘‘annual average’’; and 

(B) by striking ‘‘from the previous applicable period to the applicable period involved’’ and inserting ‘‘during the 10-year period ending with the applicable period involved’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

computations of the sustainable growth rate for years beginning with 2003. 

SEC. 602. STUDIES ON ACCESS TO PHYSICIANS’ SERVICES. 

(a) GAO STUDY ON BENEFICIARY ACCESS TO PHYSICIANS’ SERVICES.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study on access of medicare beneficiaries to physicians’ services under the medicare program. The study shall include—

(A) an assessment of the use by beneficiaries of such services through an 

analysis of claims submitted by physicians for such services under part B 

of the medicare program; 

86

(B) an examination of changes in the use by beneficiaries of physicians’ 

services over time; 

(C) an examination of the extent to which physicians are not accepting 

new medicare beneficiaries as patients. 

(2) REPORT.—Not later than 18 months after the date of the enactment of this 

Act, the Comptroller General shall submit to Congress a report on the study 

conducted under paragraph (1). The report shall include a determination whether—

(A) data from claims submitted by physicians under part B of the medicare program indicate potential access problems for medicare beneficiaries 

in certain geographic areas; and 

(B) access by medicare beneficiaries to physicians’ services may have improved, remained constant, or deteriorated over time.

(b) STUDY AND REPORT ON SUPPLY OF PHYSICIANS.—

(1) STUDY.—The Secretary shall request the Institute of Medicine of the National Academy of Sciences to conduct a study on the adequacy of the supply 

of physicians (including specialists) in the United States and the factors that 

affect such supply. 

(2) REPORT TO CONGRESS.—Not later than 2 years after the date of enactment 

of this section, the Secretary shall submit to Congress a report on the results 

of the study described in paragraph (1), including any recommendations for legislation. 

(c) GAO STUDY OF MEDICARE PAYMENT FOR INHALATION THERAPY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to examine the adequacy of current reimbursements for inhalation therapy under the medicare program. 

(2) REPORT.—Not later than May 1, 2004, the Comptroller General shall submit to Congress a report on the study conducted under paragraph (1). 

SEC. 603. MEDPAC REPORT ON PAYMENT FOR PHYSICIANS’ SERVICES. 

(a) PRACTICE EXPENSE COMPONENT.—Not later than 1 year after the date of the 

enactment of this Act, the Medicare Payment Advisory Commission shall submit to 

Congress a report on the effect of refinements to the practice expense component 

of payments for physicians’ services, after the transition to a full resource-based 

payment system in 2002, under section 1848 of the Social Security Act (42 U.S.C. 

1395w–4). Such report shall examine the following matters by physician specialty: 

(1) The effect of such refinements on payment for physicians’ services. 

(2) The interaction of the practice expense component with other components 

of and adjustments to payment for physicians’ services under such section. 

(3) The appropriateness of the amount of compensation by reason of such refinements. 

(4) The effect of such refinements on access to care by medicare beneficiaries 

to physicians’ services. 

(5) The effect of such refinements on physician participation under the medicare program. 

(b) VOLUME OF PHYSICIAN SERVICES.—The Medicare Payment Advisory Commission shall submit to Congress a report on the extent to which increases in the volume of physicians’ services under part B of the medicare program are a result of 

care that improves the health and well-being of medicare beneficiaries. The study 

shall include the following: 

(1) An analysis of recent and historic growth in the components that the Secretary includes under the sustainable growth rate (under section 1848(f) of the 

Social Security Act). 

(2) An examination of the relative growth of volume in physician services between medicare beneficiaries and other populations. 

(3) An analysis of the degree to which new technology, including coverage determinations of the Centers for Medicare & Medicaid Services, has affected the 

volume of physicians’ services. 

(4) An examination of the impact on volume of demographic changes. 

(5) An examination of shifts in the site of service of services that influence 

the number and intensity of services furnished in physicians’ offices and the extent to which changes in reimbursement rates to other providers have affected 

these changes. 

(6) An evaluation of the extent to which the Centers for Medicare & Medicaid 

Services takes into account the impact of law and regulations on the sustainable 

growth rate. 

87

Subtitle B—Preventive Services

SEC. 611. COVERAGE OF AN INITIAL PREVENTIVE PHYSICAL EXAMINATION. 

(a) COVERAGE.—Section 1861(s)(2) (42 U.S.C. 1395x(s)(2)) is amended—

(1) in subparagraph (U), by striking ‘‘and’’ at the end; 

(2) in subparagraph (V), by inserting ‘‘and’’ at the end; and 

(3) by adding at the end the following new subparagraph: 

‘‘(W) an initial preventive physical examination (as defined in subsection 

(ww));’’. 

(b) SERVICES DESCRIBED.—Section 1861 (42 U.S.C. 1395x) is amended by adding 

at the end the following new subsection: 

‘‘Initial Preventive Physical Examination 

‘‘(ww) The term ‘initial preventive physical examination’ means physicians’ services consisting of a physical examination with the goal of health promotion and disease detection and includes items and services (excluding clinical laboratory tests), 

as determined by the Secretary, consistent with the recommendations of the United 

States Preventive Services Task Force.’’. 

(c) WAIVER OF DEDUCTIBLE AND COINSURANCE.—

(1) DEDUCTIBLE.—The first sentence of section 1833(b) (42 U.S.C. 1395l(b)) is 

amended—

(A) by striking ‘‘and’’ before ‘‘(6)’’, and 

(B) by inserting before the period at the end the following: ‘‘, and (7) such 

deductible shall not apply with respect to an initial preventive physical examination (as defined in section 1861(ww))’’. 

(2) COINSURANCE.—Section 1833(a)(1) (42 U.S.C. 1395l(a)(1)) is amended—

(A) in clause (N), by inserting ‘‘(or 100 percent in the case of an initial 

preventive physical examination, as defined in section 1861(ww))’’ after ‘‘80 

percent’’; and 

(B) in clause (O), by inserting ‘‘(or 100 percent in the case of an initial 

preventive physical examination, as defined in section 1861(ww))’’ after ‘‘80 

percent’’. 

(d) PAYMENT AS PHYSICIANS’ SERVICES.—Section 1848(j)(3) (42 U.S.C. 1395w–

4(j)(3)) is amended by inserting ‘‘(2)(W),’’ after ‘‘(2)(S),’’. 

(e) OTHER CONFORMING AMENDMENTS.—Section 1862(a) (42 U.S.C. 1395y(a)) is 

amended—

(1) in paragraph (1)—

(A) by striking ‘‘and’’ at the end of subparagraph (H); 

(B) by striking the semicolon at the end of subparagraph (I) and inserting 

‘‘, and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(J) in the case of an initial preventive physical examination, which is performed not later than 6 months after the date the individual’s first coverage period begins under part B;’’; and 

(2) in paragraph (7), by striking ‘‘or (H)’’ and inserting ‘‘(H), or (J)’’. 

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to services furnished on or after January 1, 2004, but only for individuals whose coverage 

period begins on or after such date. 

SEC. 612. COVERAGE OF CHOLESTEROL AND BLOOD LIPID SCREENING. 

(a) COVERAGE.—Section 1861(s)(2) (42 U.S.C. 1395x(s)(2)), as amended by section 

611(a), is amended—

(1) in subparagraph (V), by striking ‘‘and’’ at the end; 

(2) in subparagraph (W), by inserting ‘‘and’’ at the end; and 

(3) by adding at the end the following new subparagraph: 

‘‘(X) cholesterol and other blood lipid screening tests (as defined in subsection (XX));’’. 

(b) SERVICES DESCRIBED.—Section 1861 (42 U.S.C. 1395x), as amended by section 

611(b), is amended by adding at the end the following new subsection: 

‘‘Cholesterol and Other Blood Lipid Screening Test 

‘‘(xx)(1) The term ‘cholesterol and other blood lipid screening test’ means diagnostic testing of cholesterol and other lipid levels of the blood for the purpose of 

early detection of abnormal cholesterol and other lipid levels. 

‘‘(2) The Secretary shall establish standards, in consultation with appropriate organizations, regarding the frequency and type of cholesterol and other blood lipid 

88

screening tests, except that such frequency may not be more often than once every 

2 years.’’. 

(c) FREQUENCY.—Section 1862(a)(1) (42 U.S.C. 1395y(a)(1)), as amended by section 

611(e), is amended—

(1) by striking ‘‘and’’ at the end of subparagraph (I); 

(2) by striking the semicolon at the end of subparagraph (J) and inserting ‘‘; 

and’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(K) in the case of a cholesterol and other blood lipid screening test (as defined in section 1861(xx)(1)), which is performed more frequently than is covered under section 1861(xx)(2).’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to tests 

furnished on or after January 1, 2005. 

SEC. 613. WAIVER OF DEDUCTIBLE FOR COLORECTAL CANCER SCREENING TESTS. 

(a) IN GENERAL.—The first sentence of section 1833(b) (42 U.S.C. 1395l(b)), as 

amended by section 611(c)(1), is amended—

(1) by striking ‘‘and’’ before ‘‘(7)’’; and 

(2) by inserting before the period at the end the following: ‘‘, and (8) such deductible shall not apply with respect to colorectal cancer screening tests (as described in section 1861(pp)(1))’’. 

(b) CONFORMING AMENDMENTS.—Paragraphs (2)(C)(ii) and (3)(C)(ii) of section 

1834(d) (42 U.S.C. 1395m(d)) are each amended—

(1) by striking ‘‘DEDUCTIBLE AND’’ in the heading; and 

(2) in subclause (I), by striking ‘‘deductible or’’ each place it appears. 

(c) EFFECTIVE DATE.—The amendment made by this section shall apply to items 

and services furnished on or after Janaury 1, 2004.

SEC. 614. IMPROVED PAYMENT FOR CERTAIN MAMMOGRAPHY SERVICES. 

(a) EXCLUSION FROM OPD FEE SCHEDULE.—Section 1833(t)(1)(B)(iv) (42 U.S.C. 

1395l(t)(1)(B)(iv)) is amended by inserting before the period at the end the following: 

‘‘and does not include screening mammography (as defined in section 1861(jj)) and 

unilateral and bilateral diagnostic mammography’’. 

(b) ADJUSTMENT TO TECHNICAL COMPONENT.—For diagnostic mammography performed on or after January 1, 2004, for which payment is made under the physician 

fee schedule under section 1848 of the Social Security Act (42 U.S.C. 1395w–4), the 

Secretary, based on the most recent cost data available, shall provide for an appropriate adjustment in the payment amount for the technical component of the diagnostic mammography. 

(c) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to 

mammography performed on or after January 1, 2004.

Subtitle C—Other Services 

SEC. 621. HOSPITAL OUTPATIENT DEPARTMENT (HOPD) PAYMENT REFORM. 

(a) PAYMENT FOR DRUGS.—

(1) MODIFICATION OF AMBULATORY PAYMENT CLASSIFICATION (APC) GROUPS.—

Section 1833(t) (42 U.S.C. 1395l(t)) is amended—

(A) by redesignating paragraph (13) as paragraph (14); and 

(B) by inserting after paragraph (12) the following new paragraph: 

‘‘(13) DRUG APC PAYMENT RATES.—

‘‘(A) IN GENERAL.—With respect to payment for covered OPD services that 

includes a specified covered outpatient drug (defined in subparagraph (B)), 

the amount provided for payment for such drug under the payment system 

under this subsection for services furnished in—

‘‘(i) 2004, 2005, or 2006, shall in no case—

‘‘(I) exceed 95 percent of the average wholesale price for the drug; 

or 

‘‘(II) be less than the transition percentage (under subparagraph 

(C)) of the average wholesale price for the drug; or 

‘‘(ii) a subsequent year, shall be equal to the average price for the 

drug for that area and year established under the competitive acquisition program under section 1847A as calculated and applied by the Secretary for purposes of this paragraph. 

‘‘(B) SPECIFIED COVERED OUTPATIENT DRUG DEFINED.—

‘‘(i) IN GENERAL.—In this paragraph, the term ‘specified covered outpatient drug’ means, subject to clause (ii), a covered outpatient drug (as 

defined in 1927(k)(2), that is—

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‘‘(I) a radiopharmaceutical; or 

‘‘(II) a drug or biological for which payment was made under 

paragraph (6) (relating to pass-through payments) on or before December 31, 2002. 

‘‘(ii) EXCEPTION.—Such term does not include—

‘‘(I) a drug for which payment is first made on or after January 

1, 2003, under paragraph (6); or 

‘‘(II) a drug for a which a temporary HCPCS code has not been 

assigned. 

‘‘(C) TRANSITION TOWARDS HISTORICAL AVERAGE ACQUISITION COST.—The 

transition percentage under this subparagraph for drugs furnished in a 

year is determined in accordance with the following table:

For the year—

The transition percentage for—

Single source 

drugs are—

Innovator multiple source 

drugs are—

Generic drugs are—

2004 ............... 83% 81.5% 46%

2005 ............... 77% 75% 46%

2006 ............... 71% 68% 46%

‘‘(D) PAYMENT FOR NEW DRUGS UNTIL TEMPORARY HCPCS CODE ASSIGNED.—With respect to payment for covered OPD services that includes 

a covered outpatient drug (as defined in 1927(k)) for a which a temporary 

HCPCS code has not been assigned, the amount provided for payment for 

such drug under the payment system under this subsection shall be equal 

to 95 percent of the average wholesale price for the drug. 

‘‘(E) CLASSES OF DRUGS.—For purposes of this paragraph, each of the following shall be treated as a separate class of drugs: 

‘‘(i) SOLE SOURCE DRUGS.—A sole source drug which for purposes of 

this paragraph means a drug or biological that is not a multiple source 

drug (as defined in subclauses (I) and (II) of section 1927(k)(7)(A)(i)) 

and is not a drug approved under an abbreviated new drug application 

under section 355(j) of the Federal Food, Drug, and Cosmetic Act. 

‘‘(ii) INNOVATOR MULTIPLE SOURCE DRUGS.—Innovator multiple source 

drugs (as defined in section 1927(k)(7)(A)(ii)). 

‘‘(iii) NONINNOVATOR MULTIPLE SOURCE DRUGS.—Noninnovator multiple source drugs (as defined in section 1927(k)(7)(A)(iii)). 

‘‘(F) INAPPLICABILITY OF EXPENDITURES IN DETERMINING CONVERSION FACTORS.—Additional expenditures resulting from this paragraph and paragraph (14)(C) in a year shall not be taken into account in establishing the 

conversion factor for that year.’’. 

(2) REDUCTION IN THRESHOLD FOR SEPARATE APCS FOR DRUGS.—Section 

1833(t)(14), as redesignated by paragraph (1)(A), is amended by adding at the 

end the following new subparagraph: 

‘‘(B) THRESHOLD FOR ESTABLISHMENT OF SEPARATE APCS FOR DRUGS.—The 

Secretary shall reduce the threshold for the establishment of separate ambulatory procedure classification groups (APCs) with respect to drugs to $50 

per administration.’’. 

(3) EXCLUSION OF SEPARATE DRUG APCS FROM OUTLIER PAYMENTS.—Section 

1833(t)(5) is amended by adding at the end the following new subparagraph: 

‘‘(E) EXCLUSION OF SEPARATE DRUG APCS FROM OUTLIER PAYMENTS.—No 

additional payment shall be made under subparagraph (A) in the case of 

ambulatory procedure codes established separately for drugs.’’. 

(4) PAYMENT FOR PASS THROUGH DRUGS.—Clause (i) of section 1833(t)(6)(D) 

(42 U.S.C. 1395l(t)(6)(D)) is amended by inserting after ‘‘under section 1842(o)’’ 

the following: ‘‘(or if the drug is covered under a competitive acquisition contract 

under section 1847A for an area, an amount determined by the Secretary equal 

to the average price for the drug for that area and year established under such 

section as calculated and applied by the Secretary for purposes of this paragraph)’’. 

(5) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to services furnished on or after January 1, 2004. 

(b) SPECIAL PAYMENT FOR BRACHYTHERAPY.—

(1) IN GENERAL.—Section 1833(t)(14), as so redesignated and amended by subsection (a)(2), is amended by adding at the end the following new subparagraph: 

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‘‘(C) PAYMENT FOR DEVICES OF BRACHYTHERAPY AT CHARGES ADJUSTED TO

COST.—Notwithstanding the preceding provisions of this subsection, for a 

device of brachytherapy furnished on or after January 1, 2004, and before 

January 1, 2007, the payment basis for the device under this subsection 

shall be equal to the hospital’s charges for each device furnished, adjusted 

to cost.’’. 

(2) SPECIFICATION OF GROUPS FOR BRACHYTHERAPY DEVICES.—Section 

1833(t)(2) (42 U.S.C. 1395l(t)(2) is amended—

(A) in subparagraph (F), by striking ‘‘and’’ at the end; 

(B) in subparagraph (G), by striking the period at the end and inserting 

‘‘; and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(H) with respect to devices of brachytherapy, the Secretary shall create 

additional groups of covered OPD services that classify such devices separately from the other services (or group of services) paid for under this subsection in a manner reflecting the number, isotope, and radioactive intensity of such devices furnished, including separate groups for palladium-103 

and iodine-125 devices.’’. 

(3) GAO REPORT.—The Comptroller General of the United States shall conduct a study to determine appropriate payment amounts under section 

1833(t)(13)(B) of the Social Security Act, as added by paragraph (1), for devices 

of brachytherapy. Not later than January 1, 2005, the Comptroller General 

shall submit to Congress and the Secretary a report on the study conducted 

under this paragraph, and shall include specific recommendations for appropriate payments for such devices.

(c) APPLICATION OF FUNCTIONAL EQUIVALENCE TEST.—

(1) IN GENERAL.—Section 1833(t)(6) (42 U.S.C. 1395l(t)(6)) is amended by adding at the end the following new subparagraph: 

‘‘(F) LIMITATION ON APPLICATION OF FUNCTIONAL EQUIVALENCE STANDARD.—The Secretary may not apply a ‘functional equivalence’ payment 

standard (including such standard promulgated on November 1, 2002) or 

any other similar standard in order to deem a particular drug or biological 

to be identical to or similar to another drug or biological with respect to 

its mechanism of action or clinical effect to deny pass-through status to new 

drugs or biologics or to remove such status of an existing eligible drug or 

biologic under this paragraph unless—

‘‘(i) the Secretary develops by regulation (after providing notice and 

a period for public comment) criteria for the application of such standard; and 

‘‘(ii) such criteria provide for coordination with the Federal Food and 

Drug Administration and require scientific studies that show the clinical relationship between the drugs or biologicals treated as functionally equivalent.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

the application of a functional equivalence standard to a drug or biological on 

or after the date of the enactment of this Act, unless such application was being 

made to such drug or biological prior to June 13, 2003. 

(d) HOSPITAL ACQUISITION COST STUDY.—

(1) IN GENERAL.—The Secretary shall conduct a study on the costs incurred 

by hospitals in acquiring covered outpatient drugs for which payment is made 

under section 1833(t) of the Social Security Act (42 U.S.C. 1395l(t)). 

(2) DRUGS COVERED.—The study in paragraph (1) shall not include those 

drugs for which the acquisition costs is less than $50 per administration. 

(3) REPRESENTATIVE SAMPLE OF HOSPITALS.—In conducting the study under 

paragraph (1), the Secretary shall collect data from a statistically valid sample 

of hospitals with an urban/rural stratification. 

(4) REPORT.—Not later than January 1, 2006, the Secretary shall submit to 

Congress a report on the study conducted under paragraph (1), and shall include recommendations with respect to the following: 

(A) Whether the study should be repeated, and if so, how frequently. 

(B) Whether the study produced useful data on hospital acquisition cost. 

(C) Whether data produced in the study is appropriate for use in making 

adjustments to payments for drugs and biologicals under section 1847A of 

the Social Security Act. 

(D) Whether separate estimates can made of overhead costs, including 

handing and administering costs for drugs.

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SEC. 622. PAYMENT FOR AMBULANCE SERVICES. 

(a) PHASE-IN PROVIDING FLOOR USING BLEND OF FEE SCHEDULE AND REGIONAL

FEE SCHEDULES.—Section 1834(l) (42 U.S.C. 1395m(l)), as amended by section 

410(a), is amended—

(1) in paragraph (2)(E), by inserting ‘‘consistent with paragraph (11)’’ after ‘‘in 

an efficient and fair manner’’; and 

(2) by adding at the end the following new paragraph: 

‘‘(11) PHASE-IN PROVIDING FLOOR USING BLEND OF FEE SCHEDULE AND REGIONAL FEE SCHEDULES.—In carrying out the phase-in under paragraph (2)(E) 

for each level of service furnished in a year, the portion of the payment amount 

that is based on the fee schedule shall not be less than the following blended 

rate of the fee schedule under paragraph (1) and of a regional fee schedule for 

the region involved: 

‘‘(A) For 2004, the blended rate shall be based 20 percent on the fee 

schedule under paragraph (1) and 80 percent on the regional fee schedule. 

‘‘(B) For 2005, the blended rate shall be based 40 percent on the fee 

schedule under paragraph (1) and 60 percent on the regional fee schedule. 

‘‘(C) For 2006, the blended rate shall be based 60 percent on the fee 

schedule under paragraph (1) and 40 percent on the regional fee schedule. 

‘‘(D) For 2007, 2008, and 2009, the blended rate shall be based 80 percent 

on the fee schedule under paragraph (1) and 20 percent on the regional fee 

schedule. 

‘‘(E) For 2010 and each succeeding year, the blended rate shall be based 

100 percent on the fee schedule under paragraph (1). 

For purposes of this paragraph, the Secretary shall establish a regional fee 

schedule for each of the 9 Census divisions using the methodology (used in establishing the fee schedule under paragraph (1)) to calculate a regional conversion factor and a regional mileage payment rate and using the same payment 

adjustments and the same relative value units as used in the fee schedule 

under such paragraph.’’. 

(b) ADJUSTMENT IN PAYMENT FOR CERTAIN LONG TRIPS.—Section 1834(l), as 

amended by subsection (a), is further amended by adding at the end the following 

new paragraph: 

‘‘(12) ADJUSTMENT IN PAYMENT FOR CERTAIN LONG TRIPS.—In the case of 

ground ambulance services furnished on or after January 1, 2004, and before 

January 1, 2009, regardless of where the transportation originates, the fee 

schedule established under this subsection shall provide that, with respect to 

the payment rate for mileage for a trip above 50 miles the per mile rate otherwise established shall be increased by 1⁄4 of the payment per mile otherwise applicable to such miles.’’. 

(c) GAO REPORT ON COSTS AND ACCESS.—Not later than December 31, 2005, the 

Comptroller General of the United States shall submit to Congress an initial report 

on how costs differ among the types of ambulance providers and on access, supply, 

and quality of ambulance services in those regions and States that have a reduction 

in payment under the medicare ambulance fee schedule (under section 1834(l) of the 

Social Security Act, as amended by this section). Not later than December 31, 2007, 

the Comptroller General shall submit to Congress a final report on such access and 

supply. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to ambulance services furnished on or after January 1, 2004.

SEC. 623. RENAL DIALYSIS SERVICES. 

(a) DEMONSTRATION OF ALTERNATIVE DELIVERY MODELS.—

(1) USE OF ADVISORY BOARD.—In carrying out the demonstration project relating to improving care for people with end-stage renal disease through alternative delivery models (as published in the Federal Register of June 4, 2003), 

the Secretary shall establish an advisory board comprised of representatives described in paragraph (2) to provide advice and recommendations with respect 

to the establishment and operation of such demonstration project. 

(2) REPRESENTATIVES.—Representatives referred to in paragraph (1) include 

representatives of the following: 

(A) Patient organizations. 

(B) Clinicians. 

(C) The medicare payment advisory commission, established under section 1805 of the Social Security Act (42 U.S.C. 1395b–6). 

(D) The National Kidney Foundation. 

(E) The National Institute of Diabetes and Digestive and Kidney Diseases 

of National Institutes of Health. 

(F) End-stage renal disease networks. 

92

(G) Medicare contractors to monitor quality of care. 

(I) providers of services and renal dialysis facilities furnishing end-stage 

renal disease services. 

(J) Economists. 

(K) Researchers. 

(b) RESTORING COMPOSITE RATE EXCEPTIONS FOR PEDIATRIC FACILITIES.—

(1) IN GENERAL.—Section 422(a)(2) of BIPA is amended—

(A) in subparagraph (A), by striking ‘‘and (C)’’ and inserting ‘‘, (C), and 

(D)’’; 

(B) in subparagraph (B), by striking ‘‘In the case’’ and inserting ‘‘Subject 

to subparagraph (D), in the case’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(D) INAPPLICABILITY TO PEDIATRIC FACILITIES.—Subparagraphs (A) and 

(B) shall not apply, as of October 1, 2002, to pediatric facilities that do not 

have an exception rate described in subparagraph (C) in effect on such date. 

For purposes of this subparagraph, the term ‘pediatric facility’ means a 

renal facility at least 50 percent of whose patients are individuals under 18 

years of age.’’. 

(2) CONFORMING AMENDMENT.—The fourth sentence of section 1881(b)(7) (42 

U.S.C. 1395rr(b)(7)), as amended by subsection (b), is further amended by striking ‘‘Until’’ and inserting ‘‘Subject to section 422(a)(2) of the Medicare, Medicaid, 

and SCHIP Benefits Improvement and Protection Act of 2000, and until’’. 

(c) INCREASE IN RENAL DIALYSIS COMPOSITE RATE FOR SERVICES FURNISHED IN

2004.—Notwithstanding any other provision of law, with respect to payment under 

part B of title XVIII of the Social Security Act for renal dialysis services furnished 

in 2004, the composite payment rate otherwise established under section 1881(b)(7) 

of such Act (42 U.S.C. 1395rr(b)(7)) shall be increased by 1.6 percent. 

SEC. 624. ONE-YEAR MORATORIUM ON THERAPY CAPS; PROVISIONS RELATING TO REPORTS. 

(a) 1-YEAR MORATORIUM ON THERAPY CAPS.—Section 1833(g)(4) (42 U.S.C. 

1395l(g)(4)) is amended by striking ‘‘and 2002’’ and inserting ‘‘2002, and 2004’’. 

(b) PROMPT SUBMISSION OF OVERDUE REPORTS ON PAYMENT AND UTILIZATION OF

OUTPATIENT THERAPY SERVICES.—Not later than December 31, 2003, the Secretary 

shall submit to Congress the reports required under section 4541(d)(2) of the Balanced Budget Act of 1997 (relating to alternatives to a single annual dollar cap on 

outpatient therapy) and under section 221(d) of the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 1999 (relating to utilization patterns for outpatient therapy).

(c) IDENTIFICATION OF CONDITIONS AND DISEASES JUSTIFYING WAIVER OF THERAPY

CAP.—

(1) STUDY.—The Secretary shall request the Institute of Medicine of the National Academy of Sciences to identify conditions or diseases that should justify 

conducting an assessment of the need to waive the therapy caps under section 

1833(g)(4) of the Social Security Act (42 U.S.C. 1395l(g)(4)). 

(2) REPORTS TO CONGRESS.—

(A) PRELIMINARY REPORT.—Not later than July 1, 2004, the Secretary 

shall submit to Congress a preliminary report on the conditions and diseases identified under paragraph (1). 

(B) FINAL REPORT.—Not later than September 1, 2004, the Secretary shall 

submit to Congress a final report on such conditions and diseases. 

(C) RECOMMENDATIONS.—Not later than October 1, 2004, the Secretary 

shall submit to Congress a recommendation of criteria, with respect to such 

conditions and disease, under which a waiver of the therapy caps would 

apply. 

(d) GAO STUDY OF PATIENT ACCESS TO PHYSICAL THERAPIST SERVICES.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study on access to physical therapist services in States authorizing such services without a physician referral and in States that require such a physician 

referral. The study shall—

(A) examine the use of and referral patterns for physical therapist services for patients age 50 and older in States that authorize such services 

without a physician referral and in States that require such a physician referral; 

(B) examine the use of and referral patterns for physical therapist services for patients who are medicare beneficiaries; 

(C) examine the potential effect of prohibiting a physician from referring 

patients to physical therapy services owned by the physician and provided 

in the physician’s office; 

93

(D) examine the delivery of physical therapists’ services within the facilities of Department of Defense; and 

(E) analyze the potential impact on medicare beneficiaries and on expenditures under the medicare program of eliminating the need for a physician 

referral and physician certification for physical therapist services under the 

medicare program. 

(2) REPORT.—The Comptroller General shall submit to Congress a report on 

the study conducted under paragraph (1) by not later than 1 year after the date 

of the enactment of this Act. 

SEC. 625. ADJUSTMENT TO PAYMENTS FOR SERVICES FURNISHED IN AMBULATORY SURGICAL CENTERS. 

Section 1833(i)(2)(C) (42 U.S.C. 1395l(i)(2)(C)) is amended in the last sentence by 

inserting ‘‘and each of fiscal years 2004 through 2008’’ after ‘‘In each of the fiscal 

years 1998 through 2002’’. 

SEC. 626. PAYMENT FOR CERTAIN SHOES AND INSERTS UNDER THE FEE SCHEDULE FOR 

ORTHOTICS AND PROSTHETICS. 

(a) IN GENERAL.—Section 1833(o) (42 U.S.C. 1395l(o)) is amended—

(1) in paragraph (1), by striking ‘‘no more than the limits established under 

paragraph (2)’’ and inserting ‘‘no more than the amount of payment applicable 

under paragraph (2)’’; and 

(2) in paragraph (2), to read as follows: 

‘‘(2)(A) Except as provided by the Secretary under subparagraphs (B) and (C), the 

amount of payment under this paragraph for custom molded shoes, extra depth 

shoes, and inserts shall be the amount determined for such items by the Secretary 

under section 1834(h). 

‘‘(B) The Secretary or a carrier may establish payment amounts for shoes and inserts that are lower than the amount established under section 1834(h) if the Secretary finds that shoes and inserts of an appropriate quality are readily available 

at or below the amount established under such section. 

‘‘(C) In accordance with procedures established by the Secretary, an individual entitled to benefits with respect to shoes described in section 1861(s)(12) may substitute modification of such shoes instead of obtaining one (or more, as specified by 

the Secretary) pair of inserts (other than the original pair of inserts with respect 

to such shoes). In such case, the Secretary shall substitute, for the payment amount 

established under section 1834(h), a payment amount that the Secretary estimates 

will assure that there is no net increase in expenditures under this subsection as 

a result of this subparagraph.’’. 

(b) CONFORMING AMENDMENTS.—(1) Section 1834(h)(4)(C) (42 U.S.C. 

1395m(h)(4)(C)) is amended by inserting ‘‘(and includes shoes described in section 

1861(s)(12))’’ after ‘‘in section 1861(s)(9)’’. 

(2) Section 1842(s)(2) (42 U.S.C. 1395u(s)(2)) is amended by striking subparagraph 

(C). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to items 

furnished on or after January 1, 2004.

SEC. 627. WAIVER OF PART B LATE ENROLLMENT PENALTY FOR CERTAIN MILITARY RETIREES; SPECIAL ENROLLMENT PERIOD. 

(a) WAIVER OF PENALTY.— (1) IN GENERAL.—Section 1839(b) (42 U.S.C. 1395r(b)) is amended by adding 

at the end the following new sentence: ‘‘No increase in the premium shall be 

effected for a month in the case of an individual who is 65 years of age or older, 

who enrolls under this part during 2001, 2002, 2003, or 2004 and who demonstrates to the Secretary before December 31, 2004, that the individual is a 

covered beneficiary (as defined in section 1072(5) of title 10, United States 

Code). The Secretary of Health and Human Services shall consult with the Secretary of Defense in identifying individuals described in the previous sentence.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

premiums for months beginning with January 2004. The Secretary of Health 

and Human Services shall establish a method for providing rebates of premium 

penalties paid for months on or after January 2004 for which a penalty does 

not apply under such amendment but for which a penalty was previously collected. 

(b) MEDICARE PART B SPECIAL ENROLLMENT PERIOD.—

(1) IN GENERAL.—In the case of any individual who, as of the date of the enactment of this Act, is 65 years of age or older, is eligible to enroll but is not 

enrolled under part B of title XVIII of the Social Security Act, and is a covered 

beneficiary (as defined in section 1072(5) of title 10, United States Code), the 

Secretary of Health and Human Services shall provide for a special enrollment 

period during which the individual may enroll under such part. Such period 

94

shall begin as soon as possible after the date of the enactment of this Act and 

shall end on December 31, 2004. 

(2) COVERAGE PERIOD.—In the case of an individual who enrolls during the 

special enrollment period provided under paragraph (1), the coverage period 

under part B of title XVIII of the Social Security Act shall begin on the first 

day of the month following the month in which the individual enrolls. 

SEC. 628. PART B DEDUCTIBLE. 

Section 1833(b) (42 U.S.C. 1395l(b)) is amended—

(1) by striking ‘‘1991 and’’ and inserting ‘‘1991,’’; and 

(2) by striking ‘‘and subsequent years’’ and inserting ‘‘and each subsequent 

year through 2003, and for a subsequent year after 2003 the amount of such 

deductible for the previous year increased by the annual percentage increase in 

the monthly actuarial rate under section 1839(a)(1) ending with such subsequent year (rounded to the nearest $1)’’.

SEC. 629. EXTENSION OF COVERAGE OF INTRAVENOUS IMMUNE GLOBULIN (IVIG) FOR THE 

TREATMENT OF PRIMARY IMMUNE DEFICIENCY DISEASES IN THE HOME. 

(a) IN GENERAL.—Section 1861 (42 U.S.C. 1395x), as amended by sections 611(a) 

and 612(a) is amended—

(1) in subsection (s)(2)—

(A) by striking ‘‘and’’ at the end of subparagraph (W); 

(B) by adding ‘‘and’’ at the end of subparagraph (X); and 

(C) by adding at the end the following new subparagraph: 

‘‘(Y) intravenous immune globulin for the treatment of primary immune 

deficiency diseases in the home (as defined in subsection (yy));’’; and 

(2) by adding at the end the following new subsection: 

‘‘Intravenous Immune Globulin 

‘‘(yy) The term ‘intravenous immune globulin’ means an approved pooled plasma 

derivative for the treatment in the patient’s home of a patient with a diagnosed primary immune deficiency disease, but not including items or services related to the 

administration of the derivative, if a physician determines administration of the derivative in the patient’s home is medically appropriate.’’. 

(b) PAYMENT AS A DRUG OR BIOLOGICAL.—Section 1833(a)(1)(S) (42 U.S.C. 

1395l(a)(1)(S)) is amended by inserting ‘‘(including intravenous immune globulin (as 

defined in section 1861(yy)))’’ after ‘‘with respect to drugs and biologicals’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to items 

furnished administered on or after January 1, 2004.

TITLE VII—PROVISIONS RELATING TO PARTS 

A AND B 

Subtitle A—Home Health Services 

SEC. 701. UPDATE IN HOME HEALTH SERVICES. 

(a) CHANGE TO CALENDER YEAR UPDATE.— (1) IN GENERAL.—Section 1895(b) (42 U.S.C. 1395fff(b)(3)) is amended—

(A) in paragraph (3)(B)(i)—

(i) by striking ‘‘each fiscal year (beginning with fiscal year 2002)’’ and 

inserting ‘‘fiscal year 2002 and for fiscal year 2003 and for each subsequent year (beginning with 2004)’’; and 

(ii) by inserting ‘‘or year’’ after ‘‘the fiscal year’’; 

(B) in paragraph (3)(B)(ii)(II), by striking ‘‘any subsequent fiscal year’’ 

and inserting ‘‘2004 and any subsequent year’’; 

(C) in paragraph (3)(B)(iii), by inserting ‘‘or year’’ after ‘‘fiscal year’’ each 

place it appears; 

(D) in paragraph (3)(B)(iv)—

(i) by inserting ‘‘or year’’ after ‘‘fiscal year’’ each place it appears; and 

(ii) by inserting ‘‘or years’’ after ‘‘fiscal years’’; and 

(E) in paragraph (5), by inserting ‘‘or year’’ after ‘‘fiscal year’’. 

(2) TRANSITION RULE.—The standard prospective payment amount (or 

amounts) under section 1895(b)(3) of the Social Security Act for the calendar 

quarter beginning on October 1, 2003, shall be such amount (or amounts) for 

the previous calendar quarter. 

(b) CHANGES IN UPDATES FOR 2004, 2005, AND 2006.—Section 1895(b)(3)(B)(ii) (42 

U.S.C. 1395fff(b)(3)(B)(ii)), as amended by subsection (a)(1)(B), is amended—

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(1) by striking ‘‘or’’ at the end of subclause (I); 

(2) by redesignating subclause (II) as subclause (III); 

(3) in subclause (III), as so redesignated, by striking ‘‘2004’’ and inserting 

‘‘2007’’; and 

(4) by inserting after subclause (I) the following new subclause: 

‘‘(II) each of 2004, 2005, and 2006 the home health market basket percentage increase minus 0.4 percentage points; or’’.

SEC. 702. ESTABLISHMENT OF REDUCED COPAYMENT FOR A HOME HEALTH SERVICE EPISODE OF CARE FOR CERTAIN BENEFICIARIES. 

(a) PART A.—

(1) IN GENERAL.—Section 1813(a) (42 U.S.C. 1395e(a)) is amended by adding 

at the end the following new paragraph: 

‘‘(5)(A)(i) Subject to clause (ii), the amount payable for home health services furnished to the individual under this title for each episode of care beginning in a year 

(beginning with 2004) shall be reduced by a copayment equal to the copayment 

amount specified in subparagraph (B)(ii) for such year. 

‘‘(ii) The copayment under clause (i) shall not apply—

‘‘(I) in the case of an individual who has been determined to be entitled to 

medical assistance under section 1902(a)(10)(A) or 1902(a)(10)(C) or to be a 

qualified medicare beneficiary (as defined in section 1905(p)(1)), a specified lowincome medicare beneficiary described in section 1902(a)(10)(E)(iii), or a qualifying individual described in section 1902(a)(10)(E)(iv)(I); and 

‘‘(II) in the case of an episode of care which consists of 4 or fewer visits. 

‘‘(B)(i) The Secretary shall estimate, before the beginning of each year (beginning 

with 2004), the national average payment under this title per episode for home 

health services projected for the year involved. 

‘‘(ii) For each year the copayment amount under this clause is equal to 1.5 percent 

of the national average payment estimated for the year involved under clause (i). 

Any amount determined under the preceding sentence which is not a multiple of $5 

shall be rounded to the nearest multiple of $5. 

‘‘(iii) There shall be no administrative or judicial review under section 1869, 1878, 

or otherwise of the estimation of average payment under clause (i).’’. 

(2) TIMELY IMPLEMENTATION.—Unless the Secretary of Health and Human 

Services otherwise provides on a timely basis, the copayment amount specified 

under section 1813(a)(5)(B)(ii) of the Social Security Act (as added by paragraph 

(1)) for 2004 shall be deemed to be $40. 

(b) CONFORMING PROVISIONS.—

(1) Section 1833(a)(2)(A) (42 U.S.C. 1395l(a)(2)(A)) is amended by inserting 

‘‘less the copayment amount applicable under section 1813(a)(5)’’ after ‘‘1895’’. 

(2) Section 1866(a)(2)(A)(i) (42 U.S.C. 1395cc(a)(2)(A)(i)) is amended—

(A) by striking ‘‘or coinsurance’’ and inserting ‘‘, coinsurance, or copayment’’; and 

(B) by striking ‘‘or (a)(4)’’ and inserting ‘‘(a)(4), or (a)(5)’’. 

SEC. 703. MEDPAC STUDY ON MEDICARE MARGINS OF HOME HEALTH AGENCIES. 

(a) STUDY.—The Medicare Payment Advisory Commission shall conduct a study 

of payment margins of home health agencies under the home health prospective 

payment system under section 1895 of the Social Security Act (42 U.S.C. 1395fff). 

Such study shall examine whether systematic differences in payment margins are 

related to differences in case mix (as measured by home health resource groups 

(HHRGs)) among such agencies. The study shall use the partial or full-year cost reports filed by home health agencies. 

(b) REPORT.—Not later than 2 years after the date of the enactment of this Act, 

the Commission shall submit to Congress a report on the study under subsection 

(a).

Subtitle B—Direct Graduate Medical Education 

SEC. 711. EXTENSION OF UPDATE LIMITATION ON HIGH COST PROGRAMS. 

Section 1886(h)(2)(D)(iv) (42 U.S.C. 1395ww(h)(2)(D)(iv)) is amended—

(1) in subclause (I)—

(A) by inserting ‘‘AND 2004 THROUGH 2013’’ after ‘‘AND 2002’’; and 

(B) by inserting ‘‘or during the period beginning with fiscal year 2004 and 

ending with fiscal year 2013’’ after ‘‘during fiscal year 2001 or fiscal year 

2002’’; and 

(2) in subclause (II)—

(A) by striking ‘‘fiscal year 2004, or fiscal year 2005,’’ and 

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(B) by striking ‘‘For a’’ and inserting ‘‘For the’’.

Subtitle C—Chronic Care Improvement 

SEC. 721. VOLUNTARY CHRONIC CARE IMPROVEMENT UNDER TRADITIONAL FEE-FOR-SERVICE. 

Title XVIII, as amended by section 105(a), is amended by inserting after section 

1807 the following new section: 

‘‘CHRONIC CARE IMPROVEMENT

‘‘SEC. 1808. (a) IN GENERAL.—

‘‘(1) IN GENERAL.—The Secretary shall establish a process for providing chronic care improvement programs in each CCIA region for medicare beneficiaries 

who are not enrolled under part C or E and who have certain chronic conditions, such as congestive heart failure, diabetes, chronic obstructive pulmonary 

disease (COPD), stroke, or other disease as identified by the Secretary as appropriate for chronic care improvement. Such a process shall begin to be implemented no later than 1 year after the date of the enactment of this section. 

‘‘(2) TERMINOLOGY.—For purposes of this section: 

‘‘(A) CCIA REGION.—The term ‘CCIA region’ means a chronic care improvement administrative region delineated under subsection (b)(2). 

‘‘(B) CHRONIC CARE IMPROVEMENT PROGRAM.—The terms ‘chronic care improvement program’ and ‘program’ means such a program provided by a 

contractor under this section. 

‘‘(C) CONTRACTOR.—The term ‘contractor’ means an entity with a contract 

to provide a chronic care improvement program in a CCIA region under this 

section. 

‘‘(D) INDIVIDUAL PLAN.—The term ‘individual plan’ means a chronic care 

improvement plan established under subsection (c)(5) for an individual. 

‘‘(3) CONSTRUCTION.—Nothing in this section shall be construed as expanding 

the amount, duration, or scope of benefits under this title. 

‘‘(b) COMPETITIVE BIDDING PROCESS.—

‘‘(1) IN GENERAL.—Under this section the Secretary shall award contracts to 

qualified entities for chronic care improvement programs for each CCIA region 

under this section through a competitive bidding process. 

‘‘(2) PROCESS.—Under such process—

‘‘(A) the Secretary shall delineate the United States into multiple chronic 

care improvement administrative regions; and 

‘‘(B) the Secretary shall select at least 2 winning bidders in each CCIA 

region on the basis of the ability of each bidder to carry out a chronic care 

improvement program in accordance with this section, in order to achieve 

improved health and financial outcomes. 

‘‘(3) ELIGIBLE CONTRACTOR.—A contractor may be a disease improvement organization, health insurer, provider organization, a group of physicians, or any 

other legal entity that the Secretary determines appropriate. 

‘‘(c) CHRONIC CARE IMPROVEMENT PROGRAMS.—

‘‘(1) IN GENERAL.—Each contract under this section shall provide for the operation of a chronic care improvement program by a contractor in a CCIA region 

consistent with this subsection. 

‘‘(2) IDENTIFICATION OF PROSPECTIVE PROGRAM PARTICIPANTS.—Each contractor shall have a method for identifying medicare beneficiaries in the region 

to whom it will offer services under its program. The contractor shall identify 

such beneficiaries through claims or other data and other means permitted consistent with applicable disclosure provisions. 

‘‘(3) INITIAL CONTACT BY SECRETARY.—The Secretary shall communicate with 

each beneficiary identified under paragraph (2) as a prospective participant in 

one or more programs concerning participation in a program. Such communication may be made by the Secretary (or on behalf of the Secretary) and shall include information on the following: 

‘‘(A) A description of the advantages to the beneficiary in participating in 

a program. 

‘‘(B) Notification that the contractor offering a program may contact the 

beneficiary directly concerning such participation. 

‘‘(C) Notification that participation in a program is voluntary. 

‘‘(D) A description of the method for the beneficiary to select the single 

program in which the beneficiary wishes to participate and for declining to 

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participate and a method for obtaining additional information concerning 

such participation. 

‘‘(4) PARTICIPATION.—A medicare beneficiary may participate in only one program under this section and may terminate participation at any time in a manner specified by the Secretary. 

‘‘(5) INDIVIDUAL CHRONIC CARE IMPROVEMENT PLANS.— ‘‘(A) IN GENERAL.—For each beneficiary participating in a program of a 

contractor under this section, the contractor shall develop with the beneficiary an individualized, goal-oriented chronic care improvement plan. 

‘‘(B) ELEMENTS OF INDIVIDUAL PLAN.—Each individual plan developed 

under subparagraph (A) shall include a single point of contact to coordinate 

care and the following, as appropriate: 

‘‘(i) Self-improvement education for the beneficiary and support education for health care providers, primary caregivers, and family members. 

‘‘(ii) Coordination of health care services, such as application of a prescription drug regimen and home health services. 

‘‘(iii) Collaboration with physicians and other providers to enhance 

communication of relevant clinical information. 

‘‘(iv) The use of monitoring technologies that enable patient guidance 

through the exchange of pertinent clinical information, such as vital 

signs, symptomatic information, and health self-assessment. 

‘‘(v) The provision of information about hospice care, pain and palliative care, and end-of-life care. 

‘‘(C) CONTRACTOR RESPONSIBILITIES.—In establishing and carrying out individual plans under a program, a contractor shall, directly or through subcontractors—

‘‘(i) guide participants in managing their health, including all their 

co-morbidities, and in performing activities as specified under the elements of the plan; 

‘‘(ii) use decision support tools such as evidence-based practice guidelines or other criteria as determined by the Secretary; and 

‘‘(iii) develop a clinical information database to track and monitor 

each participant across settings and to evaluate outcomes. 

‘‘(6) ADDITIONAL REQUIREMENTS.—The Secretary may establish additional requirements for programs and contractors under this section. 

‘‘(7) ACCREDITATION.—The Secretary may provide that programs that are accredited by qualified organizations may be deemed to meet such requirements 

under this section as the Secretary may specify. 

‘‘(c) CONTRACT TERMS.—

‘‘(1) IN GENERAL.—A contract under this section shall contain such terms and 

conditions as the Secretary may specify consistent with this section. The Secretary may not enter into a contract with an entity under this section unless 

the entity meets such clinical, quality improvement, financial, and other requirements as the Secretary deems to be appropriate for the population to be 

served. 

‘‘(2) USE OF SUBCONTRACTORS PERMITTED.—A contractor may carry out a program directly or through contracts with subcontractors. 

‘‘(3) BUDGET NEUTRAL PAYMENT CONDITION.—In entering into a contract with 

an entity under this subsection, the Secretary shall establish payment rates 

that assure that there will be no net aggregate increase in payments under this 

title over any period of 3 years or longer, as agreed to by the Secretary. Under 

this section, the Secretary shall assure that medicare program outlays plus administrative expenses (that would not have been paid under this title without 

implementation of this section), including contractor fees, shall not exceed the 

expenditures that would have been incurred under this title for a comparable 

population in the absence of the program under this section for the 3-year contract period. 

‘‘(4) AT RISK RELATIONSHIP.—For purposes of section 1128B(b)(3)(F), a contract 

under this section shall be treated as a risk-sharing arrangement referred to 

in such section. 

‘‘(5) PERFORMANCE STANDARDS.—Payment to contractors under this section 

shall be subject to the contractor’s meeting of clinical and financial performance 

standards set by the Secretary. 

‘‘(6) CONTRACTOR OUTCOMES REPORT.—Each contractor offering a program 

shall monitor and report to the Secretary, in a manner specified by the Secretary, the quality of care and efficacy of such program in terms of—

‘‘(A) process measures, such as reductions in errors of treatment and rehospitalization rates; 

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‘‘(B) beneficiary and provider satisfaction; 

‘‘(C) health outcomes; and 

‘‘(D) financial outcomes. 

‘‘(7) PHASED IN IMPLEMENTATION.—Nothing in this section shall be construed 

as preventing the Secretary from phasing in the implementation of programs. 

‘‘(d) BIANNUAL OUTCOMES REPORTS.—The Secretary shall submit to the Congress 

biannual reports on the implementation of this section. Each such report shall include information on—

‘‘(1) the scope of implementation (in terms of both regions and chronic conditions); 

‘‘(2) program design; and 

‘‘(3) improvements in health outcomes and financial efficiencies that result 

from such implementation. 

‘‘(e) CLINICAL TRIALS.—The Secretary shall conduct randomized clinical trials, 

that compare program participants with medicare beneficiaries who are offered, but 

decline, to participate, in order to assess the potential of programs to—

‘‘(1) reduce costs under this title; and 

‘‘(2) improve health outcomes under this title. 

‘‘(f) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated 

to the Secretary, in appropriate part from the Hospital Insurance Trust Fund and 

the Supplementary Medical Insurance Trust Fund, such sums as may be necessary 

to provide for contracts with chronic care improvement programs under this section. 

‘‘(g) LIMITATION ON FUNDING.—In no case shall the funding under this section ex- ceed $100,000,000 over a period of 3 years.’’. 

SEC. 722. CHRONIC CARE IMPROVEMENT UNDER MEDICARE ADVANTAGE AND ENHANCED 

FEE-FOR-SERVICE PROGRAMS. 

(a) UNDER MEDICARE ADVANTAGE PROGRAM.—Section 1852 (42 U.S.C. 1395w–22) 

is amended—

(1) by amending subsection (e) to read as follows: 

‘‘(e) IMPLEMENTATION OF CHRONIC CARE IMPROVEMENT PROGRAMS FOR BENE- FICIARIES WITH MULTIPLE OR SUFFICIENTLY SEVERE CHRONIC CONDITIONS.— ‘‘(1) IN GENERAL.—Each Medicare Advantage organization with respect to 

each Medicare Advantage plan it offers shall have in effect, for enrollees with 

multiple or sufficiently severe chronic conditions, a chronic care improvement 

program that is designed to manage the needs of such enrollees and that meets 

the requirements of this subsection. 

‘‘(2) ENROLLEE WITH MULTIPLE OR SUFFICIENTLY SEVERE CHRONIC CONDI- TIONS.—For purposes of this subsection, the term ‘enrollee with multiple or sufficiently severe chronic conditions’ means, with respect to an enrollee in a Medicare Advantage plan of a Medicare Advantage organization, an enrollee in the 

plan who has one or more chronic conditions, such as congestive heart failure, 

diabetes, COPD, stroke, or other disease as identified by the organization as appropriate for chronic care improvement. 

‘‘(3) GENERAL REQUIREMENTS.— ‘‘(A) IN GENERAL.—Each chronic care improvement program under this 

subsection shall be conducted consistent with this subsection. 

‘‘(B) IDENTIFICATION OF ENROLLEES.—Each such program shall have a 

method for monitoring and identifying enrollees with multiple or sufficiently severe chronic conditions that meet the organization’s criteria for 

participation under the program. 

‘‘(C) DEVELOPMENT OF PLANS.—For an enrollee identified under subparagraph (B) for participation in a program, the program shall develop, with 

the enrollee’s consent, an individualized, goal-oriented chronic care improvement plan for chronic care improvement. 

‘‘(D) ELEMENTS OF PLANS.—Each chronic care improvement plan developed under subparagraph (C) shall include a single point of contact to coordinate care and the following, as appropriate: 

‘‘(i) Self-improvement education for the enrollee and support education for health care providers, primary caregivers, and family members. 

‘‘(ii) Coordination of health care services, such as application of a prescription drug regimen and home health services. 

‘‘(iii) Collaboration with physicians and other providers to enhance 

communication of relevant clinical information. 

‘‘(iv) The use of monitoring technologies that enable patient guidance 

through the exchange of pertinent clinical information, such as vital 

signs, symptomatic information, and health self-assessment. 

‘‘(v) The provision of information about hospice care, pain and palliative care, and end-of-life care. 

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‘‘(E) ORGANIZATION RESPONSIBILITIES.—In establishing and carrying out 

chronic care improvement plans for participants under this paragraph, a 

Medicare Advantage organization shall, directly or through subcontractors—

‘‘(i) guide participants in managing their health, including all their 

co-morbidities, and in performing the activities as specified under the 

elements of the plan; 

‘‘(ii) use decision support tools such as evidence-based practice guidelines or other criteria as determined by the Secretary; and 

‘‘(iii) develop a clinical information database to track and monitor 

each participant across settings and to evaluate outcomes. 

‘‘(3) ADDITIONAL REQUIREMENTS.—The Secretary may establish additional requirements for chronic care improvement programs under this section. 

‘‘(4) ACCREDITATION.—The Secretary may provide that chronic care improvement programs that are accredited by qualified organizations may be deemed 

to meet such requirements under this subsection as the Secretary may specify. 

‘‘(5) OUTCOMES REPORT.—Each Medicare Advantage organization with respect 

to its chronic care improvement program under this subsection shall monitor 

and report to the Secretary information on the quality of care and efficacy of 

such program as the Secretary may require.’’; and 

(2) by amending subparagraph (I) of subsection (c)(1) to read as follows: 

‘‘(I) CHRONIC CARE IMPROVEMENT PROGRAM.—A description of the organization’s chronic care improvement program under subsection (e).’’. 

(b) APPLICATION UNDER ENHANCED FEE-FOR-SERVICE PROGRAM.—Section 1860E–

2(c)(3), as inserted by section 201(a), is amended by inserting ‘‘, including subsection 

(e) (relating to implementation of chronic care improvement programs)’’ after ‘‘The 

provisions of section 1852’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply for contract years beginning on or after 1 year after the date of the enactment of this Act. 

SEC. 723. INSTITUTE OF MEDICINE REPORT. 

(a) STUDY.—

(1) IN GENERAL.—The Secretary of Health and Human Services shall contract 

with the Institute of Medicine of the National Academy of Sciences to conduct 

a study of the barriers to effective integrated care improvement for medicare 

beneficiaries with multiple or severe chronic conditions across settings and over 

time and to submit a report under subsection (b). 

(2) SPECIFIC ITEMS.—The study shall examine the statutory and regulatory 

barriers to coordinating care across settings for medicare beneficiaries in transition from one setting to another (such as between hospital, nursing facility, 

home health, hospice, and home). The study shall specifically identify the following: 

(A) Clinical, financial, or administrative requirements in the medicare 

program that present barriers to effective, seamless transitions across care 

settings. 

(B) Policies that impede the establishment of administrative and clinical 

information systems to track health status, utilization, cost, and quality 

data across settings. 

(C) State-level requirements that may present barriers to better care for 

medicare beneficiaries. 

(3) CONSULTATION.—The study under this subsection shall be conducted in 

consultation with experts in the field of chronic care, consumers, and family 

caregivers, working to integrate care delivery and create more seamless transitions across settings and over time. 

(b) REPORT.—The report under this subsection shall be submitted to the Secretary 

and Congress not later than 18 months after the date of the enactment of this Act. 

SEC. 724. MEDPAC REPORT. 

(a) EVALUATION.—shall conduct an evaluation that includes a description of the 

status of the implementation of chronic care improvement programs under section 

1808 of the Social Security Act, the quality of health care services provided to individuals in such program, the health status of the participants of such program, and 

the cost savings attributed to implementation of such program. 

(b) REPORT.—Not later than 2 years after the date of implementation of such 

chronic care improvement programs, the Commission shall submit a report on such 

evaluation.

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Subtitle D—Other Provisions 

SEC. 731. MODIFICATIONS TO MEDICARE PAYMENT ADVISORY COMMISSION (MEDPAC). 

(a) EXAMINATION OF BUDGET CONSEQUENCES.—Section 1805(b) (42 U.S.C. 1395b–

6(b)) is amended by adding at the end the following new paragraph: 

‘‘(8) EXAMINATION OF BUDGET CONSEQUENCES.—Before making any recommendations, the Commission shall examine the budget consequences of such 

recommendations, directly or through consultation with appropriate expert entities.’’. 

(b) CONSIDERATION OF EFFICIENT PROVISION OF SERVICES.—Section 

1805(b)(2)(B)(i) (42 U.S.C. 1395b–6(b)(2)(B)(i)) is amended by inserting ‘‘the efficient 

provision of’’ after ‘‘expenditures for’’. 

(c) APPLICATION OF DISCLOSURE REQUIREMENTS.—

(1) IN GENERAL.—Section 1805(c)(2)(D) (42 U.S.C. 1395b–6(c)(2)(D)) is amended by adding at the end the following: ‘‘Members of the Commission shall be 

treated as employees of the Congress for purposes of applying title I of the Ethics in Government Act of 1978 (Public Law 95-521).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on January 1, 2004. 

(d) ADDITIONAL REPORTS.—

(1) DATA NEEDS AND SOURCES.—The Medicare Payment Advisory Commission 

shall conduct a study, and submit a report to Congress by not later than June 

1, 2004, on the need for current data, and sources of current data available, to 

determine the solvency and financial circumstances of hospitals and other medicare providers of services. The Commission shall examine data on uncompensated care, as well as the share of uncompensated care accounted for by the expenses for treating illegal aliens. 

(2) USE OF TAX-RELATED RETURNS.—Using return information provided under 

Form 990 of the Internal Revenue Service, the Commission shall submit to Congress, by not later than June 1, 2004, a report on the following: 

(A) Investments, endowments, and fundraising of hospitals participating 

under the medicare program and related foundations. 

(B) Access to capital financing for private and for not-for-profit hospitals. 

SEC. 732. DEMONSTRATION PROJECT FOR MEDICAL ADULT DAY CARE SERVICES. 

(a) ESTABLISHMENT.—Subject to the succeeding provisions of this section, the Secretary of Health and Human Services shall establish a demonstration project (in 

this section referred to as the ‘‘demonstration project’’) under which the Secretary 

shall, as part of a plan of an episode of care for home health services established 

for a medicare beneficiary, permit a home health agency, directly or under arrangements with a medical adult day care facility, to provide medical adult day care services as a substitute for a portion of home health services that would otherwise be 

provided in the beneficiary’s home. 

(b) PAYMENT.—

(1) IN GENERAL.—The amount of payment for an episode of care for home 

health services, a portion of which consists of substitute medical adult day care 

services, under the demonstration project shall be made at a rate equal to 95 

percent of the amount that would otherwise apply for such home health services 

under section 1895 of the Social Security Act (42 u.s.c. 1395fff). In no case may 

a home health agency, or a medical adult day care facility under arrangements 

with a home health agency, separately charge a beneficiary for medical adult 

day care services furnished under the plan of care. 

(2) BUDGET NEUTRALITY FOR DEMONSTRATION PROJECT.—Notwithstanding any 

other provision of law, the Secretary shall provide for an appropriate reduction 

in the aggregate amount of additional payments made under section 1895 of the 

Social Security Act (42 U.S.C. 1395fff) to reflect any increase in amounts expended from the Trust Funds as a result of the demonstration project conducted 

under this section. 

(c) DEMONSTRATION PROJECT SITES.—The project established under this section 

shall be conducted in not more than 5 States selected by the Secretary that license 

or certify providers of services that furnish medical adult day care services. 

(d) DURATION.—The Secretary shall conduct the demonstration project for a period 

of 3 years. 

(e) VOLUNTARY PARTICIPATION.—Participation of medicare beneficiaries in the 

demonstration project shall be voluntary. The total number of such beneficiaries 

that may participate in the project at any given time may not exceed 15,000. 

(f) PREFERENCE IN SELECTING AGENCIES.—In selecting home health agencies to 

participate under the demonstration project, the Secretary shall give preference to 

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those agencies that are currently licensed or certified through common ownership 

and control to furnish medical adult day care services. 

(g) WAIVER AUTHORITY.—The Secretary may waive such requirements of title 

XVIII of the Social Security Act as may be necessary for the purposes of carrying 

out the demonstration project, other than waiving the requirement that an individual be homebound in order to be eligible for benefits for home health services. 

(h) EVALUATION AND REPORT.—The Secretary shall conduct an evaluation of the 

clinical and cost effectiveness of the demonstration project. Not later 30 months 

after the commencement of the project, the Secretary shall submit to Congress a report on the evaluation, and shall include in the report the following: 

(1) An analysis of the patient outcomes and costs of furnishing care to the 

medicare beneficiaries participating in the project as compared to such outcomes and costs to beneficiaries receiving only home health services for the 

same health conditions. 

(2) Such recommendations regarding the extension, expansion, or termination 

of the project as the Secretary determines appropriate. 

(i) DEFINITIONS.—In this section: 

(1) HOME HEALTH AGENCY.—The term ‘‘home health agency’’ has the meaning 

given such term in section 1861(o) of the Social Security Act (42 U.S.C. 

1395x(o)). 

(2) MEDICAL ADULT DAY CARE FACILITY.—The term ‘‘medical adult day care facility’’ means a facility that—

(A) has been licensed or certified by a State to furnish medical adult day 

care services in the State for a continuous 2-year period; 

(B) is engaged in providing skilled nursing services and other therapeutic 

services directly or under arrangement with a home health agency; 

(C) meets such standards established by the Secretary to assure quality 

of care and such other requirements as the Secretary finds necessary in the 

interest of the health and safety of individuals who are furnished services 

in the facility; and 

(D) provides medical adult day care services. 

(3) MEDICAL ADULT DAY CARE SERVICES.—The term ‘‘medical adult day care 

services’’ means—

(A) home health service items and services described in paragraphs (1) 

through (7) of section 1861(m) furnished in a medical adult day care facility; 

(B) a program of supervised activities furnished in a group setting in the 

facility that—

(i) meet such criteria as the Secretary determines appropriate; and 

(ii) is designed to promote physical and mental health of the individuals; and 

(C) such other services as the Secretary may specify. 

(4) MEDICARE BENEFICIARY.—The term ‘‘medicare beneficiary’’ means an individual entitled to benefits under part A of this title, enrolled under part B of 

this title, or both. 

SEC. 733. IMPROVEMENTS IN NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS 

TO RESPOND TO CHANGES IN TECHNOLOGY. 

(a) NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS.—

(1) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended—

(A) in the third sentence of subsection (a) by inserting ‘‘consistent with 

subsection (k)’’ after ‘‘the Secretary shall ensure’’; and 

(B) by adding at the end the following new subsection: 

‘‘(k) NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS.—

‘‘(1) CRITERIA AND EVIDENCE USED IN MAKING NATIONAL COVERAGE DETERMINATIONS.—The Secretary shall make available to the public the criteria the 

Secretary uses in making national coverage determinations, including how evidence to demonstrate that a procedure or device is reasonable and necessary is 

considered. 

‘‘(2) TIMEFRAME FOR DECISIONS ON REQUESTS FOR NATIONAL COVERAGE DETERMINATIONS.—In the case of a request for a national coverage determination 

that—

‘‘(A) does not require a technology assessment from an outside entity or 

deliberation from the Medicare Coverage Advisory Committee, the decision 

on the request shall be made not later than 6 months after the date of the 

request; or 

‘‘(B) requires such an assessment or deliberation and in which a clinical 

trial is not requested, the decision on the request shall be made not later 

than 12 months after the date of the request. 

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‘‘(3) PROCESS FOR PUBLIC COMMENT IN NATIONAL COVERAGE DETERMINATIONS.—At the end of the 6-month period that begins on the date a request for 

a national coverage determination is made, the Secretary shall—

‘‘(A) make a draft of proposed decision on the request available to the 

public through the Medicare Internet site of the Department of Health and 

Human Services or other appropriate means; 

‘‘(B) provide a 30-day period for public comment on such draft; 

‘‘(C) make a final decision on the request within 60 days of the conclusion 

of the 30-day period referred to under subparagraph (B); 

‘‘(D) include in such final decision summaries of the public comments received and responses thereto; 

‘‘(E) make available to the public the clinical evidence and other data 

used in making such a decision when the decision differs from the recommendations of the Medicare Coverage Advisory Committee; and 

‘‘(F) in the case of a decision to grant the coverage determination, assign 

a temporary or permanent code during the 60-day period referred to in subparagraph (C). 

‘‘(4) CONSULTATION WITH OUTSIDE EXPERTS IN CERTAIN NATIONAL COVERAGE

DETERMINATIONS.—With respect to a request for a national coverage determination for which there is not a review by the Medicare Coverage Advisory Committee, the Secretary shall consult with appropriate outside clinical experts. 

‘‘(5) LOCAL COVERAGE DETERMINATION PROCESS.—With respect to local coverage determinations made on or after January 1, 2004—

‘‘(A) PLAN TO PROMOTE CONSISTENCY OF COVERAGE DETERMINATIONS.—

The Secretary shall develop a plan to evaluate new local coverage determinations to determine which determinations should be adopted nationally 

and to what extent greater consistency can be achieved among local coverage determinations. 

‘‘(B) CONSULTATION.—The Secretary shall require the fiscal intermediaries or carriers providing services within the same area to consult on 

all new local coverage determinations within the area. 

‘‘(C) DISSEMINATION OF INFORMATION.—The Secretary should serve as a 

center to disseminate information on local coverage determinations among 

fiscal intermediaries and carriers to reduce duplication of effort. 

‘‘(6) NATIONAL AND LOCAL COVERAGE DETERMINATION DEFINED.—For purposes 

of this subsection, the terms ‘national coverage determination’ and ‘local coverage determination’ have the meaning given such terms in paragraphs (1)(B) 

and (2)(B), respectively, of section 1869(f).’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

national and local coverage determinations as of January 1, 2004. 

(b) MEDICARE COVERAGE OF ROUTINE COSTS ASSOCIATED WITH CERTAIN CLINICAL

TRIALS.—

(1) IN GENERAL.—With respect to the coverage of routine costs of care for 

beneficiaries participating in a qualifying clinical trial, as set forth on the date 

of the enactment of this Act in National Coverage Determination 30-1 of the 

Medicare Coverage Issues Manual, the Secretary shall deem clinical trials conducted in accordance with an investigational device exemption approved under 

section 520(g) of the Federal Food, Drug, and Cosmetic Act (42 U.S.C. 360j(g)) 

to be automatically qualified for such coverage. 

(2) RULE OF CONSTRUCTION.—Nothing in this subsection shall be construed as 

authorizing or requiring the Secretary to modify the regulations set forth on the 

date of the enactment of this Act at subpart B of part 405 of title 42, Code of 

Federal Regulations, or subpart A of part 411 of such title, relating to coverage 

of, and payment for, a medical device that is the subject of an investigational 

device exemption by the Food and Drug Administration (except as may be necessary to implement paragraph (1)). 

(3) EFFECTIVE DATE.—This subsection shall apply to clinical trials begun before, on, or after the date of the enactment of this Act and to items and services 

furnished on or after such date. 

(c) ISSUANCE OF TEMPORARY NATIONAL CODES.—Not later than January 1, 2004, 

the Secretary shall implement revised procedures for the issuance of temporary national HCPCS codes under part B of title XVIII of the Social Security Act. 

SEC. 734. TREATMENT OF CERTAIN PHYSICIAN PATHOLOGY SERVICES. 

(a) IN GENERAL.—Section 1848(i) (42 U.S.C. 1395w–4(i)) is amended by adding at 

the end the following new paragraph: 

‘‘(4) TREATMENT OF CERTAIN INPATIENT PHYSICIAN PATHOLOGY SERVICES.—

‘‘(A) IN GENERAL.—With respect to services furnished on or after January 

1, 2001, and before January 1, 2006, if an independent laboratory furnishes 

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the technical component of a physician pathology service to a fee-for-service 

medicare beneficiary who is an inpatient or outpatient of a covered hospital, 

the Secretary shall treat such component as a service for which payment 

shall be made to the laboratory under this section and not as an inpatient 

hospital service for which payment is made to the hospital under section 

1886(d) or as a hospital outpatient service for which payment is made to 

the hospital under section 1833(t). 

‘‘(B) DEFINITIONS.—In this paragraph: 

‘‘(i) COVERED HOSPITAL.— ‘‘(I) IN GENERAL.—The term ‘covered hospital’ means, with respect to an inpatient or outpatient, a hospital that had an arrangement with an independent laboratory that was in effect as of July 

22, 1999, under which a laboratory furnished the technical component of physician pathology services to fee-for-service medicare 

beneficiaries who were hospital inpatients or outpatients, respectively, and submitted claims for payment for such component to a 

carrier with a contract under section 1842 and not to the hospital. 

‘‘(II) CHANGE IN OWNERSHIP DOES NOT AFFECT DETERMINATION.— A change in ownership with respect to a hospital on or after the 

date referred to in subclause (I) shall not affect the determination 

of whether such hospital is a covered hospital for purposes of such 

subclause. 

‘‘(ii) FEE-FOR-SERVICE MEDICARE BENEFICIARY.—The term ‘fee-forservice medicare beneficiary’ means an individual who is entitled to 

benefits under part A, or enrolled under this part, or both, but is not 

enrolled in any of the following: 

‘‘(I) A Medicare+Choice plan under part C. 

‘‘(II) A plan offered by an eligible organization under section 

1876. 

‘‘(III) A program of all-inclusive care for the elderly (PACE) 

under section 1894. 

‘‘(IV) A social health maintenance organization (SHMO) demonstration project established under section 4018(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law 100–203).’’. 

(b) CONFORMING AMENDMENT.—Section 542 of the Medicare, Medicaid, and 

SCHIP Benefits Improvement and Protection Act of 2000 (114 Stat. 2763A–550), as 

enacted into law by section 1(a)(6) of Public Law 106–554, is repealed. 

(c) EFFECTIVE DATES.—The amendments made by this section shall take effect as 

if included in the enactment of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Appendix F, 114 Stat. 2763A–463), as enacted into law by section 1(a)(6) of Public Law 106–554.

TITLE VIII—MEDICARE BENEFITS 

ADMINISTRATION

SEC. 801. ESTABLISHMENT OF MEDICARE BENEFITS ADMINISTRATION. 

(a) IN GENERAL.—Title XVIII (42 U.S.C. 1395 et seq.), as amended by sections 105 

and 721, is amended by inserting after 1808 the following new section: 

‘‘MEDICARE BENEFITS ADMINISTRATION

‘‘SEC. 1809. (a) ESTABLISHMENT.—There is established within the Department of 

Health and Human Services an agency to be known as the Medicare Benefits Administration. 

‘‘(b) ADMINISTRATOR; DEPUTY ADMINISTRATOR; CHIEF ACTUARY.—

‘‘(1) ADMINISTRATOR.—

‘‘(A) IN GENERAL.—The Medicare Benefits Administration shall be headed 

by an administrator to be known as the ‘Medicare Benefits Administrator’ 

(in this section referred to as the ‘Administrator’) who shall be appointed 

by the President, by and with the advice and consent of the Senate. The 

Administrator shall be in direct line of authority to the Secretary. 

‘‘(B) COMPENSATION.—The Administrator shall be paid at the rate of basic 

pay payable for level III of the Executive Schedule under section 5314 of 

title 5, United States Code. 

‘‘(C) TERM OF OFFICE.—The Administrator shall be appointed for a term 

of 4 years. In any case in which a successor does not take office at the end 

of an Administrator’s term of office, that Administrator may continue in office until the entry upon office of such a successor. An Administrator apVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00103 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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pointed to a term of office after the commencement of such term may serve 

under such appointment only for the remainder of such term. 

‘‘(D) GENERAL AUTHORITY.—The Administrator shall be responsible for 

the exercise of all powers and the discharge of all duties of the Administration, and shall have authority and control over all personnel and activities 

thereof. 

‘‘(E) RULEMAKING AUTHORITY.—The Administrator may prescribe such 

rules and regulations as the Administrator determines necessary or appropriate to carry out the functions of the Administration. The regulations prescribed by the Administrator shall be subject to the rulemaking procedures 

established under section 553 of title 5, United States Code. The Administrator shall provide for the issuance of new regulations to carry out parts 

C, D, and E. 

‘‘(F) AUTHORITY TO ESTABLISH ORGANIZATIONAL UNITS.—The Administrator may establish, alter, consolidate, or discontinue such organizational 

units or components within the Administration as the Administrator considers necessary or appropriate, except as specified in this section. 

‘‘(G) AUTHORITY TO DELEGATE.—The Administrator may assign duties, 

and delegate, or authorize successive redelegations of, authority to act and 

to render decisions, to such officers and employees of the Administration as 

the Administrator may find necessary. Within the limitations of such delegations, redelegations, or assignments, all official acts and decisions of such 

officers and employees shall have the same force and effect as though performed or rendered by the Administrator. 

‘‘(2) DEPUTY ADMINISTRATOR.—

‘‘(A) IN GENERAL.—There shall be a Deputy Administrator of the Medicare 

Benefits Administration who shall be appointed by the President, by and 

with the advice and consent of the Senate. 

‘‘(B) COMPENSATION.—The Deputy Administrator shall be paid at the rate 

of basic pay payable for level IV of the Executive Schedule under section 

5315 of title 5, United States Code. 

‘‘(C) TERM OF OFFICE.—The Deputy Administrator shall be appointed for 

a term of 4 years. In any case in which a successor does not take office at 

the end of a Deputy Administrator’s term of office, such Deputy Administrator may continue in office until the entry upon office of such a successor. 

A Deputy Administrator appointed to a term of office after the commencement of such term may serve under such appointment only for the remainder of such term. 

‘‘(D) DUTIES.—The Deputy Administrator shall perform such duties and 

exercise such powers as the Administrator shall from time to time assign 

or delegate. The Deputy Administrator shall be Acting Administrator of the 

Administration during the absence or disability of the Administrator and, 

unless the President designates another officer of the Government as Acting 

Administrator, in the event of a vacancy in the office of the Administrator. 

‘‘(3) CHIEF ACTUARY.—

‘‘(A) IN GENERAL.—There is established in the Administration the position 

of Chief Actuary. The Chief Actuary shall be appointed by, and in direct 

line of authority to, the Administrator of such Administration. The Chief 

Actuary shall be appointed from among individuals who have demonstrated, by their education and experience, superior expertise in the actuarial sciences. The Chief Actuary may be removed only for cause. 

‘‘(B) COMPENSATION.—The Chief Actuary shall be compensated at the 

highest rate of basic pay for the Senior Executive Service under section 

5382(b) of title 5, United States Code. 

‘‘(C) DUTIES.—The Chief Actuary shall exercise such duties as are appropriate for the office of the Chief Actuary and in accordance with professional standards of actuarial independence. 

‘‘(4) SECRETARIAL COORDINATION OF PROGRAM ADMINISTRATION.—The Secretary shall ensure appropriate coordination between the Administrator and the 

Administrator of the Centers for Medicare & Medicaid Services in carrying out 

the programs under this title. 

‘‘(c) DUTIES; ADMINISTRATIVE PROVISIONS.—

‘‘(1) DUTIES.—

‘‘(A) GENERAL DUTIES.—The Administrator shall carry out parts C, D, and 

E, including—

‘‘(i) negotiating, entering into, and enforcing, contracts with plans for 

the offering of Medicare Advantage plans under part C and EFFS plans 

under part E, including the offering of qualified prescription drug coverage under such plans; and 

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‘‘(ii) negotiating, entering into, and enforcing, contracts with PDP 

sponsors for the offering of prescription drug plans under part D. 

‘‘(B) OTHER DUTIES.—The Administrator shall carry out any duty provided for under part C, part D, or part E, including demonstration projects 

carried out in part or in whole under such parts, the programs of all-inclusive care for the elderly (PACE program) under section 1894, the social 

health maintenance organization (SHMO) demonstration projects (referred 

to in section 4104(c) of the Balanced Budget Act of 1997), medicare cost contractors under section 1876(h), and through a Medicare Advantage project 

that demonstrates the application of capitation payment rates for frail elderly medicare beneficiaries through the use of a interdisciplinary team and 

through the provision of primary care services to such beneficiaries by 

means of such a team at the nursing facility involved). 

‘‘(C) PRESCRIPTION DRUG CARD.—The Administrator shall carry out section 1807 (relating to the medicare prescription drug discount card endorsement program). 

‘‘(D) NONINTERFERENCE.—In carrying out its duties with respect to the 

provision of qualified prescription drug coverage to beneficiaries under this 

title, the Administrator may not—

‘‘(i) require a particular formulary or institute a price structure for 

the reimbursement of covered outpatient drugs; 

‘‘(ii) interfere in any way with negotiations between PDP sponsors 

and Medicare Advantage organizations and EFFS organizations and 

drug manufacturers, wholesalers, or other suppliers of covered outpatient drugs; and 

‘‘(iii) otherwise interfere with the competitive nature of providing 

such coverage through such sponsors and organizations. 

‘‘(E) ANNUAL REPORTS.—Not later March 31 of each year, the Administrator shall submit to Congress and the President a report on the administration of parts C, D, and E during the previous fiscal year. 

‘‘(2) STAFF.—

‘‘(A) IN GENERAL.—The Administrator, with the approval of the Secretary, 

may employ, without regard to chapter 31 of title 5, United States Code, 

other than sections 3102 through 3108, 3110 through 3113, 3136m and 

3151, such officers and employees as are necessary to administer the activities to be carried out through the Medicare Benefits Administration. The 

Administrator shall employ staff with appropriate and necessary expertise 

in negotiating contracts in the private sector. 

‘‘(B) FLEXIBILITY WITH RESPECT TO COMPENSATION.—

‘‘(i) IN GENERAL.—The staff of the Medicare Benefits Administration 

shall, subject to clause (ii), be paid without regard to the provisions of 

chapter 51 (other than section 5101) and chapter 53 (other than section 

5301) of such title (relating to classification and schedule pay rates). 

‘‘(ii) MAXIMUM RATE.—In no case may the rate of compensation determined under clause (i) exceed the rate of basic pay payable for level IV 

of the Executive Schedule under section 5315 of title 5, United States 

Code. 

‘‘(C) LIMITATION ON FULL-TIME EQUIVALENT STAFFING FOR CURRENT CMS

FUNCTIONS BEING TRANSFERRED.—The Administrator may not employ under 

this paragraph a number of full-time equivalent employees, to carry out 

functions that were previously conducted by the Centers for Medicare & 

Medicaid Services and that are conducted by the Administrator by reason 

of this section, that exceeds the number of such full-time equivalent employees authorized to be employed by the Centers for Medicare & Medicaid 

Services to conduct such functions as of the date of the enactment of this 

Act. 

‘‘(3) REDELEGATION OF CERTAIN FUNCTIONS OF THE CENTERS FOR MEDICARE &

MEDICAID SERVICES.—

‘‘(A) IN GENERAL.—The Secretary, the Administrator, and the Administrator of the Centers for Medicare & Medicaid Services shall establish an 

appropriate transition of responsibility in order to redelegate the administration of part C from the Secretary and the Administrator of the Centers 

for Medicare & Medicaid Services to the Administrator as is appropriate to 

carry out the purposes of this section. 

‘‘(B) TRANSFER OF DATA AND INFORMATION.—The Secretary shall ensure 

that the Administrator of the Centers for Medicare & Medicaid Services 

transfers to the Administrator of the Medicare Benefits Administration 

such information and data in the possession of the Administrator of the 

Centers for Medicare & Medicaid Services as the Administrator of the 

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Medicare Benefits Administration requires to carry out the duties described 

in paragraph (1). 

‘‘(C) CONSTRUCTION.—Insofar as a responsibility of the Secretary or the 

Administrator of the Centers for Medicare & Medicaid Services is redelegated to the Administrator under this section, any reference to the Secretary or the Administrator of the Centers for Medicare & Medicaid Services in this title or title XI with respect to such responsibility is deemed 

to be a reference to the Administrator.

‘‘(d) OFFICE OF BENEFICIARY ASSISTANCE.—

‘‘(1) ESTABLISHMENT.—The Secretary shall establish within the Medicare Benefits Administration an Office of Beneficiary Assistance to coordinate functions 

relating to outreach and education of medicare beneficiaries under this title, including the functions described in paragraph (2). The Office shall be separate 

operating division within the Administration. 

‘‘(2) DISSEMINATION OF INFORMATION ON BENEFITS AND APPEALS RIGHTS.—

‘‘(A) DISSEMINATION OF BENEFITS INFORMATION.—The Office of Beneficiary 

Assistance shall disseminate, directly or through contract, to medicare 

beneficiaries, by mail, by posting on the Internet site of the Medicare Benefits Administration and through a toll-free telephone number, information 

with respect to the following: 

‘‘(i) Benefits, and limitations on payment (including cost-sharing, 

stop-loss provisions, and formulary restrictions) under parts C, D, and 

E. 

‘‘(ii) Benefits, and limitations on payment under parts A and B, including information on medicare supplemental policies under section 

1882. 

Such information shall be presented in a manner so that medicare beneficiaries may compare benefits under parts A, B, D, and medicare supplemental policies with benefits under Medicare Advantage plans under part 

C and EFFS plans under part E. 

‘‘(B) DISSEMINATION OF APPEALS RIGHTS INFORMATION.—The Office of Beneficiary Assistance shall disseminate to medicare beneficiaries in the manner provided under subparagraph (A) a description of procedural rights (including grievance and appeals procedures) of beneficiaries under the original medicare fee-for-service program under parts A and B, the Medicare 

Advantage program under part C, the Voluntary Prescription Drug Benefit 

Program under part D, and the Enhanced Fee-for-Service program under 

part E. 

‘‘(e) MEDICARE POLICY ADVISORY BOARD.—

‘‘(1) ESTABLISHMENT.—There is established within the Medicare Benefits Administration the Medicare Policy Advisory Board (in this section referred to the 

‘Board’). The Board shall advise, consult with, and make recommendations to 

the Administrator of the Medicare Benefits Administration with respect to the 

administration of parts C, D, and E, including the review of payment policies 

under such parts. 

‘‘(2) REPORTS.—

‘‘(A) IN GENERAL.—With respect to matters of the administration of parts 

C, D, and E the Board shall submit to Congress and to the Administrator 

of the Medicare Benefits Administration such reports as the Board determines appropriate. Each such report may contain such recommendations as 

the Board determines appropriate for legislative or administrative changes 

to improve the administration of such parts, including the topics described 

in subparagraph (B). Each such report shall be published in the Federal 

Register. 

‘‘(B) TOPICS DESCRIBED.—Reports required under subparagraph (A) may 

include the following topics: 

‘‘(i) FOSTERING COMPETITION.—Recommendations or proposals to increase competition under parts C, D, and E for services furnished to 

medicare beneficiaries. 

‘‘(ii) EDUCATION AND ENROLLMENT.—Recommendations for the improvement to efforts to provide medicare beneficiaries information and 

education on the program under this title, and specifically parts C, D, 

and E, and the program for enrollment under the title. 

‘‘(iii) IMPLEMENTATION OF RISK-ADJUSTMENT.—Evaluation of the implementation under section 1853(a)(3)(C) of the risk adjustment methodology to payment rates under that section to Medicare Advantage organizations offering Medicare Advantage plans (and the corresponding 

payment provisions under part E) that accounts for variations in per 

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capita costs based on health status, geography, and other demographic 

factors. 

‘‘(iv) RURAL ACCESS.—Recommendations to improve competition and 

access to plans under parts C, D, and E in rural areas. 

‘‘(C) MAINTAINING INDEPENDENCE OF BOARD.—The Board shall directly 

submit to Congress reports required under subparagraph (A). No officer or 

agency of the United States may require the Board to submit to any officer 

or agency of the United States for approval, comments, or review, prior to 

the submission to Congress of such reports. 

‘‘(3) DUTY OF ADMINISTRATOR OF MEDICARE BENEFITS ADMINISTRATION.—With 

respect to any report submitted by the Board under paragraph (2)(A), not later 

than 90 days after the report is submitted, the Administrator of the Medicare 

Benefits Administration shall submit to Congress and the President an analysis 

of recommendations made by the Board in such report. Each such analysis shall 

be published in the Federal Register. 

‘‘(4) MEMBERSHIP.— ‘‘(A) APPOINTMENT.—Subject to the succeeding provisions of this paragraph, the Board shall consist of seven members to be appointed as follows: 

‘‘(i) Three members shall be appointed by the President. 

‘‘(ii) Two members shall be appointed by the Speaker of the House 

of Representatives, with the advice of the chairmen and the ranking 

minority members of the Committees on Ways and Means and on Energy and Commerce of the House of Representatives. 

‘‘(iii) Two members shall be appointed by the President pro tempore 

of the Senate with the advice of the chairman and the ranking minority 

member of the Senate Committee on Finance. 

‘‘(B) QUALIFICATIONS.—The members shall be chosen on the basis of their 

integrity, impartiality, and good judgment, and shall be individuals who 

are, by reason of their education and experience in health care benefits 

management, exceptionally qualified to perform the duties of members of 

the Board. 

‘‘(C) PROHIBITION ON INCLUSION OF FEDERAL EMPLOYEES.—No officer or 

employee of the United States may serve as a member of the Board. 

‘‘(5) COMPENSATION.—Members of the Board shall receive, for each day (including travel time) they are engaged in the performance of the functions of the 

board, compensation at rates not to exceed the daily equivalent to the annual 

rate in effect for level IV of the Executive Schedule under section 5315 of title 

5, United States Code. 

‘‘(6) TERMS OF OFFICE.—

‘‘(A) IN GENERAL.—The term of office of members of the Board shall be 

3 years. 

‘‘(B) TERMS OF INITIAL APPOINTEES.—As designated by the President at 

the time of appointment, of the members first appointed—

‘‘(i) one shall be appointed for a term of 1 year; 

‘‘(ii) three shall be appointed for terms of 2 years; and 

‘‘(iii) three shall be appointed for terms of 3 years. 

‘‘(C) REAPPOINTMENTS.—Any person appointed as a member of the Board 

may not serve for more than 8 years. 

‘‘(D) VACANCY.—Any member appointed to fill a vacancy occurring before 

the expiration of the term for which the member’s predecessor was appointed shall be appointed only for the remainder of that term. A member 

may serve after the expiration of that member’s term until a successor has 

taken office. A vacancy in the Board shall be filled in the manner in which 

the original appointment was made. 

‘‘(7) CHAIR.—The Chair of the Board shall be elected by the members. The 

term of office of the Chair shall be 3 years. 

‘‘(8) MEETINGS.—The Board shall meet at the call of the Chair, but in no 

event less than three times during each fiscal year. 

‘‘(9) DIRECTOR AND STAFF.—

‘‘(A) APPOINTMENT OF DIRECTOR.—The Board shall have a Director who 

shall be appointed by the Chair. 

‘‘(B) IN GENERAL.—With the approval of the Board, the Director may appoint, without regard to chapter 31 of title 5, United States Code, such additional personnel as the Director considers appropriate. 

‘‘(C) FLEXIBILITY WITH RESPECT TO COMPENSATION.—

‘‘(i) IN GENERAL.—The Director and staff of the Board shall, subject 

to clause (ii), be paid without regard to the provisions of chapter 51 and 

chapter 53 of such title (relating to classification and schedule pay 

rates). 

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‘‘(ii) MAXIMUM RATE.—In no case may the rate of compensation determined under clause (i) exceed the rate of basic pay payable for level IV 

of the Executive Schedule under section 5315 of title 5, United States 

Code. 

‘‘(D) ASSISTANCE FROM THE ADMINISTRATOR OF THE MEDICARE BENEFITS

ADMINISTRATION.—The Administrator of the Medicare Benefits Administration shall make available to the Board such information and other assistance as it may require to carry out its functions. 

‘‘(10) CONTRACT AUTHORITY.—The Board may contract with and compensate 

government and private agencies or persons to carry out its duties under this 

subsection, without regard to section 3709 of the Revised Statutes (41 U.S.C. 

5). 

‘‘(f) FUNDING.—There is authorized to be appropriated, in appropriate part from 

the Federal Hospital Insurance Trust Fund and from the Federal Supplementary 

Medical Insurance Trust Fund (including the Medicare Prescription Drug Account), 

such sums as are necessary to carry out this section.’’. 

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a) shall take effect on 

the date of the enactment of this Act. 

(2) DUTIES WITH RESPECT TO ELIGIBILITY DETERMINATIONS AND ENROLLMENT.—The Administrator of the Medicare Benefits Administration shall carry 

out enrollment under title XVIII of the Social Security Act, make eligibility determinations under such title, and carry out parts C and E of such title for 

years beginning or after January 1, 2006. 

(3) TRANSITION.—Before the date the Administrator of the Medicare Benefits 

Administration is appointed and assumes responsibilities under this section and 

section 1807 of the Social Security Act, the Secretary of Health and Human 

Services shall provide for the conduct of any responsibilities of such Administrator that are otherwise provided under law. 

(c) MISCELLANEOUS ADMINISTRATIVE PROVISIONS.—

(1) ADMINISTRATOR AS MEMBER OF THE BOARD OF TRUSTEES OF THE MEDICARE

TRUST FUNDS.—Section 1817(b) and section 1841(b) (42 U.S.C. 1395i(b), 

1395t(b)) are each amended by striking ‘‘and the Secretary of Health and 

Human Services, all ex officio,’’ and inserting ‘‘the Secretary of Health and 

Human Services, and the Administrator of the Medicare Benefits Administration, all ex officio,’’. 

(2) INCREASE IN GRADE TO EXECUTIVE LEVEL III FOR THE ADMINISTRATOR OF

THE CENTERS FOR MEDICARE & MEDICAID SERVICES; LEVEL FOR MEDICARE BENEFITS ADMINISTRATOR.—

(A) IN GENERAL.—Section 5314 of title 5, United States Code, by adding 

at the end the following: 

‘‘Administrator of the Centers for Medicare & Medicaid Services. 

‘‘Administrator of the Medicare Benefits Administration.’’. 

(B) CONFORMING AMENDMENT.—Section 5315 of such title is amended by 

striking ‘‘Administrator of the Health Care Financing Administration.’’. 

(C) EFFECTIVE DATE.—The amendments made by this paragraph take effect on January 1, 2004.

TITLE IX—REGULATORY REDUCTION AND 

CONTRACTING REFORM 

Subtitle A—Regulatory Reform 

SEC. 901. CONSTRUCTION; DEFINITION OF SUPPLIER. 

(a) CONSTRUCTION.—Nothing in this title shall be construed—

(1) to compromise or affect existing legal remedies for addressing fraud or 

abuse, whether it be criminal prosecution, civil enforcement, or administrative 

remedies, including under sections 3729 through 3733 of title 31, United States 

Code (known as the False Claims Act); or 

(2) to prevent or impede the Department of Health and Human Services in 

any way from its ongoing efforts to eliminate waste, fraud, and abuse in the 

medicare program. 

Furthermore, the consolidation of medicare administrative contracting set forth in 

this Act does not constitute consolidation of the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund or reflect any 

position on that issue. 

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(b) DEFINITION OF SUPPLIER.—Section 1861 (42 U.S.C. 1395x) is amended by inserting after subsection (c) the following new subsection: 

‘‘Supplier 

‘‘(d) The term ‘supplier’ means, unless the context otherwise requires, a physician 

or other practitioner, a facility, or other entity (other than a provider of services) 

that furnishes items or services under this title.’’. 

SEC. 902. ISSUANCE OF REGULATIONS. 

(a) REGULAR TIMELINE FOR PUBLICATION OF FINAL RULES.— (1) IN GENERAL.—Section 1871(a) (42 U.S.C. 1395hh(a)) is amended by adding 

at the end the following new paragraph: 

‘‘(3)(A) The Secretary, in consultation with the Director of the Office of Management and Budget, shall establish and publish a regular timeline for the publication 

of final regulations based on the previous publication of a proposed regulation or 

an interim final regulation. 

‘‘(B) Such timeline may vary among different regulations based on differences in 

the complexity of the regulation, the number and scope of comments received, and 

other relevant factors, but shall not be longer than 3 years except under exceptional 

circumstances. If the Secretary intends to vary such timeline with respect to the 

publication of a final regulation, the Secretary shall cause to have published in the 

Federal Register notice of the different timeline by not later than the timeline previously established with respect to such regulation. Such notice shall include a brief 

explanation of the justification for such variation. 

‘‘(C) In the case of interim final regulations, upon the expiration of the regular 

timeline established under this paragraph for the publication of a final regulation 

after opportunity for public comment, the interim final regulation shall not continue 

in effect unless the Secretary publishes (at the end of the regular timeline and, if 

applicable, at the end of each succeeding 1-year period) a notice of continuation of 

the regulation that includes an explanation of why the regular timeline (and any 

subsequent 1-year extension) was not complied with. If such a notice is published, 

the regular timeline (or such timeline as previously extended under this paragraph) 

for publication of the final regulation shall be treated as having been extended for 

1 additional year. 

‘‘(D) The Secretary shall annually submit to Congress a report that describes the 

instances in which the Secretary failed to publish a final regulation within the applicable regular timeline under this paragraph and that provides an explanation for 

such failures.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. The Secretary shall provide for 

an appropriate transition to take into account the backlog of previously published interim final regulations. 

(b) LIMITATIONS ON NEW MATTER IN FINAL REGULATIONS.—

(1) IN GENERAL.—Section 1871(a) (42 U.S.C. 1395hh(a)), as amended by subsection (a), is amended by adding at the end the following new paragraph: 

‘‘(4) If the Secretary publishes a final regulation that includes a provision that is 

not a logical outgrowth of a previously published notice of proposed rulemaking or 

interim final rule, such provision shall be treated as a proposed regulation and shall 

not take effect until there is the further opportunity for public comment and a publication of the provision again as a final regulation.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

final regulations published on or after the date of the enactment of this Act. 

SEC. 903. COMPLIANCE WITH CHANGES IN REGULATIONS AND POLICIES. 

(a) NO RETROACTIVE APPLICATION OF SUBSTANTIVE CHANGES.—

(1) IN GENERAL.—Section 1871 (42 U.S.C. 1395hh), as amended by section 

902(a), is amended by adding at the end the following new subsection: 

‘‘(e)(1)(A) A substantive change in regulations, manual instructions, interpretative 

rules, statements of policy, or guidelines of general applicability under this title 

shall not be applied (by extrapolation or otherwise) retroactively to items and services furnished before the effective date of the change, unless the Secretary determines that—

‘‘(i) such retroactive application is necessary to comply with statutory requirements; or 

‘‘(ii) failure to apply the change retroactively would be contrary to the public 

interest.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

substantive changes issued on or after the date of the enactment of this Act. 

(b) TIMELINE FOR COMPLIANCE WITH SUBSTANTIVE CHANGES AFTER NOTICE.—

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(1) IN GENERAL.—Section 1871(e)(1), as added by subsection (a), is amended 

by adding at the end the following: 

‘‘(B)(i) Except as provided in clause (ii), a substantive change referred to in subparagraph (A) shall not become effective before the end of the 30-day period that 

begins on the date that the Secretary has issued or published, as the case may be, 

the substantive change. 

‘‘(ii) The Secretary may provide for such a substantive change to take effect on 

a date that precedes the end of the 30-day period under clause (i) if the Secretary 

finds that waiver of such 30-day period is necessary to comply with statutory requirements or that the application of such 30-day period is contrary to the public 

interest. If the Secretary provides for an earlier effective date pursuant to this 

clause, the Secretary shall include in the issuance or publication of the substantive 

change a finding described in the first sentence, and a brief statement of the reasons for such finding. 

‘‘(C) No action shall be taken against a provider of services or supplier with respect to noncompliance with such a substantive change for items and services furnished before the effective date of such a change.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

compliance actions undertaken on or after the date of the enactment of this Act. 

(c) RELIANCE ON GUIDANCE.—

(1) IN GENERAL.—Section 1871(e), as added by subsection (a), is further 

amended by adding at the end the following new paragraph: 

‘‘(2)(A) If—

‘‘(i) a provider of services or supplier follows the written guidance (which may 

be transmitted electronically) provided by the Secretary or by a medicare contractor (as defined in section 1889(g)) acting within the scope of the contractor’s 

contract authority, with respect to the furnishing of items or services and submission of a claim for benefits for such items or services with respect to such 

provider or supplier; 

‘‘(ii) the Secretary determines that the provider of services or supplier has accurately presented the circumstances relating to such items, services, and claim 

to the contractor in writing; and 

‘‘(iii) the guidance was in error; 

the provider of services or supplier shall not be subject to any sanction (including 

any penalty or requirement for repayment of any amount) if the provider of services 

or supplier reasonably relied on such guidance. 

‘‘(B) Subparagraph (A) shall not be construed as preventing the recoupment or repayment (without any additional penalty) relating to an overpayment insofar as the 

overpayment was solely the result of a clerical or technical operational error.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act but shall not apply to any sanction 

for which notice was provided on or before the date of the enactment of this 

Act. 

SEC. 904. REPORTS AND STUDIES RELATING TO REGULATORY REFORM. 

(a) GAO STUDY ON ADVISORY OPINION AUTHORITY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to determine the feasibility and appropriateness of establishing in the 

Secretary authority to provide legally binding advisory opinions on appropriate 

interpretation and application of regulations to carry out the medicare program 

under title XVIII of the Social Security Act. Such study shall examine the appropriate timeframe for issuing such advisory opinions, as well as the need for 

additional staff and funding to provide such opinions. 

(2) REPORT.—The Comptroller General shall submit to Congress a report on 

the study conducted under paragraph (1) by not later than one year after the 

date of the enactment of this Act. 

(b) REPORT ON LEGAL AND REGULATORY INCONSISTENCIES.—Section 1871 (42 

U.S.C. 1395hh), as amended by section 2(a), is amended by adding at the end the 

following new subsection: 

‘‘(f)(1) Not later than 2 years after the date of the enactment of this subsection, 

and every 2 years thereafter, the Secretary shall submit to Congress a report with 

respect to the administration of this title and areas of inconsistency or conflict 

among the various provisions under law and regulation. 

‘‘(2) In preparing a report under paragraph (1), the Secretary shall collect—

‘‘(A) information from individuals entitled to benefits under part A or enrolled 

under part B, or both, providers of services, and suppliers and from the Medicare Beneficiary Ombudsman and the Medicare Provider Ombudsman with respect to such areas of inconsistency and conflict; and 

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‘‘(B) information from medicare contractors that tracks the nature of written 

and telephone inquiries. 

‘‘(3) A report under paragraph (1) shall include a description of efforts by the Secretary to reduce such inconsistency or conflicts, and recommendations for legislation 

or administrative action that the Secretary determines appropriate to further reduce 

such inconsistency or conflicts.’’. 

Subtitle B—Contracting Reform 

SEC. 911. INCREASED FLEXIBILITY IN MEDICARE ADMINISTRATION. 

(a) CONSOLIDATION AND FLEXIBILITY IN MEDICARE ADMINISTRATION.— (1) IN GENERAL.—Title XVIII is amended by inserting after section 1874 the 

following new section: 

‘‘CONTRACTS WITH MEDICARE ADMINISTRATIVE CONTRACTORS

‘‘SEC. 1874A. (a) AUTHORITY.—

‘‘(1) AUTHORITY TO ENTER INTO CONTRACTS.—The Secretary may enter into 

contracts with any eligible entity to serve as a medicare administrative contractor with respect to the performance of any or all of the functions described 

in paragraph (4) or parts of those functions (or, to the extent provided in a contract, to secure performance thereof by other entities). 

‘‘(2) ELIGIBILITY OF ENTITIES.—An entity is eligible to enter into a contract 

with respect to the performance of a particular function described in paragraph 

(4) only if—

‘‘(A) the entity has demonstrated capability to carry out such function; 

‘‘(B) the entity complies with such conflict of interest standards as are 

generally applicable to Federal acquisition and procurement; 

‘‘(C) the entity has sufficient assets to financially support the performance of such function; and 

‘‘(D) the entity meets such other requirements as the Secretary may impose. 

‘‘(3) MEDICARE ADMINISTRATIVE CONTRACTOR DEFINED.—For purposes of this 

title and title XI—

‘‘(A) IN GENERAL.—The term ‘medicare administrative contractor’ means 

an agency, organization, or other person with a contract under this section. 

‘‘(B) APPROPRIATE MEDICARE ADMINISTRATIVE CONTRACTOR.—With respect 

to the performance of a particular function in relation to an individual entitled to benefits under part A or enrolled under part B, or both, a specific 

provider of services or supplier (or class of such providers of services or suppliers), the ‘appropriate’ medicare administrative contractor is the medicare 

administrative contractor that has a contract under this section with respect to the performance of that function in relation to that individual, provider of services or supplier or class of provider of services or supplier. 

‘‘(4) FUNCTIONS DESCRIBED.—The functions referred to in paragraphs (1) and 

(2) are payment functions, provider services functions, and functions relating to 

services furnished to individuals entitled to benefits under part A or enrolled 

under part B, or both, as follows: 

‘‘(A) DETERMINATION OF PAYMENT AMOUNTS.—Determining (subject to the 

provisions of section 1878 and to such review by the Secretary as may be 

provided for by the contracts) the amount of the payments required pursuant to this title to be made to providers of services, suppliers and individuals. 

‘‘(B) MAKING PAYMENTS.—Making payments described in subparagraph 

(A) (including receipt, disbursement, and accounting for funds in making 

such payments). 

‘‘(C) BENEFICIARY EDUCATION AND ASSISTANCE.—Providing education and 

outreach to individuals entitled to benefits under part A or enrolled under 

part B, or both, and providing assistance to those individuals with specific 

issues, concerns or problems. 

‘‘(D) PROVIDER CONSULTATIVE SERVICES.—Providing consultative services 

to institutions, agencies, and other persons to enable them to establish and 

maintain fiscal records necessary for purposes of this title and otherwise to 

qualify as providers of services or suppliers. 

‘‘(E) COMMUNICATION WITH PROVIDERS.—Communicating to providers of 

services and suppliers any information or instructions furnished to the 

medicare administrative contractor by the Secretary, and facilitating communication between such providers and suppliers and the Secretary. 

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‘‘(F) PROVIDER EDUCATION AND TECHNICAL ASSISTANCE.—Performing the 

functions relating to provider education, training, and technical assistance. 

‘‘(G) ADDITIONAL FUNCTIONS.—Performing such other functions as are 

necessary to carry out the purposes of this title. 

‘‘(5) RELATIONSHIP TO MIP CONTRACTS.—

‘‘(A) NONDUPLICATION OF DUTIES.—In entering into contracts under this 

section, the Secretary shall assure that functions of medicare administrative contractors in carrying out activities under parts A and B do not duplicate activities carried out under the Medicare Integrity Program under section 1893. The previous sentence shall not apply with respect to the activity 

described in section 1893(b)(5) (relating to prior authorization of certain 

items of durable medical equipment under section 1834(a)(15)). 

‘‘(B) CONSTRUCTION.—An entity shall not be treated as a medicare administrative contractor merely by reason of having entered into a contract with 

the Secretary under section 1893. 

‘‘(6) APPLICATION OF FEDERAL ACQUISITION REGULATION.—Except to the extent 

inconsistent with a specific requirement of this title, the Federal Acquisition 

Regulation applies to contracts under this title. 

‘‘(b) CONTRACTING REQUIREMENTS.—

‘‘(1) USE OF COMPETITIVE PROCEDURES.—

‘‘(A) IN GENERAL.—Except as provided in laws with general applicability 

to Federal acquisition and procurement or in subparagraph (B), the Secretary shall use competitive procedures when entering into contracts with 

medicare administrative contractors under this section, taking into account 

performance quality as well as price and other factors. 

‘‘(B) RENEWAL OF CONTRACTS.—The Secretary may renew a contract with 

a medicare administrative contractor under this section from term to term 

without regard to section 5 of title 41, United States Code, or any other provision of law requiring competition, if the medicare administrative contractor has met or exceeded the performance requirements applicable with 

respect to the contract and contractor, except that the Secretary shall provide for the application of competitive procedures under such a contract not 

less frequently than once every five years. 

‘‘(C) TRANSFER OF FUNCTIONS.—The Secretary may transfer functions 

among medicare administrative contractors consistent with the provisions 

of this paragraph. The Secretary shall ensure that performance quality is 

considered in such transfers. The Secretary shall provide public notice 

(whether in the Federal Register or otherwise) of any such transfer (including a description of the functions so transferred, a description of the providers of services and suppliers affected by such transfer, and contact information for the contractors involved). 

‘‘(D) INCENTIVES FOR QUALITY.—The Secretary shall provide incentives for 

medicare administrative contractors to provide quality service and to promote efficiency. 

‘‘(2) COMPLIANCE WITH REQUIREMENTS.—No contract under this section shall 

be entered into with any medicare administrative contractor unless the Secretary finds that such medicare administrative contractor will perform its obligations under the contract efficiently and effectively and will meet such requirements as to financial responsibility, legal authority, quality of services provided, 

and other matters as the Secretary finds pertinent. 

‘‘(3) PERFORMANCE REQUIREMENTS.—

‘‘(A) DEVELOPMENT OF SPECIFIC PERFORMANCE REQUIREMENTS.—In developing contract performance requirements, the Secretary shall develop performance requirements applicable to functions described in subsection 

(a)(4). 

‘‘(B) CONSULTATION.— In developing such requirements, the Secretary 

may consult with providers of services and suppliers, organizations representing individuals entitled to benefits under part A or enrolled under 

part B, or both, and organizations and agencies performing functions necessary to carry out the purposes of this section with respect to such performance requirements. 

‘‘(C) INCLUSION IN CONTRACTS.—All contractor performance requirements 

shall be set forth in the contract between the Secretary and the appropriate 

medicare administrative contractor. Such performance requirements—

‘‘(i) shall reflect the performance requirements developed under subparagraph (A), but may include additional performance requirements; 

‘‘(ii) shall be used for evaluating contractor performance under the 

contract; and 

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‘‘(iii) shall be consistent with the written statement of work provided 

under the contract. 

‘‘(4) INFORMATION REQUIREMENTS.—The Secretary shall not enter into a contract with a medicare administrative contractor under this section unless the 

contractor agrees—

‘‘(A) to furnish to the Secretary such timely information and reports as 

the Secretary may find necessary in performing his functions under this 

title; and 

‘‘(B) to maintain such records and afford such access thereto as the Secretary finds necessary to assure the correctness and verification of the information and reports under subparagraph (A) and otherwise to carry out 

the purposes of this title. 

‘‘(5) SURETY BOND.—A contract with a medicare administrative contractor 

under this section may require the medicare administrative contractor, and any 

of its officers or employees certifying payments or disbursing funds pursuant to 

the contract, or otherwise participating in carrying out the contract, to give surety bond to the United States in such amount as the Secretary may deem appropriate. 

‘‘(c) TERMS AND CONDITIONS.— ‘‘(1) IN GENERAL.—A contract with any medicare administrative contractor 

under this section may contain such terms and conditions as the Secretary finds 

necessary or appropriate and may provide for advances of funds to the medicare 

administrative contractor for the making of payments by it under subsection 

(a)(4)(B). 

‘‘(2) PROHIBITION ON MANDATES FOR CERTAIN DATA COLLECTION.—The Secretary may not require, as a condition of entering into, or renewing, a contract 

under this section, that the medicare administrative contractor match data obtained other than in its activities under this title with data used in the administration of this title for purposes of identifying situations in which the provisions 

of section 1862(b) may apply. 

‘‘(d) LIMITATION ON LIABILITY OF MEDICARE ADMINISTRATIVE CONTRACTORS AND

CERTAIN OFFICERS.—

‘‘(1) CERTIFYING OFFICER.—No individual designated pursuant to a contract 

under this section as a certifying officer shall, in the absence of the reckless disregard of the individual’s obligations or the intent by that individual to defraud 

the United States, be liable with respect to any payments certified by the individual under this section. 

‘‘(2) DISBURSING OFFICER.—No disbursing officer shall, in the absence of the 

reckless disregard of the officer’s obligations or the intent by that officer to defraud the United States, be liable with respect to any payment by such officer 

under this section if it was based upon an authorization (which meets the applicable requirements for such internal controls established by the Comptroller 

General) of a certifying officer designated as provided in paragraph (1) of this 

subsection. 

‘‘(3) LIABILITY OF MEDICARE ADMINISTRATIVE CONTRACTOR.—

‘‘(A) IN GENERAL.—No medicare administrative contractor shall be liable to 

the United States for a payment by a certifying or disbursing officer unless, in 

connection with such payment, the medicare administrative contractor acted 

with reckless disregard of its obligations under its medicare administrative contract or with intent to defraud the United States. 

‘‘(B) RELATIONSHIP TO FALSE CLAIMS ACT.—Nothing in this subsection shall be 

construed to limit liability for conduct that would constitute a violation of sections 3729 through 3731 of title 31, United States Code (commonly known as 

the ‘False Claims Act’). 

‘‘(4) INDEMNIFICATION BY SECRETARY.—

‘‘(A) IN GENERAL.—Subject to subparagraphs (B) and (D), in the case of 

a medicare administrative contractor (or a person who is a director, officer, 

or employee of such a contractor or who is engaged by the contractor to participate directly in the claims administration process) who is made a party 

to any judicial or administrative proceeding arising from or relating directly 

to the claims administration process under this title, the Secretary may, to 

the extent the Secretary determines to be appropriate and as specified in 

the contract with the contractor, indemnify the contractor and such persons. 

‘‘(B) CONDITIONS.—The Secretary may not provide indemnification under 

subparagraph (A) insofar as the liability for such costs arises directly from 

conduct that is determined by the judicial proceeding or by the Secretary 

to be criminal in nature, fraudulent, or grossly negligent. If indemnification 

is provided by the Secretary with respect to a contractor before a deterVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00113 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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mination that such costs arose directly from such conduct, the contractor 

shall reimburse the Secretary for costs of indemnification. 

‘‘(C) SCOPE OF INDEMNIFICATION.—Indemnification by the Secretary under 

subparagraph (A) may include payment of judgments, settlements (subject 

to subparagraph (D)), awards, and costs (including reasonable legal expenses). 

‘‘(D) WRITTEN APPROVAL FOR SETTLEMENTS.—A contractor or other person 

described in subparagraph (A) may not propose to negotiate a settlement 

or compromise of a proceeding described in such subparagraph without the 

prior written approval of the Secretary to negotiate such settlement or compromise. Any indemnification under subparagraph (A) with respect to 

amounts paid under a settlement or compromise of a proceeding described 

in such subparagraph are conditioned upon prior written approval by the 

Secretary of the final settlement or compromise. 

‘‘(E) CONSTRUCTION.—Nothing in this paragraph shall be construed—

‘‘(i) to change any common law immunity that may be available to 

a medicare administrative contractor or person described in subparagraph (A); or 

‘‘(ii) to permit the payment of costs not otherwise allowable, reasonable, or allocable under the Federal Acquisition Regulations.’’. 

(2) CONSIDERATION OF INCORPORATION OF CURRENT LAW STANDARDS.—In developing contract performance requirements under section 1874A(b) of the Social Security Act, as inserted by paragraph (1), the Secretary shall consider inclusion of the performance standards described in sections 1816(f)(2) of such Act 

(relating to timely processing of reconsiderations and applications for exemptions) and section 1842(b)(2)(B) of such Act (relating to timely review of determinations and fair hearing requests), as such sections were in effect before the 

date of the enactment of this Act. 

(b) CONFORMING AMENDMENTS TO SECTION 1816 (RELATING TO FISCAL INTERMEDIARIES).—Section 1816 (42 U.S.C. 1395h) is amended as follows: 

(1) The heading is amended to read as follows: 

‘‘PROVISIONS RELATING TO THE ADMINISTRATION OF PART A’’. 

(2) Subsection (a) is amended to read as follows: 

‘‘(a) The administration of this part shall be conducted through contracts with 

medicare administrative contractors under section 1874A.’’. 

(3) Subsection (b) is repealed. 

(4) Subsection (c) is amended—

(A) by striking paragraph (1); and 

(B) in each of paragraphs (2)(A) and (3)(A), by striking ‘‘agreement under 

this section’’ and inserting ‘‘contract under section 1874A that provides for 

making payments under this part’’. 

(5) Subsections (d) through (i) are repealed. 

(6) Subsections (j) and (k) are each amended—

(A) by striking ‘‘An agreement with an agency or organization under this 

section’’ and inserting ‘‘A contract with a medicare administrative contractor under section 1874A with respect to the administration of this part’’; 

and 

(B) by striking ‘‘such agency or organization’’ and inserting ‘‘such medicare administrative contractor’’ each place it appears. 

(7) Subsection (l) is repealed. 

(c) CONFORMING AMENDMENTS TO SECTION 1842 (RELATING TO CARRIERS).—Section 1842 (42 U.S.C. 1395u) is amended as follows: 

(1) The heading is amended to read as follows: 

‘‘PROVISIONS RELATING TO THE ADMINISTRATION OF PART B’’. 

(2) Subsection (a) is amended to read as follows: 

‘‘(a) The administration of this part shall be conducted through contracts with 

medicare administrative contractors under section 1874A.’’. 

(3) Subsection (b) is amended—

(A) by striking paragraph (1); 

(B) in paragraph (2)—

(i) by striking subparagraphs (A) and (B); 

(ii) in subparagraph (C), by striking ‘‘carriers’’ and inserting ‘‘medicare administrative contractors’’; and 

(iii) by striking subparagraphs (D) and (E); 

(C) in paragraph (3)—

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(i) in the matter before subparagraph (A), by striking ‘‘Each such contract shall provide that the carrier’’ and inserting ‘‘The Secretary’’; 

(ii) by striking ‘‘will’’ the first place it appears in each of subparagraphs (A), (B), (F), (G), (H), and (L) and inserting ‘‘shall’’; 

(iii) in subparagraph (B), in the matter before clause (i), by striking 

‘‘to the policyholders and subscribers of the carrier’’ and inserting ‘‘to 

the policyholders and subscribers of the medicare administrative contractor’’; 

(iv) by striking subparagraphs (C), (D), and (E); 

(v) in subparagraph (H)—

(I) by striking ‘‘if it makes determinations or payments with respect to physicians’ services,’’ in the matter preceding clause (i); 

and 

(II) by striking ‘‘carrier’’ and inserting ‘‘medicare administrative 

contractor’’ in clause (i); 

(vi) by striking subparagraph (I); 

(vii) in subparagraph (L), by striking the semicolon and inserting a 

period; 

(viii) in the first sentence, after subparagraph (L), by striking ‘‘and 

shall contain’’ and all that follows through the period; and 

(ix) in the seventh sentence, by inserting ‘‘medicare administrative 

contractor,’’ after ‘‘carrier,’’; and 

(D) by striking paragraph (5); 

(E) in paragraph (6)(D)(iv), by striking ‘‘carrier’’ and inserting ‘‘medicare 

administrative contractor’’; and 

(F) in paragraph (7), by striking ‘‘the carrier’’ and inserting ‘‘the Secretary’’ each place it appears. 

(4) Subsection (c) is amended—

(A) by striking paragraph (1); 

(B) in paragraph (2)(A), by striking ‘‘contract under this section which 

provides for the disbursement of funds, as described in subsection (a)(1)(B),’’ 

and inserting ‘‘contract under section 1874A that provides for making payments under this part’’; 

(C) in paragraph (3)(A), by striking ‘‘subsection (a)(1)(B)’’ and inserting 

‘‘section 1874A(a)(3)(B)’’; 

(D) in paragraph (4), in the matter preceding subparagraph (A), by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’; and 

(E) by striking paragraphs (5) and (6). 

(5) Subsections (d), (e), and (f) are repealed. 

(6) Subsection (g) is amended by striking ‘‘carrier or carriers’’ and inserting 

‘‘medicare administrative contractor or contractors’’. 

(7) Subsection (h) is amended—

(A) in paragraph (2)—

(i) by striking ‘‘Each carrier having an agreement with the Secretary 

under subsection (a)’’ and inserting ‘‘The Secretary’’; and 

(ii) by striking ‘‘Each such carrier’’ and inserting ‘‘The Secretary’’; 

(B) in paragraph (3)(A)—

(i) by striking ‘‘a carrier having an agreement with the Secretary 

under subsection (a)’’ and inserting ‘‘medicare administrative contractor 

having a contract under section 1874A that provides for making payments under this part’’; and 

(ii) by striking ‘‘such carrier’’ and inserting ‘‘such contractor’’; 

(C) in paragraph (3)(B)—

(i) by striking ‘‘a carrier’’ and inserting ‘‘a medicare administrative 

contractor’’ each place it appears; and 

(ii) by striking ‘‘the carrier’’ and inserting ‘‘the contractor’’ each place 

it appears; and 

(D) in paragraphs (5)(A) and (5)(B)(iii), by striking ‘‘carriers’’ and inserting ‘‘medicare administrative contractors’’ each place it appears. 

(8) Subsection (l) is amended—

(A) in paragraph (1)(A)(iii), by striking ‘‘carrier’’ and inserting ‘‘medicare 

administrative contractor’’; and 

(B) in paragraph (2), by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’. 

(9) Subsection (p)(3)(A) is amended by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’. 

(10) Subsection (q)(1)(A) is amended by striking ‘‘carrier’’. 

(d) EFFECTIVE DATE; TRANSITION RULE.—

(1) EFFECTIVE DATE.—

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(A) IN GENERAL.—Except as otherwise provided in this subsection, the 

amendments made by this section shall take effect on October 1, 2005, and 

the Secretary is authorized to take such steps before such date as may be 

necessary to implement such amendments on a timely basis. 

(B) CONSTRUCTION FOR CURRENT CONTRACTS.—Such amendments shall 

not apply to contracts in effect before the date specified under subparagraph (A) that continue to retain the terms and conditions in effect on such 

date (except as otherwise provided under this Act, other than under this 

section) until such date as the contract is let out for competitive bidding 

under such amendments. 

(C) DEADLINE FOR COMPETITIVE BIDDING.—The Secretary shall provide for 

the letting by competitive bidding of all contracts for functions of medicare 

administrative contractors for annual contract periods that begin on or after 

October 1, 2010. 

(D) WAIVER OF PROVIDER NOMINATION PROVISIONS DURING TRANSITION.— During the period beginning on the date of the enactment of this Act and 

before the date specified under subparagraph (A), the Secretary may enter 

into new agreements under section 1816 of the Social Security Act (42 

U.S.C. 1395h) without regard to any of the provider nomination provisions 

of such section. 

(2) GENERAL TRANSITION RULES.—The Secretary shall take such steps, consistent with paragraph (1)(B) and (1)(C), as are necessary to provide for an appropriate transition from contracts under section 1816 and section 1842 of the 

Social Security Act (42 U.S.C. 1395h, 1395u) to contracts under section 1874A, 

as added by subsection (a)(1). 

(3) AUTHORIZING CONTINUATION OF MIP FUNCTIONS UNDER CURRENT CON- TRACTS AND AGREEMENTS AND UNDER ROLLOVER CONTRACTS.—The provisions 

contained in the exception in section 1893(d)(2) of the Social Security Act (42 

U.S.C. 1395ddd(d)(2)) shall continue to apply notwithstanding the amendments 

made by this section, and any reference in such provisions to an agreement or 

contract shall be deemed to include a contract under section 1874A of such Act, 

as inserted by subsection (a)(1), that continues the activities referred to in such 

provisions. 

(e) REFERENCES.—On and after the effective date provided under subsection (d)(1), 

any reference to a fiscal intermediary or carrier under title XI or XVIII of the Social 

Security Act (or any regulation, manual instruction, interpretative rule, statement 

of policy, or guideline issued to carry out such titles) shall be deemed a reference 

to a medicare administrative contractor (as provided under section 1874A of the Social Security Act). 

(f) REPORTS ON IMPLEMENTATION.— (1) PLAN FOR IMPLEMENTATION.—By not later than October 1, 2004, the Secretary shall submit a report to Congress and the Comptroller General of the 

United States that describes the plan for implementation of the amendments 

made by this section. The Comptroller General shall conduct an evaluation of 

such plan and shall submit to Congress, not later than 6 months after the date 

the report is received, a report on such evaluation and shall include in such report such recommendations as the Comptroller General deems appropriate. 

(2) STATUS OF IMPLEMENTATION.—The Secretary shall submit a report to Congress not later than October 1, 2008, that describes the status of implementation of such amendments and that includes a description of the following: 

(A) The number of contracts that have been competitively bid as of such 

date. 

(B) The distribution of functions among contracts and contractors. 

(C) A timeline for complete transition to full competition. 

(D) A detailed description of how the Secretary has modified oversight 

and management of medicare contractors to adapt to full competition. 

SEC. 912. REQUIREMENTS FOR INFORMATION SECURITY FOR MEDICARE ADMINISTRATIVE 

CONTRACTORS. 

(a) IN GENERAL.—Section 1874A, as added by section 911(a)(1), is amended by 

adding at the end the following new subsection: 

‘‘(e) REQUIREMENTS FOR INFORMATION SECURITY.—

‘‘(1) DEVELOPMENT OF INFORMATION SECURITY PROGRAM.—A medicare administrative contractor that performs the functions referred to in subparagraphs (A) 

and (B) of subsection (a)(4) (relating to determining and making payments) 

shall implement a contractor-wide information security program to provide information security for the operation and assets of the contractor with respect 

to such functions under this title. An information security program under this 

paragraph shall meet the requirements for information security programs imposed on Federal agencies under paragraphs (1) through (8) of section 3544(b) 

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of title 44, United States Code (other than the requirements under paragraphs 

(2)(D)(i), (5)(A), and (5)(B) of such section). 

‘‘(2) INDEPENDENT AUDITS.—

‘‘(A) PERFORMANCE OF ANNUAL EVALUATIONS.—Each year a medicare administrative contractor that performs the functions referred to in subparagraphs (A) and (B) of subsection (a)(4) (relating to determining and making 

payments) shall undergo an evaluation of the information security of the 

contractor with respect to such functions under this title. The evaluation 

shall—

‘‘(i) be performed by an entity that meets such requirements for independence as the Inspector General of the Department of Health and 

Human Services may establish; and 

‘‘(ii) test the effectiveness of information security control techniques 

of an appropriate subset of the contractor’s information systems (as defined in section 3502(8) of title 44, United States Code) relating to such 

functions under this title and an assessment of compliance with the requirements of this subsection and related information security policies, 

procedures, standards and guidelines, including policies and procedures 

as may be prescribed by the Director of the Office of Management and 

Budget and applicable information security standards promulgated 

under section 11331 of title 40, United States Code. 

‘‘(B) DEADLINE FOR INITIAL EVALUATION.—

‘‘(i) NEW CONTRACTORS.—In the case of a medicare administrative 

contractor covered by this subsection that has not previously performed 

the functions referred to in subparagraphs (A) and (B) of subsection 

(a)(4) (relating to determining and making payments) as a fiscal intermediary or carrier under section 1816 or 1842, the first independent 

evaluation conducted pursuant subparagraph (A) shall be completed 

prior to commencing such functions. 

‘‘(ii) OTHER CONTRACTORS.—In the case of a medicare administrative 

contractor covered by this subsection that is not described in clause (i), 

the first independent evaluation conducted pursuant subparagraph (A) 

shall be completed within 1 year after the date the contractor commences functions referred to in clause (i) under this section. 

‘‘(C) REPORTS ON EVALUATIONS.—

‘‘(i) TO THE DEPARTMENT OF HEALTH AND HUMAN SERVICES.—The results of independent evaluations under subparagraph (A) shall be submitted promptly to the Inspector General of the Department of Health 

and Human Services and to the Secretary. 

‘‘(ii) TO CONGRESS.—The Inspector General of Department of Health 

and Human Services shall submit to Congress annual reports on the 

results of such evaluations, including assessments of the scope and sufficiency of such evaluations. 

‘‘(iii) AGENCY REPORTING.—The Secretary shall address the results of 

such evaluations in reports required under section 3544(c) of title 44, 

United States Code.’’. 

(b) APPLICATION OF REQUIREMENTS TO FISCAL INTERMEDIARIES AND CARRIERS.—

(1) IN GENERAL.—The provisions of section 1874A(e)(2) of the Social Security 

Act (other than subparagraph (B)), as added by subsection (a), shall apply to 

each fiscal intermediary under section 1816 of the Social Security Act (42 U.S.C. 

1395h) and each carrier under section 1842 of such Act (42 U.S.C. 1395u) in 

the same manner as they apply to medicare administrative contractors under 

such provisions. 

(2) DEADLINE FOR INITIAL EVALUATION.—In the case of such a fiscal intermediary or carrier with an agreement or contract under such respective section 

in effect as of the date of the enactment of this Act, the first evaluation under 

section 1874A(e)(2)(A) of the Social Security Act (as added by subsection (a)), 

pursuant to paragraph (1), shall be completed (and a report on the evaluation 

submitted to the Secretary) by not later than 1 year after such date. 

Subtitle C—Education and Outreach 

SEC. 921. PROVIDER EDUCATION AND TECHNICAL ASSISTANCE. 

(a) COORDINATION OF EDUCATION FUNDING.—

(1) IN GENERAL.—Title XVIII is amended by inserting after section 1888 the 

following new section: 

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‘‘PROVIDER EDUCATION AND TECHNICAL ASSISTANCE

‘‘SEC. 1889. (a) COORDINATION OF EDUCATION FUNDING.—The Secretary shall coordinate the educational activities provided through medicare contractors (as defined in subsection (g), including under section 1893) in order to maximize the effectiveness of Federal education efforts for providers of services and suppliers.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. 

(3) REPORT.—Not later than October 1, 2004, the Secretary shall submit to 

Congress a report that includes a description and evaluation of the steps taken 

to coordinate the funding of provider education under section 1889(a) of the Social Security Act, as added by paragraph (1). 

(b) INCENTIVES TO IMPROVE CONTRACTOR PERFORMANCE.—

(1) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended by section 912(a), is amended by adding at the end the following new subsection: 

‘‘(f) INCENTIVES TO IMPROVE CONTRACTOR PERFORMANCE IN PROVIDER EDUCATION

AND OUTREACH.—The Secretary shall use specific claims payment error rates or 

similar methodology of medicare administrative contractors in the processing or reviewing of medicare claims in order to give such contractors an incentive to implement effective education and outreach programs for providers of services and suppliers.’’. 

(2) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of 

section 1874A(f) of the Social Security Act, as added by paragraph (1), shall 

apply to each fiscal intermediary under section 1816 of the Social Security Act 

(42 U.S.C. 1395h) and each carrier under section 1842 of such Act (42 U.S.C. 

1395u) in the same manner as they apply to medicare administrative contractors under such provisions. 

(3) GAO REPORT ON ADEQUACY OF METHODOLOGY.—Not later than October 1, 

2004, the Comptroller General of the United States shall submit to Congress 

and to the Secretary a report on the adequacy of the methodology under section 

1874A(f) of the Social Security Act, as added by paragraph (1), and shall include 

in the report such recommendations as the Comptroller General determines appropriate with respect to the methodology. 

(4) REPORT ON USE OF METHODOLOGY IN ASSESSING CONTRACTOR PERFORMANCE.—Not later than October 1, 2004, the Secretary shall submit to Congress 

a report that describes how the Secretary intends to use such methodology in 

assessing medicare contractor performance in implementing effective education 

and outreach programs, including whether to use such methodology as a basis 

for performance bonuses. The report shall include an analysis of the sources of 

identified errors and potential changes in systems of contractors and rules of 

the Secretary that could reduce claims error rates. 

(c) PROVISION OF ACCESS TO AND PROMPT RESPONSES FROM MEDICARE ADMINISTRATIVE CONTRACTORS.—

(1) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended by section 912(a) and subsection (b), is further amended by adding at the 

end the following new subsection: 

‘‘(g) COMMUNICATIONS WITH BENEFICIARIES, PROVIDERS OF SERVICES AND SUPPLIERS.—

‘‘(1) COMMUNICATION STRATEGY.—The Secretary shall develop a strategy for 

communications with individuals entitled to benefits under part A or enrolled 

under part B, or both, and with providers of services and suppliers under this 

title. 

‘‘(2) RESPONSE TO WRITTEN INQUIRIES.—Each medicare administrative contractor shall, for those providers of services and suppliers which submit claims 

to the contractor for claims processing and for those individuals entitled to benefits under part A or enrolled under part B, or both, with respect to whom 

claims are submitted for claims processing, provide general written responses 

(which may be through electronic transmission) in a clear, concise, and accurate 

manner to inquiries of providers of services, suppliers and individuals entitled 

to benefits under part A or enrolled under part B, or both, concerning the programs under this title within 45 business days of the date of receipt of such 

inquiries. 

‘‘(3) RESPONSE TO TOLL-FREE LINES.—The Secretary shall ensure that each 

medicare administrative contractor shall provide, for those providers of services 

and suppliers which submit claims to the contractor for claims processing and 

for those individuals entitled to benefits under part A or enrolled under part 

B, or both, with respect to whom claims are submitted for claims processing, 

a toll-free telephone number at which such individuals, providers of services 

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and suppliers may obtain information regarding billing, coding, claims, coverage, and other appropriate information under this title. 

‘‘(4) MONITORING OF CONTRACTOR RESPONSES.— ‘‘(A) IN GENERAL.—Each medicare administrative contractor shall, consistent with standards developed by the Secretary under subparagraph 

(B)—

‘‘(i) maintain a system for identifying who provides the information 

referred to in paragraphs (2) and (3); and 

‘‘(ii) monitor the accuracy, consistency, and timeliness of the information so provided. 

‘‘(B) DEVELOPMENT OF STANDARDS.— ‘‘(i) IN GENERAL.—The Secretary shall establish and make public 

standards to monitor the accuracy, consistency, and timeliness of the 

information provided in response to written and telephone inquiries 

under this subsection. Such standards shall be consistent with the performance requirements established under subsection (b)(3). 

‘‘(ii) EVALUATION.—In conducting evaluations of individual medicare 

administrative contractors, the Secretary shall take into account the results of the monitoring conducted under subparagraph (A) taking into 

account as performance requirements the standards established under 

clause (i). The Secretary shall, in consultation with organizations representing providers of services, suppliers, and individuals entitled to 

benefits under part A or enrolled under part B, or both, establish 

standards relating to the accuracy, consistency, and timeliness of the 

information so provided. 

‘‘(C) DIRECT MONITORING.—Nothing in this paragraph shall be construed 

as preventing the Secretary from directly monitoring the accuracy, consistency, and timeliness of the information so provided.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect October 1, 2004. 

(3) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of 

section 1874A(g) of the Social Security Act, as added by paragraph (1), shall 

apply to each fiscal intermediary under section 1816 of the Social Security Act 

(42 U.S.C. 1395h) and each carrier under section 1842 of such Act (42 U.S.C. 

1395u) in the same manner as they apply to medicare administrative contractors under such provisions. 

(d) IMPROVED PROVIDER EDUCATION AND TRAINING.—

(1) IN GENERAL.—Section 1889, as added by subsection (a), is amended by 

adding at the end the following new subsections: 

‘‘(b) ENHANCED EDUCATION AND TRAINING.—

‘‘(1) ADDITIONAL RESOURCES.—There are authorized to be appropriated to the 

Secretary (in appropriate part from the Federal Hospital Insurance Trust Fund 

and the Federal Supplementary Medical Insurance Trust Fund) $25,000,000 for 

each of fiscal years 2005 and 2006 and such sums as may be necessary for succeeding fiscal years. 

‘‘(2) USE.—The funds made available under paragraph (1) shall be used to increase the conduct by medicare contractors of education and training of providers of services and suppliers regarding billing, coding, and other appropriate 

items and may also be used to improve the accuracy, consistency, and timeliness of contractor responses. 

‘‘(c) TAILORING EDUCATION AND TRAINING ACTIVITIES FOR SMALL PROVIDERS OR

SUPPLIERS.—

‘‘(1) IN GENERAL.—Insofar as a medicare contractor conducts education and 

training activities, it shall tailor such activities to meet the special needs of 

small providers of services or suppliers (as defined in paragraph (2)). 

‘‘(2) SMALL PROVIDER OF SERVICES OR SUPPLIER.—In this subsection, the term 

‘small provider of services or supplier’ means—

‘‘(A) a provider of services with fewer than 25 full-time-equivalent employees; or 

‘‘(B) a supplier with fewer than 10 full-time-equivalent employees.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(e) REQUIREMENT TO MAINTAIN INTERNET SITES.—

(1) IN GENERAL.—Section 1889, as added by subsection (a) and as amended 

by subsection (d), is further amended by adding at the end the following new 

subsection: 

‘‘(d) INTERNET SITES; FAQS.—The Secretary, and each medicare contractor insofar 

as it provides services (including claims processing) for providers of services or suppliers, shall maintain an Internet site which—

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‘‘(1) provides answers in an easily accessible format to frequently asked questions, and 

‘‘(2) includes other published materials of the contractor, 

that relate to providers of services and suppliers under the programs under this title 

(and title XI insofar as it relates to such programs).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(f) ADDITIONAL PROVIDER EDUCATION PROVISIONS.—

(1) IN GENERAL.—Section 1889, as added by subsection (a) and as amended 

by subsections (d) and (e), is further amended by adding at the end the following new subsections: 

‘‘(e) ENCOURAGEMENT OF PARTICIPATION IN EDUCATION PROGRAM ACTIVITIES.—A 

medicare contractor may not use a record of attendance at (or failure to attend) educational activities or other information gathered during an educational program conducted under this section or otherwise by the Secretary to select or track providers 

of services or suppliers for the purpose of conducting any type of audit or prepayment review. 

‘‘(f) CONSTRUCTION.—Nothing in this section or section 1893(g) shall be construed 

as providing for disclosure by a medicare contractor of information that would compromise pending law enforcement activities or reveal findings of law enforcementrelated audits. 

‘‘(g) DEFINITIONS.—For purposes of this section, the term ‘medicare contractor’ includes the following: 

‘‘(1) A medicare administrative contractor with a contract under section 

1874A, including a fiscal intermediary with a contract under section 1816 and 

a carrier with a contract under section 1842. 

‘‘(2) An eligible entity with a contract under section 1893. 

Such term does not include, with respect to activities of a specific provider of services or supplier an entity that has no authority under this title or title IX with respect to such activities and such provider of services or supplier.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. 

SEC. 922. SMALL PROVIDER TECHNICAL ASSISTANCE DEMONSTRATION PROGRAM. 

(a) ESTABLISHMENT.—

(1) IN GENERAL.—The Secretary shall establish a demonstration program (in 

this section referred to as the ‘‘demonstration program’’) under which technical 

assistance described in paragraph (2) is made available, upon request and on 

a voluntary basis, to small providers of services or suppliers in order to improve 

compliance with the applicable requirements of the programs under medicare 

program under title XVIII of the Social Security Act (including provisions of 

title XI of such Act insofar as they relate to such title and are not administered 

by the Office of the Inspector General of the Department of Health and Human 

Services). 

(2) FORMS OF TECHNICAL ASSISTANCE.—The technical assistance described in 

this paragraph is—

(A) evaluation and recommendations regarding billing and related systems; and 

(B) information and assistance regarding policies and procedures under 

the medicare program, including coding and reimbursement. 

(3) SMALL PROVIDERS OF SERVICES OR SUPPLIERS.—In this section, the term 

‘‘small providers of services or suppliers’’ means—

(A) a provider of services with fewer than 25 full-time-equivalent employees; or 

(B) a supplier with fewer than 10 full-time-equivalent employees. 

(b) QUALIFICATION OF CONTRACTORS.—In conducting the demonstration program, 

the Secretary shall enter into contracts with qualified organizations (such as peer 

review organizations or entities described in section 1889(g)(2) of the Social Security 

Act, as inserted by section 5(f)(1)) with appropriate expertise with billing systems 

of the full range of providers of services and suppliers to provide the technical assistance. In awarding such contracts, the Secretary shall consider any prior investigations of the entity’s work by the Inspector General of Department of Health and 

Human Services or the Comptroller General of the United States. 

(c) DESCRIPTION OF TECHNICAL ASSISTANCE.—The technical assistance provided 

under the demonstration program shall include a direct and in-person examination 

of billing systems and internal controls of small providers of services or suppliers 

to determine program compliance and to suggest more efficient or effective means 

of achieving such compliance. 

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(d) AVOIDANCE OF RECOVERY ACTIONS FOR PROBLEMS IDENTIFIED AS CORRECTED.—The Secretary shall provide that, absent evidence of fraud and notwithstanding any other provision of law, any errors found in a compliance review for 

a small provider of services or supplier that participates in the demonstration program shall not be subject to recovery action if the technical assistance personnel 

under the program determine that—

(1) the problem that is the subject of the compliance review has been corrected to their satisfaction within 30 days of the date of the visit by such personnel to the small provider of services or supplier; and 

(2) such problem remains corrected for such period as is appropriate. 

The previous sentence applies only to claims filed as part of the demonstration program and lasts only for the duration of such program and only as long as the small 

provider of services or supplier is a participant in such program. 

(e) GAO EVALUATION.—Not later than 2 years after the date of the date the demonstration program is first implemented, the Comptroller General, in consultation 

with the Inspector General of the Department of Health and Human Services, shall 

conduct an evaluation of the demonstration program. The evaluation shall include 

a determination of whether claims error rates are reduced for small providers of 

services or suppliers who participated in the program and the extent of improper 

payments made as a result of the demonstration program. The Comptroller General 

shall submit a report to the Secretary and the Congress on such evaluation and 

shall include in such report recommendations regarding the continuation or extension of the demonstration program. 

(f) FINANCIAL PARTICIPATION BY PROVIDERS.—The provision of technical assistance 

to a small provider of services or supplier under the demonstration program is conditioned upon the small provider of services or supplier paying an amount estimated 

(and disclosed in advance of a provider’s or supplier’s participation in the program) 

to be equal to 25 percent of the cost of the technical assistance. 

(g) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated 

to the Secretary (in appropriate part from the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund) to carry out 

the demonstration program— 

(1) for fiscal year 2005, $1,000,000, and 

(2) for fiscal year 2006, $6,000,000. 

SEC. 923. MEDICARE PROVIDER OMBUDSMAN; MEDICARE BENEFICIARY OMBUDSMAN. 

(a) MEDICARE PROVIDER OMBUDSMAN.—Section 1868 (42 U.S.C. 1395ee) is amended—

(1) by adding at the end of the heading the following: ‘‘; MEDICARE PROVIDER

OMBUDSMAN’’; 

(2) by inserting ‘‘PRACTICING PHYSICIANS ADVISORY COUNCIL.—(1)’’ after ‘‘(a)’’; 

(3) in paragraph (1), as so redesignated under paragraph (2), by striking ‘‘in 

this section’’ and inserting ‘‘in this subsection’’; 

(4) by redesignating subsections (b) and (c) as paragraphs (2) and (3), respectively; and 

(5) by adding at the end the following new subsection: 

‘‘(b) MEDICARE PROVIDER OMBUDSMAN.—The Secretary shall appoint within the 

Department of Health and Human Services a Medicare Provider Ombudsman. The 

Ombudsman shall—

‘‘(1) provide assistance, on a confidential basis, to providers of services and 

suppliers with respect to complaints, grievances, and requests for information 

concerning the programs under this title (including provisions of title XI insofar 

as they relate to this title and are not administered by the Office of the Inspector General of the Department of Health and Human Services) and in the resolution of unclear or conflicting guidance given by the Secretary and medicare 

contractors to such providers of services and suppliers regarding such programs 

and provisions and requirements under this title and such provisions; and 

‘‘(2) submit recommendations to the Secretary for improvement in the administration of this title and such provisions, including—

‘‘(A) recommendations to respond to recurring patterns of confusion in 

this title and such provisions (including recommendations regarding suspending imposition of sanctions where there is widespread confusion in program administration), and 

‘‘(B) recommendations to provide for an appropriate and consistent response (including not providing for audits) in cases of self-identified overpayments by providers of services and suppliers. 

The Ombudsman shall not serve as an advocate for any increases in payments or 

new coverage of services, but may identify issues and problems in payment or coverage policies.’’. 

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(b) MEDICARE BENEFICIARY OMBUDSMAN.—Title XVIII, as previously amended, is 

amended by inserting after section 1809 the following new section: 

‘‘MEDICARE BENEFICIARY OMBUDSMAN

‘‘SEC. 1810. (a) IN GENERAL.—The Secretary shall appoint within the Department 

of Health and Human Services a Medicare Beneficiary Ombudsman who shall have 

expertise and experience in the fields of health care and education of (and assistance to) individuals entitled to benefits under this title. 

‘‘(b) DUTIES.—The Medicare Beneficiary Ombudsman shall—

‘‘(1) receive complaints, grievances, and requests for information submitted by 

individuals entitled to benefits under part A or enrolled under part B, or both, 

with respect to any aspect of the medicare program; 

‘‘(2) provide assistance with respect to complaints, grievances, and requests 

referred to in paragraph (1), including—

‘‘(A) assistance in collecting relevant information for such individuals, to 

seek an appeal of a decision or determination made by a fiscal intermediary, carrier, Medicare+Choice organization, or the Secretary; 

‘‘(B) assistance to such individuals with any problems arising from 

disenrollment from a Medicare+Choice plan under part C; and 

‘‘(C) assistance to such individuals in presenting information under section 1860D–2(b)(4)(D)(v); and 

‘‘(3) submit annual reports to Congress and the Secretary that describe the 

activities of the Office and that include such recommendations for improvement 

in the administration of this title as the Ombudsman determines appropriate. 

The Ombudsman shall not serve as an advocate for any increases in payments or 

new coverage of services, but may identify issues and problems in payment or coverage policies. 

‘‘(c) WORKING WITH HEALTH INSURANCE COUNSELING PROGRAMS.—To the extent 

possible, the Ombudsman shall work with health insurance counseling programs 

(receiving funding under section 4360 of Omnibus Budget Reconciliation Act of 

1990) to facilitate the provision of information to individuals entitled to benefits 

under part A or enrolled under part B, or both regarding Medicare+Choice plans 

and changes to those plans. Nothing in this subsection shall preclude further collaboration between the Ombudsman and such programs.’’. 

(c) DEADLINE FOR APPOINTMENT.—The Secretary shall appoint the Medicare Provider Ombudsman and the Medicare Beneficiary Ombudsman, under the amendments made by subsections (a) and (b), respectively, by not later than 1 year after 

the date of the enactment of this Act. 

(d) FUNDING.—There are authorized to be appropriated to the Secretary (in appropriate part from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund) to carry out the provisions of subsection 

(b) of section 1868 of the Social Security Act (relating to the Medicare Provider Ombudsman), as added by subsection (a)(5) and section 1807 of such Act (relating to 

the Medicare Beneficiary Ombudsman), as added by subsection (b), such sums as 

are necessary for fiscal year 2004 and each succeeding fiscal year. 

(e) USE OF CENTRAL, TOLL-FREE NUMBER (1–800–MEDICARE).—

(1) PHONE TRIAGE SYSTEM; LISTING IN MEDICARE HANDBOOK INSTEAD OF OTHER

TOLL-FREE NUMBERS.—Section 1804(b) (42 U.S.C. 1395b–2(b)) is amended by 

adding at the end the following: ‘‘The Secretary shall provide, through the tollfree number 1–800–MEDICARE, for a means by which individuals seeking information about, or assistance with, such programs who phone such toll-free 

number are transferred (without charge) to appropriate entities for the provision of such information or assistance. Such toll-free number shall be the tollfree number listed for general information and assistance in the annual notice 

under subsection (a) instead of the listing of numbers of individual contractors.’’. 

(2) MONITORING ACCURACY.—

(A) STUDY.—The Comptroller General of the United States shall conduct 

a study to monitor the accuracy and consistency of information provided to 

individuals entitled to benefits under part A or enrolled under part B, or 

both, through the toll-free number 1–800–MEDICARE, including an assessment of whether the information provided is sufficient to answer questions 

of such individuals. In conducting the study, the Comptroller General shall 

examine the education and training of the individuals providing information through such number. 

(B) REPORT.—Not later than 1 year after the date of the enactment of this 

Act, the Comptroller General shall submit to Congress a report on the 

study conducted under subparagraph (A). 

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SEC. 924. BENEFICIARY OUTREACH DEMONSTRATION PROGRAM. 

(a) IN GENERAL.—The Secretary shall establish a demonstration program (in this 

section referred to as the ‘‘demonstration program’’) under which medicare specialists employed by the Department of Health and Human Services provide advice and 

assistance to individuals entitled to benefits under part A of title XVIII of the Social 

Security Act, or enrolled under part B of such title, or both, regarding the medicare 

program at the location of existing local offices of the Social Security Administration. 

(b) LOCATIONS.— (1) IN GENERAL.—The demonstration program shall be conducted in at least 

6 offices or areas. Subject to paragraph (2), in selecting such offices and areas, 

the Secretary shall provide preference for offices with a high volume of visits 

by individuals referred to in subsection (a). 

(2) ASSISTANCE FOR RURAL BENEFICIARIES.—The Secretary shall provide for 

the selection of at least 2 rural areas to participate in the demonstration program. In conducting the demonstration program in such rural areas, the Secretary shall provide for medicare specialists to travel among local offices in a 

rural area on a scheduled basis. 

(c) DURATION.—The demonstration program shall be conducted over a 3-year period. 

(d) EVALUATION AND REPORT.— (1) EVALUATION.—The Secretary shall provide for an evaluation of the demonstration program. Such evaluation shall include an analysis of—

(A) utilization of, and satisfaction of those individuals referred to in subsection (a) with, the assistance provided under the program; and 

(B) the cost-effectiveness of providing beneficiary assistance through outstationing medicare specialists at local offices of the Social Security Administration. 

(2) REPORT.—The Secretary shall submit to Congress a report on such evaluation and shall include in such report recommendations regarding the feasibility 

of permanently out-stationing medicare specialists at local offices of the Social 

Security Administration. 

SEC. 925. INCLUSION OF ADDITIONAL INFORMATION IN NOTICES TO BENEFICIARIES ABOUT 

SKILLED NURSING FACILITY BENEFITS. 

(a) IN GENERAL.—The Secretary shall provide that in medicare beneficiary notices 

provided (under section 1806(a) of the Social Security Act, 42 U.S.C. 1395b–7(a)) 

with respect to the provision of post-hospital extended care services under part A 

of title XVIII of the Social Security Act, there shall be included information on the 

number of days of coverage of such services remaining under such part for the medicare beneficiary and spell of illness involved. 

(b) EFFECTIVE DATE.—Subsection (a) shall apply to notices provided during calendar quarters beginning more than 6 months after the date of the enactment of 

this Act. 

SEC. 926. INFORMATION ON MEDICARE-CERTIFIED SKILLED NURSING FACILITIES IN HOSPITAL DISCHARGE PLANS. 

(a) AVAILABILITY OF DATA.—The Secretary shall publicly provide information that 

enables hospital discharge planners, medicare beneficiaries, and the public to identify skilled nursing facilities that are participating in the medicare program. 

(b) INCLUSION OF INFORMATION IN CERTAIN HOSPITAL DISCHARGE PLANS.— (1) IN GENERAL.—Section 1861(ee)(2)(D) (42 U.S.C. 1395x(ee)(2)(D)) is amended—

(A) by striking ‘‘hospice services’’ and inserting ‘‘hospice care and posthospital extended care services’’; and 

(B) by inserting before the period at the end the following: ‘‘and, in the 

case of individuals who are likely to need post-hospital extended care services, the availability of such services through facilities that participate in 

the program under this title and that serve the area in which the patient 

resides’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

discharge plans made on or after such date as the Secretary shall specify, but 

not later than 6 months after the date the Secretary provides for availability 

of information under subsection (a). 

Subtitle D—Appeals and Recovery 

SEC. 931. TRANSFER OF RESPONSIBILITY FOR MEDICARE APPEALS. 

(a) TRANSITION PLAN.—

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(1) IN GENERAL.—Not later than October 1, 2004, the Commissioner of Social 

Security and the Secretary shall develop and transmit to Congress and the 

Comptroller General of the United States a plan under which the functions of 

administrative law judges responsible for hearing cases under title XVIII of the 

Social Security Act (and related provisions in title XI of such Act) are transferred from the responsibility of the Commissioner and the Social Security Administration to the Secretary and the Department of Health and Human Services. 

(2) GAO EVALUATION.—The Comptroller General of the United States shall 

evaluate the plan and, not later than the date that is 6 months after the date 

on which the plan is received by the Comptroller General, shall submit to Congress a report on such evaluation. 

(b) TRANSFER OF ADJUDICATION AUTHORITY.—

(1) IN GENERAL.—Not earlier than July 1, 2005, and not later than October 

1, 2005, the Commissioner of Social Security and the Secretary shall implement 

the transition plan under subsection (a) and transfer the administrative law 

judge functions described in such subsection from the Social Security Administration to the Secretary. 

(2) ASSURING INDEPENDENCE OF JUDGES.—The Secretary shall assure the 

independence of administrative law judges performing the administrative law 

judge functions transferred under paragraph (1) from the Centers for Medicare 

& Medicaid Services and its contractors. In order to assure such independence, 

the Secretary shall place such judges in an administrative office that is organizationally and functionally separate from such Centers. Such judges shall report 

to, and be under the general supervision of, the Secretary, but shall not report 

to, or be subject to supervision by, another other officer of the Department. 

(3) GEOGRAPHIC DISTRIBUTION.—The Secretary shall provide for an appropriate geographic distribution of administrative law judges performing the administrative law judge functions transferred under paragraph (1) throughout 

the United States to ensure timely access to such judges. 

(4) HIRING AUTHORITY.—Subject to the amounts provided in advance in appropriations Act, the Secretary shall have authority to hire administrative law 

judges to hear such cases, giving priority to those judges with prior experience 

in handling medicare appeals and in a manner consistent with paragraph (3), 

and to hire support staff for such judges. 

(5) FINANCING.—Amounts payable under law to the Commissioner for administrative law judges performing the administrative law judge functions transferred under paragraph (1) from the Federal Hospital Insurance Trust Fund 

and the Federal Supplementary Medical Insurance Trust Fund shall become 

payable to the Secretary for the functions so transferred. 

(6) SHARED RESOURCES.—The Secretary shall enter into such arrangements 

with the Commissioner as may be appropriate with respect to transferred functions of administrative law judges to share office space, support staff, and other 

resources, with appropriate reimbursement from the Trust Funds described in 

paragraph (5). 

(c) INCREASED FINANCIAL SUPPORT.—In addition to any amounts otherwise appropriated, to ensure timely action on appeals before administrative law judges and the 

Departmental Appeals Board consistent with section 1869 of the Social Security Act 

(as amended by section 521 of BIPA, 114 Stat. 2763A–534), there are authorized to 

be appropriated (in appropriate part from the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund) to the Secretary such sums as are necessary for fiscal year 2005 and each subsequent fiscal 

year to—

(1) increase the number of administrative law judges (and their staffs) under 

subsection (b)(4); 

(2) improve education and training opportunities for administrative law 

judges (and their staffs); and 

(3) increase the staff of the Departmental Appeals Board. 

(d) CONFORMING AMENDMENT.—Section 1869(f)(2)(A)(i) (42 U.S.C. 

1395ff(f)(2)(A)(i)), as added by section 522(a) of BIPA (114 Stat. 2763A–543), is 

amended by striking ‘‘of the Social Security Administration’’. 

SEC. 932. PROCESS FOR EXPEDITED ACCESS TO REVIEW. 

(a) EXPEDITED ACCESS TO JUDICIAL REVIEW.—Section 1869(b) (42 U.S.C. 1395ff(b)) 

as amended by BIPA, is amended—

(1) in paragraph (1)(A), by inserting ‘‘, subject to paragraph (2),’’ before ‘‘to 

judicial review of the Secretary’s final decision’’; 

(2) in paragraph (1)(F)—

(A) by striking clause (ii); 

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(B) by striking ‘‘PROCEEDING’’ and all that follows through ‘‘DETERMINA- TION’’ and inserting ‘‘DETERMINATIONS AND RECONSIDERATIONS’’; and 

(C) by redesignating subclauses (I) and (II) as clauses (i) and (ii) and by 

moving the indentation of such subclauses (and the matter that follows) 2 

ems to the left; and 

(3) by adding at the end the following new paragraph: 

‘‘(2) EXPEDITED ACCESS TO JUDICIAL REVIEW.— ‘‘(A) IN GENERAL.—The Secretary shall establish a process under which 

a provider of services or supplier that furnishes an item or service or an 

individual entitled to benefits under part A or enrolled under part B, or 

both, who has filed an appeal under paragraph (1) may obtain access to judicial review when a review panel (described in subparagraph (D)), on its 

own motion or at the request of the appellant, determines that no entity 

in the administrative appeals process has the authority to decide the question of law or regulation relevant to the matters in controversy and that 

there is no material issue of fact in dispute. The appellant may make such 

request only once with respect to a question of law or regulation in a case 

of an appeal. 

‘‘(B) PROMPT DETERMINATIONS.—If, after or coincident with appropriately 

filing a request for an administrative hearing, the appellant requests a determination by the appropriate review panel that no review panel has the 

authority to decide the question of law or regulations relevant to the matters in controversy and that there is no material issue of fact in dispute 

and if such request is accompanied by the documents and materials as the 

appropriate review panel shall require for purposes of making such determination, such review panel shall make a determination on the request in 

writing within 60 days after the date such review panel receives the request and such accompanying documents and materials. Such a determination by such review panel shall be considered a final decision and not subject to review by the Secretary. 

‘‘(C) ACCESS TO JUDICIAL REVIEW.—

‘‘(i) IN GENERAL.—If the appropriate review panel—

‘‘(I) determines that there are no material issues of fact in dispute and that the only issue is one of law or regulation that no review panel has the authority to decide; or 

‘‘(II) fails to make such determination within the period provided 

under subparagraph (B); 

then the appellant may bring a civil action as described in this subparagraph. 

‘‘(ii) DEADLINE FOR FILING.—Such action shall be filed, in the case described in—

‘‘(I) clause (i)(I), within 60 days of date of the determination described in such subparagraph; or 

‘‘(II) clause (i)(II), within 60 days of the end of the period provided under subparagraph (B) for the determination. 

‘‘(iii) VENUE.—Such action shall be brought in the district court of the 

United States for the judicial district in which the appellant is located 

(or, in the case of an action brought jointly by more than one applicant, 

the judicial district in which the greatest number of applicants are located) or in the district court for the District of Columbia. 

‘‘(iv) INTEREST ON AMOUNTS IN CONTROVERSY.—Where a provider of 

services or supplier seeks judicial review pursuant to this paragraph, 

the amount in controversy shall be subject to annual interest beginning 

on the first day of the first month beginning after the 60-day period 

as determined pursuant to clause (ii) and equal to the rate of interest 

on obligations issued for purchase by the Federal Hospital Insurance 

Trust Fund and by the Federal Supplementary Medical Insurance 

Trust Fund for the month in which the civil action authorized under 

this paragraph is commenced, to be awarded by the reviewing court in 

favor of the prevailing party. No interest awarded pursuant to the preceding sentence shall be deemed income or cost for the purposes of determining reimbursement due providers of services or suppliers under 

this Act. 

‘‘(D) REVIEW PANELS.—For purposes of this subsection, a ‘review panel’ is 

a panel consisting of 3 members (who shall be administrative law judges, 

members of the Departmental Appeals Board, or qualified individuals associated with a qualified independent contractor (as defined in subsection 

(c)(2)) or with another independent entity) designated by the Secretary for 

purposes of making determinations under this paragraph.’’. 

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(b) APPLICATION TO PROVIDER AGREEMENT DETERMINATIONS.—Section 1866(h)(1) 

(42 U.S.C. 1395cc(h)(1)) is amended—

(1) by inserting ‘‘(A)’’ after ‘‘(h)(1)’’; and 

(2) by adding at the end the following new subparagraph: 

‘‘(B) An institution or agency described in subparagraph (A) that has filed for a 

hearing under subparagraph (A) shall have expedited access to judicial review under 

this subparagraph in the same manner as providers of services, suppliers, and individuals entitled to benefits under part A or enrolled under part B, or both, may obtain expedited access to judicial review under the process established under section 

1869(b)(2). Nothing in this subparagraph shall be construed to affect the application 

of any remedy imposed under section 1819 during the pendency of an appeal under 

this subparagraph.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to appeals filed on or after October 1, 2004. 

(d) EXPEDITED REVIEW OF CERTAIN PROVIDER AGREEMENT DETERMINATIONS.—

(1) TERMINATION AND CERTAIN OTHER IMMEDIATE REMEDIES.—The Secretary 

shall develop and implement a process to expedite proceedings under sections 

1866(h) of the Social Security Act (42 U.S.C. 1395cc(h)) in which the remedy of 

termination of participation, or a remedy described in clause (i) or (iii) of section 

1819(h)(2)(B) of such Act (42 U.S.C. 1395i–3(h)(2)(B)) which is applied on an immediate basis, has been imposed. Under such process priority shall be provided 

in cases of termination. 

(2) INCREASED FINANCIAL SUPPORT.—In addition to any amounts otherwise appropriated, to reduce by 50 percent the average time for administrative determinations on appeals under section 1866(h) of the Social Security Act (42 U.S.C. 

1395cc(h)), there are authorized to be appropriated (in appropriate part from 

the Federal Hospital Insurance Trust Fund and the Federal Supplementary 

Medical Insurance Trust Fund) to the Secretary such additional sums for fiscal 

year 2005 and each subsequent fiscal year as may be necessary. The purposes 

for which such amounts are available include increasing the number of administrative law judges (and their staffs) and the appellate level staff at the Departmental Appeals Board of the Department of Health and Human Services and 

educating such judges and staffs on long-term care issues. 

SEC. 933. REVISIONS TO MEDICARE APPEALS PROCESS. 

(a) REQUIRING FULL AND EARLY PRESENTATION OF EVIDENCE.—

(1) IN GENERAL.—Section 1869(b) (42 U.S.C. 1395ff(b)), as amended by BIPA 

and as amended by section 932(a), is further amended by adding at the end the 

following new paragraph: 

‘‘(3) REQUIRING FULL AND EARLY PRESENTATION OF EVIDENCE BY PROVIDERS.—

A provider of services or supplier may not introduce evidence in any appeal 

under this section that was not presented at the reconsideration conducted by 

the qualified independent contractor under subsection (c), unless there is good 

cause which precluded the introduction of such evidence at or before that reconsideration.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(b) USE OF PATIENTS’ MEDICAL RECORDS.—Section 1869(c)(3)(B)(i) (42 U.S.C. 

1395ff(c)(3)(B)(i)), as amended by BIPA, is amended by inserting ‘‘(including the 

medical records of the individual involved)’’ after ‘‘clinical experience’’. 

(c) NOTICE REQUIREMENTS FOR MEDICARE APPEALS.— 

(1) INITIAL DETERMINATIONS AND REDETERMINATIONS.—Section 1869(a) (42 

U.S.C. 1395ff(a)), as amended by BIPA, is amended by adding at the end the 

following new paragraphs: 

‘‘(4) REQUIREMENTS OF NOTICE OF DETERMINATIONS.—With respect to an initial determination insofar as it results in a denial of a claim for benefits—

‘‘(A) the written notice on the determination shall include—

‘‘(i) the reasons for the determination, including whether a local medical review policy or a local coverage determination was used; 

‘‘(ii) the procedures for obtaining additional information concerning 

the determination, including the information described in subparagraph 

(B); and 

‘‘(iii) notification of the right to seek a redetermination or otherwise 

appeal the determination and instructions on how to initiate such a redetermination under this section; and 

‘‘(B) the person provided such notice may obtain, upon request, the specific provision of the policy, manual, or regulation used in making the determination. 

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‘‘(5) REQUIREMENTS OF NOTICE OF REDETERMINATIONS.—With respect to a redetermination insofar as it results in a denial of a claim for benefits—

‘‘(A) the written notice on the redetermination shall include—

‘‘(i) the specific reasons for the redetermination; 

‘‘(ii) as appropriate, a summary of the clinical or scientific evidence 

used in making the redetermination; 

‘‘(iii) a description of the procedures for obtaining additional information concerning the redetermination; and 

‘‘(iv) notification of the right to appeal the redetermination and instructions on how to initiate such an appeal under this section; 

‘‘(B) such written notice shall be provided in printed form and written in 

a manner calculated to be understood by the individual entitled to benefits 

under part A or enrolled under part B, or both; and 

‘‘(C) the person provided such notice may obtain, upon request, information on the specific provision of the policy, manual, or regulation used in 

making the redetermination.’’. 

(2) RECONSIDERATIONS.—Section 1869(c)(3)(E) (42 U.S.C. 1395ff(c)(3)(E)), as 

amended by BIPA, is amended—

(A) by inserting ‘‘be written in a manner calculated to be understood by 

the individual entitled to benefits under part A or enrolled under part B, 

or both, and shall include (to the extent appropriate)’’ after ‘‘in writing, ’’; 

and 

(B) by inserting ‘‘and a notification of the right to appeal such determination and instructions on how to initiate such appeal under this section’’ 

after ‘‘such decision,’’. 

(3) APPEALS.—Section 1869(d) (42 U.S.C. 1395ff(d)), as amended by BIPA, is 

amended—

(A) in the heading, by inserting ‘‘; NOTICE’’ after ‘‘SECRETARY’’; and 

(B) by adding at the end the following new paragraph: 

‘‘(4) NOTICE.—Notice of the decision of an administrative law judge shall be 

in writing in a manner calculated to be understood by the individual entitled 

to benefits under part A or enrolled under part B, or both, and shall include—

‘‘(A) the specific reasons for the determination (including, to the extent 

appropriate, a summary of the clinical or scientific evidence used in making 

the determination); 

‘‘(B) the procedures for obtaining additional information concerning the 

decision; and 

‘‘(C) notification of the right to appeal the decision and instructions on 

how to initiate such an appeal under this section.’’. 

(4) SUBMISSION OF RECORD FOR APPEAL.—Section 1869(c)(3)(J)(i) (42 U.S.C. 

1395ff(c)(3)(J)(i)) by striking ‘‘prepare’’ and inserting ‘‘submit’’ and by striking 

‘‘with respect to’’ and all that follows through ‘‘and relevant policies’’. 

(d) QUALIFIED INDEPENDENT CONTRACTORS.—

(1) ELIGIBILITY REQUIREMENTS OF QUALIFIED INDEPENDENT CONTRACTORS.—

Section 1869(c)(3) (42 U.S.C. 1395ff(c)(3)), as amended by BIPA, is amended—

(A) in subparagraph (A), by striking ‘‘sufficient training and expertise in 

medical science and legal matters’’ and inserting ‘‘sufficient medical, legal, 

and other expertise (including knowledge of the program under this title) 

and sufficient staffing’’; and 

(B) by adding at the end the following new subparagraph: 

‘‘(K) INDEPENDENCE REQUIREMENTS.—

‘‘(i) IN GENERAL.—Subject to clause (ii), a qualified independent contractor shall not conduct any activities in a case unless the entity—

‘‘(I) is not a related party (as defined in subsection (g)(5)); 

‘‘(II) does not have a material familial, financial, or professional 

relationship with such a party in relation to such case; and 

‘‘(III) does not otherwise have a conflict of interest with such a 

party. 

‘‘(ii) EXCEPTION FOR REASONABLE COMPENSATION.—Nothing in clause 

(i) shall be construed to prohibit receipt by a qualified independent contractor of compensation from the Secretary for the conduct of activities 

under this section if the compensation is provided consistent with 

clause (iii). 

‘‘(iii) LIMITATIONS ON ENTITY COMPENSATION.—Compensation provided by the Secretary to a qualified independent contractor in connection with reviews under this section shall not be contingent on any decision rendered by the contractor or by any reviewing professional.’’. 

(2) ELIGIBILITY REQUIREMENTS FOR REVIEWERS.—Section 1869 (42 U.S.C. 

1395ff), as amended by BIPA, is amended—

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(A) by amending subsection (c)(3)(D) to read as follows: 

‘‘(D) QUALIFICATIONS FOR REVIEWERS.—The requirements of subsection (g) 

shall be met (relating to qualifications of reviewing professionals).’’; and 

(B) by adding at the end the following new subsection: 

‘‘(g) QUALIFICATIONS OF REVIEWERS.— ‘‘(1) IN GENERAL.—In reviewing determinations under this section, a qualified 

independent contractor shall assure that—

‘‘(A) each individual conducting a review shall meet the qualifications of 

paragraph (2); 

‘‘(B) compensation provided by the contractor to each such reviewer is 

consistent with paragraph (3); and 

‘‘(C) in the case of a review by a panel described in subsection (c)(3)(B) 

composed of physicians or other health care professionals (each in this subsection referred to as a ‘reviewing professional’), a reviewing professional 

meets the qualifications described in paragraph (4) and, where a claim is 

regarding the furnishing of treatment by a physician (allopathic or osteopathic) or the provision of items or services by a physician (allopathic or 

osteopathic), a reviewing professional shall be a physician (allopathic or osteopathic). 

‘‘(2) INDEPENDENCE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), each individual conducting a review in a case shall—

‘‘(i) not be a related party (as defined in paragraph (5)); 

‘‘(ii) not have a material familial, financial, or professional relationship with such a party in the case under review; and 

‘‘(iii) not otherwise have a conflict of interest with such a party. 

‘‘(B) EXCEPTION.—Nothing in subparagraph (A) shall be construed to—

‘‘(i) prohibit an individual, solely on the basis of a participation agreement with a fiscal intermediary, carrier, or other contractor, from serving as a reviewing professional if—

‘‘(I) the individual is not involved in the provision of items or 

services in the case under review; 

‘‘(II) the fact of such an agreement is disclosed to the Secretary 

and the individual entitled to benefits under part A or enrolled 

under part B, or both, (or authorized representative) and neither 

party objects; and 

‘‘(III) the individual is not an employee of the intermediary, carrier, or contractor and does not provide services exclusively or primarily to or on behalf of such intermediary, carrier, or contractor; 

‘‘(ii) prohibit an individual who has staff privileges at the institution 

where the treatment involved takes place from serving as a reviewer 

merely on the basis of having such staff privileges if the existence of 

such privileges is disclosed to the Secretary and such individual (or authorized representative), and neither party objects; or 

‘‘(iii) prohibit receipt of compensation by a reviewing professional 

from a contractor if the compensation is provided consistent with paragraph (3). 

For purposes of this paragraph, the term ‘participation agreement’ means 

an agreement relating to the provision of health care services by the individual and does not include the provision of services as a reviewer under 

this subsection. 

‘‘(3) LIMITATIONS ON REVIEWER COMPENSATION.—Compensation provided by a 

qualified independent contractor to a reviewer in connection with a review 

under this section shall not be contingent on the decision rendered by the reviewer. 

‘‘(4) LICENSURE AND EXPERTISE.—Each reviewing professional shall be—

‘‘(A) a physician (allopathic or osteopathic) who is appropriately 

credentialed or licensed in one or more States to deliver health care services 

and has medical expertise in the field of practice that is appropriate for the 

items or services at issue; or 

‘‘(B) a health care professional who is legally authorized in one or more 

States (in accordance with State law or the State regulatory mechanism 

provided by State law) to furnish the health care items or services at issue 

and has medical expertise in the field of practice that is appropriate for 

such items or services. 

‘‘(5) RELATED PARTY DEFINED.—For purposes of this section, the term ‘related 

party’ means, with respect to a case under this title involving a specific individual entitled to benefits under part A or enrolled under part B, or both, any 

of the following: 

129

‘‘(A) The Secretary, the medicare administrative contractor involved, or 

any fiduciary, officer, director, or employee of the Department of Health 

and Human Services, or of such contractor. 

‘‘(B) The individual (or authorized representative). 

‘‘(C) The health care professional that provides the items or services involved in the case. 

‘‘(D) The institution at which the items or services (or treatment) involved 

in the case are provided. 

‘‘(E) The manufacturer of any drug or other item that is included in the 

items or services involved in the case. 

‘‘(F) Any other party determined under any regulations to have a substantial interest in the case involved.’’. 

(3) REDUCING MINIMUM NUMBER OF QUALIFIED INDEPENDENT CONTRACTORS.—

Section 1869(c)(4) (42 U.S.C. 1395ff(c)(4)) is amended by striking ‘‘not fewer 

than 12 qualified independent contractors under this subsection’’ and inserting 

‘‘with a sufficient number of qualified independent contractors (but not fewer 

than 4 such contractors) to conduct reconsiderations consistent with the timeframes applicable under this subsection’’. 

(4) EFFECTIVE DATE.—The amendments made by paragraphs (1) and (2) shall 

be effective as if included in the enactment of the respective provisions of subtitle C of title V of BIPA, (114 Stat. 2763A–534). 

(5) TRANSITION.—In applying section 1869(g) of the Social Security Act (as 

added by paragraph (2)), any reference to a medicare administrative contractor 

shall be deemed to include a reference to a fiscal intermediary under section 

1816 of the Social Security Act (42 U.S.C. 1395h) and a carrier under section 

1842 of such Act (42 U.S.C. 1395u). 

SEC. 934. PREPAYMENT REVIEW. 

(a) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended 

by sections 912(b), 921(b)(1), and 921(c)(1), is further amended by adding at the end 

the following new subsection: 

‘‘(h) CONDUCT OF PREPAYMENT REVIEW.—

‘‘(1) CONDUCT OF RANDOM PREPAYMENT REVIEW.—

‘‘(A) IN GENERAL.—A medicare administrative contractor may conduct 

random prepayment review only to develop a contractor-wide or programwide claims payment error rates or under such additional circumstances as 

may be provided under regulations, developed in consultation with providers of services and suppliers. 

‘‘(B) USE OF STANDARD PROTOCOLS WHEN CONDUCTING PREPAYMENT REVIEWS.—When a medicare administrative contractor conducts a random prepayment review, the contractor may conduct such review only in accordance 

with a standard protocol for random prepayment audits developed by the 

Secretary. 

‘‘(C) CONSTRUCTION.—Nothing in this paragraph shall be construed as 

preventing the denial of payments for claims actually reviewed under a random prepayment review. 

‘‘(D) RANDOM PREPAYMENT REVIEW.—For purposes of this subsection, the 

term ‘random prepayment review’ means a demand for the production of 

records or documentation absent cause with respect to a claim. 

‘‘(2) LIMITATIONS ON NON-RANDOM PREPAYMENT REVIEW.—

‘‘(A) LIMITATIONS ON INITIATION OF NON-RANDOM PREPAYMENT REVIEW.—

A medicare administrative contractor may not initiate non-random prepayment review of a provider of services or supplier based on the initial identification by that provider of services or supplier of an improper billing practice unless there is a likelihood of sustained or high level of payment error 

(as defined in subsection (i)(3)(A)). 

‘‘(B) TERMINATION OF NON-RANDOM PREPAYMENT REVIEW.—The Secretary 

shall issue regulations relating to the termination, including termination 

dates, of non-random prepayment review. Such regulations may vary such 

a termination date based upon the differences in the circumstances triggering prepayment review.’’. 

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendment made 

by subsection (a) shall take effect 1 year after the date of the enactment of this 

Act. 

(2) DEADLINE FOR PROMULGATION OF CERTAIN REGULATIONS.—The Secretary 

shall first issue regulations under section 1874A(h) of the Social Security Act, 

as added by subsection (a), by not later than 1 year after the date of the enactment of this Act. 

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(3) APPLICATION OF STANDARD PROTOCOLS FOR RANDOM PREPAYMENT REVIEW.—Section 1874A(h)(1)(B) of the Social Security Act, as added by subsection 

(a), shall apply to random prepayment reviews conducted on or after such date 

(not later than 1 year after the date of the enactment of this Act) as the Secretary shall specify. 

(c) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of section 1874A(h) of the Social Security Act, as added by subsection (a), shall apply to 

each fiscal intermediary under section 1816 of the Social Security Act (42 U.S.C. 

1395h) and each carrier under section 1842 of such Act (42 U.S.C. 1395u) in the 

same manner as they apply to medicare administrative contractors under such provisions. 

SEC. 935. RECOVERY OF OVERPAYMENTS. 

(a) IN GENERAL.—Section 1893 (42 U.S.C. 1395ddd) is amended by adding at the 

end the following new subsection: 

‘‘(f) RECOVERY OF OVERPAYMENTS.—

‘‘(1) USE OF REPAYMENT PLANS.—

‘‘(A) IN GENERAL.—If the repayment, within 30 days by a provider of services or supplier, of an overpayment under this title would constitute a hardship (as defined in subparagraph (B)), subject to subparagraph (C), upon request of the provider of services or supplier the Secretary shall enter into 

a plan with the provider of services or supplier for the repayment (through 

offset or otherwise) of such overpayment over a period of at least 6 months 

but not longer than 3 years (or not longer than 5 years in the case of extreme hardship, as determined by the Secretary). Interest shall accrue on 

the balance through the period of repayment. Such plan shall meet terms 

and conditions determined to be appropriate by the Secretary. 

‘‘(B) HARDSHIP.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A), the repayment 

of an overpayment (or overpayments) within 30 days is deemed to constitute a hardship if—

‘‘(I) in the case of a provider of services that files cost reports, 

the aggregate amount of the overpayments exceeds 10 percent of 

the amount paid under this title to the provider of services for the 

cost reporting period covered by the most recently submitted cost 

report; or 

‘‘(II) in the case of another provider of services or supplier, the 

aggregate amount of the overpayments exceeds 10 percent of the 

amount paid under this title to the provider of services or supplier 

for the previous calendar year. 

‘‘(ii) RULE OF APPLICATION.—The Secretary shall establish rules for 

the application of this subparagraph in the case of a provider of services or supplier that was not paid under this title during the previous 

year or was paid under this title only during a portion of that year. 

‘‘(iii) TREATMENT OF PREVIOUS OVERPAYMENTS.—If a provider of services or supplier has entered into a repayment plan under subparagraph 

(A) with respect to a specific overpayment amount, such payment 

amount under the repayment plan shall not be taken into account 

under clause (i) with respect to subsequent overpayment amounts. 

‘‘(C) EXCEPTIONS.—Subparagraph (A) shall not apply if—

‘‘(i) the Secretary has reason to suspect that the provider of services 

or supplier may file for bankruptcy or otherwise cease to do business 

or discontinue participation in the program under this title; or 

‘‘(ii) there is an indication of fraud or abuse committed against the 

program. 

‘‘(D) IMMEDIATE COLLECTION IF VIOLATION OF REPAYMENT PLAN.—If a provider of services or supplier fails to make a payment in accordance with a 

repayment plan under this paragraph, the Secretary may immediately seek 

to offset or otherwise recover the total balance outstanding (including applicable interest) under the repayment plan. 

‘‘(E) RELATION TO NO FAULT PROVISION.—Nothing in this paragraph shall 

be construed as affecting the application of section 1870(c) (relating to no 

adjustment in the cases of certain overpayments). 

‘‘(2) LIMITATION ON RECOUPMENT.—

‘‘(A) IN GENERAL.—In the case of a provider of services or supplier that 

is determined to have received an overpayment under this title and that 

seeks a reconsideration by a qualified independent contractor on such determination under section 1869(b)(1), the Secretary may not take any action 

(or authorize any other person, including any medicare contractor, as deVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00130 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
131

fined in subparagraph (C)) to recoup the overpayment until the date the decision on the reconsideration has been rendered. If the provisions of section 

1869(b)(1) (providing for such a reconsideration by a qualified independent 

contractor) are not in effect, in applying the previous sentence any reference to such a reconsideration shall be treated as a reference to a redetermination by the fiscal intermediary or carrier involved. 

‘‘(B) COLLECTION WITH INTEREST.—Insofar as the determination on such 

appeal is against the provider of services or supplier, interest on the overpayment shall accrue on and after the date of the original notice of overpayment. Insofar as such determination against the provider of services or supplier is later reversed, the Secretary shall provide for repayment of the 

amount recouped plus interest at the same rate as would apply under the 

previous sentence for the period in which the amount was recouped. 

‘‘(C) MEDICARE CONTRACTOR DEFINED.—For purposes of this subsection, 

the term ‘medicare contractor’ has the meaning given such term in section 

1889(g). 

‘‘(3) LIMITATION ON USE OF EXTRAPOLATION.—A medicare contractor may not 

use extrapolation to determine overpayment amounts to be recovered by 

recoupment, offset, or otherwise unless—

‘‘(A) there is a sustained or high level of payment error (as defined by the 

Secretary by regulation); or 

‘‘(B) documented educational intervention has failed to correct the payment error (as determined by the Secretary). 

‘‘(4) PROVISION OF SUPPORTING DOCUMENTATION.—In the case of a provider of 

services or supplier with respect to which amounts were previously overpaid, a 

medicare contractor may request the periodic production of records or supporting documentation for a limited sample of submitted claims to ensure that 

the previous practice is not continuing. 

‘‘(5) CONSENT SETTLEMENT REFORMS.—

‘‘(A) IN GENERAL.—The Secretary may use a consent settlement (as defined in subparagraph (D)) to settle a projected overpayment. 

‘‘(B) OPPORTUNITY TO SUBMIT ADDITIONAL INFORMATION BEFORE CONSENT

SETTLEMENT OFFER.—Before offering a provider of services or supplier a 

consent settlement, the Secretary shall—

‘‘(i) communicate to the provider of services or supplier—

‘‘(I) that, based on a review of the medical records requested by 

the Secretary, a preliminary evaluation of those records indicates 

that there would be an overpayment; 

‘‘(II) the nature of the problems identified in such evaluation; 

and 

‘‘(III) the steps that the provider of services or supplier should 

take to address the problems; and 

‘‘(ii) provide for a 45-day period during which the provider of services 

or supplier may furnish additional information concerning the medical 

records for the claims that had been reviewed. 

‘‘(C) CONSENT SETTLEMENT OFFER.—The Secretary shall review any additional information furnished by the provider of services or supplier under 

subparagraph (B)(ii). Taking into consideration such information, the Secretary shall determine if there still appears to be an overpayment. If so, the 

Secretary—

‘‘(i) shall provide notice of such determination to the provider of services or supplier, including an explanation of the reason for such determination; and 

‘‘(ii) in order to resolve the overpayment, may offer the provider of 

services or supplier—

‘‘(I) the opportunity for a statistically valid random sample; or 

‘‘(II) a consent settlement. 

The opportunity provided under clause (ii)(I) does not waive any appeal 

rights with respect to the alleged overpayment involved. 

‘‘(D) CONSENT SETTLEMENT DEFINED.—For purposes of this paragraph, the 

term ‘consent settlement’ means an agreement between the Secretary and 

a provider of services or supplier whereby both parties agree to settle a projected overpayment based on less than a statistically valid sample of claims 

and the provider of services or supplier agrees not to appeal the claims involved. 

‘‘(6) NOTICE OF OVER-UTILIZATION OF CODES.—The Secretary shall establish, in 

consultation with organizations representing the classes of providers of services 

and suppliers, a process under which the Secretary provides for notice to classes 

of providers of services and suppliers served by the contractor in cases in which 

132

the contractor has identified that particular billing codes may be overutilized 

by that class of providers of services or suppliers under the programs under this 

title (or provisions of title XI insofar as they relate to such programs). 

‘‘(7) PAYMENT AUDITS.—

‘‘(A) WRITTEN NOTICE FOR POST-PAYMENT AUDITS.—Subject to subparagraph (C), if a medicare contractor decides to conduct a post-payment audit 

of a provider of services or supplier under this title, the contractor shall 

provide the provider of services or supplier with written notice (which may 

be in electronic form) of the intent to conduct such an audit. 

‘‘(B) EXPLANATION OF FINDINGS FOR ALL AUDITS.—Subject to subparagraph (C), if a medicare contractor audits a provider of services or supplier 

under this title, the contractor shall—

‘‘(i) give the provider of services or supplier a full review and explanation of the findings of the audit in a manner that is understandable 

to the provider of services or supplier and permits the development of 

an appropriate corrective action plan; 

‘‘(ii) inform the provider of services or supplier of the appeal rights 

under this title as well as consent settlement options (which are at the 

discretion of the Secretary); 

‘‘(iii) give the provider of services or supplier an opportunity to provide additional information to the contractor; and 

‘‘(iv) take into account information provided, on a timely basis, by the 

provider of services or supplier under clause (iii). 

‘‘(C) EXCEPTION.—Subparagraphs (A) and (B) shall not apply if the provision of notice or findings would compromise pending law enforcement activities, whether civil or criminal, or reveal findings of law enforcement-related 

audits. 

‘‘(8) STANDARD METHODOLOGY FOR PROBE SAMPLING.—The Secretary shall establish a standard methodology for medicare contractors to use in selecting a 

sample of claims for review in the case of an abnormal billing pattern.’’. 

(b) EFFECTIVE DATES AND DEADLINES.—

(1) USE OF REPAYMENT PLANS.—Section 1893(f)(1) of the Social Security Act, 

as added by subsection (a), shall apply to requests for repayment plans made 

after the date of the enactment of this Act. 

(2) LIMITATION ON RECOUPMENT.—Section 1893(f)(2) of the Social Security Act, 

as added by subsection (a), shall apply to actions taken after the date of the 

enactment of this Act. 

(3) USE OF EXTRAPOLATION.—Section 1893(f)(3) of the Social Security Act, as 

added by subsection (a), shall apply to statistically valid random samples initiated after the date that is 1 year after the date of the enactment of this Act. 

(4) PROVISION OF SUPPORTING DOCUMENTATION.—Section 1893(f)(4) of the Social Security Act, as added by subsection (a), shall take effect on the date of 

the enactment of this Act. 

(5) CONSENT SETTLEMENT.—Section 1893(f)(5) of the Social Security Act, as 

added by subsection (a), shall apply to consent settlements entered into after 

the date of the enactment of this Act. 

(6) NOTICE OF OVERUTILIZATION.—Not later than 1 year after the date of the 

enactment of this Act, the Secretary shall first establish the process for notice 

of overutilization of billing codes under section 1893A(f)(6) of the Social Security 

Act, as added by subsection (a). 

(7) PAYMENT AUDITS.—Section 1893A(f)(7) of the Social Security Act, as added 

by subsection (a), shall apply to audits initiated after the date of the enactment 

of this Act. 

(8) STANDARD FOR ABNORMAL BILLING PATTERNS.—Not later than 1 year after 

the date of the enactment of this Act, the Secretary shall first establish a standard methodology for selection of sample claims for abnormal billing patterns 

under section 1893(f)(8) of the Social Security Act, as added by subsection (a). 

SEC. 936. PROVIDER ENROLLMENT PROCESS; RIGHT OF APPEAL. 

(a) IN GENERAL.—Section 1866 (42 U.S.C. 1395cc) is amended—

(1) by adding at the end of the heading the following: ‘‘; ENROLLMENT PROCESSES’’; and 

(2) by adding at the end the following new subsection: 

‘‘(j) ENROLLMENT PROCESS FOR PROVIDERS OF SERVICES AND SUPPLIERS.—

‘‘(1) ENROLLMENT PROCESS.—

‘‘(A) IN GENERAL.—The Secretary shall establish by regulation a process 

for the enrollment of providers of services and suppliers under this title. 

‘‘(B) DEADLINES.—The Secretary shall establish by regulation procedures 

under which there are deadlines for actions on applications for enrollment 

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(and, if applicable, renewal of enrollment). The Secretary shall monitor the 

performance of medicare administrative contractors in meeting the deadlines established under this subparagraph. 

‘‘(C) CONSULTATION BEFORE CHANGING PROVIDER ENROLLMENT FORMS.— The Secretary shall consult with providers of services and suppliers before 

making changes in the provider enrollment forms required of such providers and suppliers to be eligible to submit claims for which payment may 

be made under this title. 

‘‘(2) HEARING RIGHTS IN CASES OF DENIAL OR NON-RENEWAL.—A provider of 

services or supplier whose application to enroll (or, if applicable, to renew enrollment) under this title is denied may have a hearing and judicial review of 

such denial under the procedures that apply under subsection (h)(1)(A) to a provider of services that is dissatisfied with a determination by the Secretary.’’. 

(b) EFFECTIVE DATES.— (1) ENROLLMENT PROCESS.—The Secretary shall provide for the establishment 

of the enrollment process under section 1866(j)(1) of the Social Security Act, as 

added by subsection (a)(2), within 6 months after the date of the enactment of 

this Act. 

(2) CONSULTATION.—Section 1866(j)(1)(C) of the Social Security Act, as added 

by subsection (a)(2), shall apply with respect to changes in provider enrollment 

forms made on or after January 1, 2004. 

(3) HEARING RIGHTS.—Section 1866(j)(2) of the Social Security Act, as added 

by subsection (a)(2), shall apply to denials occurring on or after such date (not 

later than 1 year after the date of the enactment of this Act) as the Secretary 

specifies. 

SEC. 937. PROCESS FOR CORRECTION OF MINOR ERRORS AND OMISSIONS WITHOUT PURSUING APPEALS PROCESS. 

(a) CLAIMS.—The Secretary shall develop, in consultation with appropriate medicare contractors (as defined in section 1889(g) of the Social Security Act, as inserted 

by section 301(a)(1)) and representatives of providers of services and suppliers, a 

process whereby, in the case of minor errors or omissions (as defined by the Secretary) that are detected in the submission of claims under the programs under title 

XVIII of such Act, a provider of services or supplier is given an opportunity to correct such an error or omission without the need to initiate an appeal. Such process 

shall include the ability to resubmit corrected claims. 

(b) PERMITTING USE OF CORRECTED AND SUPPLEMENTARY DATA.—

(1) IN GENERAL.—Section 1886(d)(10)(D)(vi) (42 U.S.C. 1395ww(d)(10)(D)(vi)) 

is amended by adding after subclause (II) at the end the following: 

‘‘Notwithstanding subclause (I), a hospital may submit, and the Secretary may accept upon verification, data that corrects or supplements the data described in such 

subclause without regard to whether the corrected or supplementary data relate to 

a cost report that has been settled.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

fiscal years beginning with fiscal year 2004. 

(3) SUBMITTAL AND RESUBMITTAL OF APPLICATIONS PERMITTED FOR FISCAL

YEAR 2004.—

(A) IN GENERAL.—Notwithstanding any other provision of law, a hospital 

may submit (or resubmit) an application for a change described in section 

1886(d)(10)(C)(i)(II) of the Social Security Act for fiscal year 2004 if the hospital demonstrates on a timely basis to the satisfaction of the Secretary 

that the use of corrected or supplementary data under the amendment 

made by paragraph (1) would materially affect the approval of such an application. 

(B) APPLICATION OF BUDGET NEUTRALITY.—If one or more hospital’s applications are approved as a result of paragraph (1) and subparagraph (A) for 

fiscal year 2004, the Secretary shall make a proportional adjustment in the 

standardized amounts determined under section 1886(d)(3) of the Social Security Act (42 U.S.C. 1395ww(d)(3)) for fiscal year 2004 to assure that approval of such applications does not result in aggregate payments under 

section 1886(d) of such Act that are greater or less than those that would 

otherwise be made if paragraph (1) and subparagraph (A) did not apply. 

SEC. 938. PRIOR DETERMINATION PROCESS FOR CERTAIN ITEMS AND SERVICES; ADVANCE 

BENEFICIARY NOTICES. 

(a) IN GENERAL.—Section 1869 (42 U.S.C. 1395ff(b)), as amended by sections 521 

and 522 of BIPA and section 933(d)(2)(B), is further amended by adding at the end 

the following new subsection: 

‘‘(h) PRIOR DETERMINATION PROCESS FOR CERTAIN ITEMS AND SERVICES.—

‘‘(1) ESTABLISHMENT OF PROCESS.—

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‘‘(A) IN GENERAL.—With respect to a medicare administrative contractor 

that has a contract under section 1874A that provides for making payments 

under this title with respect to eligible items and services described in subparagraph (C), the Secretary shall establish a prior determination process 

that meets the requirements of this subsection and that shall be applied by 

such contractor in the case of eligible requesters. 

‘‘(B) ELIGIBLE REQUESTER.—For purposes of this subsection, each of the 

following shall be an eligible requester: 

‘‘(i) A physician, but only with respect to eligible items and services 

for which the physician may be paid directly. 

‘‘(ii) An individual entitled to benefits under this title, but only with 

respect to an item or service for which the individual receives, from the 

physician who may be paid directly for the item or service, an advance 

beneficiary notice under section 1879(a) that payment may not be made 

(or may no longer be made) for the item or service under this title. 

‘‘(C) ELIGIBLE ITEMS AND SERVICES.—For purposes of this subsection and 

subject to paragraph (2), eligible items and services are items and services 

which are physicians’ services (as defined in paragraph (4)(A) of section 

1848(f) for purposes of calculating the sustainable growth rate under such 

section). 

‘‘(2) SECRETARIAL FLEXIBILITY.—The Secretary shall establish by regulation 

reasonable limits on the categories of eligible items and services for which a 

prior determination of coverage may be requested under this subsection. In establishing such limits, the Secretary may consider the dollar amount involved 

with respect to the item or service, administrative costs and burdens, and other 

relevant factors. 

‘‘(3) REQUEST FOR PRIOR DETERMINATION.—

‘‘(A) IN GENERAL.—Subject to paragraph (2), under the process established 

under this subsection an eligible requester may submit to the contractor a 

request for a determination, before the furnishing of an eligible item or 

service involved as to whether the item or service is covered under this title 

consistent with the applicable requirements of section 1862(a)(1)(A) (relating to medical necessity). 

‘‘(B) ACCOMPANYING DOCUMENTATION.—The Secretary may require that 

the request be accompanied by a description of the item or service, supporting documentation relating to the medical necessity for the item or 

service, and any other appropriate documentation. In the case of a request 

submitted by an eligible requester who is described in paragraph (1)(B)(ii), 

the Secretary may require that the request also be accompanied by a copy 

of the advance beneficiary notice involved. 

‘‘(4) RESPONSE TO REQUEST.—

‘‘(A) IN GENERAL.—Under such process, the contractor shall provide the 

eligible requester with written notice of a determination as to whether—

‘‘(i) the item or service is so covered; 

‘‘(ii) the item or service is not so covered; or 

‘‘(iii) the contractor lacks sufficient information to make a coverage 

determination. 

If the contractor makes the determination described in clause (iii), the contractor shall include in the notice a description of the additional information required to make the coverage determination. 

‘‘(B) DEADLINE TO RESPOND.—Such notice shall be provided within the 

same time period as the time period applicable to the contractor providing 

notice of initial determinations on a claim for benefits under subsection 

(a)(2)(A). 

‘‘(C) INFORMING BENEFICIARY IN CASE OF PHYSICIAN REQUEST.—In the case 

of a request in which an eligible requester is not the individual described 

in paragraph (1)(B)(ii), the process shall provide that the individual to 

whom the item or service is proposed to be furnished shall be informed of 

any determination described in clause (ii) (relating to a determination of 

non-coverage) and the right (referred to in paragraph (6)(B)) to obtain the 

item or service and have a claim submitted for the item or service. 

‘‘(5) EFFECT OF DETERMINATIONS.—

‘‘(A) BINDING NATURE OF POSITIVE DETERMINATION.—If the contractor 

makes the determination described in paragraph (4)(A)(i), such determination shall be binding on the contractor in the absence of fraud or evidence 

of misrepresentation of facts presented to the contractor. 

‘‘(B) NOTICE AND RIGHT TO REDETERMINATION IN CASE OF A DENIAL.—

‘‘(i) IN GENERAL.—If the contractor makes the determination described in paragraph (4)(A)(ii)—

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‘‘(I) the eligible requester has the right to a redetermination by 

the contractor on the determination that the item or service is not 

so covered; and 

‘‘(II) the contractor shall include in notice under paragraph (4)(A) 

a brief explanation of the basis for the determination, including on 

what national or local coverage or noncoverage determination (if 

any) the determination is based, and the right to such a redetermination. 

‘‘(ii) DEADLINE FOR REDETERMINATIONS.—The contractor shall complete and provide notice of such redetermination within the same time 

period as the time period applicable to the contractor providing notice 

of redeterminations relating to a claim for benefits under subsection 

(a)(3)(C)(ii). 

‘‘(6) LIMITATION ON FURTHER REVIEW.—

‘‘(A) IN GENERAL.—Contractor determinations described in paragraph 

(4)(A)(ii) or (4)(A)(iii) (and redeterminations made under paragraph (5)(B)), 

relating to pre-service claims are not subject to further administrative appeal or judicial review under this section or otherwise. 

‘‘(B) DECISION NOT TO SEEK PRIOR DETERMINATION OR NEGATIVE DETERMINATION DOES NOT IMPACT RIGHT TO OBTAIN SERVICES, SEEK REIMBURSEMENT, OR APPEAL RIGHTS.—Nothing in this subsection shall be construed as 

affecting the right of an individual who—

‘‘(i) decides not to seek a prior determination under this subsection 

with respect to items or services; or 

‘‘(ii) seeks such a determination and has received a determination described in paragraph (4)(A)(ii), 

from receiving (and submitting a claim for) such items services and from 

obtaining administrative or judicial review respecting such claim under the 

other applicable provisions of this section. Failure to seek a prior determination under this subsection with respect to items and services shall not 

be taken into account in such administrative or judicial review. 

‘‘(C) NO PRIOR DETERMINATION AFTER RECEIPT OF SERVICES.—Once an individual is provided items and services, there shall be no prior determination under this subsection with respect to such items or services.’’. 

(b) EFFECTIVE DATE; TRANSITION.—

(1) EFFECTIVE DATE.—The Secretary shall establish the prior determination 

process under the amendment made by subsection (a) in such a manner as to 

provide for the acceptance of requests for determinations under such process 

filed not later than 18 months after the date of the enactment of this Act. 

(2) TRANSITION.—During the period in which the amendment made by subsection (a) has become effective but contracts are not provided under section 

1874A of the Social Security Act with medicare administrative contractors, any 

reference in section 1869(g) of such Act (as added by such amendment) to such 

a contractor is deemed a reference to a fiscal intermediary or carrier with an 

agreement under section 1816, or contract under section 1842, respectively, of 

such Act. 

(3) LIMITATION ON APPLICATION TO SGR.—For purposes of applying section 

1848(f)(2)(D) of the Social Security Act (42 U.S.C. 1395w–4(f)(2)(D)), the amendment made by subsection (a) shall not be considered to be a change in law or 

regulation. 

(c) PROVISIONS RELATING TO ADVANCE BENEFICIARY NOTICES; REPORT ON PRIOR

DETERMINATION PROCESS.—

(1) DATA COLLECTION.—The Secretary shall establish a process for the collection of information on the instances in which an advance beneficiary notice (as 

defined in paragraph (5)) has been provided and on instances in which a beneficiary indicates on such a notice that the beneficiary does not intend to seek 

to have the item or service that is the subject of the notice furnished. 

(2) OUTREACH AND EDUCATION.—The Secretary shall establish a program of 

outreach and education for beneficiaries and providers of services and other persons on the appropriate use of advance beneficiary notices and coverage policies 

under the medicare program. 

(3) GAO REPORT REPORT ON USE OF ADVANCE BENEFICIARY NOTICES.—Not 

later than 18 months after the date on which section 1869(g) of the Social Security Act (as added by subsection (a)) takes effect, the Comptroller General of the 

United States shall submit to Congress a report on the use of advance beneficiary notices under title XVIII of such Act. Such report shall include information concerning the providers of services and other persons that have provided 

such notices and the response of beneficiaries to such notices. 

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(4) GAO REPORT ON USE OF PRIOR DETERMINATION PROCESS.—Not later than 

18 months after the date on which section 1869(g) of the Social Security Act 

(as added by subsection (a)) takes effect, the Comptroller General of the United 

States shall submit to Congress a report on the use of the prior determination 

process under such section. Such report shall include—

(A) information concerning the types of procedures for which a prior determination has been sought, determinations made under the process, and 

changes in receipt of services resulting from the application of such process; 

and 

(B) an evaluation of whether the process was useful for physicians (and 

other suppliers) and beneficiaries, whether it was timely, and whether the 

amount of information required was burdensome to physicians and beneficiaries. 

(5) ADVANCE BENEFICIARY NOTICE DEFINED.—In this subsection, the term ‘‘advance beneficiary notice’’ means a written notice provided under section 1879(a) 

of the Social Security Act (42 U.S.C. 1395pp(a)) to an individual entitled to benefits under part A or B of title XVIII of such Act before items or services are 

furnished under such part in cases where a provider of services or other person 

that would furnish the item or service believes that payment will not be made 

for some or all of such items or services under such title. 

Subtitle V—Miscellaneous Provisions 

SEC. 941. POLICY DEVELOPMENT REGARDING EVALUATION AND MANAGEMENT (E & M) DOCUMENTATION GUIDELINES. 

(a) IN GENERAL.—The Secretary may not implement any new documentation 

guidelines for, or clinical examples of, evaluation and management physician services under the title XVIII of the Social Security Act on or after the date of the enactment of this Act unless the Secretary—

(1) has developed the guidelines in collaboration with practicing physicians 

(including both generalists and specialists) and provided for an assessment of 

the proposed guidelines by the physician community; 

(2) has established a plan that contains specific goals, including a schedule, 

for improving the use of such guidelines; 

(3) has conducted appropriate and representative pilot projects under subsection (b) to test modifications to the evaluation and management documentation guidelines; 

(4) finds that the objectives described in subsection (c) will be met in the implementation of such guidelines; and 

(5) has established, and is implementing, a program to educate physicians on 

the use of such guidelines and that includes appropriate outreach. 

The Secretary shall make changes to the manner in which existing evaluation and 

management documentation guidelines are implemented to reduce paperwork burdens on physicians. 

(b) PILOT PROJECTS TO TEST EVALUATION AND MANAGEMENT DOCUMENTATION

GUIDELINES.— (1) IN GENERAL.—The Secretary shall conduct under this subsection appropriate and representative pilot projects to test new evaluation and management 

documentation guidelines referred to in subsection (a). 

(2) LENGTH AND CONSULTATION.—Each pilot project under this subsection 

shall—

(A) be voluntary; 

(B) be of sufficient length as determined by the Secretary to allow for preparatory physician and medicare contractor education, analysis, and use 

and assessment of potential evaluation and management guidelines; and 

(C) be conducted, in development and throughout the planning and operational stages of the project, in consultation with practicing physicians (including both generalists and specialists). 

(3) RANGE OF PILOT PROJECTS.—Of the pilot projects conducted under this 

subsection—

(A) at least one shall focus on a peer review method by physicians (not 

employed by a medicare contractor) which evaluates medical record information for claims submitted by physicians identified as statistical outliers 

relative to definitions published in the Current Procedures Terminology 

(CPT) code book of the American Medical Association; 

(B) at least one shall focus on an alternative method to detailed guidelines based on physician documentation of face to face encounter time with 

a patient; 

137

(C) at least one shall be conducted for services furnished in a rural area 

and at least one for services furnished outside such an area; and 

(D) at least one shall be conducted in a setting where physicians bill 

under physicians’ services in teaching settings and at least one shall be conducted in a setting other than a teaching setting. 

(4) BANNING OF TARGETING OF PILOT PROJECT PARTICIPANTS.—Data collected 

under this subsection shall not be used as the basis for overpayment demands 

or post-payment audits. Such limitation applies only to claims filed as part of 

the pilot project and lasts only for the duration of the pilot project and only as 

long as the provider is a participant in the pilot project. 

(5) STUDY OF IMPACT.—Each pilot project shall examine the effect of the new 

evaluation and management documentation guidelines on—

(A) different types of physician practices, including those with fewer than 

10 full-time-equivalent employees (including physicians); and 

(B) the costs of physician compliance, including education, implementation, auditing, and monitoring. 

(6) PERIODIC REPORTS.—The Secretary shall submit to Congress periodic reports on the pilot projects under this subsection. 

(c) OBJECTIVES FOR EVALUATION AND MANAGEMENT GUIDELINES.—The objectives 

for modified evaluation and management documentation guidelines developed by the 

Secretary shall be to—

(1) identify clinically relevant documentation needed to code accurately and 

assess coding levels accurately; 

(2) decrease the level of non-clinically pertinent and burdensome documentation time and content in the physician’s medical record; 

(3) increase accuracy by reviewers; and 

(4) educate both physicians and reviewers. 

(d) STUDY OF SIMPLER, ALTERNATIVE SYSTEMS OF DOCUMENTATION FOR PHYSICIAN

CLAIMS.—

(1) STUDY.—The Secretary shall carry out a study of the matters described 

in paragraph (2). 

(2) MATTERS DESCRIBED.—The matters referred to in paragraph (1) are—

(A) the development of a simpler, alternative system of requirements for 

documentation accompanying claims for evaluation and management physician services for which payment is made under title XVIII of the Social Security Act; and 

(B) consideration of systems other than current coding and documentation requirements for payment for such physician services. 

(3) CONSULTATION WITH PRACTICING PHYSICIANS.—In designing and carrying 

out the study under paragraph (1), the Secretary shall consult with practicing 

physicians, including physicians who are part of group practices and including 

both generalists and specialists. 

(4) APPLICATION OF HIPAA UNIFORM CODING REQUIREMENTS.—In developing an 

alternative system under paragraph (2), the Secretary shall consider requirements of administrative simplification under part C of title XI of the Social Security Act. 

(5) REPORT TO CONGRESS.—(A) Not later than October 1, 2005, the Secretary 

shall submit to Congress a report on the results of the study conducted under 

paragraph (1). 

(B) The Medicare Payment Advisory Commission shall conduct an analysis of 

the results of the study included in the report under subparagraph (A) and shall 

submit a report on such analysis to Congress. 

(e) STUDY ON APPROPRIATE CODING OF CERTAIN EXTENDED OFFICE VISITS.—The 

Secretary shall conduct a study of the appropriateness of coding in cases of extended 

office visits in which there is no diagnosis made. Not later than October 1, 2005, 

the Secretary shall submit a report to Congress on such study and shall include recommendations on how to code appropriately for such visits in a manner that takes 

into account the amount of time the physician spent with the patient. 

(f) DEFINITIONS.—In this section—

(1) the term ‘‘rural area’’ has the meaning given that term in section 

1886(d)(2)(D) of the Social Security Act, 42 U.S.C. 1395ww(d)(2)(D); and 

(2) the term ‘‘teaching settings’’ are those settings described in section 

415.150 of title 42, Code of Federal Regulations. 

SEC. 942. IMPROVEMENT IN OVERSIGHT OF TECHNOLOGY AND COVERAGE. 

(a) COUNCIL FOR TECHNOLOGY AND INNOVATION.—Section 1868 (42 U.S.C. 1395ee), 

as amended by section 921(a), is amended by adding at the end the following new 

subsection: 

‘‘(c) COUNCIL FOR TECHNOLOGY AND INNOVATION.—

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‘‘(1) ESTABLISHMENT.—The Secretary shall establish a Council for Technology 

and Innovation within the Centers for Medicare & Medicaid Services (in this 

section referred to as ‘CMS’). 

‘‘(2) COMPOSITION.—The Council shall be composed of senior CMS staff and 

clinicians and shall be chaired by the Executive Coordinator for Technology and 

Innovation (appointed or designated under paragraph (4)). 

‘‘(3) DUTIES.—The Council shall coordinate the activities of coverage, coding, 

and payment processes under this title with respect to new technologies and 

procedures, including new drug therapies, and shall coordinate the exchange of 

information on new technologies between CMS and other entities that make 

similar decisions. 

‘‘(4) EXECUTIVE COORDINATOR FOR TECHNOLOGY AND INNOVATION.—The Secretary shall appoint (or designate) a noncareer appointee (as defined in section 

3132(a)(7) of title 5, United States Code) who shall serve as the Executive Coordinator for Technology and Innovation. Such executive coordinator shall report 

to the Administrator of CMS, shall chair the Council, shall oversee the execution of its duties, and shall serve as a single point of contact for outside groups 

and entities regarding the coverage, coding, and payment processes under this 

title.’’. 

(b) METHODS FOR DETERMINING PAYMENT BASIS FOR NEW LAB TESTS.—Section 

1833(h) (42 U.S.C. 1395l(h)) is amended by adding at the end the following: 

‘‘(8)(A) The Secretary shall establish by regulation procedures for determining the 

basis for, and amount of, payment under this subsection for any clinical diagnostic 

laboratory test with respect to which a new or substantially revised HCPCS code 

is assigned on or after January 1, 2005 (in this paragraph referred to as ‘new tests’). 

‘‘(B) Determinations under subparagraph (A) shall be made only after the Secretary—

‘‘(i) makes available to the public (through an Internet site and other appropriate mechanisms) a list that includes any such test for which establishment 

of a payment amount under this subsection is being considered for a year; 

‘‘(ii) on the same day such list is made available, causes to have published 

in the Federal Register notice of a meeting to receive comments and recommendations (and data on which recommendations are based) from the public 

on the appropriate basis under this subsection for establishing payment 

amounts for the tests on such list; 

‘‘(iii) not less than 30 days after publication of such notice convenes a meeting, that includes representatives of officials of the Centers for Medicare & Medicaid Services involved in determining payment amounts, to receive such comments and recommendations (and data on which the recommendations are 

based); 

‘‘(iv) taking into account the comments and recommendations (and accompanying data) received at such meeting, develops and makes available to the 

public (through an Internet site and other appropriate mechanisms) a list of 

proposed determinations with respect to the appropriate basis for establishing 

a payment amount under this subsection for each such code, together with an 

explanation of the reasons for each such determination, the data on which the 

determinations are based, and a request for public written comments on the 

proposed determination; and 

‘‘(v) taking into account the comments received during the public comment period, develops and makes available to the public (through an Internet site and 

other appropriate mechanisms) a list of final determinations of the payment 

amounts for such tests under this subsection, together with the rationale for 

each such determination, the data on which the determinations are based, and 

responses to comments and suggestions received from the public. 

‘‘(C) Under the procedures established pursuant to subparagraph (A), the Secretary shall—

‘‘(i) set forth the criteria for making determinations under subparagraph (A); 

and 

‘‘(ii) make available to the public the data (other than proprietary data) considered in making such determinations. 

‘‘(D) The Secretary may convene such further public meetings to receive public 

comments on payment amounts for new tests under this subsection as the Secretary 

deems appropriate. 

‘‘(E) For purposes of this paragraph: 

‘‘(i) The term ‘HCPCS’ refers to the Health Care Procedure Coding System. 

‘‘(ii) A code shall be considered to be ‘substantially revised’ if there is a substantive change to the definition of the test or procedure to which the code applies (such as a new analyte or a new methodology for measuring an existing 

analyte-specific test).’’. 

139

(c) GAO STUDY ON IMPROVEMENTS IN EXTERNAL DATA COLLECTION FOR USE IN

THE MEDICARE INPATIENT PAYMENT SYSTEM.— (1) STUDY.—The Comptroller General of the United States shall conduct a 

study that analyzes which external data can be collected in a shorter time 

frame by the Centers for Medicare & Medicaid Services for use in computing 

payments for inpatient hospital services. The study may include an evaluation 

of the feasibility and appropriateness of using of quarterly samples or special 

surveys or any other methods. The study shall include an analysis of whether 

other executive agencies, such as the Bureau of Labor Statistics in the Department of Commerce, are best suited to collect this information. 

(2) REPORT.—By not later than October 1, 2004, the Comptroller General 

shall submit a report to Congress on the study under paragraph (1). 

(d) PROCESS FOR ADOPTION OF ICD CODES AS DATA STANDARD.—Section 1172(f) 

(42 U.S.C. 1320d–1(f)) is amended by inserting after the first sentence the following: 

‘‘Notwithstanding the preceding sentence, if the National Committee on Vital and 

Health Statistics has not made a recommendation to the Secretary before the date 

of the enactment of this sentence, with respect to the adoption of the International 

Classification of Diseases, 10th Revision, Procedure Coding System (‘ICD–10–PCS’) 

and the International Classification of Diseases, 10th Revision, Clinical Modification 

(‘ICD–10–CM’) as a standard under this part for the reporting of diagnoses, the Secretary may adopt ICD–10–PCS and ICD–10–CM as such a standard on or after 1 

year after such date without receiving such a recommendation.’’. 

SEC. 943. TREATMENT OF HOSPITALS FOR CERTAIN SERVICES UNDER MEDICARE SECONDARY PAYOR (MSP) PROVISIONS. 

(a) IN GENERAL.—The Secretary shall not require a hospital (including a critical 

access hospital) to ask questions (or obtain information) relating to the application 

of section 1862(b) of the Social Security Act (relating to medicare secondary payor 

provisions) in the case of reference laboratory services described in subsection (b), 

if the Secretary does not impose such requirement in the case of such services furnished by an independent laboratory. 

(b) REFERENCE LABORATORY SERVICES DESCRIBED.—Reference laboratory services 

described in this subsection are clinical laboratory diagnostic tests (or the interpretation of such tests, or both) furnished without a face-to-face encounter between the 

individual entitled to benefits under part A or enrolled under part B, or both, and 

the hospital involved and in which the hospital submits a claim only for such test 

or interpretation. 

SEC. 944. EMTALA IMPROVEMENTS. 

(a) PAYMENT FOR EMTALA-MANDATED SCREENING AND STABILIZATION SERVICES.—

(1) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended by inserting 

after subsection (c) the following new subsection: 

‘‘(d) For purposes of subsection (a)(1)(A), in the case of any item or service that 

is required to be provided pursuant to section 1867 to an individual who is entitled 

to benefits under this title, determinations as to whether the item or service is reasonable and necessary shall be made on the basis of the information available to 

the treating physician or practitioner (including the patient’s presenting symptoms 

or complaint) at the time the item or service was ordered or furnished by the physician or practitioner (and not on the patient’s principal diagnosis). When making 

such determinations with respect to such an item or service, the Secretary shall not 

consider the frequency with which the item or service was provided to the patient 

before or after the time of the admission or visit.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

items and services furnished on or after January 1, 2004. 

(b) NOTIFICATION OF PROVIDERS WHEN EMTALA INVESTIGATION CLOSED.—Section 

1867(d) (42 U.S.C. 42 U.S.C. 1395dd(d)) is amended by adding at the end the following new paragraph: 

‘‘(4) NOTICE UPON CLOSING AN INVESTIGATION.—The Secretary shall establish 

a procedure to notify hospitals and physicians when an investigation under this 

section is closed.’’. 

(c) PRIOR REVIEW BY PEER REVIEW ORGANIZATIONS IN EMTALA CASES INVOLVING

TERMINATION OF PARTICIPATION.—

(1) IN GENERAL.—Section 1867(d)(3) (42 U.S.C. 1395dd(d)(3)) is amended—

(A) in the first sentence, by inserting ‘‘or in terminating a hospital’s participation under this title’’ after ‘‘in imposing sanctions under paragraph 

(1)’’; and 

(B) by adding at the end the following new sentences: ‘‘Except in the case 

in which a delay would jeopardize the health or safety of individuals, the 

Secretary shall also request such a review before making a compliance deVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00139 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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termination as part of the process of terminating a hospital’s participation 

under this title for violations related to the appropriateness of a medical 

screening examination, stabilizing treatment, or an appropriate transfer as 

required by this section, and shall provide a period of 5 days for such review. The Secretary shall provide a copy of the organization’s report to the 

hospital or physician consistent with confidentiality requirements imposed 

on the organization under such part B.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

terminations of participation initiated on or after the date of the enactment of 

this Act.

(d) MODIFICATION OF REQUIRMENT FOR MEDICAL SCREENING EXAMINATIONS FOR

PATIENTS NOT REQUESTING EMERGENCY DEPARTMENT SERVICES.— (1) IN GENERAL.—Section 1867(a) (42 U.S.C. 1395dd(a)) is amended—

(A) by designating all that follows ‘‘(a) MEDICAL SCREENING REQUIRE- MENT.—’’ as paragraph (1) with the heading ‘‘IN GENERAL.—’’; 

(B) by aligning such paragraph with the paragraph added by paragraph 

(3); and 

(C) by adding at the end the following new paragraph: 

‘‘(2) EXCEPTION FOR CERTAIN CASES.—The requirement for an appropriate 

medical screening examination under paragraph (1) shall not apply in the case 

of an individual who comes to the emergency department and does not request 

examination or treatment for an emergency medical condition (such as a request solely for prescription refills, blood pressure screening, and non-emergency laboratory and diagnostic tests).’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

terminations of participation initiated on or after the date of the enactment of 

this Act. 

SEC. 945. EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT (EMTALA) TECHNICAL 

ADVISORY GROUP. 

(a) ESTABLISHMENT.—The Secretary shall establish a Technical Advisory Group 

(in this section referred to as the ‘‘Advisory Group’’) to review issues related to the 

Emergency Medical Treatment and Labor Act (EMTALA) and its implementation. 

In this section, the term ‘‘EMTALA’’ refers to the provisions of section 1867 of the 

Social Security Act (42 U.S.C. 1395dd). 

(b) MEMBERSHIP.—The Advisory Group shall be composed of 19 members, including the Administrator of the Centers for Medicare & Medicaid Services and the Inspector General of the Department of Health and Human Services and of which—

(1) 4 shall be representatives of hospitals, including at least one public hospital, that have experience with the application of EMTALA and at least 2 of 

which have not been cited for EMTALA violations; 

(2) 7 shall be practicing physicians drawn from the fields of emergency medicine, cardiology or cardiothoracic surgery, orthopedic surgery, neurosurgery, pediatrics or a pediatric subspecialty, obstetrics-gynecology, and psychiatry, with 

not more than one physician from any particular field; 

(3) 2 shall represent patients; 

(4) 2 shall be staff involved in EMTALA investigations from different regional 

offices of the Centers for Medicare & Medicaid Services; and 

(5) 1 shall be from a State survey office involved in EMTALA investigations 

and 1 shall be from a peer review organization, both of whom shall be from 

areas other than the regions represented under paragraph (4). 

In selecting members described in paragraphs (1) through (3), the Secretary shall 

consider qualified individuals nominated by organizations representing providers 

and patients. 

(c) GENERAL RESPONSIBILITIES.—The Advisory Group—

(1) shall review EMTALA regulations; 

(2) may provide advice and recommendations to the Secretary with respect to 

those regulations and their application to hospitals and physicians; 

(3) shall solicit comments and recommendations from hospitals, physicians, 

and the public regarding the implementation of such regulations; and 

(4) may disseminate information on the application of such regulations to hospitals, physicians, and the public. 

(d) ADMINISTRATIVE MATTERS.—

(1) CHAIRPERSON.—The members of the Advisory Group shall elect a member 

to serve as chairperson of the Advisory Group for the life of the Advisory Group. 

(2) MEETINGS.—The Advisory Group shall first meet at the direction of the 

Secretary. The Advisory Group shall then meet twice per year and at such other 

times as the Advisory Group may provide. 

(e) TERMINATION.—The Advisory Group shall terminate 30 months after the date 

of its first meeting. 

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(f) WAIVER OF ADMINISTRATIVE LIMITATION.—The Secretary shall establish the Advisory Group notwithstanding any limitation that may apply to the number of advisory committees that may be established (within the Department of Health and 

Human Services or otherwise). 

SEC. 946. AUTHORIZING USE OF ARRANGEMENTS TO PROVIDE CORE HOSPICE SERVICES IN 

CERTAIN CIRCUMSTANCES. 

(a) IN GENERAL.—Section 1861(dd)(5) (42 U.S.C. 1395x(dd)(5)) is amended by adding at the end the following: 

‘‘(D) In extraordinary, exigent, or other non-routine circumstances, such as unanticipated periods of high patient loads, staffing shortages due to illness or other 

events, or temporary travel of a patient outside a hospice program’s service area, 

a hospice program may enter into arrangements with another hospice program for 

the provision by that other program of services described in paragraph (2)(A)(ii)(I). 

The provisions of paragraph (2)(A)(ii)(II) shall apply with respect to the services provided under such arrangements. 

‘‘(E) A hospice program may provide services described in paragraph (1)(A) other 

than directly by the program if the services are highly specialized services of a registered professional nurse and are provided non-routinely and so infrequently so 

that the provision of such services directly would be impracticable and prohibitively 

expensive.’’. 

(b) CONFORMING PAYMENT PROVISION.—Section 1814(i) (42 U.S.C. 1395f(i)) is 

amended by adding at the end the following new paragraph: 

‘‘(4) In the case of hospice care provided by a hospice program under arrangements under section 1861(dd)(5)(D) made by another hospice program, the hospice 

program that made the arrangements shall bill and be paid for the hospice care.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to hospice care provided on or after the date of the enactment of this Act. 

SEC. 947. APPLICATION OF OSHA BLOODBORNE PATHOGENS STANDARD TO CERTAIN HOSPITALS. 

(a) IN GENERAL.—Section 1866 (42 U.S.C. 1395cc) is amended—

(1) in subsection (a)(1)—

(A) in subparagraph (R), by striking ‘‘and’’ at the end; 

(B) in subparagraph (S), by striking the period at the end and inserting 

‘‘, and’’; and 

(C) by inserting after subparagraph (S) the following new subparagraph: 

‘‘(T) in the case of hospitals that are not otherwise subject to the Occupational 

Safety and Health Act of 1970, to comply with the Bloodborne Pathogens standard under section 1910.1030 of title 29 of the Code of Federal Regulations (or 

as subsequently redesignated).’’; and 

(2) by adding at the end of subsection (b) the following new paragraph: 

‘‘(4)(A) A hospital that fails to comply with the requirement of subsection (a)(1)(T) 

(relating to the Bloodborne Pathogens standard) is subject to a civil money penalty 

in an amount described in subparagraph (B), but is not subject to termination of 

an agreement under this section. 

‘‘(B) The amount referred to in subparagraph (A) is an amount that is similar to 

the amount of civil penalties that may be imposed under section 17 of the Occupational Safety and Health Act of 1970 for a violation of the Bloodborne Pathogens 

standard referred to in subsection (a)(1)(T) by a hospital that is subject to the provisions of such Act. 

‘‘(C) A civil money penalty under this paragraph shall be imposed and collected 

in the same manner as civil money penalties under subsection (a) of section 1128A 

are imposed and collected under that section.’’. 

(b) EFFECTIVE DATE.—The amendments made by this subsection (a) shall apply 

to hospitals as of July 1, 2004. 

SEC. 948. BIPA-RELATED TECHNICAL AMENDMENTS AND CORRECTIONS. 

(a) TECHNICAL AMENDMENTS RELATING TO ADVISORY COMMITTEE UNDER BIPA 

SECTION 522.—(1) Subsection (i) of section 1114 (42 U.S.C. 1314)—

(A) is transferred to section 1862 and added at the end of such section; and 

(B) is redesignated as subsection (j). 

(2) Section 1862 (42 U.S.C. 1395y) is amended—

(A) in the last sentence of subsection (a), by striking ‘‘established under section 1114(f)’’; and 

(B) in subsection (j), as so transferred and redesignated—

(i) by striking ‘‘under subsection (f)’’; and 

(ii) by striking ‘‘section 1862(a)(1)’’ and inserting ‘‘subsection (a)(1)’’. 

(b) TERMINOLOGY CORRECTIONS.—(1) Section 1869(c)(3)(I)(ii) (42 U.S.C. 

1395ff(c)(3)(I)(ii)), as amended by section 521 of BIPA, is amended—

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(A) in subclause (III), by striking ‘‘policy’’ and inserting ‘‘determination’’; and 

(B) in subclause (IV), by striking ‘‘medical review policies’’ and inserting ‘‘coverage determinations’’. 

(2) Section 1852(a)(2)(C) (42 U.S.C. 1395w–22(a)(2)(C)) is amended by striking 

‘‘policy’’ and ‘‘POLICY’’ and inserting ‘‘determination’’ each place it appears and ‘‘DE- TERMINATION’’, respectively. 

(c) REFERENCE CORRECTIONS.—Section 1869(f)(4) (42 U.S.C. 1395ff(f)(4)), as added 

by section 522 of BIPA, is amended—

(1) in subparagraph (A)(iv), by striking ‘‘subclause (I), (II), or (III)’’ and inserting ‘‘clause (i), (ii), or (iii)’’; 

(2) in subparagraph (B), by striking ‘‘clause (i)(IV)’’ and ‘‘clause (i)(III)’’ and 

inserting ‘‘subparagraph (A)(iv)’’ and ‘‘subparagraph (A)(iii)’’, respectively; and 

(3) in subparagraph (C), by striking ‘‘clause (i)’’, ‘‘subclause (IV)’’ and ‘‘subparagraph (A)’’ and inserting ‘‘subparagraph (A)’’, ‘‘clause (iv)’’ and ‘‘paragraph 

(1)(A)’’, respectively each place it appears. 

(d) OTHER CORRECTIONS.—Effective as if included in the enactment of section 

521(c) of BIPA, section 1154(e) (42 U.S.C. 1320c–3(e)) is amended by striking paragraph (5). 

(e) EFFECTIVE DATE.—Except as otherwise provided, the amendments made by 

this section shall be effective as if included in the enactment of BIPA. 

SEC. 949. CONFORMING AUTHORITY TO WAIVE A PROGRAM EXCLUSION. 

The first sentence of section 1128(c)(3)(B) (42 U.S.C. 1320a–7(c)(3)(B)) is amended 

to read as follows: ‘‘Subject to subparagraph (G), in the case of an exclusion under 

subsection (a), the minimum period of exclusion shall be not less than five years, 

except that, upon the request of the administrator of a Federal health care program 

(as defined in section 1128B(f)) who determines that the exclusion would impose a 

hardship on individuals entitled to benefits under part A of title XVIII or enrolled 

under part B of such title, or both, the Secretary may waive the exclusion under 

subsection (a)(1), (a)(3), or (a)(4) with respect to that program in the case of an individual or entity that is the sole community physician or sole source of essential specialized services in a community.’’. 

SEC. 950. TREATMENT OF CERTAIN DENTAL CLAIMS. 

(a) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended by adding after subsection (g) the following new subsection: 

‘‘(h)(1) Subject to paragraph (2), a group health plan (as defined in subsection 

(a)(1)(A)(v)) providing supplemental or secondary coverage to individuals also entitled to services under this title shall not require a medicare claims determination 

under this title for dental benefits specifically excluded under subsection (a)(12) as 

a condition of making a claims determination for such benefits under the group 

health plan. 

‘‘(2) A group health plan may require a claims determination under this title in 

cases involving or appearing to involve inpatient dental hospital services or dental 

services expressly covered under this title pursuant to actions taken by the Secretary.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect on 

the date that is 60 days after the date of the enactment of this Act. 

SEC. 951. FURNISHING HOSPITALS WITH INFORMATION TO COMPUTE DSH FORMULA. 

Beginning not later than 1 year after the date of the enactment of this Act, the 

Secretary shall furnish to subsection (d) hospitals (as defined in section 

1886(d)(1)(B) of the Social Security Act, 42 U.S.C. 1395ww(d)(1)(B)) the data necessary for such hospitals to compute the number of patient days described in subclause (II) of section 1886(d)(5)(F)(vi) of the Social Security Act (42 U.S.C. 

1395ww(d)(5)(F)(vi)) used in computing the disproportionate patient percentage 

under such section for that hospital. Such data shall also be furnished to other hospitals which would qualify for additional payments under part A of title XVIII of 

the Social Security Act on the basis of such data. 

SEC. 952. REVISIONS TO REASSIGNMENT PROVISIONS. 

(a) IN GENERAL.—Section 1842(b)(6)(A) (42 U.S.C. 1395u(b)(6)(A)) is amended by 

striking ‘‘or (ii) (where the service was provided in a hospital, critical access hospital, clinic, or other facility) to the facility in which the service was provided if 

there is a contractual arrangement between such physician or other person and 

such facility under which such facility submits the bill for such service,’’ and inserting ‘‘or (ii) where the service was provided under a contractual arrangement between such physician or other person and an entity (as defined by the Secretary), 

to the entity if, under the contractual arrangement, the entity submits the bill for 

the service and the contractual arrangement meets such other program integrity 

and other safeguards as the Secretary may determine to be appropriate,’’. 

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(b) CONFORMING AMENDMENT.—The second sentence of section 1842(b)(6) (42 

U.S.C. 1395u(b)(6)) is amended by striking ‘‘except to an employer or facility’’ and 

inserting ‘‘except to an employer, entity, or other person’’. 

(c) EFFECTIVE DATE.—The amendments made by section shall apply to payments 

made on or after the date that is one year after the date of the enactment of this 

Act. 

SEC. 953. OTHER PROVISIONS. 

(a) GAO REPORTS ON THE PHYSICIAN COMPENSATION.—

(1) SUSTAINABLE GROWTH RATE AND UPDATES.—Not later than 6 months after 

the date of the enactment of this Act, the Comptroller General of the United 

States shall submit to Congress a report on the appropriateness of the updates 

in the conversion factor under subsection (d)(3) of section 1848 of the Social Security Act (42 U.S.C. 1395w–4), including the appropriateness of the sustainable 

growth rate formula under subsection (f) of such section for 2002 and succeeding years. Such report shall examine the stability and predictability of such 

updates and rate and alternatives for the use of such rate in the updates. 

(2) PHYSICIAN COMPENSATION GENERALLY.—Not later than 12 months after 

the date of the enactment of this Act, the Comptroller General shall submit to 

Congress a report on all aspects of physician compensation for services furnished under title XVIII of the Social Security Act, and how those aspects interact and the effect on appropriate compensation for physician services. Such report shall review alternatives for the physician fee schedule under section 1848 

of such title (42 U.S.C. 1395w–4). 

(b) ANNUAL PUBLICATION OF LIST OF NATIONAL COVERAGE DETERMINATIONS.—The 

Secretary shall provide, in an appropriate annual publication available to the public, 

a list of national coverage determinations made under title XVIII of the Social Security Act in the previous year and information on how to get more information with 

respect to such determinations. 

(c) GAO REPORT ON FLEXIBILITY IN APPLYING HOME HEALTH CONDITIONS OF PARTICIPATION TO PATIENTS WHO ARE NOT MEDICARE BENEFICIARIES.—Not later than 

6 months after the date of the enactment of this Act, the Comptroller General of 

the United States shall submit to Congress a report on the implications if there 

were flexibility in the application of the medicare conditions of participation for 

home health agencies with respect to groups or types of patients who are not medicare beneficiaries. The report shall include an analysis of the potential impact of 

such flexible application on clinical operations and the recipients of such services 

and an analysis of methods for monitoring the quality of care provided to such recipients. 

(d) OIG REPORT ON NOTICES RELATING TO USE OF HOSPITAL LIFETIME RESERVE

DAYS.—Not later than 1 year after the date of the enactment of this Act, the Inspector General of the Department of Health and Human Services shall submit a report 

to Congress on—

(1) the extent to which hospitals provide notice to medicare beneficiaries in 

accordance with applicable requirements before they use the 60 lifetime reserve 

days described in section 1812(a)(1) of the Social Security Act (42 U.S.C. 

1395d(a)(1)); and 

(2) the appropriateness and feasibility of hospitals providing a notice to such 

beneficiaries before they completely exhaust such lifetime reserve days. 

SEC. 954. TEMPORARY SUSPENSION OF OASIS REQUIREMENT FOR COLLECTION OF DATA ON 

NON-MEDICARE AND NON-MEDICAID PATIENTS. 

(a) IN GENERAL.—During the period described in subsection (b), the Secretary may 

not require, under section 4602(e) of the Balanced Budget Act of 1997 or otherwise 

under OASIS, a home health agency to gather or submit information that relates 

to an individual who is not eligible for benefits under either title XVIII or title XIX 

of the Social Security Act (such information in this section referred to as ‘‘non-medicare/medicaid OASIS information’’). 

(b) PERIOD OF SUSPENSION.—The period described in this subsection—

(1) begins on the date of the enactment of this Act; and 

(2) ends on the last day of the 2nd month beginning after the date as of which 

the Secretary has published final regulations regarding the collection and use 

by the Centers for Medicare & Medicaid Services of non-medicare/medicaid 

OASIS information following the submission of the report required under subsection (c). 

(c) REPORT.—

(1) STUDY.—The Secretary shall conduct a study on how non-medicare/medicaid OASIS information is and can be used by large home health agencies. 

Such study shall examine—

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(A) whether there are unique benefits from the analysis of such information that cannot be derived from other information available to, or collected 

by, such agencies; and 

(B) the value of collecting such information by small home health agencies compared to the administrative burden related to such collection. 

In conducting the study the Secretary shall obtain recommendations from quality assessment experts in the use of such information and the necessity of 

small, as well as large, home health agencies collecting such information. 

(2) REPORT.—The Secretary shall submit to Congress a report on the study 

conducted under paragraph (1) by not later than 18 months after the date of 

the enactment of this Act. 

(d) CONSTRUCTION.—Nothing in this section shall be construed as preventing 

home health agencies from collecting non-medicare/medicaid OASIS information for 

their own use.

I. INTRODUCTION 

A. PURPOSE AND SUMMARY, AND

B. BACKGROUND AND NEED FOR LEGISLATION

Nearly four decades ago, Congress enacted the Medicare program 

to help provide health care to our nation’s seniors. Medicare has 

improved and lengthened the lives of millions of people. In recent 

years, Congress has both successfully slowed Medicare’s growth 

rate and added new preventive benefits to keep seniors healthier. 

Yet Medicare has still not met its true promise because it remains 

mired in a rigid administrative structure that can only change 

when Congress enacts a law. 

When Medicare was enacted, there were few prescription drugs, 

and most care was delivered in hospitals and physician offices. 

Consequently, Medicare did not cover prescription drugs. While 

about two-thirds of seniors have some prescription drug coverage 

through various sources, access to such coverage has been declining 

and oftentimes remains inadequate. Many other seniors lack prescription drug coverage, and therefore, they lack the bargaining 

power to reduce their drug costs. 

Prescription drugs are an integral part of health care today. They 

prevent and manage diseases and most often are less invasive and 

costly than alternative health care options (e.g. surgery, hospitalization, nursing home admission, etc.). Most private health 

plans have voluntarily integrated prescription drugs into their benefits. Nobody today with a blank sheet of paper would design a 

health care program for seniors that excluded prescription drugs. 

Yet, the absence of a prescription drug benefit epitomizes how 

Medicare has not kept pace with modern medicine. While a Medicare prescription drug benefit is long overdue, it is not the only 

problem afflicting a program so many cherish and want to 

strengthen. 

Irrational and unpredictable payments to physicians are just one 

example of what is wrong with Medicare’s reimbursement policy. 

While health costs are escalating under the current Sustainable 

Growth Rate formula, payments to physicians under current law 

would be substantially reduced. Patients’ access to physicians will 

suffer and the doctors beneficiaries rely on will only become more 

demoralized. Similarly, rural hospitals continue to struggle and are 

not paid equitably compared to large urban hospitals. In addition, 

numerous Medicare+Choice plans are withdrawing from the program and are substantially cutting benefits because government 

145

payments are not related to the actual cost of providing health 

care. 

At the same time, Medicare is overpaying on other counts, such 

as for durable medical equipment. The Office of Inspector General 

has documented that taxpayers and Medicare beneficiaries are paying millions more for durable medical equipment than other programs, such as the Federal Employees Health Benefit Program 

(FEHBP). Similarly, numerous studies by the General Accounting 

Office, Office of Inspector General and others have documented tremendous overpayments to oncologists and other physicians for currently covered prescription drugs. In some cases, the beneficiary 

copay exceeds the actual acquisition cost of the drug. 

In addition, the health care professionals serving Medicare beneficiaries are being crushed by more than 130,000 pages of overly 

burdensome regulations—four times more than those governing the 

Internal Revenue Code. This over-regulation hampers efforts to 

provide quality care to seniors, and it must be changed. 

Finally, and most importantly, Medicare’s long-term viability is 

not on stable ground. When Medicare was enacted, there were 

more than six workers per beneficiary. Today, there are about four 

workers per beneficiary. After the baby-boom generation retires 

(which starts at the end of this decade), there will be about two 

workers per beneficiary. Absent any change in law, Medicare costs 

will nearly double over the next 10 years. Medicare needs to become more efficient. 

This bill addresses all of these issues and more. 

First and foremost, the bill provides a voluntary, affordable prescription drug benefit as an entitlement to all beneficiaries. The 

proposal is within the $400 billion over 10 years allocated under 

the budget resolution. Under the bill, Medicare beneficiaries would 

pay a $250 deductible and then receive 80 percent coverage of their 

annual drug costs up to $2,000. This 80–20 benefit looks like standard coverage offered by employer plans, and today nearly twothirds of beneficiaries spend less than $2,000 on drugs annually. In 

addition, the bill provides catastrophic protection after an individual has incurred $3,500 in out-of-pocket costs. At that threshold, 

100 percent of costs will be covered. The Congressional Budget Office (CBO) estimates the average monthly beneficiary premium to 

be about $35. 

Additionally, the bill targets resources to those who need them 

most. For low-income seniors up to 135 percent of poverty, premiums would be fully subsidized and all cost-sharing, except for 

nominal copays, would be covered. Those with incomes between 135 

and 150 percent would also receive assistance for their premiums. 

Seniors with incomes above $60,000 or couples with incomes above 

$120,000 would have a higher catastrophic threshold, but would receive the same front-end benefit. This higher threshold would affect 

only about five percent of individuals. 

The prescription drug benefit would be delivered through competing integrated health plans and private sector entities that already deliver pharmaceutical benefits for millions of people, including every Member of Congress. The bill permits and encourages 

these plans to utilize private sector tools to aggressively negotiate 

lower drug prices and provide better service for beneficiaries. By 

exempting prices negotiated for Medicare beneficiaries from the 

146

Medicaid ‘‘best price’’ provision, the bill encourages steep discounting by pharmaceutical manufacturers that would save taxpayers and beneficiaries billions of dollars. The private sector delivery of benefits is backed up by a government guarantee that all 

seniors in every area of the country must be covered. Indeed, the 

Congressional Budget Office and the Centers for Medicare and 

Medicaid Services (CMS) Office of the Actuary predicts that more 

than 95 percent of the seniors that lack coverage would voluntarily 

sign up for this benefit. 

The bill would provide seniors with more and better choices for 

the delivery of their health care. The Medicare+Choice program 

would be fundamentally reformed by re-linking payments to fee-forservice costs and permitting plans to bid their actual costs, beginning in 2006. Plans would be paid what they bid and savings would 

be split 75 percent–25 percent between the beneficiary and government for plans that bid below the benchmark. The bill would also 

implement the President’s ‘‘enhanced fee-for-service’’ program, 

which provides for regional, open-network plans offering better integrated care. 

In 2010, the bill would put Medicare on a more stable funding 

path by moving to a FEHBP-style of competition between plans. 

Nothing would change Medicare’s entitlement to a defined set of 

benefits, but costs between fee-for-service and private plans would 

be directly compared. Beneficiaries would be rewarded for enrolling 

in more efficient plans, regardless of whether the plans are private 

or traditional fee-for-service. This program would only apply in 

areas with significant private plan penetration (at least equal to 

the national average market share), and the fee-for-service plan 

would have disproportionate influence in establishing the benchmark. This transition would be phased in over five years. This provision provides Medicare the best chance to bend its growth rate 

in the out-years by enabling beneficiaries to make efficient and rational choices, and by permitting the government to share in the 

savings when beneficiaries select cost-effective plans. 

More than 179 different patient groups, provider groups, and employers have endorsed this legislation because it provides a meaningful benefit, modernizes irrational reimbursements, and reduces 

burdensome regulatory structures that undermine the quality and 

accessibility of care. The bill reforms physician payments, addresses payment inequities for rural hospitals and home health providers, and makes responsible decisions on provider reimbursements based on the Medicare Payment Advisory Commission’s recommendations. More importantly, the legislation sets Medicare on 

a path of more rational pricing—determined by the marketplace, 

rather than government edict—through moving durable medical 

equipment, currently covered drugs, and Medicare’s contractors 

into a competitive system. In addition to creating a more rational 

system that saves money over time, these changes get Congress out 

of the business of micro-managing payments to providers across 

communities in America based on political decisions in Washington. 

The bill provides clear improvements for preventive benefits for 

beneficiaries. For the first time, in order to diagnose problems early 

and keep seniors healthy, Medicare would cover initial physicals 

and provide coverage for cholesterol screening. The bill would also 

147

provide better-coordinated care for the numerous Medicare beneficiaries who suffer from multiple chronic illnesses. 

The bill also includes regulatory and contracting reforms—reforms that passed the House twice in the 107th Congress—to reduce unnecessary regulation and modernize how Medicare selects 

its contractors. 

Finally, the bill also establishes a new Medicare Benefits Administration (MBA) to manage and oversee the Medicare Advantage 

and Enhanced Fee-for-Service Programs as well as the prescription 

drug benefit. Creating of the MBA eliminates the inherent conflictof-interest in requiring a government-run fee-for-service plan to 

regulate competing private plans. 

C. LEGISLATIVE HISTORY

Legislative Hearings 

During the 107th and 108th Congresses, the Committee on Ways 

and Means, and its Subcommittee on Health, held 24 hearings exploring how Medicare should be strengthened and modernized. 

These hearings, which examined all aspects of the Medicare program, included expert testimony from academic, beneficiary and 

provider representatives. The following lists the hearings in the 

107th and 108th Congresses in reverse chronological order: 

108TH CONGRESS

May 1, 2003: Medicare Cost-Sharing and Medigap Reform (Subcommittee on Health) 

Witnesses 

Glenn M. Hackbarth, Chairman, Medicare Payment Advisory 

Commission. 

Stephen W. Still, Esq., Maynard, Cooper & Gale, P.C., Birmingham, Alabama, on behalf of Torchmark Corporation, Birmingham, Alabama, and United American Insurance Company, 

McKinney, Texas. 

Richard White, Vice President, Individual Project Management, 

Southeast Region, Anthem Blue Cross and Blue Shield, Roanoke, 

Virginia. 

Patricia Neuman, Sc. D., Vice President and Director, Medicare 

Policy Project, Kaiser Medicare Policy Project, Henry J. Kaiser 

Family Foundation. 

April 9, 2003: Hearing on Expanding Coverage of Prescription 

Drugs in Medicare (Full Committee) 

Witnesses 

Douglas Holtz-Eakin, Ph.D., Director, Congressional Budget Office. 

The Honorable David M. Walker, Comptroller General, U.S. General Accounting Office. 

Bruce Stewart, Ph.D., Director, Peter Lamy Center on Drug 

Therapy and Aging, University of Maryland, Baltimore, Maryland. 

Mark V. Pauly, Ph.D., Chairperson, Health Care Systems Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania.

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Uwe Reinhardt, Ph.D., Professor, Economics and Public Affairs, 

Department of Economics, and Woodrow Wilson School of Public 

and International Affairs, Princeton University, Princeton, New 

Jersey 

March 6, 2003: Hearing on the MedPAC Report on Medicare Payment Policies (Subcommittee on Health) 

Witnesses 

Glenn M. Hackbarth, Chairman, MedPAC. 

James Jaruzewicz, President and Chief Executive Officer, Visiting Nurses Association of Erie County, Erie, Pennsylvania, on behalf of the Visiting Nurses Association of America. 

Larry C. Buckelew, President and Chief Executive Officer, 

Gambro Healthcare U.S., and Chairman, Renal Leadership Council. 

William G. Plested, III, M.D., Chair-Elect, American Medical Association. 

Mary K. Ousley, Chairman, American Health Care Association. 

Dennis Barry, President and Chief Executive Officer, Moses Cone 

Health System, Greensboro, North Carolina, and Chairman, Board 

of Trustees, American Hospital Association. 

Betty Severyn, Member, Board of Directors, AARP. 

February 25, 2003: Hearing on Eliminating Barriers to Chronic 

Care Management in Medicare (Subcommittee on Health) 

Witnesses 

Stuart Guterman, Director, Office of Research, Development and 

Information, Centers for Medicare and Medicaid Services. 

Jeff Lemieux, Senior Economist, Progressive Policy Institute. 

Ed Wagner, M.D., Director, MacColl Institute for Healthcare Innovation, Center for Health Studies, Group Health Cooperative, Seattle, Washington. 

George A. Taler, M.D., Director, Long Term Care, Department of 

Medicine, Washington Hospital Center, on behalf of the American 

Geriatric Society. 

Jan Berger, M.D., Senior Vice President, Clinical Quality and 

Support, Caremark Rx Incorporated, Northbrook, Illinois. 

February 13, 2003: Hearing on Medicare Regulatory and Contracting Reform (Subcommittee on Health) 

Witnesses 

The Honorable Thomas A. Scully, Administrator, Centers for 

Medicare and Medicaid Services. 

Douglas L. Wood, M.D., Vice Chair, Department of Medicine, 

Mayo Clinic and Foundation, Rochester, Minnesota. 

Michael Luebke, President, Verizon Information Technologies 

Inc., Tampa, Florida. 

Tony Fay, Vice President, Government Affairs, Province 

Healthcare Company, Brentwood, Tennessee, on behalf of the 

American Hospital Association. 

J. Edward Hill, M.D., Chairman, Board of Trustees, American 

Medical Association. 

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Janet B. Wolf, President, Munson Home Health, Traverse City, 

Michigan, and Past President, Board of Directors, Michigan Home 

Health Association, Okemos, Michigan, on behalf of the National 

Association for Home Care and Hospice. 

Judith A. Ryan, Ph.D., President and Chief Executive Officer, 

Evangelical Lutheran Good Samaritan Society, Sioux Falls, South 

Dakota, on behalf of the American Health Care Association. 

Michael Carius, M.D., Immediate Past President, American College of Emergency Physicians, Norwalk, Connecticut, and Founding 

Member, Alliance of Specialty Medicine. 

Vicki Gottlich, Attorney, Healthcare Rights Project, Center for 

Medicare Advocacy, Inc. 

February 6, 2003: Hearing on the President’s Fiscal Year 2004 

Budget with U.S. Department of Health and Human Services 

(Full Committee) 

Witness 

The Honorable Tommy G. Thompson, Secretary, U.S. Department of Health and Human Services. 

107TH CONGRESS

October 3, 2002: Medicare Payments for Currently Covered Prescription Drugs (Subcommittee on Health) 

July 23, 2002: Medicare’s Geographic Cost Adjusters (Subcommittee on Health)

April 17, 2002: Integrating Prescription Drugs into Medicare (Full 

Committee) 

April 16, 2002: Promoting Disease Management in Medicare (Subcommittee on Health) 

March 14, 2002: Medicare Supplemental Insurance (Subcommittee 

on Health) 

March 7, 2002: Health Quality and Medical Errors (Subcommittee 

on Health) 

February 28, 2002: Reforming Physician Payments (Subcommittee 

on Health) 

December 4, 2001: Status of the Medicare+Choice Program (Subcommittee on Health) 

September 25, 2001: H.R. 2768, Medicare Regulatory and Contracting Reform Act (Subcommittee on Health) 

July 19, 2001: Administration’s Principles to Strengthen and Modernize Medicare (Full Committee) 

June 12, 2001: Rural Health Care in Medicare (Subcommittee on 

Health) 

May 9, 2001: Strengthening Medicare: Modernizing Beneficiary 

Cost-Sharing (Subcommittee on Health) 

May 1, 2001: Medicare+Choice: Lessons for Reform (Subcommittee 

on Health) 

March 27, 2001: Laying the Groundwork for a Prescription Drug 

Benefit (Subcommittee on Health) 

March 20, 2001: Medicare Solvency (Full Committee) 

March 15, 2001: Bringing Regulatory Relief to Beneficiaries and 

Providers (Subcommittee on Health) 

March 14, 2001: Administration’s Health and Welfare Priorities 

(Full Committee) 

150

February 28, 2001: Perspectives on Medicare Reform (Subcommittee on Health)

On April 11, 2003, Congress agreed to the conference report for 

H. Con. Res. 95, ‘‘Establishing the congressional budget for the 

United States Government for fiscal year 2004 and setting forth 

appropriate budgetary levels for fiscal years 2003 and 2005 

through 2013,’’ which provided $400 billion over 10 years for Medicare modernization and prescription drugs. 

On June 16, 2003, Committee on Ways and Means Chairman Bill 

Thomas and Committee on Energy and Commerce Chairman Billy 

Tauzin introduced H.R. 2473, the ‘‘Medicare Prescription Drug and 

Modernization Act of 2003’’. (Identical language in the form of a report was released publicly June 13, 2003.) On June 17, 2003, H.R. 

2473 was marked up by the full Committee on Ways and Means 

and ordered favorably reported by a vote of 25–15, after adopted 

amendments—including the Thomas amendment in the nature of 

a substitute—were accepted into the bill. The amendments that 

were accepted to the Thomas amendment in the nature of a substitute were: (1) an amendment offered by Mrs. Johnson to instruct 

the Secretary of the U.S. Department of Health and Human Services to promptly evaluate existing codes for physician services associated with the administration of covered outpatient drugs; and to 

use existing processes to establish relative values for such services; 

(2) an en bloc amendment offered by Mr. Collins to exempt MA private FFS plans from compliance with the drug utilization management program, negotiation of discounts from manufacturers, disclosure of fact that generic drug is available at a lower cost, and 

TRICARE standards for participation; and (3) an amendment offered by Mr. Nussle and Mr. Pomeroy to adjust the Medicare inpatient hospital prospective payments system wage index to revise 

the labor-related share of such index, and to provide a five percent 

bonus payment to physicians operating in physician scarcity areas.

II. EXPLANATION OF PROVISIONS 

A. TITLE I—MEDICARE PRESCRIPTION DRUG BENEFIT

Section 101. Establishment of a Medicare Prescription Drug Benefit 

CURRENT LAW

Medicare does not cover most outpatient prescription drugs. 

Beneficiaries in hospitals or skilled nursing facilities may receive 

drugs as part of their treatment. Medicare payments made to the 

facilities cover these costs. Medicare also makes payments to physicians for drugs or biologicals that are not usually self-administered. 

This means that coverage is generally limited to drugs or 

biologicals administered by injection. However, if the injection is 

generally self-administered (e.g., insulin), it is not covered. 

Despite the general limitation on coverage for outpatient drugs, 

Medicare statute specifically authorizes coverage for the following: 

(1) drugs used in immunosuppressive therapy (such as cyclosporin) 

following discharge from a hospital for a Medicare-covered organ 

transplant, (2) erythropoietin (EPO) for the treatment of anemia 

for persons with chronic renal failure who are on dialysis, (3) drugs 

taken orally during cancer chemotherapy provided they have the 

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same active ingredients and are used for the same indications as 

chemotherapy drugs which would be covered if they were not selfadministered and were administered as incident to a physician’s 

professional service, and (4) hemophilia clotting factors for hemophilia patients competent to use such factors to control bleeding 

without medical supervision, and items related to the administration of such factors. The program also pays for supplies (including 

drugs) that are necessary for the effective use of covered durable 

medical equipment, including those that must be put directly into 

equipment (e.g., tumor chemotherapy agents used with an infusion 

pump). Medicare also covers pneumococcal pneumonia vaccines, 

hepatitis B vaccines, and influenza virus vaccines. 

EXPLANATION OF PROVISION

The provision would establish a new voluntary prescription drug 

benefit program under a new Medicare Part D of Title XVIII of the 

Social Security Act. Effective January 1, 2006, a new voluntary 

benefit would be established. Beneficiaries could purchase either 

‘‘standard coverage’’ or actuarially equivalent coverage approved by 

the Secretary of Health and Human Services. In 2006, ‘‘standard 

coverage’’ would have a $250 deductible, 80 percent coverage for 

costs between $251 and $2,000, and all costs after the individual 

has borne $3,500 in out-of-pocket spending (a.k.a. the catastrophic 

threshold). The catastrophic threshold would be raised for individuals with income above $60,000 and couples with income above 

$120,000. Subsidies would be provided for persons with income 

below 150 percent of poverty. Coverage would be provided through 

PDPs, Medicare Advantage (MA) plans (formerly known as 

Medicare+Choice plans), or Enhanced Fee-For-Service plans 

(EFFS). The program would rely on private plans to provide coverage and to bear some of the financial risk for drug costs. Federal 

subsidies would be provided to encourage participation. Plans 

would be expected to negotiate prices for drugs. A new Medicare 

Benefits Administration (MBA), within the Department of Health 

and Human Services (HHS), would contract with plans. 

New Section 1860D–1. Benefits; Eligibility; Enrollment; and 

Coverage Period 

The new Section 1860A would specify that each individual entitled to Medicare Part A or enrolled in Medicare Part B would be 

entitled to obtain qualified prescription drug coverage under Medicare. MA plans and EFFS plans (MA–EFFS plans) would be required to offer qualified prescription drug coverage. An individual 

enrolled in a MA–EFFS plan would obtain their drug coverage 

through the plan. An individual not enrolled in either a Medicare 

Advantage or EFFS plan could enroll in a new PDP. The provision 

would specify that an individual eligible to make an election to enroll in a PDP, or with a MA–EFFS plan, would do so in accordance 

with regulations issued by the Administrator of the new MBA. Enrollments and changes in enrollment could occur only during a 

specified election period. The election periods would generally be 

the same as those established for MA–EFFS programs including 

annual coordinated election periods and special election periods. An 

individual discontinuing a MA election during the first year of eligibility would be permitted to enroll in a PDP at the same time as 

152

the election of coverage under the original fee-for-service plan 

(FFS). 

An initial six month election period, beginning on October 1, 

2005, would be established for persons entitled to Part A or enrolled under Part B on that date. For persons first entitled to Part 

A or enrolled in Part B after that date, an initial election period 

that would be the same as that for initial Part B enrollment, would 

be established. The MBA Administrator would be required to establish special election periods for persons in specific circumstances, 

such as having and then involuntarily losing prescription drug coverage; enrollment delays or non-enrollment attributable to government action; becoming eligible for Medicaid drug coverage; or any 

such exceptional circumstance specified by the MBA Administrator 

(including circumstances pertaining to MA enrollment). 

Guaranteed issue and community-rating protections would be established for beneficiaries. Individuals electing qualified prescription drug coverage under a PDP plan or MA–EFFS plan could not 

be denied enrollment based on health status or other factor. MA 

provisions relating to priority enrollment (where capacity limits 

have been reached) and limitations on terminations of elections 

would apply to PDP sponsors. 

The provision would specify that PDP sponsors and MA–EFFS 

organizations providing qualified prescription drug coverage could 

not deny, limit, or condition the coverage or provision of benefits 

or increase the premium based on any health-related status factor 

in the case of persons who maintained continuous prescription drug 

coverage since the date they first qualified to elect drug coverage 

under Part D. Individuals who did not maintain continuous coverage could be subject to an adjusted premium in a manner reflecting the additional actuarial risk involved. Such risk would be established through an appropriate actuarial opinion. 

An individual would be considered to have had continuous prescription drug coverage if the individual could establish that he or 

she had coverage under one of the following (and coverage in one 

plan occurred no more than 63 days after termination of coverage 

in another plan): (1) a qualified PDP or MA–EFFS plan, (2) Medicaid, (3) a group health plan, but only if benefits were at least 

equivalent to benefits under a qualified PDP, (4) a Medigap plan, 

but only if the policy was in effect on January 1, 2006, and only 

if the benefits were at least equivalent to benefits under a qualified 

PDP, (5) a state pharmaceutical assistance program, but only if 

benefits were at least equivalent to benefits under a qualified PDP, 

or (6) a veteran’s plan, but only if benefits were at least equivalent 

to benefits under a qualified PDP. Individuals could apply to the 

MBA Administrator to waive the requirement that such coverage 

be at least equivalent to benefits under a qualified PDP if they 

could establish that they were not adequately informed that the 

coverage did not provide such level of coverage. 

PDP sponsors would make drug coverage available to all eligible 

individuals residing in the area—without regard to their health, 

economic status, or place of residence. 

Elections would take effect at the same time that they do for MA 

plans; however, no election could take effect before January 1, 

2006. The MBA Administrator would provide for the termination of 

an election in the case of termination of Part A and Part B covVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00152 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
153

erage or termination of an election for cause (including failure to 

pay the required premium). 

New Section 1860D–2. Requirements for Qualified Prescription Drug Coverage 

The new Section 1860D–2 would specify the requirements for 

qualified prescription drug coverage. Qualified coverage would be 

defined as either ‘‘standard coverage’’ or actuarially equivalent coverage. 

For 2006, ‘‘standard coverage’’ would have a $250 deductible, 80 

percent coverage for costs between $251 and $2,000, and full coverage for all costs after the individual has borne $3,500 in out-ofpocket spending (a.k.a. the catastrophic threshold). Beneficiaries 

would have access to negotiated discounts even where there would 

be no insurance benefit (between $2,000 in spending and $3,500 in 

out-of-pocket spending). Beginning in 2007, standard coverage 

thresholds would be increased by the annual percent increase in 

average per capita expenditures for covered outpatient drugs for 

beneficiaries (for the 12-month period ending in July of the previous year). 

Plans would be permitted to substitute cost-sharing schedules for 

costs up to the initial coverage limit ($2,000) that are actuarially 

consistent with the average expected 20 percent cost-sharing up to 

the initial coverage limit. They could also apply tiered coinsurance, 

provided such coinsurance was actuarially consistent with the average 20 percent cost-sharing requirements. 

Costs that would count toward meeting the catastrophic limit 

would only be considered incurred if they were paid for the deductible, cost-sharing, or benefits not paid because of application to the 

initial coverage limit. Costs would be treated as incurred costs only 

if they are paid by the individual (or by another family member on 

behalf of the individual), paid on behalf of a low-income individual 

under the subsidy provisions, under the Medicaid program, or by 

a state pharmaceutical assistance program. Substantial new assistance would be provided to those states with pharmaceutical assistance programs through the catastrophic benefit by requiring Medicare to pay 80 percent of the costs above the catastrophic limit. 

Any costs for which the individual was reimbursed by insurance or 

otherwise would not count toward incurred costs. 

The provision would increase the annual out-of-pocket threshold 

for each enrollee whose adjusted gross income exceeds a specified 

income threshold. The portion of income exceeding this income 

threshold ($60,000 for individuals and $120,000 for couples in 

2006), but below an income threshold limit ($200,000 in 2006), 

would be considered in making this calculation. The increase would 

be calculated as follows: first, the ratio of the annual out-of-pocket 

limit to the income limit would be calculated and expressed as a 

percent; for 2006, this would be $3,500 divided by $60,000, equaling about 5.8 percent. This percentage would be multiplied by income over the income threshold, not exceeding $140,000. Thus, the 

catastrophic out-of-pocket limit would be $5,820 for an enrollee 

with an income of $100,000 and $11,620 for persons with incomes 

at $200,000 or above. Beginning in 2007, the income threshold and 

income threshold limit would be increased by the percentage inVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00153 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
154

crease in the consumer product index (CPI) for all urban consumers, rounding to the nearest $100. 

The amount used for making the income determination would be 

adjusted gross income Individuals filing joint returns would be 

treated separately with each person considered to have an adjusted 

gross income equal to one-half of the total. The determination 

would be the most recent return information disclosed by the Secretary of the Treasury to the Secretary of HHS before the beginning of the year. The Secretary, in coordination with the Secretary 

of the Treasury, would provide a procedure under which an enrollee could elect to use more recent information, including information for a taxable year ending in the current calendar year. 

Through the 1–800 toll free Medicare beneficiary line, individuals 

would have assistance in appealing a determination from the Medicare Ombudsman. The process would require: (1) the enrollee to 

provide the Secretary with the relevant portion of the more recent 

return, (2) verification by the Secretary of the Treasury, and (3) 

payment by the Secretary to the enrollee equal to the benefit payments that would have been payable under the plan if more recent 

information had been used. If such payments were made, the PDP 

sponsor would pay the Secretary the requisite amount, less the applicable reinsurance that would have applied. 

The Secretary would be required to provide, through the annual 

Medicare handbook, general information on the calculation of catastrophic out-of-pocket thresholds. The Secretary would periodically 

transmit to the Secretary of the Treasury the names and Social Security Numbers (SSNs) of enrollees in PDPs or MA–EFFS plans 

and request that the Secretary of the Treasury disclose income information. The Secretary would disclose to entities offering the 

plan the amount of the out-of-pocket threshold that would apply to 

a specified taxpayer. New confidentiality protections and severe 

criminal and civil penalties would apply to any unauthorized disclosure of information. 

The provision would permit a PDP or MA–EFFS sponsor to offer, 

subject to approval by the MBA Administrator, alternative coverage providing certain requirements were met. The actuarial 

value of total coverage would have to be at least equal to the actuarial value of standard coverage. The unsubsidized value of the 

coverage (i.e. the value of the coverage exceeding subsidy payments) would have to be equal to the unsubsidized value of standard coverage. The coverage would be designed (based on actuarially 

representative patterns of utilization) to provide for payment of incurred costs up to the initial coverage limit of at least the same 

percentage of costs provided under standard coverage. Further, catastrophic protection would have to be the same as that under 

standard coverage. It could not vary. 

Both standard coverage and actuarially equivalent coverage 

would offer access to negotiated prices, including applicable discounts. Access would be provided even when no benefits were payable because of the application of cost-sharing or initial coverage 

limits. Insofar as a State elected to use these negotiated prices for 

its Medicaid program, the Medicaid drug payment provisions would 

not apply. Further, the negotiated prices would not be taken into 

account in making ‘‘best price’’ determinations under Medicaid. 

Under the current Medicaid best price policy, the largest discount 

155

a pharmaceutical manufacturer negotiates in the private market 

must be passed along to the Medicaid program as well. Since manufacturers can only influence market share and volume in the private sector, not Medicaid, the ‘‘best price’’ policy has led to less discounting by manufacturers. As a result, arbitrary price floors are 

created and consumers pay the price as competing manufacturers 

have had less incentive to steeply discount their prices. This provision saves Medicare billions of dollars by encouraging pharmaceutical manufacturers to offer the same discounts that private 

plans currently receive. For transparency reasons, the PDP or MA–

EFFS sponsor would be required to disclose to the MBA Administrator the extent to which manufacturer discounts or rebates or 

other remunerations or price concessions are made available to the 

sponsor or organization and passed through to enrollees through 

pharmacies. Manufacturers would be required to disclose pricing 

information to the MBA Administrator under the same conditions 

currently required for Medicaid. Transparency in pricing and rebate arrangements is a key factor in ensuring beneficiaries and 

taxpayers are receiving the best value for their resources. 

Qualified prescription drug coverage could include coverage exceeding that specified for standard coverage or actuarially equivalent coverage. However, any additional coverage would be limited 

to covered outpatient drugs. The MBA Administrator could terminate a contract with a PDP or MA–EFFS sponsor if a determination was made that the sponsor or organizations engaged in activities intended to discourage enrollment of classes of eligible Medicare beneficiaries obtaining coverage through the plan on the basis 

of their higher likelihood of utilizing prescription drug coverage. 

Covered outpatient drugs would be defined to include: (1) a drug 

which may only be dispensed subject to a prescription and which 

is described in subparagraph (A)(i) or (A)(ii) of Section 1927(k)(2) 

of the Social Security Act (relating to drugs covered under Medicaid), (2) a biological product described in paragraph B of such 

subsection, (3) insulin described in subparagraph C of such section, 

and (4) vaccines licensed under Section 351 of the Public Health 

Service Act. Drugs excluded from Medicaid coverage would be excluded from the definition except for smoking cessation drugs. The 

definition includes any use of a covered outpatient drug for a medically accepted indication. Drugs paid for under Medicare Part B 

would not be covered under Part D. A plan could elect to exclude 

a drug that would otherwise be covered, if the drug was excluded 

under the formulary and the exclusion was not successfully appealed under the new Section 1860D–3. In addition, a PDP or MA–

EFFS sponsor could exclude from coverage, subject to reconsideration and appeals provisions, any drug that either does not meet 

Medicare’s definition of medical necessity or is not prescribed in accordance with the plan or Part D. Beneficiaries could appeal the 

placement of a drug in a higher coinsurance tier to an external, 

independent entity. 

New Section 1860D–3. Beneficiary Protections for Qualified 

Prescription Drug Coverage 

The new Section 1860D–3 would specify required beneficiary protections. Plans would have to comply with guaranteed issue and 

community-rated premium requirements specified in the new SecVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00155 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
156

tion 1860D–1, access to negotiated prices as specified in the new 

Section 1860D–2, and the non-discrimination provisions specified in 

the new Section 1860D–6. 

The PDP sponsors would be required to disclose to each enrolling 

beneficiary information about the plan’s benefit structure, including information on: (1) access to covered drugs, including access 

through pharmacy networks, (2) how any formulary used by the 

sponsor functioned, (3) copayment and deductible requirements (including any applicable tiered copayment requirements), and (4) 

grievance and appeals procedures. In addition, beneficiaries would 

have the right to obtain more detailed plan information. The sponsor would be required to make available, through an Internet site 

and, on request, in writing, information regarding the basis for exclusion of any drug from the formulary. Plans must notify enrollees 

when a change has been made in the preferred status of a drug or 

biological, or if there has been a change in a beneficiary’s coinsurance. Plans would be required to furnish to enrollees a detailed explanation of benefits, including information on benefits compared to 

the initial coverage limit and the applicable out-of-pocket threshold. 

PDP and MA–EFFs sponsors would be required to permit the 

participation of any pharmacy that met the plan’s terms and conditions. Beneficiaries would be ensured access to any convenient local 

pharmacy that chose to participate in the plan. PDP and MA–

EFFS sponsors could reduce coinsurance for their enrolled beneficiaries below the otherwise applicable level for drugs dispensed 

through in-network pharmacies; in no case could the reduction result in an increase in subsidy payments made by the MBA Administrator to the plan. Sponsors would be required to secure participation in its network of a sufficient number of pharmacies that dispense drugs directly to patients to assure convenient access. Mail 

order only pharmacy would be prohibited so that beneficiaries have 

access to a convenient bricks and mortar pharmacy. The MBA Administrator would establish convenient access rules that were no 

less favorable to enrollees than rules for convenient access established by the Secretary of Defense on June 1, 2003, for the 

TRICARE Retail Pharmacy program. The TRICARE standard 

specifies that, in an urban area, 90 percent of beneficiaries must 

be within two miles of a participating pharmacy; in a suburban 

area, 90 percent of beneficiaries must be within five miles of a participating pharmacy; and in rural areas, 70 percent of beneficiaries 

must be within fifteen miles of a participating pharmacy. According 

to the Department of Defense, the TRICARE Retail Pharmacy program receives minimal access complaints each year, and problems 

and disputes related to access are resolved quickly. The rules 

would include adequate emergency access for enrolled beneficiaries. 

Sponsors would permit enrollees to receive benefits through a community pharmacy, rather than through mail-order, with any differential in cost paid by enrollees. Pharmacies could not be required to accept insurance risk as a condition of participation. It 

is important that pharmacies are not put at risk for events they 

cannot control, such as volume and frequency of prescriptions.

PDP and MA–EFFS sponsors would be required to issue (and reissue as appropriate) a card or other technology that could be used 

by an enrolled beneficiary to assure access to negotiated prices for 

157

drugs when coverage is not otherwise provided under the plan. The 

MBA Administrator would provide for the development of uniform 

standards relating to a standardized format for the card or other 

technology. These standards would be compatible with the administrative simplification requirements of Title XI of the Social Security 

Act. 

There is no requirement to use a formulary, however, if a PDP 

or MA–EFFS sponsor uses a formulary, it would have to meet certain requirements. It would be required to establish an independent pharmaceutical and therapeutic committee free of conflict 

with the plan to develop and review the formulary. The committee 

would include at least one physician and one pharmacist with expertise in the care of elderly or disabled persons, and the majority 

of members would be physicians or pharmacists. The committee 

would be required, when developing and reviewing the formulary, 

to base clinical decisions on the strength of scientific evidence and 

standards of practice, including assessing peer-reviewed medical 

literature, such as randomized clinical trials, pharmacoeconomic 

studies, outcomes research data, and such other information the 

committee determined appropriate. Arbitrary determinations to exclude products from the formulary would not be permitted. 

The P&T committee would also take into account whether including a particular covered drug had therapeutic advantages in terms 

of safety and efficacy. In addition, the formulary would have to include at least two drugs within each therapeutic category and class 

of covered outpatient drugs, although not necessarily all drugs 

within such categories or classes. When establishing such classes, 

the committee would take into account the standards published in 

the United States Pharmacopoeia Drug Information. It would be 

required to make available to plan enrollees, through the Internet 

or otherwise, the clinical basis for the coverage of any drug on the 

formulary. The committee would be required to establish policies 

and procedures to educate and inform health care providers concerning the formulary. Any removal of a drug from the formulary 

could not occur until appropriate notice had been provided to beneficiaries and physicians. The plan would provide for periodic evaluation and analysis of treatment protocols and procedures. Further, the PDP or MA–EFFS sponsor would be required to provide 

for, as part of its overall appeals process, appeals of coverage denials regarding application of the formulary. 

Each PDP or MA–EFFS sponsor would ensure that each pharmacy or other dispenser informed enrolled beneficiaries at the time 

of purchase, of any price differential between their prescribed drug 

and the price of the lowest cost generic drug covered under the 

plan that was therapeutically equivalent and bioequivalent. 

The PDP or MA–EFFS sponsor would be required to have (directly, or indirectly through arrangements): (1) an effective cost 

and drug utilization management program, (2) quality assurance 

measures including a medication therapy management program, 

(3) for years beginning with 2007, an electronic prescription drug 

program, and (4) a program to control waste, fraud, and abuse. Utilization management programs would be required to include medically appropriate incentives to use generic drugs and therapeutic 

interchange where appropriate. Medication therapy management 

programs would be designed to assure, for beneficiaries at risk for 

158

potential medication problems such as beneficiaries with complex 

or chronic diseases (such as diabetes, asthma, hypertension, and 

congestive heart failure) or multiple prescriptions, that drugs 

under the plan were appropriately used to optimize therapeutic 

outcomes through improved medication use and to reduce the risk 

of adverse events, including adverse drug interactions. The program would be developed in cooperation with licensed pharmacists 

and physicians. The PDP sponsor would be required, when establishing fees for pharmacists and other providers, to take into account the resources and time associated with the medication therapy management program. MA private fee-for-service plans would 

not be required to comply with the drug utilization management 

program, negotiate discounts from manufacturers, meet the 

TRICARE standards for participation, or disclose the fact that a 

lower priced generic drug is available at the time of purchase. 

The electronic prescription drug program would have to be consistent with national standards developed by the MBA Administrator. The program would be required to provide for electronic 

transmittal of prescriptions (except in emergencies and exceptional 

cases) and for provision of information to the prescribing health 

professional. To the extent feasible, the program would permit the 

prescribing health professional to provide, and be provided, information on an interactive real-time basis. The electronic prescribing 

program would permit health professionals to access information 

on the different medications a senior may be taking—making it 

easier to prevent adverse drug interactions and side effects. In addition, electronic prescribing would cut down on both the costs and 

hassle that pharmacists incur trying to decipher a handwritten 

script. These systems will increase drug compliance and properly 

monitor drug utilization. 

The MBA Administrator would be required to provide for the development of national standards relating to the electronic prescription drug program. The standards would be compatible with those 

established for the administrative simplification program established under title XI of the Social Security Act. The MBA Administrator would establish an advisory task force that included representatives of physicians, hospitals, pharmacies, beneficiaries, 

pharmacy benefit managers, technology experts, and pharmacy 

benefit experts of the Department of Veterans Affairs, Defense and 

other appropriate Federal agencies. The task force would provide 

recommendations to the MBA Administrator on standards including recommendations relating to: (1) range of available computerized prescribing software and hardware and their costs to develop 

and implement, (2) extent to which such standards and systems reduce medication errors and can be readily implemented by physicians, pharmacies, and hospitals, (3) efforts to develop uniform 

standards and a common software platform for the secure electronic transmission of medication history, eligibility, benefit and 

prescription information, (4) efforts to develop and promote universal connectivity and interoperability for the secure exchange of 

information, (5) cost of implementing such systems in hospital and 

physician office settings and pharmacies, and (6) implementation 

issues as they relate to administrative simplification requirements 

and current Federal and State prescribing laws and regulations 

and their impact on implementation of computerized prescribing. 

159

The MBA Administrator would be required to establish the task 

force by April 1, 2004. The task force would be required to submit 

recommendations to the MBA Administrator by January 1, 2005. 

The MBA Administrator would be required to promulgate national 

standards by January 1, 2006. Given current available technology, 

the committee supports the timely development of standards to facilitate a secure electronic prescription information program between prescribing health care professionals, pharmacists, and pharmacy benefit managers (PBMs) to reduce dangerous drug interactions as well as errors due to poor handwriting and transcribing 

errors. To this end, the committee believes that it would be to the 

benefit of the patient for prescribing professionals to have realtime, ‘‘up-front’’ access to the patient’s medication history, eligibility for benefits, drug formulary (if applicable), and coverage, 

when making prescribing decisions. 

Each PDP sponsor would be required to have meaningful procedures for the hearing and resolving of any grievances between the 

organization (including any entity or individual through which the 

organization provides covered benefits) and enrollees. Enrollees 

would be afforded access to expedited determinations and reconsiderations, in the same manner afforded under MA. A beneficiary in 

a plan that provided for tiered cost-sharing could request coverage 

of a non-preferred drug on the same conditions applicable to preferred drugs if the prescribing physician determines that the preferred drug for the treatment of the same condition was not as effective for the enrollee or could have adverse effects for the enrollee. Such decisions could also be appealed under the MA appeals 

structure. 

In general, PDP sponsors would be required to meet for independent review standards for coverage denials and appeals in the 

same manner that such standards apply to MA organizations. An 

individual enrolled in a PDP could appeal to obtain coverage for a 

drug not on the formulary or in a different cost sharing tier if the 

prescribing physician determined that the formulary drug for treatment of the same condition was not as effective for the individual 

or had adverse effects for the individual. The PDP sponsor would 

be required to meet requirements related to confidentiality and accuracy of enrollee records in the same manner that such requirements apply to MA organizations. 

New Section 1860D–4. Requirements for and Contracts With 

Prescription Drug Plan (PDP) Sponsors 

New Section 1860D–4 would specify organizational plan requirements for entities seeking to become PDP sponsors. In general, the 

section would require a PDP sponsor to be licensed under state law 

as a risk-bearing entity eligible to offer health insurance or health 

benefits coverage in each state in which it offers a prescription 

drug plan. Alternatively it could meet solvency standards established by the MBA Administrator for entities not licensed by the 

state. Plans would be required to assume full financial risk on a 

prospective basis for covered benefits except: (1) as covered by federal subsidy payments and reinsurance payments for high-cost enrollees, or (2) as covered by federal incentive payments to encourage plans to expand service areas for existing plans or establish 

160

new plans. The entity could obtain insurance or make other arrangements for the cost of coverage provided to enrollees. 

PDP sponsors would be required to enter into a contract with the 

MBA Administrator under which the sponsor agrees to comply both 

with the applicable requirements and standards and the terms and 

conditions of payment. The contract could cover more than one 

plan. The MBA Administrator would have the same authority to 

negotiate the terms and conditions of the plans as the Director of 

the Office of Personnel Management has with respect to FEHB 

plans. The MBA Administrator would be required to take into account subsidy payments for covered benefits in negotiating the 

terms and conditions regarding premiums. The MBA Administrator 

would designate at least 10 service areas consistent with the areas 

established for EFFS plans. 

The new section would incorporate, by reference, many of the 

contract requirements applicable to MA plans, including minimum 

enrollment, contract periods, allowable audits to protect against 

fraud and abuse, intermediate sanctions, and contract terminations. Pro rated user fees could be established to help finance enrollment activities; in no case could the amount of the fee exceed 

20 percent of the maximum fee permitted for a MA plan. 

The new Section would permit the MBA Administrator to waive 

the state licensure requirement under circumstances similar to 

those permitted under Part C for provider-sponsored organizations. 

In such cases, plans would be required to meet financial solvency 

and capital adequacy standards established by the MBA Administrator. The MBA Administrator would establish such standards by 

regulation by October 1, 2004. 

The standards established under Part D would supersede any 

state law or regulation (other than state licensing laws or laws relating to plan solvency). In addition, states would be prohibited 

from imposing premium taxes or similar taxes with respect to premiums paid to PDP sponsors or payments made to such sponsors 

by the MBA Administrator. 

New Section 1860D–5. Process for Beneficiaries To Select 

Qualified Prescription Drug Coverage 

The new Section 1860D–5 would require the MBA Administrator 

to establish a process for the selection of a PDP or MA–EFFS sponsor that provided qualified prescription drug coverage. The process 

would include the conduct of annual coordinated election periods 

under which individuals could change the qualifying plans through 

which they obtained coverage. The process would also include the 

active dissemination of information to promote an informed selection among qualifying plans (based on price, quality, and other features) in a manner consistent with and in coordination with the 

dissemination of information under MA. Further, the process would 

provide for the coordination of elections through filing with a PDP 

or MA–EFFS sponsor in a manner consistent with that provided 

under MA. The plan would have to inform each enrollee at the beginning of the year of the enrollee’s annual out-of-pocket threshold. 

The section would specify that an EFFS enrollee could only elect 

to receive drug coverage through the plan. 

The MBA Administrator would assure that all eligible individuals residing in the United States would have a choice of enrollVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00160 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
161

ment in at least two qualifying plan options, at least one of which 

is a PDP, in their area of residence. The requirement would not be 

satisfied if only one PDP or MA–EFFS sponsor offers all the qualifying plans in the area. If necessary to ensure such access, the 

MBA Administrator would be authorized to provide partial underwriting of risk for a PDP sponsor to expand its service area under 

an existing prescription drug plan to adjoining or additional areas, 

or to establish such a plan, including offering such plan on a regional or nationwide basis. The assistance would be available only 

so long as, and to the extent necessary, to assure the guaranteed 

access. However, the MBA Administrator could never provide for 

the full underwriting of financial risk for any PDP sponsor. Additionally, the MBA Administrator would be directed to seek to maximize the assumption of financial risk by PDP sponsors and entities 

offering MA–EFFS plans. The MBA Administrator would be required to report to Congress annually on the exercise of this authority and recommendations to minimize the exercise of such authority. 

New Section 1860D–6. Submission of Bids 

The new Section 1860D–6 would require each PDP sponsor to 

submit to the MBA Administrator specified information in the 

same manner MA organizations submit information. The submitted 

information would be the qualified drug coverage to be provided, 

the actuarial value of the coverage, and details of the bid and coverage premium. The PDP sponsor would include: (1) actuarial certification of the bid and premium, (2) the portion of the bid and 

premium attributable to benefits in excess of the standard coverage, (3) the reduction in the premium resulting from reinsurance 

subsidies, (4) the reduction in the bid resulting from direct and reinsurance subsidy payments, and (5) such other information required by the MBA Administrator. 

The MBA Administrator would review the submitted information 

for purposes of conducting negotiations with the plan. The MBA 

Administrator would approve the premium only if it accurately reflected the actuarial value of the benefits and the 73 percent average subsidy provided for under the new Section 1860D–8. The MBA 

Administrator would apply actuarial principles to approval of a 

premium in a manner similar to that used for establishing the 

monthly Part B premium. These requirements would not apply to 

MA plans. 

The bid and premium for a PDP could not vary among individuals enrolled in the plan in the same service area, provided they 

were not subject to late enrollment penalties. A PDP sponsor would 

permit each enrollee to have their premiums withheld from their 

Social Security checks in the same manner as is currently done for 

Part B premiums and transferred to the plan in which they are enrolled. Beneficiaries could also make payment of the premium 

through an electronic funds transfer mechanism. The amount 

would be credited to the Medicare Prescription Drug Trust Fund. 

Reductions in Part B premiums attributable to enrollment in MA 

plans could be used to reduce the premium otherwise applicable. 

Under certain conditions, PDP or MA–EFFS sponsors in an area 

would be required to accept, for an individual eligible for a low-income premium subsidy, the reference premium amount (premium 

162

for standard coverage) as payment in full for the premium for 

qualified prescription coverage. This requirement would apply if 

there was no standard coverage available in the area. 

New Section 1860D–7. Premium and Cost-Sharing Subsidies 

for Low-Income Individuals 

The new Section 1860D–7 would provide subsidies for low-income 

individuals. Low-income persons would receive a premium subsidy 

(based on the value of standard coverage). Individuals with incomes 

below 135 percent of poverty (and assets below $4,000) would have 

a subsidy equal to 100 percent of the value of standard drug coverage provided under the plan. For individuals between 135 percent and 150 percent of poverty, there would be a sliding scale premium subsidy ranging from 100 percent of such value at 135 percent of poverty to zero percent of such value at 150 percent of poverty. The asset test for this part is twice the asset test used for determining Supplemental Security Income (SSI) eligibility, indexed 

to inflation. (Note: the asset test has not previously been indexed.) 

Not all resources are counted. Excluded resources include: a home 

(with no limit on its value) if the individual lives in it; household 

goods and personal effects up to $2,000; one car used to provide 

necessary transportation regardless of value or if not used to provide transportation, excluded up to $4,500 in value; the value of a 

burial space; other property essential for self support of the individual; life insurance up to $1,500; the value of a trust, but trusts 

must meet very specific criteria; and other exclusions. Sponsors 

and entities could not charge individuals receiving cost-sharing 

subsidies more than five dollars per prescription. Sponsors and entities could reduce the cost-sharing to zero, which would otherwise 

be applicable for generic drugs. 

State Medicaid programs or the Social Security Administration 

(SSA) would determine whether an individual would be eligible for 

a low-income subsidy, as well as the amount of the subsidy. SSA 

would be appropriated the necessary funds. The Congressional 

Budget Office (CBO) estimates that 152,000 seniors who would otherwise not enroll in the low-income subsidy program would participate since the enrollment process through SSA avoids the stigma 

of signing up at a welfare office. Individuals not in the 50 States 

or the District of Columbia could not be subsidy eligible individuals 

but could be eligible for financial assistance with drug costs under 

new Section 1935(e) added by Section 103. 

Whether offered by a PDP or MA–EFFS sponsor, the premium 

subsidy amount would be defined as the benchmark premium 

amount for the qualified prescription drug coverage chosen by the 

beneficiary. The benchmark premium amount for a plan means the 

premium amount for enrollment under the plan (without regard to 

any subsidies or late enrollment penalties) for standard coverage 

(or alternative coverage if the actuarial value is equivalent). If a 

plan provides alternative coverage with a higher actuarial value 

than that for standard coverage, the benchmark amount would 

bear the same ratio to the total premium as the actuarial value of 

standard coverage was to the actuarial value of alternative coverage. 

The MBA Administrator would provide a process whereby the 

PDP or MA–EFFS sponsor would notify an individual that he or 

163

she is eligible for a subsidy as well as the amount of the subsidy. 

The sponsor would reduce the individual’s premium or cost-sharing 

otherwise imposed by the amount of the subsidy. The MBA Administrator would periodically, and on a timely basis, reimburse the 

sponsor or entity for the amount of such reductions. 

Part D benefits would be primary to any coverage available 

under Medicaid. The MBA Administrator would be required to develop and implement a plan for the coordination of Part D benefits 

and Medicaid benefits. Particular attention would be given to coordination of payments and preventing fraud and abuse. The MBA 

Administrator would be required to involve the Secretary, the 

States, the data processing industry, pharmacists, pharmaceutical 

manufacturers, and other experts in the development and administration of the plan.

New Section 1860D–8. Subsidies for All Medicare Beneficiaries for Qualified Prescription Drug Coverage 

New Section 1860D–8 would provide for subsidy payments to 

qualifying entities. The payments would reduce premiums for all 

enrolled beneficiaries consistent with an overall subsidy level of 73 

percent, reduce adverse selection among plans, and promote the 

participation of PDP sponsors. Such payments would be made as 

direct subsidies and through reinsurance. The section would constitute budget authority in advance of appropriations and represent 

the obligation of the MBA Administrator to provide for subsidy 

payments specified under the section. 

Direct subsidies would be made for individuals enrolled in a PDP 

or MA–EFFS plan, equal to 43 percent of the national weighted average monthly bid amount. Each year, the MBA Administrator 

would compute a national average monthly bid amount equal to the 

average of the benchmark bid amounts for each drug plan (not including those offered by private plans) adjusted to add back in the 

value of reinsurance subsidies. The benchmark bid amount would 

be defined as the portion of the bid attributable to standard coverage or actuarial equivalent coverage. The bid amount would be 

a weighted average with the weight for each plan equal to the average number of beneficiaries enrolled in the plan for the previous 

year. (The MBA Administrator would establish a procedure for determining the weighted average for 2005). 

Reinsurance payments would be made for specified costs incurred 

in providing prescription drug coverage for individuals enrolled in 

either a PDP or MA–EFFS plan. The MBA Administrator would 

provide for reinsurance payments to PDP sponsors, and entities offering MA or EFFS plans. Reinsurance payments would be provided for 30 percent of an individual’s allowable drug costs over the 

initial reinsurance threshold ($1,000 in 2006) but not over the initial coverage limit ($2,000 in 2006). Reinsurance of 80 percent 

would also be provided for allowable costs over the out-of-pocket 

threshold ($3,500 in 2006). These reinsurance payments would provide additional assistance to those plans that enroll beneficiaries 

who have multiple or very expensive prescription drug regimens. In 

the aggregate, reinsurance payments would equal 30 percent of 

total payments made by qualifying entities for standard coverage. 

For purposes of calculating reinsurance payments, allowable 

costs would be defined as the portion of gross covered prescription 

164

drug costs that were actually paid by the plan, but in no case more 

than the part of such costs that would have been paid by the plan 

if the drug coverage under the plan were standard coverage. Gross 

covered drug costs would be defined as costs (including administrative costs) incurred under the plan for covered prescription drugs 

dispensed during the year, including costs related to the deductible, 

whether paid by the enrollee or the plan, regardless of whether 

coverage under the plan exceeded standard coverage and regardless of when the payment for the drugs was made. 

The MBA Administrator would be required to estimate the total 

reinsurance subsidy payments that would be made during the year 

(including those made to qualified retiree plans) and total benefit 

payments to be made by qualifying entities for standard coverage 

during the year. The MBA Administrator would proportionately adjust payments such that total subsidy payments during the year 

were equal to 30 percent of total payments made by qualifying 

plans for standard coverage during the year. The MBA Administrator could adjust direct subsidy payments in order to avoid risk 

selection. The MBA Administrator would determine the payment 

method and could use an interim payment system based on estimates. Payments would be made from the Medicare Prescription 

Drug Trust Fund. 

Special subsidy payments would be made to a qualified retiree 

prescription drug plan. A qualified plan would be defined as employment-based retiree health coverage (including coverage offered 

pursuant to one or more collective bargaining agreements) meeting 

certain requirements. The MBA Administrator would approve coverage with at least the same actuarial value as standard coverage. 

The sponsor (and the plan) would be required to maintain and provide access to records needed to ensure the adequacy of coverage 

and the accuracy of payments made. Further, the sponsor would be 

required to provide certifications of coverage. Payment could not be 

made for an individual unless the individual was covered under the 

retiree plan and entitled to enroll under a PDP or MA–EFFS plan 

but elected not to. Subsidy payments would equal 28 percent of allowable costs between $250 and $5,000. (The dollar amounts would 

be adjusted annually by the percentage increase in Medicare per 

capita prescription drug costs.) 

About one-third of Medicare beneficiaries receive retiree coverage 

from their former employers. While most of these people are satisfied with their coverage, employers are under increasing pressure 

to drop or reduce prescription drug coverage. This subsidy provides 

employers and union plans with maximum flexibility, encouraging 

them to maintain or expand their retiree plans. Thus, Medicare 

would reap significant savings from subsidizing employer plans at 

two-thirds of the cost of other Medicare prescription drug plans. 

New Section 1860D–9. Medicare Prescription Drug Trust 

Fund 

New Section 1860D–9 would create a Medicare Prescription Drug 

Trust Fund. Requirements applicable to the Part B trust fund 

would apply in the same manner to the Drug Trust Fund as they 

apply to the Part B Trust Fund. The Managing Trustee would pay 

from the account, from time to time, low-income subsidy payments, 

subsidy payments, and payments for administrative expenses. The 

165

Managing Trustee would transfer, from time to time, to the Medicaid account amounts attributable to allowable increases in administrative costs associated with identifying and qualifying beneficiaries eligible for low-income subsidies. Amounts deposited into 

the Trust Fund would include the federal amount which would otherwise be payable by Medicaid except for the fact that Medicaid becomes the secondary payer of drug benefits for the dual-eligibles. 

The provision would authorize appropriations to the Trust Fund an 

amount equal to the amount of payments from the Trust Fund reduced by the amount transferred to the Trust Fund. 

The provision would specify that any provision of law relating to 

the solvency of the Trust Fund would take into account the 

amounts received by, or payable from, the Trust Fund. 

EFFECTIVE DATE

Upon enactment.

New Section 1860D–10. Definitions; Treatment of References 

to Provisions in Part C 

New section 1860D–10 would include definitions of terms and 

specify how cross-references to Part C would be applied. It would 

further provide that any reduction or waiver of cost-sharing would 

not be in violation of kickback and similar prohibitions. The section 

would further require the Secretary to submit a report to Congress 

within 6 months of enactment that makes recommendations regarding providing benefits under Part D. 

Also within six months of enactment, the Secretary would be required to review the current standards of practice for pharmacy 

services provided to patients in nursing facilities. Specifically, the 

Secretary would assess: (1) the current standards of practice, clinical services, and other service requirements generally utilized for 

such pharmacy services, (2) evaluate the impact of those standards 

with respect to patient safety, reduction of medication errors, and 

quality of care, and (3) recommend necessary actions. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Prescription drugs are just as important to modern health care 

as hospitals and physician services were when Medicare was enacted in nearly 40 years ago. Prescription drugs are more often 

than not, the health care solution of choice. Most often, they prevent, treat or manage diseases more effectively and less invasively 

than hospitals and nursing homes. The typical senior now takes 

more than 20 prescriptions a year to improve their health or manage their diseases. While seniors are taking more drugs than any 

other demographic group, they are often paying the highest prices 

because more than one-third of seniors have no prescription drug 

coverage. Similarly, low-income beneficiaries must often make unacceptable choices between life-savings medicines and other essentials. 

The addition of a prescription drug benefit to Medicare, while 

providing seniors additional choices in how they receive their 

166

health services, is a critical modernization of the program. In designing how these benefits are delivered, the Committee believes 

competition among plans will lead to the most efficient allocation 

of resources and will create opportunities to increase the availability of certain drugs, to reduce the cost of drugs, and the cost 

of the program to taxpayers. 

Importantly, guaranteeing issuance of policies, providing uniform 

plan premiums, ensuring two plans in each area and providing a 

worst case fall back ensure beneficiaries have the coverage to 

which they are entitled. Important new beneficiary protections, 

such as allowing any willing pharmacy to participate, ensuring convenient access to bricks and mortar pharmacies, creating a level 

playing field for mail order and retail pharmacy, and prohibiting 

plans from pushing insurance risk onto pharmacists ensure seniors 

can get the drugs at the pharmacy of their choice. Establishing new 

appeal rights for coverage denials or tiered cost sharing problems 

helps beneficiaries access the drugs most appropriate to their medical condition. 

In addition, by providing new tools to improve health, such as 

electronic prescribing, medication therapy management, and utilization review, the provision would greatly improve the quality of 

services provided to beneficiaries. 

In combination, these provisions will provide important new benefits where Medicare is lacking, create new choices for seniors, and 

create new protections to achieve the goals of reduced costs and improved health. 

Section 102. Offering of Qualified Prescription Drug Coverage 

Under the Medicare Advantage and Enhanced Fee-For-Service 

Program 

CURRENT LAW

Under current law, Medicare+Choice plans may elect to offer prescription drug coverage under Part C. The extent of these benefits 

varies and is not subject to any explicit standardization requirements. However, as with all Medicare+Choice benefit specifics, the 

financing and design of such benefits must meet the approval of 

the Secretary under the adjusted community rate (ACR) approval 

process. Generally, plans offering drugs must either finance such 

benefits from the differences between the applicable county payment rate and their costs in providing Medicare’s basic benefits, or 

by assessing beneficiaries who enroll in the plan supplemental premiums. 

EXPLANATION OF PROVISION

The provision would specify that, beginning January 1, 2006, a 

MA organization could not offer a coordinated care MA plan unless 

either that plan or another plan offered by the organization in the 

area included qualified drug coverage. It could not offer drug coverage (other than that already required under Medicare) unless the 

coverage was at least qualified prescription drug coverage. An individual not electing qualified prescription drug coverage under Part 

D would be treated as ineligible to enroll in a MA plan offering 

such coverage. 

167

The organization would be required to meet beneficiary protections outlined in the new Section 1860D–3, including requirements 

relating to information dissemination and grievance and appeals. 

The organization would also be required to submit the same information required of PDP sponsors when submitting a bid. The MBA 

Administrator could waive such requirements to the extent the 

MBA Administrator determined they were duplicative of requirements otherwise applicable to the organization or plan. MA organizations providing qualified drug coverage would receive low-income 

subsidy payments, and direct and reinsurance subsidies. A single 

premium would be established for drug and non-drug coverage. 

The same requirements would be applicable to an EFFS organization.

EFFECTIVE DATE

Applies to coverage provided on or after January 1, 2006 

REASON FOR CHANGE

Ensures MA–EFFS plans offer qualified prescription drug coverage if they offer coverage, consistent with Section 101. 

Section 103. Medicaid Amendments 

CURRENT LAW

Some low-income aged and disabled Medicare beneficiaries are 

also eligible for full or partial coverage under Medicaid. Within 

broad federal guidelines, each state sets its own eligibility criteria, 

including income eligibility standards. Persons meeting the state 

standards are entitled to full coverage under Medicaid. Persons entitled to full Medicaid protection generally have all of their health 

care expenses met by a combination of Medicare and Medicaid. For 

these ‘‘dual-eligibles’’ Medicare pays first for services both programs cover. Medicaid picks up Medicare cost-sharing charges and 

provides protection against the costs of services generally not covered by Medicare, including prescription drugs. State Medicaid programs have the option to include prescription drugs in their Medicaid benefit packages. All states include drugs for at least some of 

their Medicaid beneficiaries and many offer it to all program recipients entitled to full Medicaid benefits. 

Federal law specifies several population groups that are entitled 

to more limited Medicaid protection. These are qualified Medicare 

beneficiaries (QMBs), specified low-income Medicare beneficiaries 

(SLMBs), and certain qualifying individuals. QMBs are aged or disabled persons with incomes at or below the federal poverty level 

and assets below $4,000 for an individual and $6,000 for a couple. 

QMBs are entitled to have their Medicare cost-sharing charges, including the Part B premium, paid by the federal-state Medicaid 

program. SLMBs are persons who meet the QMB criteria, except 

that their income is over the QMB limit; the SLMB limit is 120 

percent of the federal poverty level. Medicaid protection for SLMBs 

is limited to payment of the Medicare Part B premium. QMBs and 

SLMBs are not entitled to Medicaid’s prescription drug benefit unless they are also entitled to full Medicaid coverage under their 

state’s Medicaid program. 

168

Qualifying individuals (QIs) are never entitled to Medicaid drug 

coverage (because, by definition, they are not eligible for full Medicaid benefits). QI–1s are persons who meet the QMB criteria, except that their income is between 120 percent and 135 percent of 

poverty. Medicaid protection for QI–1s is limited to payment of the 

monthly Medicare Part B premium. QI–2s are persons who meet 

the QMB criteria, except that their income is between 135 percent 

and 175 percent of poverty. Medicaid protection for QI–2s is limited 

to payment of that portion of the Part B premium attributable to 

the gradual transfer of some home health visits from Medicare Part 

A to Medicare Part B. Expenditures under the QI–1 and QI–2 programs are paid for 100 percent by the Federal government (from 

the Part B Trust Fund) up to the state’s allocation level. A state 

is only required to cover the number of persons which would bring 

its spending on these population groups in a year up to its allocation level. Any expenditure beyond that level would be paid by the 

state. Assistance under the QI–1 and QI–2 programs is available 

for the period January 1, 1998 to December 31, 2002. 

EXPLANATION OF PROVISION

Section 103 would add a new Section 1935 to the Social Security 

Act entitled ‘‘Special Provisions Relating to Medicare Prescription 

Drug Benefit.’’ The provision requires states, as a condition of receiving Federal Medicaid assistance, to make eligibility determinations for low-income premium and cost-sharing subsidies, inform 

the MBA Administrator of cases where eligibility has been established, and otherwise provide the MBA Administrator with information that may be needed to carry out Part D. In 2005, the federal matching rate would be increased to 100 percent over 15 

years. Beginning in 2020 the, the federal matching rate would be 

100 percent. The states would be required to provide the MBA Administrator with the appropriate information needed to properly allocate administrative expenditures that could be made for similar 

eligibility determinations. 

The provision would provide for the Federal phase-in of the costs 

of premiums and cost-sharing subsidies for dual-eligibles (i.e. persons eligible for Medicare and full Medicaid benefits, including 

drugs). Over the 2006–2020 period, the Federal matching rate for 

these costs would be increased to cover 100 percent of what would 

otherwise be state costs. States would be required to maintain 

Medicaid benefits as a wrap-around to Medicare benefits for dualeligibles; states could require that these persons elect Part D drug 

coverage. 

Residents of territories would not be eligible for regular low-income subsidies. However, territories would be able to get additional 

Medicaid funds, beginning at $25 million in 2006 and increasing in 

subsequent years by the annual percentage increase in prescription 

drug costs for Medicare beneficiaries. In order to obtain these 

funds, territories would be required to formulate a plan on how 

they would dedicate the funds to assist low-income Medicare beneficiaries in obtaining covered outpatient prescription drugs. The 

MBA Administrator would be required to report to Congress on the 

application of the law in the territories. 

169

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Seniors should be treated as seniors first and low-income second. 

The patchwork of state Medicaid programs that can vary from 

state to state is confusing and demoralizing for many seniors. By 

federalizing the drug costs of the dual eligibles, we ensure beneficiaries have access to a uniform, Medicare benefit.

Section 104. Medigap Transition 

CURRENT LAW

Most beneficiaries have some health insurance coverage in addition to basic Medicare benefits. Some individuals obtain private 

supplemental coverage through an individually purchased policy, 

commonly referred to as a ‘‘Medigap’’ policy. Beneficiaries with 

Medigap insurance typically have coverage for Medicare’s 

deductibles and coinsurance; they may also have coverage for some 

items and services not covered by Medicare. Individuals generally 

select from one of ten standardized plans, though not all ten plans 

are offered in all states. The plans are known as Plans A through 

plan J. Plan A covers a basic package of benefits. Each of the other 

nine plans includes the basic benefits plus a different combination 

of additional benefits. Plan J is the most comprehensive. Plans H, 

I, and J offer some drug coverage. 

The law provided for the development by the National Association of Insurance Commissioners (NAIC) of standardized benefit 

packages. It also provides for modifications of such packages when 

Medicare benefit changes are enacted. 

All insurers offering Medigap policies are required to offer open 

enrollment for 6 months from the date a person first enrolls in 

Medicare Part B (generally when the enrollee turns 65). The law 

also guarantees issuance of specified Medigap policies for certain 

persons whose previous supplemental coverage was terminated. 

Guaranteed issue also applies to certain persons who elect to try 

out a managed care option under the Medicare+Choice plan program. 

EXPLANATION OF PROVISION

The provision would prohibit, effective January 1, 2006, the 

issuance of new Medigap policies with prescription drug coverage. 

The prohibition would not apply to policies replacing another policy 

with drug coverage. Further, it would not apply to policies meeting 

new standards, or pre-standards, as outlined below. Beneficiaries 

could keep their existing H, I, and J plans. 

The provision would guarantee issuance of a substitute Medigap 

policy for persons, enrolling in Part D, who at the time of such enrollment were enrolled in and terminated enrollment in a Medigap 

H, I, or J plan. The guaranteed enrollment would be for any of the 

Plans A through Plan G. The guarantee would apply for enrollments occurring in the new Medigap plan within 63 days of termination of enrollment in a Medigap H, I, or J plan. The insurer 

could not impose an exclusion based on a pre-existing condition for 

170

such individuals. Further, the insurer would be prohibited from 

discriminating in the pricing of such policy on the basis of the individual’s health status, claims experience, receipt of health care or 

medical condition. 

The provision would provide for the development by the NAIC of 

two new standardized Medigap plans and would outline the standards for these policies. The first new policy would have the following benefits (notwithstanding other provisions of law relating to 

core benefits): (1) coverage of 50 percent of the cost-sharing otherwise applicable (except coverage of 100 percent cost-sharing applicable for preventive benefits), (2) no coverage of the Part B deductible, (3) coverage of all hospital coinsurance for long stays (as in 

current core package), and (4) a limitation on annual out-of-pocket 

costs for Part A and Part B beneficiaries of $4,000 in 2005 (increased in future years by an appropriate inflation adjustment as 

specified by the Secretary). The second new policy would have the 

same benefit structure as the first new policy, except that: (1) coverage would be provided for 75 percent, rather than 50 percent, of 

cost-sharing otherwise applicable, and (2) the limitation on out-ofpocket costs would be $2,000, rather than $4,000. Both policies 

could provide for coverage of Part D cost-sharing; however, neither 

policy could cover the Part D deductible. 

The NAIC would make recommendations to Congress on modernizing the Medigap market. 

It is the Committee’s intent that the offering of these new 

Medigap policies would be voluntary on the part of insurers, as is 

the case for all other Medigap standardized policies beyond plan 

type A, basic Medigap coverage. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The two new Medigap policies would provide additional cost 

sharing for beneficiaries without first dollar coverage. This ensures 

beneficiaries have additional access to cover cost sharing for the 

new prescription drug benefit if they so choose. 

Section 105. Medicare Prescription Drug Discount Card Endorsement Program 

CURRENT LAW

On July 12, 2001, the President announced a new national drug 

discount card program for Medicare beneficiaries. Under this program, CMS would endorse drug card programs that meet certain 

requirements. This program was intended to be an interim step 

until a legislative reform package, including both a drug benefit 

and other Medicare reforms, is enacted. Implementation of the 

drug discount card program was suspended by court action. 

EXPLANATION OF PROVISION

The provision would require the Secretary or Administrator to 

establish a program to: (1) endorse prescription drug discount card 

programs that meet certain requirements, and (2) make available 

171

information on such programs to beneficiaries. The Secretary would 

begin operating the program within 90 days of enactment. The Secretary would provide for an appropriate transition and discontinuation at the time a drug benefit first becomes available under Part 

D.

Programs endorsed by the Secretary must meet certain requirements. Programs shall pass negotiated discounts on drugs to enrollees. Programs could not be limited to mail order drugs and must 

provide support services to educate patients and prevent adverse 

events. Programs must also provide, through the Internet or otherwise, information to enrollees that the Secretary deems necessary 

for beneficiaries to make informed choices among all endorsed programs. This information would include information on enrollment 

fees, prices charged to beneficiaries, and services offered under the 

program. Program sponsors would be required to demonstrate experience and expertise in operating such a program. The sponsor 

would also be required to have in place adequate procedures for 

quality assurance. The annual enrollment fee could not exceed $30 

(which could be paid in whole or in part by states). Further, the 

program would be required to meet additional requirements identified by the Secretary to protect and promote the interest of Medicare beneficiaries, including requirements that assure that beneficiaries were not charged more than the lower of the negotiated retail price or the usual and customary price. 

The Secretary would provide for the dissemination of information 

that compared the costs and benefits of available programs. This 

activity would be coordinated with the dissemination of educational 

information on MA plans. The Secretary would also oversee the endorsed programs’ compliance with the requirements of this section, 

including verification of discounts, and services provided, the 

amount of dispensing fees, and audits. The Secretary would be required to provide, through the use of the Medicare toll-free number, for the receipt and response to inquiries and complaints. The 

Secretary would be required to revoke the endorsement of any program that no longer meets requirements or engages in false or misleading marketing practices. The provision would specify that a 

beneficiary could only be enrolled in one endorsed program at a 

time. A beneficiary could change enrollment after he or she has 

been enrolled in a plan for a minimum period specified by the Secretary. 

The provision creates a two-year, temporary, transitional low-income assistance program. Medicare beneficiaries with incomes 

below 150 percent of poverty would be eligible for assistance in 

2004 and 2005. The program provides additional funds in conjunction with the discount card to help low-income seniors purchase 

prescription drugs prior to the implementation of the drug benefit 

in 2006. The bill provides for $2 billion in 2004 and $3 billion in 

2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Immediate help for those without prescription drug coverage will 

provide a transition into the new Part D drug benefit while ensurVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00171 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
172

ing those who cannot afford prescription drugs receive assistance. 

In addition, drug discount cards can be up and running within 90 

days, which will provide savings to seniors at retail between 10 and 

20 percent, according to HHS. Discounts must be provided by both 

manufacturers and pharmacies and must be passed on to beneficiaries. 

Section 106. Disclosure of Return Information for Purpose of Carrying Out Medicare Catastrophic Prescription Drug Program 

CURRENT LAW

Current law authorizes, under specified circumstances, the Secretary of the Treasury to disclose returns and return information 

for purposes other than tax administration. 

EXPLANATION OF PROVISION

The provision would permit the Secretary of the Treasury, upon 

written request from the Secretary of the Department of Health 

and Human Services (HHS), to disclose to officers and employees 

of HHS specific information with respect to a specified taxpayer for 

a specific tax year. Information that could be disclosed would be 

taxpayer identification information and adjusted gross income, or, 

simply the income threshold limit specified under the new Part D 

($200,000 in 2006). A specified taxpayer would be either: (1) an individual who had adjusted gross income for the year in question in 

excess of the income threshold specified in the new Part D ($60,000 

per individual), or (2) an individual who elected to use more recent 

income information as permitted under Part D. Individuals filing 

joint returns would be treated separately, each considered to have 

an adjusted gross income equal to one-half of the total. 

Officers and employees of HHS would be authorized to use tax 

return information only for administering the prescription drug 

benefit. HHS could disclose a beneficiary’s determined annual outof-pocket threshold to a beneficiary’s PDP sponsor. The sponsor 

could use such information only for the purposes of administering 

the benefit. 

EFFECTIVE DATE

Upon enactment. 

Section 107. State Pharmaceutical Assistance Transition Commission 

CURRENT LAW

A number of states currently have programs to provide low-income persons, not qualifying for Medicaid, with financial assistance 

in meeting their drug costs. The state programs differ substantially 

in both design and coverage. 

EXPLANATION OF PROVISION

The provision would establish a State Pharmaceutical Assistance 

Transition Commission to develop a proposal for dealing with the 

transitional issues facing state programs and participants due to 

implementation of the new Part D prescription drug program. The 

Commission, to be established on the first day of the third month 

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following enactment, would include: (1) a representative of each 

governor from each state with a program that the Secretary identifies as having a benefit package comparable to or more generous 

than the new Part D, (2) representatives from other states that 

have pharmaceutical assistance programs, as appointed by the Secretary, (3) representatives (not exceeding the total under (1) or (2) 

above) of organizations that represent interests of participants, appointed by the Secretary, (4) representatives of Medicare Advantage organizations; and (5) the Secretary or the Secretary’s designee and other members specified by the Secretary. The Commission would develop the proposal in accordance with specified principles, namely: (1) protection of the interests of program participants in the least disruptive manner, (2) protection of the financial 

and flexibility interests of states so they are not financially worse 

off, and (3) principles of Medicare modernization outlined in Title 

II of the Act. It is the intent of the Committee that Medicare beneficiaries use one prescription drug card for their benefit. The Committee believes presenting beneficiaries with more than one card 

would be confusing and administratively inefficient. 

The Commission would report to the President and Congress by 

January 1, 2005. The report would contain specific proposals including specific legislative or administrative recommendations, if 

any. The Commission would terminate 30 days later. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

States, especially those with comprehensive pharmaceutical assistance programs, would benefit significantly. States would receive 

billions of dollars in assistance under the proposal, with the most 

help going to those states that have already provided pharmaceutical drug assistance to seniors. Since some states have initiated 

pharmaceutical assistance for low-income seniors, these states 

would reap the most savings, as Medicare would become the primary insurer for these beneficiaries. States have several options in 

relation to the new benefit. First, they could design their pharmacy 

programs to ‘‘wrap around’’ the Medicare drug benefit. Second, 

their pharmacy program could subsidize low-income individuals 

with costs between $2,000 and the $3,500 catastrophic benefit. This 

spending would count toward the catastrophic cap. Further, state 

pharmacy assistance programs could use money saved from the 

Medicare drug benefit to extend their assistance to persons with incomes above 150 percent of poverty. Finally, state pharmacy programs could work to encourage low-income individuals to enroll in 

a PDP, thereby creating a seamless transition from the perspective 

of the individual. Their cost-sharing still could not exceed $5 per 

prescription, and they could get the prescription drugs they need 

at a convenient pharmacy. From the beneficiary’s perspective nothing will have changed. 

It is difficult to foresee every issue that may impact states that 

have already provided substantial assistance to seniors. A State 

Pharmaceutical Assistance Transition Commission would be established under the bill. This commission would develop a proposal to 

address the unique transition issues facing these states. 

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B. TITLE II—MEDICARE ENHANCED FEE-FOR-SERVICE AND

MEDICARE ADVANTAGE PROGRAMS; MEDICARE COMPETITION

Section 200. Medicare Modernization and Revitalization 

CURRENT LAW

Health Maintenance Organizations (HMOs) and other types of 

managed care plans have been allowed to participate in the Medicare program, beginning with private health plan contracts in the 

1970s and the Medicare risk contract program in the 1980s. BBA 

97 replaced the risk contract program with the Medicare+Choice 

(M+C) program. 

EXPLANATION OF PROVISION

This title would establish the Medicare Enhanced Fee-for-Service 

(EFFS) program, under which Medicare beneficiaries would be provided access to a range of EFFS plans that may include preferred 

provider networks. It would establish a Medicare Advantage (MA) 

program to offer improved managed care plans with coordinated 

care. It would also use competitive bidding, in the same style as 

FEHBP for certain areas, beginning in 2010, to promote greater efficiency and responsiveness to Medicare beneficiaries. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This title modernizes and revitalizes private plans under Medicare. BBA 97 altered payments for private plans and expanded the 

types of plans that could be offered under Medicare. Since payment 

rate changes were implemented, enrollment in private plans has 

fallen from 6.2 million beneficiaries in 1998 to 4.6 million beneficiaries in May 2003, and the number of plans has decreased from 

346 risk plans in 1998 to 153 (149 coordinated care plans and 4 

private FFS plans) in May 2003. This disruption has been due, in 

part, to unpredictable and insufficient payments. BBA 97 fundamentally de-linked payments to plans from FFS payment 

growth. 

To increase beneficiary choice, Title II reforms the payment system in 2004. All plans would be paid at a rate at least as high as 

the rate for traditional FFS Medicare, as recommended by the 

Medicare Payment Advisory Commission (MedPAC). After 2004, 

private plans’ capitation rates would grow at the same rate as FFS 

Medicare. To increase beneficiary choice in more rural areas, Title 

II would establish the Enhanced Fee-for-Service (EFFS) program, 

which would encourage private plans to serve Medicare beneficiaries in larger regions, beginning in 2006. Private plans in both 

Medicare Advantage (MA) and EFFS plans would bid competitively 

against a benchmark beginning in 2006.

Once private plans became established, and enrollment in private plans increased, plans in certain areas would enter a FEHBPstyle competitive bidding program, beginning in 2010. Plan bids 

from private plans and rates for traditional FFS Medicare would be 

averaged to create a benchmark for competitive bidding. The competitive program would encourage beneficiaries to enroll in the 

175

most efficient plan, producing savings for both beneficiaries, 

through reduced premiums, and for taxpayers, through relatively 

lower Medicare costs. 

Subtitle A—Medicare Enhanced Fee-for-Service Program 

Section 201. Establishment of Enhanced Fee-for-Service (EFFS) 

Program under Medicare 

CURRENT LAW

Payment. Under current law, Medicare+Choice (M+C) plans are 

paid an administered monthly payment, called the M+C payment 

rate, for each enrollee. The per capita rate for a payment area is 

set at the highest one of three amounts, calculated according to formulas established in statute and updated by law. The three 

amounts are: 

• A minimum payment (or floor) rate, 

• A rate calculated as a blend of an area-specific (local) rate 

and a national rate, or 

• A rate reflecting a minimum increase from the previous 

year’s rate. 

After preliminary M+C payment rates are determined for each 

payment area (typically a county), a budget neutrality adjustment 

is required by law to determine final payment rates. This adjustment is made so that estimated total M+C payments in a given 

year would be equal to the total payments that would be made if 

payments were based solely on area-specific rates. The budget neutrality adjustment may only be applied to the blended rates because rates cannot be reduced below the floor or minimum increase 

amounts. The blend payment is also adjusted to remove the costs 

of direct and indirect graduate medical education. The blend payment amount is based on a weighted average of local and national 

rates for all Medicare beneficiaries. Blend payments have been 

made only once since 1998 (in the year 2000) because of the budget 

neutrality provision. 

Each year, the three payment amounts are updated by formulas 

set in statute. Both the floor and the blend are updated each year 

by a measure of growth in program spending per capita, the national growth percentage. The minimum increase provides an additional two percent over the previous year’s amount. 

Eligibility: Medicare beneficiaries who are entitled to Medicare 

Part A and are enrolled in Part B may receive benefits through traditional FFS or they may enroll in a M+C plan. 

EXPLANATION OF PROVISION

Beginning January 1, 2006 the MBA Administrator would establish an EFFS program to offer EFFS plans to EFFS-eligible individuals in one of not less than 10 regions established by the MBA 

Administrator. Before establishing regions, the MBA Administrator 

must conduct a market survey and analysis to determine how regions should be established. 

The EFFS plans would be required to provide open network 

plans—either Fee-for-Service (FFS) or preferred provider coverage. 

Under FFS coverage, plans would: (1) reimburse hospitals, physicians and other providers at a rate determined by the plan on a 

176

FFS basis, without placing providers at financial risk, (2) not vary 

rates based on utilization related to the provider, and (3) not restrict the selection of providers from among those who are lawfully 

authorized to provide covered services and agree to accept the 

plan’s terms and conditions. Preferred Provider Organization (PPO) 

coverage plans would: (1) require a network of providers who 

agreed to a contractually specified reimbursement for covered benefits with the organization, and (2) provide for reimbursement for all 

covered benefits regardless of whether they were provided within 

the network. 

The EFFS-eligible individuals would be those individuals who 

were entitled to Medicare Part A and enrolled in Part B. EFFS 

plans could only be offered in a region, if the plan was: (1) available to all EFFS beneficiaries in an entire region, (2) complied with 

statutory access requirements, (3) uniformly provided all required 

Parts A and B benefits, and other benefits as may be required, (4) 

included a single deductible for benefits under Parts A and B, and 

a catastrophic limit on out-of-pocket expenses, and (5) provided prescription drug coverage for each enrollee electing Part D drug coverage. The MBA Administrator would not approve an EFFS plan 

if benefits were designed to substantially discourage enrollment by 

certain eligible individuals. 

Each year, beginning in 2006, an EFFS organization would submit a monthly bid amount for each plan in each region, referred 

to as the ‘‘EFFS monthly bid amount’’. The bid could not vary 

among EFFS eligible individuals in the EFFS region involved. The 

EFFS organization would be required to provide the following information: (1) the bid amount for the provision of all required items 

and services, based on average costs for a typical enrollee residing 

in the region and the actuarial basis for determining such amount, 

(2) the proportion of the bid attributed to the provision of statutory 

non-drug benefits (the ‘‘unadjusted EFFS statutory non-drug 

monthly bid amount’’), statutory prescription drug benefits, and 

non-statutory benefits, (3) the actuarial basis for determining these 

proportions, and (4) additional information as the MBA Administrator may require. The MBA Administrator would have the negotiation authority that the Director of the Office of Personnel Management has with regard to FEHBP to negotiate the bid amount 

and could also reject a bid amount or proportion, if it was not supported by the actuarial basis. The MBA Administrator could enter 

into contract for up to three EFFS plans in any region. 

Certain plans, based in part on their monthly bid amount, may 

be able to provide beneficiary savings. The EFFS plan would provide the enrollee a monthly rebate equal to 75 percent of the average per capita savings, if any. (Calculation of average per capita 

savings is discussed below.) The rebate could be in the form of a 

credit towards the EFFS monthly prescription drug premium or the 

EFFS monthly supplemental beneficiary premium, a direct monthly payment, or other means approved by the MBA Administrator. 

The MBA Administrator would determine, at the same time payment rates were announced (beginning in 2006), the average of the 

risk adjustment factors, by region. For plans offered in the previous 

year, the MBA Administrator could compute the average based on 

a previous year’s risk adjustment factors. For plans entering a region, in which no plan was offered in the previous year, the MBA 

177

Administrator would estimate the average, and could use factors 

applied in comparable regions or on a national basis. 

For each EFFS plan, the MBA Administrator would adjust the 

EFFS region-specific non-drug monthly benchmark amount and the 

unadjusted EFFS statutory non-drug monthly bid amount by the 

applicable average risk adjustment factor. The average per capita 

monthly savings would equal the amount by which the risk-adjusted benchmark exceeds the risk-adjusted bid. The EFFS regionspecific non-drug monthly benchmark amount would be an amount 

equal to 1/12 of the average (weighted by the number of EFFS-eligible individuals in each payment area) of the annual capitation 

rate calculated for that area. 

The MBA Administrator would pay plans as follows. For plans 

with bids below the benchmark (for which there were average per 

capita monthly savings), the payment would equal the unadjusted 

EFFS statutory non-drug monthly bid amount, with three adjustments. Payment would be adjusted for demographics factors including age, disability, gender, institutional status, health status, and 

other factors; intra-regional geographic variations; and the amount 

of the monthly rebate for the plan and year. For plans with bids 

at or above the benchmark (for which there were no average per 

capita monthly savings), the payment amount would equal the 

EFFS region-specific non-drug monthly benchmark amount, with 

the demographic, health status and geographic adjustments. Additionally, for an EFFS enrollee who enrolls in Part D and elects 

qualified prescription drug coverage through the plan, the plan 

would receive reimbursement for prescription drugs. This reimbursement would include a direct subsidy payment, a reinsurance 

subsidy payment and reimbursement for premiums and cost-sharing reductions for certain low-income individuals. 

Beneficiary EFFS premiums are defined as follows. In the case 

where a plan provides a rebate, the EFFS monthly basic beneficiary premium would be zero. In the case where a plan does not 

provide a rebate (the plan’s unadjusted EFFS statutory non-drug 

bid is above the EFFS region specific non-drug benchmark), the 

EFFS monthly basic beneficiary premium would be the difference 

between the bid and the benchmark amount. The EFFS monthly 

prescription drug beneficiary premium would be the portion of the 

plan’s total monthly bid that the statutory drug benefit represents. 

The EFFS monthly supplemental beneficiary premium would be 

the portion of the plan’s total monthly bid that is attributable to 

the supplemental non-statutory benefits. 

Most of the statutory requirements concerning payment rules 

(other than the requirements for rates, service areas and MSA payments), organization and financial requirements, the establishment 

of standards, and contracts, would apply to EFFS plans. However, 

unlike current law, EFFS plans would not be permitted to segment 

a region. No Medicare supplemental policy could provide coverage 

of the single deductible or more than 50 percent of the other costsharing imposed under an EFFS plan under Part E. 

EFFECTIVE DATE

On or after January 1, 2006. 

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REASON FOR CHANGE

The EFFS program would encourage the development of regional 

plans, by requiring EFFS plans to serve all beneficiaries throughout the region. Because enrollees in an EFFS plan must have the 

same benefits, cost-sharing obligations, and premiums, EFFS 

would decrease the variation in private plan offerings in the M+C 

program today. EFFS plans would also encourage plans to enter 

rural areas, where few M+C plans currently exist. 

In carrying out these programs, the Committee believes the existing experience of the Medicare Quality Improvement Organizations (QIOs) would be employed to offer assistance to beneficiaries, 

providers and plans operating in Parts C, D and E, particularly as 

it relates to quality improvement. QIOs are currently required to 

offer assistance with clinical improvement under Parts A and B in 

hospitals, physicians’ offices, nursing homes and home health agencies and to all MA organizations under part C. Expanding the 

QIOs’ work to include the new entities and benefits created in this 

legislation will help improve the quality of care for Medicare beneficiaries. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM 

Section 211. Implementation of Medicare Advantage Program 

CURRENT LAW

Health Maintenance Organizations (HMOs) and other types of 

managed care plans have been allowed to participate in the Medicare program, beginning with private health plan contracts in the 

1970s and the Medicare risk contract program in the 1980s. BBA 

97 replaced the risk contract program with the Medicare+Choice 

(M+C) program. 

EXPLANATION OF PROVISION

This provision would establish the Medicare Advantage (MA) 

program under Part C of Medicare, replacing the Medicare+Choice 

provision. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Medicare Advantage would reform Medicare+Choice to increase 

beneficiary choice. 

Section 212. Medicare Advantage Improvements 

CURRENT LAW

Payment. Under current law, Medicare+Choice (M+C) plans are 

paid an administered monthly payment, called the M+C payment 

rate, for each enrollee. The per capita rate for a payment area is 

set at the highest one of three amounts, calculated according to formulas established in statute and updated by law. The three 

amounts are: 

179

• A minimum payment (or floor) rate, • A rate calculated as a blend of an area-specific (local) rate 

and a national rate, or • A rate reflecting a minimum increase from the previous 

year’s rate. 

After preliminary M+C payment rates are determined for each 

payment area (typically a county), a budget neutrality adjustment 

is required by law to determine final payment rates. This adjustment is made so that estimated total M+C payments in a given 

year would be equal to the total payments that would be made if 

payments were based solely on area-specific rates. The budget neutrality adjustment may only be applied to the blended rates because rates cannot be reduced below the floor or minimum increase 

amounts. The blend payment is also adjusted to remove the costs 

of direct and indirect graduate medical education. The blend payment amount is based on a weighted average of local and national 

rates for all Medicare beneficiaries. Blend payments have been 

made only once since 1998 (in the year 2000) because of the budget 

neutrality provision. 

Each year, the three payment amounts are updated by formulas 

set in statute. Both the floor and the blend are updated each year 

by a measure of growth in program spending per capita, the national growth percentage. The minimum increase provides an additional two percent over the previous year’s amount. 

Eligibility. Medicare beneficiaries who are entitled to Medicare 

Part A and are enrolled in Part B may receive benefits through the 

traditional FFS program or they may enroll in a M+C plan. 

EXPLANATION OF PROVISION

This provision would change payments for MA plans. A fourth 

payment option would be added: 100 percent of the adjusted FFS 

rate for the area (the Adjusted Average Per Capita Cost (AAPCC) 

for the year, for the MA payment area for services covered under 

Parts A and B for individuals entitled to benefits under Part A, enrolled under Part B, and who are not enrolled in a MA plan). The 

AAPCC would be adjusted to include the additional payments that 

would have been made if Medicare beneficiaries had not received 

services from facilities of the Department of Veterans Affairs (VA) 

and the Department of Defense (DoD), and would include payments 

for indirect medical education costs. The minimum payment (floor) 

would be increased as under current law. The minimum percentage 

increase amount would also be changed. For 2004 and beyond, the 

minimum percent increase would be the greater of: (1) a two percent increase over the previous year, as under current law, or (2) 

the annual MA capitation rate for the area for the previous year, 

increased by the national per capita growth percentage increase. 

There would be no adjustment to the national growth percentage 

for prior years’ errors before 2004, for purposes of calculating the 

minimum percentage increase in 2004. For 2005, the annual rate 

would equal the previous year’s rate increased by the greater of 

two percent or the national per capita growth percentage. 

No later than 18 months after enactment of this legislation, the 

Medicare Payment Advisory Commission would report to Congress 

providing an assessment of the method used for determining the 

adjusted average per capita cost (AAPCC). The report would examVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00179 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
180

ine: (1) the variation in costs between different areas, including differences in input prices, utilization and practice patterns, (2) the 

appropriate geographic area for payment, and (3) the accuracy of 

the risk adjustment methods in reflecting differences in the cost of 

providing care. 

No later than July 1, 2006, the MBA Administrator would submit a report to Congress that describes the impact of additional financing provided under this Act and other Acts, including the Balanced Budget Refinement Act of 1999 (BBRA) and the Medicare, 

Medicaid, and SCHIP Benefits Improvement and Protection Act of 

2000 (BIPA) on the availability of MA plans in different areas and 

its impact on lowering premiums and increasing benefits under 

such plans. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In some M+C payment areas, the M+C payment rate is lower 

than the costs of providing FFS care to enrollees in traditional 

Medicare. Many private plans have seen their Medicare payment 

rates rise much less rapidly than the costs of FFS Medicare, as 

they have been held to increases of two percent annually every 

year since 1998, except for 2001 when a three percent increase was 

paid due to the BIPA. Health costs in general are running much 

higher than the two percent payment increases that most plans are 

receiving in the areas where most of the beneficiaries are enrolled 

in Medicare+Choice. Plans find it difficult—if not impossible—to 

contract with providers if FFS Medicare can reimburse providers at 

higher rates than private plans may offer, given their Medicare 

payments. If paid less than FFS Medicare, private plans may be 

forced to increase enrollee premiums or cost-sharing, or decrease 

supplemental benefits, such as prescription drug coverage. Since 

1998, the number of plans participating in M+C has declined from 

346 to 153. To level the playing field between traditional Medicare 

and private plans, under this provision all private plans would be 

paid at a minimum of the FFS rate. In addition, private plan rates 

would increase at the same rate as growth in FFS Medicare. The 

goal is to increase beneficiary choice, by increasing private plan 

participation in Medicare.

CHAPTER 2—IMPLEMENTATION OF COMPETITION 

PROGRAM 

Section 221. Competition Program Beginning in 2006

CURRENT LAW

See Section 200. Medicare Modernization and Revitalization and 

Section 201. Establishment of Enhanced Fee-For-Service (EFFS) 

Program under Medicare. 

EXPLANATION OF PROVISION

Each year, beginning in 2006, an MA organization would be required to provide the following information: (1) the bid amount for 

the provision of all required items and services, based on average 

181

costs for a typical enrollee residing in the area and the actuarial 

basis for determining such amount, (2) the proportion of the bid attributed to the provision of statutory non-drug benefits (the 

‘‘unadjusted MA statutory non-drug monthly bid amount’’), statutory prescription drug benefits, and non-statutory benefits, (3) the 

actuarial basis for determining these proportions, and (4) additional information as the MBA Administrator may require. The 

MBA Administrator would have the negotiation authority that the 

Director of the Office of Personnel Management has with regard to 

the FEHBP to negotiate the bid amount and could also reject a bid 

amount or proportion, if it was not supported by the actuarial 

basis. Private fee-for-service (PFFS) plans would be exempt from 

this negotiation and rejection. 

Certain plans, based in part on their monthly bid amount, may 

be able to provide beneficiary savings. The MA plan would provide 

the enrollee a monthly rebate equal to 75 percent of the average 

per capita savings, if any, as discussed below. The rebate could be 

in the form of a credit towards the MA monthly supplemental beneficiary premium or the MA monthly prescription drug premium, a 

direct monthly payment, or other means approved by the MBA Administrator. 

The MBA Administrator would determine, at the same time payment rates were announced (beginning in 2006), the average of the 

risk adjustment factors, by state, or on a basis other than the state. 

For plans offered in the previous year, the MBA Administrator 

could compute the average based on the previous year’s risk adjustment factors. For plans entering a state, in which no plan was offered in the previous year, the MBA Administrator would estimate 

the average, and could use factors applied in comparable states or 

on a national basis. 

For each MA plan, the MBA Administrator would adjust the FFS 

area-specific non-drug monthly benchmark amount and the 

unadjusted MA statutory non-drug monthly bid amount by the applicable average risk adjustment factor. The average per capita 

monthly savings would equal the amount by which the risk-adjusted benchmark exceeds the risk-adjusted bid. The FFS area-specific non-drug monthly benchmark amount would be an amount 

equal to 1/12 of the annual MA capitation rate calculated for that 

area. 

Beginning in 2006, the MBA Administrator would pay plans as 

follows. For plans below the benchmark (for which there were average per capita monthly savings), the payment would equal the 

unadjusted MA statutory non-drug monthly bid amount, with two 

adjustments. Payment would be adjusted for demographic factors 

including age, disability, gender, health status, and other factors, 

and the amount of the monthly rebate for the plan and year. For 

plans with bids at or above the benchmark (for which there were 

no average per capita monthly savings), the payment amount 

would equal the FFS area-specific non-drug monthly benchmark 

amount, with the demographic and health status adjustments. Additionally, for an MA enrollee who enrolls in Part D and elects 

qualified prescription drug coverage through the plan, the plan 

would receive reimbursement for prescription drugs. This reimbursement would include a direct subsidy payment, a reinsurance 

182

subsidy payment and reimbursement for premiums and cost-sharing reductions for certain low-income individuals. 

The MBA Administrator would not approve a plan if benefits 

were designed to discourage enrollment by certain MA-eligible individuals. The MA monthly bid amount, the MA monthly basic and 

supplemental beneficiary premium and the MA monthly MSA premium, would not vary among individuals enrolled in the plan. 

EFFECTIVE DATE

On or after January 1, 2006. 

REASON FOR CHANGE

Competitive bidding against a benchmark would encourage plans 

to become more efficient, in order to lower their bids and gain market share. Beneficiaries, because they would benefit from enrolling 

in plans with lower bids by receiving 75 percent of the difference 

between the plan’s bid and the benchmark, would be encouraged to 

enroll in more efficient plans. Plan efficiency and beneficiary enrollment in more efficient plans would reduce the costs of Medicare, 

easing the threat to insolvency of the Medicare Part A Trust Fund 

and easing the taxpayers’ burden. Indeed, the Congressional Budget Office has estimated that the increased benchmarks are fully 

paid for through the 25 percent savings to the government. The 

government would share in the savings as beneficiaries make rational and efficient choices. 

CHAPTER 3—ADDITIONAL REFORMS 

Section 231. Making Permanent Change in Medicare Advantage Reporting Deadlines and Annual, Coordinated Election Period 

CURRENT LAW

The Public Health Security and Bioterrorism Preparedness and 

Response Act of 2002 (P.L. 107–188) made temporary changes to 

reporting dates and deadlines: (1) the plan deadline for submitting 

adjusted community rates (ACRs) and other information moved 

from no later than July 1 to no later than the second Monday in 

September for 2002, 2003, and 2004, (2) the annual coordinated 

election period moved from the month of November to November 15 

through December 31 for 2002, 2003, and 2004, and (3) the M+C 

payment rate announcement moved from no later than March 1 to 

no later than the second Monday in May for 2003 and 2004. The 

Secretary is required to mail information to enrollees at least 15 

days before each annual open season, including a list of plan and 

plan options. 

EXPLANATION OF PROVISION

This provision would permanently: (1) move the plan deadline for 

submitting information to the second Monday in September; (2) 

change the annual coordinated election period to November 15 

through December 31, and (3) move the annual payment rate announcement to no later than the second Monday in May. The requirement for providing information comparing plan options would 

be amended to require that the information would be provided to 

183

the extent possible at the time of preparation of material for mailing. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The deadlines for reporting and election periods were moved to 

allow for more accurate information from both CMS and plans. As 

these dates were shifted to later in the year, consistent changes 

were made to allow for the annual open season for beneficiary enrollment in private plans. A provision was added to limit CMS’ responsibility for mailing to only those materials available at the 

time of the mailing. 

Section 232. Avoiding Duplicative State Regulations 

CURRENT LAW

Medicare law currently preempts State law or regulation from 

applying to M+C plans to the extent that they are inconsistent 

with Federal requirements imposed on M+C plans, and specifically, 

relating to benefit requirements, the inclusion or treatment of providers, and coverage determinations (including related appeals and 

grievance processes). 

EXPLANATION OF PROVISION

This provision would stipulate that Federal standards established by this legislation would supersede any state law or regulation (other than state licensing laws or state laws relating to plan 

solvency), with respect to MA plans offered by MA organizations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This clarifies that the MA program is a Federal program operated under Federal rules. State laws, do not, and should not apply, 

with the exception of state licensing laws or state laws related to 

plan solvency. There has been some confusion in recent court cases. 

This provision would apply prospectively; thus, it would not affect 

previous and ongoing litigation. 

Section 233. Specialized Medicare Advantage Plans for Special 

Needs Beneficiaries 

CURRENT LAW

One model for providing a specialized M+C plan, EverCare, operates as a demonstration program. EverCare is designed to study 

the effectiveness of managing acute-care needs of nursing home 

residents by pairing physicians and geriatric nurse practitioners. 

EverCare receives a fixed capitated payment, based on a percentage of the adjusted average per capita costs (AAPCC), for all nursing home resident Medicare enrollees. 

184

EXPLANATION OF PROVISION

This provision would establish a new MA option—specialized MA 

plans for special needs beneficiaries (such as the EverCare demonstration). Special needs beneficiaries are defined as those MA-eligible individuals who are institutionalized, entitled to Medicaid, or 

meet requirements determined by the Secretary. Enrollment in 

specialized MA plans could be limited to special needs beneficiaries 

until January 1, 2007. No later than December 31, 2005 the MBA 

Administrator would be required to submit a report to Congress 

that assesses the impact of specialized MA plans for special needs 

beneficiaries on the cost and quality of services provided. No later 

than 6 months after enactment of this Act, the Secretary would be 

required to issue final regulations to establish requirements for 

special needs beneficiaries. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Specialized MA plans for special needs beneficiaries are designed 

to serve beneficiaries with certain needs, thus these plans are not 

meant to handle beneficiaries without special needs. This provision 

allows these plans to serve beneficiaries for whom their programs 

were designed.

Section 234. Medicare MSAs 

CURRENT LAW

BBA 97 authorized a demonstration to test the feasibility of medical savings accounts (MSA) for the Medicare population. This M+C 

option is a combination of a health insurance plan with a large deductible and an M+C MSA. Contributions to an M+C MSA may be 

made annually from the enrollee’s capitation rate after the plan’s 

insurance premium has been paid. These contributions, as well as 

account earnings, are exempt from taxes. Withdrawals used to pay 

unreimbursed enrollee medical expenses are exempt from taxes if 

they would be deductible under the Internal Revenue Code. New 

enrollment is not allowed after 2003, or after the number of enrollees reaches 390,000, if earlier. 

EXPLANATION OF PROVISION

This provision would permanently extend Medicare MSAs and 

remove the enrollment cap. It would eliminate the requirement 

that Medicare MSA plans report on enrollee encounters since 

MSAs are not plans but bank accounts. Non-contract providers furnishing services to enrollees of MSAs would be subject to the same 

balanced billing limitations as non-contract providers furnishing 

services to enrollees of coordinated care plans. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

Medicare MSAs are not being offered in the Medicare program 

today, despite the legislative authority granted in 1997 and despite 

the fact that non-Medicare MSAs are being offered. By eliminating 

the cap on enrollment, the time constraint, and the reporting requirements, the Committee hopes to encourage this additional 

choice for seniors. 

Section 235. Extension of Reasonable Cost Contracts 

CURRENT LAW

Medicare reimburses cost-based plans for the actual cost of furnishing covered services, less the estimated value of beneficiary 

cost-sharing. The Secretary may not extend or renew a reasonable 

cost reimbursement contract for any period beyond December 31, 

2004. 

EXPLANATION OF PROVISION

This provision would allow reasonable cost contracts to be extended or renewed indefinitely, with an exception that would begin 

January 1, 2008. These contracts could not be extended or renewed 

for a service area, if during the entire previous year, the area had 

2 or more coordinated care MA plans or 2 or more EFFS plans 

which met the following minimum enrollment requirements: (1) at 

least 5,000 enrollees for the portion of the area within a metropolitan statistical area with a population of more than 250,000 and 

counties contiguous to such a metropolitan statistical area, and (2) 

at least 1,500 enrollees for any other portion of such area. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The uncertainty about the continuation of cost contracts would 

be removed, allowing these plans to operate indefinitely, unless two 

other plans of the same type (i.e., either 2 MA or 2(c) EFFS plans) 

enter the cost contract’s service area. If other plans are willing to 

enter the cost contract’s service area, then the cost contract would 

be required to operate under the same provisions as these other 

private plans. 

Section 236. Extension of Municipal Health Service Demonstration 

Projects 

CURRENT LAW

The Municipal Health Services Demonstration Project operates 

in four cities. These cities use their existing public health programs 

as the nucleus of a coordinated system to provide community-based 

health care for the underserved urban poor. The project provides 

comprehensive health services, including a prescription drug benefit and dental services. 

BBA 97 extended the program through 2000. The BBRA extended it through 2002, and the BIPA extended it through December 31, 2004. 

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EXPLANATION OF PROVISION

This provision would extend the program until December 31, 

2009, and permit the programs to enroll up to the number of individuals who were enrolled as of January 1, 1996. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

BBA 97 required demonstration participants to become M+C enrollees. In Baltimore, no M+C plans, and in the other, smaller 

sites, private sector options for Medicare beneficiaries are also limited. This provision also closed the program to new enrollees. The 

programs need a certain number of enrollees to remain viable; 

opening enrollment with a cap at levels from 1996 would permit 

these programs to reach the enrollment levels they need to operate 

efficiently. 

Subtitle C—Application of FEHBP-Style Competitive Reforms 

Section 241. Application of FEHBP-Style Competitive Reform Beginning in 2010 

CURRENT LAW

See Section 200. Medicare Modernization and Revitalization and 

Section 201. Establishment of Enhanced Fee-For-Service (EFFS) 

Program under Medicare. 

EXPLANATION OF PROVISION

Beginning in 2010, FEHBP-style competition would begin nationwide in competitive areas. Competitive areas are defined as areas 

in which Medicare beneficiaries have access to two private plans—

either two MA or two EFFS plans—along with traditional FFS 

Medicare. Private plan enrollment in the area must be at least as 

great as private plan enrollment nationwide, or at least 20 percent. 

For example, if private plan enrollment nationwide is 15 percent, 

the area must have private plan enrollment of at least 15 percent 

to become a competitive area. If private plan enrollment nationwide is 40 percent, the area must have private plan enrollment of 

at least 20 percent to trigger competition. In addition, competitive 

MA (CMA) areas would be limited to metropolitan statistical areas, 

or areas with substantial numbers of MA enrollees. The two private plans must be offered during the open season by different organizations, and each must meet minimum enrollment requirements as of March of the previous year. 

In competitive areas, private plans would submit bids and the 

MBA Administrator would calculate FFS amounts, based on the 

adjusted average per capita cost (AAPCC) in the area or region. 

The AAPCC would be adjusted to remove costs associated with direct graduate medical education, and to include costs of services 

provided to Medicare beneficiaries by VA and DoD military facilities. In addition, payments would be adjusted for health and other 

demographic factors. 

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The competitive benchmark would be set at the weighted average 

of the private plan bids and the FFS amount in the competitive 

area. In order to provide traditional FFS disproportionate influence 

in competitive areas, the weight of the benchmark for FFS would 

equal the nationwide proportion of Medicare beneficiaries enrolled 

in FFS, or the competitive area’s proportion, if higher. The weights 

for all other private plans would equal the national proportion of 

beneficiaries enrolled in private plans, or the regional proportion if 

lower. 

For the first 5 years of competition, the benchmarks for private 

plans would be a blend of the competitive benchmark and the 

older, pre-2010 benchmark. For the first year of competition, the 

private plan benchmark would be based 80 percent on the older 

benchmark and 20 percent on the newer benchmark. For the second year, the private plan benchmark would be based 60 percent 

on the older benchmark and 40 percent on the new benchmark. By 

the fifth year, the private plan’s benchmark would be fully phased 

in, and equal the new competitive benchmark. This phase-in allows 

for a transition to a more competitive system based on the new 

competitive benchmark. 

Premium adjustments for beneficiaries remaining in traditional 

FFS in competitive areas would also be phased-in over the first 5 

years as a competitive area. The FFS amount would be compared 

to the new competitive benchmark. During the first year of competition, 20 percent of the change in beneficiary premiums would 

occur. During the second year of competition, 40 percent of the 

change would be implemented, and so forth, until 100 percent of 

the premium change would be implemented during the fifth year 

of competition. 

Beneficiaries enrolling in plans with bids or FFS amounts below 

the competitive benchmark would receive 75 percent of the difference between the benchmark and bid/FFS amount, and the government would receive 25 percent of the difference. Beneficiaries 

enrolling in plans with bids/FFS amounts above the benchmark 

would pay the excess. Premium adjustments would be moderated 

over a 5-year period for beneficiaries remaining in traditional FFS 

in competitive areas. The traditional FFS beneficiary premium 

would be unaffected in non-competitive areas or regions. 

Beginning in 2010, the MBA Administrator would announce the 

MA area-specific non-drug benchmark yearly. If applicable, the 

MBA Administrator would also announce, for the year and CMA 

area: the competitive MA non-drug benchmark; the national FFS 

market share percentage; the demographic, end-stage renal disease, and health status adjustment factors; the MA area-wide nondrug benchmark amount; the FFS area-specific non-drug amount; 

and MA enrollment. 

To carry out this section, the MBA Administrator would transmit 

the name, social security number, and adjustment amount to the 

Commissioner of SSA at the beginning of each year and at periodic 

times throughout the year. 

EFFECTIVE DATE

On or after January 1, 2010. 

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REASON FOR CHANGE

Market-oriented policymakers have maintained that the best way 

to reform Medicare is to provide beneficiaries with a choice of 

plans, similar to the choice available to members of Congress under 

the Federal Employees Health Benefits Program (FEHBP). The Bipartisan Commission on the Future of Medicare came to the same 

conclusion. 

Medicare must be transformed to bend the growth curve in expenditures to put the program on a sound financial footing. To reduce program growth, true competition, including both traditional 

fee-for-service and private plans, would begin in 2010 in certain 

competitive areas.

As areas of the country show increased enrollment in private 

plans, a more competitive system, based on the structure of the 

FEHBP, would provide for greater beneficiary savings and reductions in government costs. Allowing for competition for enrollees, 

between private plans and traditional FFS Medicare, would level 

the playing field between all options available to Medicare beneficiaries. 

If traditional FFS Medicare is able to provide benefits at a lower 

cost than some or all private plans in a competitive area, then 

beneficiaries remaining in traditional FFS would see their premiums decline. In this case, beneficiaries enrolling in higher-cost 

private plans would be required to pay the extra price stemming 

from that decision. Likewise, if a private plan is able to offer Medicare beneficiaries coverage at a lower cost, then beneficiaries would 

be encouraged to enroll in the private plan by lowering the beneficiaries’ costs of coverage under the private plan. In any case, 

beneficiaries would be entitled to the same defined benefit package 

and payments to plans would be fully adjusted for health and other 

demographic factors. If the traditional FFS plan disproportionately 

enrolls beneficiaries with poor risk, the beneficiary premium would 

be adjusted to compensate. 

This reform is the only provision in the bill that has the potential 

to produce the savings needed for long-term solvency. Although the 

bill provides for bidding against a benchmark prior to 2010, the 

benchmarks prior to 2010 increase each year, by the rate of growth 

in Medicare. Without this stage of competition, private plans would 

not be able to influence the benchmark and would have an incentive to shadow price their benchmarks. A floating benchmark rewards more efficient plans, and it allows these more efficient plans 

to lower the benchmark and government outlays in future years, as 

their market share rises. 

Several features were added in the Chairman’s amendment in 

the nature of a substitute to allow for a smooth transition to a 

more competitive system in 2010 in competitive areas/regions, and 

to prevent shock to the current system. The competitive benchmark, based on private plan bids and traditional FFS rates, would 

be calculated based on the relative enrollment in FFS versus private plans nationwide (or the area/region if FFS enrollment is a 

larger proportion in the area/region). This feature ensures that the 

competitive benchmark is closer to the traditional FFS rate than 

would otherwise occur. Premium changes for beneficiaries remaining in traditional FFS in competitive areas would be phased-in over 

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five years to prevent oscillations. In addition, the competitive 

benchmark would be phased-in over a 5-year period for private 

plans. This would allow for a more gradual change from the benchmarks under the pre-2010 system to the new competitive benchmark for private plans in competitive areas. 

C. TITLE III—COMBATTING WASTE, FRAUD, AND ABUSE

Section 301. Medicare Secondary Payer (MSP) Provisions 

CURRENT LAW

In certain instances, Medicare is prohibited from making payment for a health care claim if payment is expected to be made 

promptly under a worker’s compensation law or plan, under automobile or liability insurance (including a self-insured plan), or 

under no-fault insurance on behalf of a beneficiary. Medicare is 

permitted to make a conditional payment in certain circumstances 

including if Medicare could reasonably expect payment to be made 

under a workers’ compensation plan or no-fault insurance claim 

and Medicare determines that the payment will not be made 

promptly, as determined in accordance with regulations. 

EXPLANATION OF PROVISION

The Secretary would be able to make a Medicare payment if a 

worker’s compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan), or a no-fault 

insurance plan, has not been made or cannot reasonably be expected to be made promptly (as determined in accordance with regulations). This payment would be contingent on reimbursement by 

the primary plan to the Medicare Trust Funds. 

The list of primary plans for which conditional payment could be 

made would be expanded; an entity engaging in a business, trade, 

or profession would be deemed as having a self-insured plan if it 

carries its own risk. Failure to obtain insurance would be required 

as evidence of carrying risk. A primary plan, as well as an entity 

that receives payment from a primary plan, would be required to 

reimburse the Medicare Trust Funds for any payment made by the 

Secretary if the primary plan was obligated to make payment. The 

Secretary’s authority to recover payment from any and all responsible entities and bring action, including the collection of double 

damages, to recover payment under the Medicare Secondary Payer 

provisions also would be clarified. 

EFFECTIVE DATE

Subsection (a) would be effective as if included in the enactment 

of Title III of the Medicare and Medicaid Budget Reconciliation 

Amendments of 1984 (P.L. 98–369). Subsection (b) would be effective upon enactment. 

REASON FOR CHANGE

Recent court decisions such as Thompson v. Goetzmann resulted 

in a narrow interpretation of the statutory reference to ‘‘promptly.’’ 

Liability insurers would have been able to draw out their settlements and avoid repaying Medicare for payment of medical expenses. Moreover, firms that self-insure for product liability would 

190

have been able to avoid paying Medicare for past medical payments 

related to the claim. This provision guards the Medicare trust fund 

and saves nearly nine-billion dollars over 10 years. 

Section 302. Competitive Acquisition of Certain Items and Services 

CURRENT LAW

In general, durable medical equipment (DME) is paid for under 

a set of local (or state) fee schedules subject to certain floors and 

ceilings as well as limited to the lower of the actual charge for the 

equipment or the fee schedule amount. Fee schedule amounts received an update of the full consumer price index for urban consumers (CPI–U) in 2003.

BBA 97 authorized the Secretary to conduct up to five demonstration projects to test competitive bidding as a way for Medicare to price and pay for Part B services other than physician services. The Secretary was required to establish up to three competitive acquisition areas for this purpose. Three competitive bidding 

demonstrations for durable medical equipment, prosthetics, 

orthotics, and supplies were successfully implemented: two in Polk 

County, Florida and one in the San Antonio, Texas area. 

EXPLANATION OF PROVISION

The Secretary would be required to establish and implement 

competitive acquisition programs for durable medical equipment, 

medical supplies, items used in infusion, drugs and supplies used 

in conjunction with durable medical equipment, parenteral nutrition, and off-the-shelf orthotics (requiring minimal self-adjustment 

for appropriate use) that would replace the Medicare fee schedule 

payments. Class III devices—devices that sustain or support life, 

are implanted, or present potential unreasonable risk (e.g. 

implantable infusion pumps and heart valve replacements)—are 

subject to premarket approval by the Food and Drug Administration and would not be covered by the competitive bidding system. 

In starting the competitive bidding programs, the Secretary 

would be required to establish competitive acquisition areas, but 

would be able to exempt rural areas and areas with low population 

density within urban areas that are not competitive, unless a significant national market exists through mail order for a particular 

item or service. The programs would be phased-in over three years 

with one-third of the areas implemented each year. High-cost and 

high-volume items and services would be required to be phased-in 

first. The Secretary would be able to exempt items and services for 

which competitive acquisition would not likely result in significant 

savings. The Secretary would be required to establish a process 

where existing rental agreements for covered DME items entered 

into contract before implementation of this program would not be 

affected. The supplier would be required to provide for appropriate 

servicing and replacement of these rental items. 

Certain requirements for the competitive acquisition program 

would be established. Specifically, the Secretary would be allowed 

to award contracts in an area only when the following conditions 

were met: entities met quality and financial standards specified by 

the Secretary or the Program Advisory and Oversight Committee; 

total amounts paid under the contracts would be expected to be 

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less than would be paid otherwise; and beneficiary access to multiple suppliers would be maintained. Beneficiary liability would be 

reduced to 20 percent of the applicable contract award price. 

Contracts would be required to be re-competed at least every 

three years. The Secretary would be required to award contracts to 

multiple entities submitting bids in each area for an item or service 

and would also have the authority to limit the number of contractors in a competitive acquisition area to the number needed to 

meet projected demand for covered items and services. The Secretary would be permitted to waive certain provisions of the Federal Acquisition Regulation that are necessary for the efficient implementation of this program, other than those relating to confidentiality of information. The Secretary would be required to report to 

Congress annually on savings, reductions in cost-sharing, access to 

items and services, and beneficiary satisfaction under the competitive acquisition program. 

A Program Advisory and Oversight Committee with members appointed by the Secretary would be established. The Committee 

would be required to provide advice and technical assistance to the 

Secretary regarding the implementation of the program, data collection requirements, proposals for efficient interaction among 

manufacturers and distributors of the items and services, providers, and beneficiaries, and other functions specified by the Secretary. The provisions of the Federal Advisory Committee Act 

would not apply to this Committee. 

The Secretary would be required to conduct a demonstration program on using competitive acquisition for clinical laboratory tests 

that are furnished without a face-to-face encounter between the individual and the hospital personnel or physician performing the 

tests. The same quality and financial conditions specified for the 

DME competitive acquisition program would apply for clinical laboratory test competitive acquisition. An initial report to Congress 

would be required of the Secretary and must be submitted by December 31, 2005 with progress and final reports, as the Secretary 

would determine appropriate. The General Accounting Office 

(GAO) would be required to report to Congress on the differences 

in reimbursement between public and private payors of clinical diagnostic services. The Secretary would be required to study whether suppliers of DME are soliciting physicians to prescribe certain 

brands or modes of delivery of covered items based on profitability. 

The covered items and services included in the competitive acquisition program would be paid as determined under this program. 

The Secretary would be able to use this payment information to adjust the payment amounts for DME not located in a competitive acquisition area. In this instance, the inherent reasonableness rule 

would not be applied. Orthotics included in a competitive acquisition program would also be paid the amounts determined by this 

program. The Secretary would be able to use this payment information to adjust the payment amounts for such items. In this instance, the regular payment rules established by regulation, including the inherent reasonableness rule, would not be applied. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

Numerous studies conducted by the HHS Office of the Inspector 

General (OIG) as well as GAO have found the government-determined fee schedule for durable medical equipment (DME) too high 

for certain items. For example, the OIG found that Medicare’s reasonable payment methodology paid too much for parenteral nutrition. The OIG also found that Medicare payments for hospital beds 

were substantially higher than rates paid by other payors. Further, 

the OIG discovered that payments for albuterol were six times the 

catalog price for the drug. 

The DME competitive bidding demonstration has been a success. 

The taxpayers and beneficiaries saved significantly and quality 

standards were higher under the demonstration. More, that threequarters of the DME winners were small businesses and beneficiary satisfaction remained high. 

Section 303. Competitive Acquisition of Covered Outpatient Drugs 

and Biologicals 

(a) Adjustment to the Physician Fee Schedule 

CURRENT LAW

The relative value associated with a particular physician service 

is the sum of three components: physician work, practice expense, 

and malpractice expense. Practice expense includes both direct 

costs (such as clinical staff time and medical supplies used to provide a specific service to an individual patient) as well as indirect 

costs such as rent, utilities, and business costs associated with running a practice. When the physician fee schedule was implemented, 

reimbursement for practice expenses was based on historic charges. 

The Social Security Act Amendments of 1994 (PL. 103–432) required the Secretary to develop a methodology for a resource-based 

system for calculating practice expenses for use in CY1998. BBA 97 

delayed the implementation of the methodology until CY1999 and 

established a transition period with full implementation by 

CY2002. BBRA required the Secretary to establish a data collection 

process and data standards for determining practice expense relative values. Under this survey process, the Secretary was required 

to use data collected or developed outside HHS, to the maximum 

extent practicable, consistent with sound data collection practices. 

The Secretary is required to periodically review and adjust the 

relative values affecting physician payment to account for changes 

in medical practice, coding changes, new data on relative value 

components, or the addition of new procedures. Under the budgetneutrality requirement, changes in these factors cannot cause expenditures to differ by more than $20 million from what would 

have been spent if such adjustments had not been made. 

EXPLANATION OF PROVISION

As part of the annual process of establishing the physician fee 

schedule, the Secretary would be required to increase the practice 

expense relative values using supplemental survey data provided 

by entities and organizations. This survey data must meet the Secretary’s criteria for acceptance and include expenses for the administration of drugs and biologicals. 

193

The Secretary would be directed to cooperate with representatives of physician specialties affected by reform of the Average 

Wholesale Price (AWP) method of reimbursement for outpatient 

prescription drugs. The Secretary would be required to expedite 

consideration of the Current Procedural Terminology (CPT) codes 

used to bill for the costs associated with the administration of outpatient drugs affected by AWP reform. In addition, the Secretary 

would be required to consult with representatives of advisory physician groups, such as the Practice Expense Advisory Committee, 

when reviewing CPT codes. 

Increases in practice expenses resulting from the use of new survey data submitted by the date of enactment, or consideration of 

CPT codes for drug administration services for drugs affected by 

AWP reform would not be subject to the budget neutrality. The 

Secretary would not be prevented from adjusting the practice expense relative values in subsequent years. The Secretary would be 

required to consult with GAO and groups representing the affected 

physician specialties before publishing the notice of proposed rulemaking. 

The resulting adjustments in practice expense relative value 

units would not be subject to administrative or judicial review. 

They would be considered as a change in law and regulation for 

purposes of determining the sustainable growth rate, used to set 

the payment update for physician services. 

The Secretary would be required to adjust the non-physician 

work pool methodology so that practice expense relative values for 

these services are not disproportionately reduced as a result of the 

above changes. 

Any physician specialty would be permitted to submit survey 

data related to practice expenses through December 31, 2004. 

Budget neutrality would not be waived. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Physicians would be paid appropriate amounts for the administration of outpatient drugs covered by Medicare. It is the Committee’s intent that the Secretary should use the survey data submitted by the American Society of Clinical Oncologists (ASCO) 

since the data meets all requirements for inclusion. The Committee 

directs the Secretary to depart from typical procedures and not average new ASCO survey data on practice expenses with older survey data from the American Medical Associations’ socioeconomic 

monitoring system data. The Committee also directs the Secretary 

not to alter the ASCO survey data by removing any responses, including outliers. The Committee intends that the Secretary use the 

new ASCO survey data in the Secretary’s normal methodology for 

determining practice expenses. 

Furthermore, it is the Committee’s intent that the Secretary use 

current procedures for consideration of CPT codes and modifications to those codes. The provision directs the Secretary to work 

with specialties affected by AWP reform to ensure that CPT codes, 

which would permit appropriate payment for drug administration, 

are in place before AWP reform occurs.

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(b) Payment Based on Competition 

CURRENT LAW

Although Medicare does not currently provide an outpatient prescription drug benefit, coverage of certain outpatient drugs is specifically authorized by statute. Specifically, under Medicare Part B, 

outpatient prescription drugs and biologicals are covered if they are 

usually not self-administered and are provided incident to a physician’s services. Drugs and biologicals are also covered if they are 

necessary for the effective use of covered durable medical equipment, including those that must be put directly into equipment. In 

addition, Medicare will pay for certain self-administered oral cancer and anti-nausea drugs, erythropoietin (used to treat anemia), 

immunosuppressive drugs after covered Medicare organ transplants and hemophilia clotting factors. Vaccines for diseases like 

influenza, pneumonia, and hepatitis B are considered drugs and 

are covered by Medicare. Payments for covered outpatient drugs 

are made under Medicare Part B and are based on 95 percent of 

AWP. The term ‘‘AWP’’ is not defined in statute or regulation, but 

generally, AWP is intended to represent the average price used by 

wholesalers to sell drugs to their customers. It has been based on 

reported prices as published in industry reference publications or 

drug price compendia. There are no uniform criteria for reporting 

these numbers. Moreover, these reported prices do not reflect the 

discounts that manufacturers and wholesalers customarily offer to 

providers and physicians. To differing degrees, the published prices 

on which Medicare payment’s are based are higher than the 

amounts actually paid to acquire a given prescription drug. 

Since covered outpatient prescription drugs are Part B services, 

Medicare pays 80 percent of the recognized amount and the beneficiary is liable for the remaining 20 percent coinsurance amount, 

except in the case of vaccines where no beneficiary cost-sharing is 

imposed. Also, beneficiaries cannot be charged for any amounts in 

excess of the recognized payment amount. 

EXPLANATION OF PROVISION

New sections 1847A and 1847B in Title XVIII of the Social Security Act would be established to provide physicians in the Medicare 

program with an annual choice between two payment and delivery 

systems: (1) a contractor who would deliver drugs to the physician 

and would be reimbursed on prices established through a competitive bidding process, or (2) the physician would be reimbursed for 

covered drugs at the Average Sales Price (ASP). 

Under Section 1847A, the Secretary would be required to establish a competitive acquisition program to acquire and pay for covered outpatient drugs. Under this program, at least two contractors 

would be established in each competitive acquisition area (which 

would be defined as an appropriate geographic region) throughout 

the United States. Each year, a physician would be required to select contractors who would deliver covered drugs and biologicals to 

the physician. There would be two categories of drugs under this 

program: the oncology category (which would include drugs determined by the Secretary as typically primarily billed by oncologists 

or are otherwise used to treat cancer) that would be implemented 

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plemented beginning in 2006. In this case, covered drugs means 

certain drugs currently covered under Section 1842(o) of the Social 

Security Act which are not covered as part of the competitive acquisition for durable medical equipment. Blood clotting factors, 

erythropoetin furnished as treatment for end-stage renal disease 

(ESRD), and radiopharmaceuticals would not be considered covered 

drugs under the competitive acquisition program. Nothing in the 

section would affect the carrier invoice pricing method used to pay 

for radiopharmaceuticals. The Secretary would also be able to exclude other drugs and biologicals or classes of drugs and biologicals 

that are not appropriate for competitive bidding or would not 

produce savings. 

Certain contractor selection and contracting requirements for the 

competitive acquisition program would be established. Specifically, 

the Secretary would be required to establish an annual selection 

process for contractors in each area for each of the two categories 

of drugs. The Secretary may not award the two-year contract to 

any entity that does not have the capacity to supply covered outpatient drugs within the applicable category, or does not meet quality, service, or financial performance and solvency standards established by the Secretary. Specifically the contractor would be required to have: (1) arrangements to ship covered drugs at least 5 

days of the week and on an emergency basis, (2) procedures for the 

prompt response and resolution of physician and beneficiary complaints and inquiries, and (3) grievance resolution procedures, including review by the Medicare Provider Ombudsman established 

in this legislation. At the Secretary’s discretion, the Secretary could 

refuse to contract with an entity that has had its license for distributing drugs (including controlled substances) suspended or revoked 

by the Federal or a State government or that has been excluded 

from Medicare program participation. A contractor would be required to comply with a specified code of conduct, including conflict 

of interest provisions and all applicable provisions relating to the 

prevention of fraud and abuse. A contract would include specifications to ensure secure facilities, safe and appropriate storage of 

covered drugs, maintain record keeping, provide written policies 

and procedures to ensure drug safety, and retain compliance personnel. Either the Secretary or the entity could terminate contracts 

with appropriate advance notice. The Secretary would make the 

list of the available contractors accessible to physicians on an ongoing basis, through a directory posted on the Internet and provided 

by request. 

The Secretary would be able to limit the number of qualified entities in each category and area, but not below two. The Secretary 

would be required to base selection on bid prices for covered drugs, 

bid prices for distribution of those drugs, ability to ensure product 

integrity, customer service, past experience with drug distribution, 

and other factors. Drugs dispensed under this program would be 

acquired directly from the manufacturer or from a distributor directly from the manufacturer. Contractors may be required to comply with additional product integrity safeguards for drugs susceptible to counterfeiting or diversion. The bid prices in an area would 

be effective for that area throughout the two-year contract period, 

but the contract would allow for appropriate price adjustments to 

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able, net acquisition costs as disclosed to the Secretary. The Secretary would not be able to accept a contract for an area if its aggregate average prices exceed 120 percent of the Average Sales 

Price established under 1847B. Under the program, the Secretary 

would be required to compute an area average of the submitted bid 

prices. For drugs and biologicals for which an average bid price has 

not been established due to its establishment as a new Medicare 

covered product, the payment rate would be the payment rate established under 1847B. The Secretary would be able to establish 

average sales price as the reimbursement amount in other exceptional cases. Beneficiary liability would be limited to 20 percent of 

the payment basis for the covered drug or biological, and would be 

collected by the contractor upon drug administration. 

The Secretary would be permitted to waive certain provisions of 

the Federal Acquisition Regulation that are necessary for the efficient implementation of this program, other than those relating to 

confidentiality of information. The contractor supplying the physician in the area would submit the claim for the drug and would 

collect the cost-sharing amount from the beneficiary after administration of the drug. Both program payment and beneficiary cost 

sharing amounts would only be made to the contractor; would only 

be made upon the administration of the drug; and would be based 

on the average bid of prices for the drug and biological in the area. 

The Secretary would be required to establish a process for recovery 

of payments billed at the time of dispensing for drugs that were not 

actually administered. 

The appropriate contractor, as selected by the physician, would 

supply covered drugs directly to the physician, except under the 

circumstances when a beneficiary is able to receive a drug at home. 

The Secretary would be able to specify other non-physician office 

settings where a beneficiary would be able to receive a covered 

drug directly. However, the contractor would not be able to deliver 

drugs to a physician without first receiving a prescription as well 

as other necessary information specified by the Secretary. A physician would not be required to submit a prescription for each individual treatment. The Secretary would establish requirements, including adequate safeguards against fraud and abuse and consistent with safe drug practices, in order for a physician to maintain an inventory of drugs in cases where: the drugs or biologicals 

are immediately required, where the physician could not have reasonably anticipated the immediate requirement, where the contractor could not deliver the product in a timely manner, and in 

emergency situations related to the patient’s health. No applicable 

State requirements relating to the licensing of pharmacies would 

be waived. 

Current rules related to physician assignment and beneficiary 

appeal rights in cases of medical necessity denial would remain unchanged. New physician appeal rights would be established similar 

to those provided to physicians who prescribe durable medical 

equipment or laboratory tests. 

The Secretary would be required to establish an advisory committee to assist in the implementation of this program. The Secretary would be required to report to Congress on savings, reductions in cost-sharing, access to items and services, the availability 

of contractors as well as beneficiary and provider satisfaction under 

197

the competitive acquisition program. These reports would be due 

each year from 2005 through 2007. 

The new section 1847B would establish an alternative choice for 

physician reimbursement for covered Part B drugs based on an Average Sales Price methodology (ASP). ASP is calculated for multiple source drugs based on the average of all sales net of volume 

discounts, prompt pay discounts, cash discounts, free goods to physicians, charge backs and rebates other than Medicaid rebates. For 

single source products, ASP is calculated using the above methodology or the Wholesale Acquisition Cost, which ever is lower. In an 

initial period for which sales data is not available, the Secretary 

may determine the amount payable under the section without regard to the manufacturer’s average sales price. In response to a 

public health emergency, the Secretary may use the wholesale acquisition cost instead of the average sales price until the price and 

availability of the drug has stabilized. Prices would be reported to 

the Secretary on a quarterly and confidential basis. 

The Secretary would submit an annual report to the Congress on 

trends in average sales prices, administrative costs associated with 

compliance with this section, the total value of payments made 

under this section, and a comparison of the average manufacturer 

price reported under Medicaid with the average sales price. GAO 

would be required to assess the impact of this program on the delivery of services, particularly with respect to beneficiary access to 

drugs and the site of delivery. MedPAC would be required to submit to Congress specific recommendations with respect to payment 

for blood clotting factors in its 2004 annual report. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Balanced Budget Act of 1997 (BBA 97, P.L. 105–33) specified 

that Medicare payment for covered outpatient prescription drugs 

would equal 95 percent of AWP. Law or regulation does not define 

AWP. Publishing organizations report AWPs provided by drug 

manufacturers. Medicare carriers use the published data to payment for Medicare covered drugs, but AWPs are not grounded in 

any real market transaction, and do not reflect the actual price 

paid by purchasers. Congress has long recognized AWP is a list 

price and not a measure of actual prices. Congress is now able to 

adopt an alternative basis for payment that will more accurately 

reflect actual acquisition costs for physicians. This will ensure that 

Medicare no longer bases its payments on prices that do not reflect 

prices otherwise available through market incentives and transactions. 

AWP for a product is often far greater than the acquisition cost 

paid by suppliers and physicians. Some drug manufacturers use 

AWP to inflate payments made for drugs. As a result of abuses in 

the current system, beneficiaries are paying hundreds of millions 

of dollars in inflated co-payments every year. Medicare also pays 

upwards of one billion dollars in excess payments every year. 

Some physicians assert that the overpayment for drugs covers 

underpayment for practice expenses. They contend that Medicare 

does not adequately reimburse them for the practice expenses assoVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00197 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ciated with providing care in outpatient settings. This section reduces the overpayment for drugs and biologics, while increasing 

physician practice expenses. 

Over the past 6 years, the OIG has issued a number of reports, 

all of which have reached the conclusion that Medicare and its 

beneficiaries pay too much for prescription drugs. The OIG studied 

the prices for 24 Medicare covered drugs that accounted for $3.1 

billion of the $3.9 billion in Medicare drug expenditures in 1999. 

The OIG compared Medicare reimbursement to prices available to 

the physician/supplier community, the Department of Veterans Affairs, and Medicaid. They found that Medicare and its beneficiaries 

would have saved substantial amounts of money on their coinsurance. The savings would have been $761 million a year by paying 

the actual wholesale prices available to physicians and suppliers. 

For each drug, Medicare paid more than the wholesale price available to physicians and suppliers. 

Subsequently, the findings of the report were updated with more 

current drug pricing information and estimated that, of the $3.7 

billion Medicare spent for 24 drugs in 2000, had Medicare paid the 

actual wholesale prices available to physicians and suppliers for 

these 24 drugs, the program and its beneficiaries would save $887 

million a year. If Medicare had paid for these drugs based on catalog prices, according to the OIG, beneficiaries would have paid over 

$175 million less in coinsurance. 

GAO’s September 2001 report found that physicians can obtain 

Medicare-covered drugs at prices below current Medicare payments. In fact, wholesalers’ and Group Purchasing Organizations’ 

(GPO) prices are less than the AWP currently used to establish 

Medicare reimbursement for covered drugs. GAO found that the 

average discount from AWP ranged from 13 percent to 34 percent, 

and that two drugs had discounts of 65 percent and 86 percent. 

In its recommendations to the Congress, the GAO urged CMS to 

take steps to begin reimbursing providers for part B-covered drugs 

and related services at levels reflecting providers’ acquisition costs 

using information about actual market transaction prices. CMS 

should also evaluate expanding competitive bidding approaches to 

setting payment levels, according to the GAO, and that CMS 

should monitor beneficiary access to covered drugs in light of any 

changes to reimbursement. 

The GAO also debunked some common myths generally held by 

many in the health care community. Specifically, the GAO found 

that despite concerns that the discounts available to large purchasers would not be available to physicians with a small number 

of drug claims, physicians with low volumes reported that their 

purchase prices were the same or less than the widely available 

prices GAO documented. GAO also believes that Medicare should 

pay for each service appropriately and not rely on overpayments for 

some services to offset inadequate payments for complementary 

services. The Committee shares this view, and believes the legislation achieves this goal. 

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Section 304. Demonstration Project for Use of Recovery Audit Contractors 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to conduct a demonstration 

project for up to three years on the use of recovery audit contractors under the Medicare Integrity Program. The recovery audit contractors would identify underpayments and overpayments in the 

Medicare program and would recoup overpayments made to providers. Payment would be made to these contractors by providing 

incentives for good performance. The Secretary would be able to 

waive Medicare statutory provisions to pay for the services of the 

recovery audit contractors. The Secretary would be required to examine the efficacy of using these contractors with respect to duplicative payments, accuracy of coding, and other payment policies in 

which inaccurate payments arise. The demonstration project would 

be required to cover at least two states among the states with the 

highest per-capita utilization rates of Medicare services and have 

at least three contractors. 

Recovery of an overpayment through this project would not prohibit the Secretary or the Attorney General from investigating and 

prosecuting appropriate allegations of fraud and abuse. Fiscal 

intermediaries, carriers, and Medicare Administrative Contractors 

would not be eligible to participate as a recovery audit contractor. 

The Secretary would be required to show preference to contracting 

with entities that have demonstrated more than three years direct 

management experience and a proficiency in recovery audits. Within six months of completion, the Secretary would be required to report to Congress on the project’s savings to the Medicare program, 

including recommendations on the cost-effectiveness of extending 

or expanding the program. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This is a common approach used in the private sector including 

physicians and hospitals to recover payments from insurers. It provides a useful check on whether the other CMS contractors are 

paying accurately and identifying potential fraud problems. 

D. TITLE IV—RURAL HEALTH CARE IMPROVEMENTS

Section 401. Enhanced Disproportionate Share Hospital (DSH) 

Treatment for Rural Hospitals and Urban Hospitals With 

Fewer Than 100 Beds 

CURRENT LAW

Medicare makes additional payments to certain acute hospitals 

that serve a large number of low-income Medicare and Medicaid 

patients as part of its inpatient prospective payment system (PPS). 

As specified by BIPA, starting with discharges occurring on or after 

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April 1, 2001, all hospitals are eligible to receive Medicare disproportionate share hospital (DSH) payments when their DSH percentage or threshold amount exceeds fifteen. 

Different formulas are used to establish a hospital’s DSH payment, depending upon the hospital’s location, number of beds and 

status as a rural referral center (RRC) or sole community hospital 

(SCH). The DSH adjustment that a small urban or rural hospital 

can receive is limited to 5.25 percent of total Medicare inpatient 

payments. 

EXPLANATION OF PROVISION

For discharges after October 1, 2003, a small rural or urban hospital that qualifies for a DSH adjustment would potentially receive 

an increase in DSH payments. The DSH adjustment for these hospitals, except for rural referral centers, would be almost doubled 

but not to exceed a maximum of 10 percent. 

EFFECTIVE DATE

The provision would apply to discharges occurring on or after October 1, 2003. 

REASON FOR CHANGE

MedPAC, an independent advisory committee that advises Congress, recommended this policy in its March 2003 report. MedPAC 

believes this change would mitigate the effects of uncompensated 

care for many rural hospitals and thereby protect Medicare beneficiaries’ access to care in rural communities. Historically, rural 

and small urban hospitals have been treated unfairly with respect 

to DSH payments. 

Section 402. Immediate Establishment of Uniform Standardized 

Amount in Rural and Small Urban Areas 

CURRENT LAW

Medicare pays for inpatient services in acute hospitals in large 

urban areas using a standardized amount that is 1.6 percent larger 

than the standardized amount used to reimburse hospitals in other 

areas (both rural areas and smaller urban areas). The Consolidated 

Appropriations Act of 2003 (P.L. 108–7) provided for a temporary 

payment increase to rural and small urban hospitals; all Medicare 

discharges from April 1, 2003, to September 30, 2003, would be 

paid on the basis of the large urban area amount. 

EXPLANATION OF PROVISION

Beginning for discharges in FY2004, the standardized amount for 

hospitals located in areas other than large urban areas would be 

equal to the amount used to pay hospitals located in large urban 

areas. Technical conforming amendments would also be adopted. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

MedPAC recommends eliminating this differential in payment. 

MedPAC found no statistically significant difference in costs between the cost of hospitals in large urban areas (over one million) 

and other hospitals, after removing the effect of geographic differences in wages, teaching and other Medicare adjustments. 

Section 403. Establishment of Essential Rural Hospital Classification 

CURRENT LAW

No provision in current law. 

EXPLANATION OF PROVISION

An Essential Rural Hospital would be a new designation for the 

purposes of Medicare reimbursement. To be eligible for the Essential Rural Hospital designation, the hospital must have more than 

25 beds and must be located in a rural area. The Secretary must 

then determine that the closure of the hospital would significantly 

diminish the ability of beneficiaries to obtain essential health care 

services based on certain criteria. Specifically, the Secretary must 

determine that (1) a high proportion of Medicare beneficiaries residing in the hospital’s service area receive basic inpatient care 

from the hospital, and (2) there exists, in the service area, a hospital with more than 200 licensed beds that provides specialized 

surgical care to a high percentage of beneficiaries. Regardless of 

the size of the hospital, almost all physicians in the area must have 

admitting privileges and provide their inpatient services primarily 

at the hospital. Also, the Secretary must determine that the closure 

of the hospital would have a significant adverse impact on the 

availability of health care service in the absence of the hospital. 

In making such determination, the Secretary may also consider: 

(1) whether ambulatory care providers in the hospital’s service area 

are insufficient to handle the outpatient care of the hospital, (2) 

whether beneficiaries would have difficulty accessing care, and (3) 

whether the hospital has a commitment to provide graduate medical education in a rural area. The essential rural hospital would 

have to have a quality of care score above the median state scores. 

A hospital classified as an essential rural hospital would not be 

able to change such classification. An essential rural hospital would 

not be able to be treated as a sole community hospital, Medicare 

dependent hospital, or rural referral center. A hospital that is classified as an essential rural hospital for a cost reporting period beginning on or after October 1, 2004 would be reimbursed 102 percent of its reasonable Medicare costs for inpatient and outpatient 

services. Beneficiary cost-sharing amounts would not be affected 

and required billing for such services would not be waived. 

EFFECTIVE DATE

The provision would apply to cost reporting periods beginning on 

or after October 1, 2004. 

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REASON FOR CHANGE

The purpose of this provision is to recognize the impact of certain 

hospitals whose existence is essential in the health care delivery 

system of the community. Some rural hospitals have high fixed 

costs because of the necessity for providing the capacity for essential services in a community. There are also problems with the definition and payment for some communities and rural referral hospitals. This would provide a new crosscutting designation field for 

hospitals that can meet the criteria. 

Section 404. More Frequent Update in Weights Used in Hospital 

Market Basket 

CURRENT LAW

Medicare’s standardized amounts, which serve as the basis for its 

payment per discharge from acute hospitals, are increased annually using an update factor which is determined in part by the projected increase in the hospital market basket. The market basket 

is a fixed-weight hospital input price index, which measures the average change in the price of goods and services hospitals purchased 

in order to furnish inpatient care. CMS revises the cost category 

weights, reevaluates the price proxies for such categories, and 

rebases (or changes the base period) for the market basket every 

five years. CMS implemented a revised and rebased market basket 

using 1997 cost data for use in the FY2003 Medicare hospital payment rates. 

EXPLANATION OF PROVISION

The Secretary would be required to revise the market basket cost 

weights including the labor share to reflect the most currently 

available data and to establish a schedule for revising the cost 

weights more often than once every five years. The Secretary would 

be required to submit a report to Congress by October 1, 2004 on 

the reasons for and the options considered in establishing such a 

schedule. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

At the current time the hospital market basket is only updated 

every ten years using five-year-old data for the weights including 

the labor share. Statisticians at the Department of Labor and other 

experts believe the measures of inflation should be updated on a 

more regular basis to correct consistent inaccuracies over time. 

Section 405. Improvements to the Critical Access Hospital (CAH) 

Program 

(a) Increase in Payment Amounts 

CURRENT LAW

Generally, a critical access hospital (CAH) receives reasonable, 

cost-based reimbursement for care rendered to Medicare beneficiaries. CAHs may elect either a cost-based hospital outpatient 

203

service payment or an all-inclusive rate, which is equal to a reasonable cost payment for facility services plus 115 percent of the fee 

schedule payment for professional services. Ambulance services 

that are owned and operated by CAHs are reimbursed on a reasonable cost basis if these ambulance services are 35 miles from another ambulance system. 

EXPLANATION OF PROVISION

Inpatient, outpatient, and covered skilled nursing facility services provided by a CAH would be reimbursed at 102 percent of reasonable costs of services furnished to Medicare beneficiaries. 

EFFECTIVE DATE

This provision would apply to cost reporting periods beginning on 

or after October 1, 2003. 

REASON FOR CHANGE

Small hospitals need the ability to build up reserves and to finance new capital expenditures. This provides a margin for these 

hospitals under the Medicare program, often their most important 

payor. 

(b) Coverage of Costs for Certain Emergency Room On-Call 

Providers 

CURRENT LAW

BIPA required the Secretary to include the costs of compensation 

(and related costs) of on-call emergency room physicians who are 

not present on the premises of a CAH, are not otherwise furnishing 

services, and are not on-call at any other provider or facility when 

determining the allowable, reasonable cost of outpatient CAH services. 

EXPLANATION OF PROVISION

Reimbursement of on-call emergency room providers would be expanded to include the costs associated with physician assistants, 

nurse practitioners, and clinical nurse specialists as well as emergency room physicians for covered Medicare services. 

EFFECTIVE DATE

This provision would apply to costs for services provided on or 

after January 1, 2004. 

REASON FOR CHANGE

In sparsely populated areas, it is often the physician assistant or 

nurse practitioner employed by a physician practice or operating 

independently who is providing the on call services for the emergency room. This recognizes the bonuses that hospitals pay for 

their services.

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(c) Modification of the Isolation Test for Cost-Based CAH Ambulance Services 

CURRENT LAW

Ambulance services provided by a CAH or provided by an entity 

that is owned or operated by a CAH is paid on a reasonable cost 

basis and not the ambulance fee schedule, if the CAH or entity is 

the only provider or supplier of ambulance services that is located 

within a 35-mile drive of the CAH. 

EXPLANATION OF PROVISION

The 35-mile requirement would not apply to the ambulance services that are furnished by a provider or supplier of ambulance services who is determined by the Secretary to be a first responder to 

emergencies. 

EFFECTIVE DATE

This provision would apply to ambulance services furnished on or 

after the first cost reporting period that begins after the date of enactment. 

REASON FOR CHANGE

CAHs may not be eligible for cost-based reimbursement because 

other ambulances may come into the area to transport patients between hospitals or to transfer patients to/from nursing homes. This 

would ensure that CAHs owned-and-operated ambulances would be 

paid cost when they are the first responders to an emergency. 

(d) Reinstatement of Periodic Interim Payment (PIP) 

CURRENT LAW

Eligible hospitals, skilled nursing facilities, and hospices, which 

meet certain requirements, receive Medicare periodic interim payments (PIP) every two weeks; these payments are based on estimated annual costs without regard to the submission of individual 

claims. At the end of the year, a settlement is made to account for 

any difference between the estimated PIP payment and the actual 

amount owed. A CAH is not eligible for PIP payments. 

EXPLANATION OF PROVISION

An eligible CAH would be able to receive payments made on a 

PIP basis for its inpatient services. The Secretary would be required to develop alternative methods based on the expenditures of 

the hospital for these PIP payments. 

EFFECTIVE DATE

This provision would apply to payments made on or after January 1, 2004. 

REASON FOR CHANGE

Small rural hospitals often have significant changes in volume 

due to the season or just on a day-to-day basis. This provision averages payments over time to aid the hospital’s financial stability. 

205

(e) Condition for Application of Special Physician Payment 

Adjustment 

CURRENT LAW

As specified by BBRA, CAHs can elect to be paid for outpatient 

services using cost-based reimbursement for its facility fee and at 

115 percent of the fee schedule for professional services otherwise 

included within its outpatient critical access hospital services for 

cost reporting periods starting on or after October 1, 2000. 

EXPLANATION OF PROVISION

The Secretary would not be able to require that all physicians 

providing services in a CAH assign their billing rights to the entity 

in order for the CAH to be able to be paid on the basis of 115 percent of the fee schedule for the professional services provided by 

the physicians. However, a CAH would not receive payment based 

on 115 percent of the fee schedule for any individual physician who 

did not assign billing rights to the CAH. 

EFFECTIVE DATE

This provision would be effective as if it had been included as 

part of BBRA. 

REASON FOR CHANGE

This provision ensures that the intent of Congress is for CMS to 

provide these payments in order to attract physicians to CAHs. 

(f) Flexibility in Bed Limitation for Hospitals 

CURRENT LAW

A CAH is a limited service facility that must provide 24-hour 

emergency services and operate a limited number of inpatient beds 

in which hospital stays can average no more than 96 hours. A CAH 

cannot operate more than 15 acute-care beds at one time, but can 

have an additional 10 swing beds that are set up for skilled nursing facility (SNF) level care. SNF beds in a unit of the facility that 

is licensed as a distinct-part skilled nursing facility at the time of 

the facility’s application for CAH designation are not counted toward these bed limits.

EXPLANATION OF PROVISION

The Secretary would be required to specify standards for determining whether a CAH has seasonal variations in patient admissions that would justify a 5-bed increase in the number of beds it 

can maintain (and still retain its classification as a CAH). CAHs 

that operate swing beds would be able to use up to 25 beds for 

acute care services as long as no more than 10 beds at any time 

are used for non-acute services. Those CAHs with swing beds that 

made this election would not be eligible for the 5-bed seasonal adjustment. A CAH with swing beds that elects to operate only 15 of 

its 25 beds as acute care beds would be eligible for the 5-bed seasonal adjustment. 

206

EFFECTIVE DATE

These provisions would only apply to CAH designations made before, on or after January 1, 2004. 

REASON FOR CHANGE

These provisions allow some needed flexibility in the CAH program designation to ensure that if there is a flu epidemic or major 

accident that the hospital would have the capacity to treat those 

patients. 

(g) Additional 5-Year Period of Funding for Grant Program 

CURRENT LAW

The Secretary is able to make grants for specified purposes to 

States or eligible small rural hospitals that apply for such awards. 

The authorization to award the grants expired in FY2002. 

EXPLANATION OF PROVISION

The authorization to award grants would be established from 

FY2004 through FY2008 from the Federal Hospital Insurance 

Trust Fund at amounts of up $25 million each year. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This would continue the planning and monitoring aspects of the 

states for the CAH program. The Committee expects that the 

states would work in cooperation with the critical access hospitals 

in determining the best use of the funds. 

Section 406. Redistribution of Unused Resident Positions 

CURRENT LAW

Medicare has different resident limits for counting residents, its 

indirect medical education (IME) adjustment and for reimbursement for a teaching hospital’s direct graduate medical education 

(DGME) costs. Generally, a hospital’s IME adjustment depends on 

a hospital’s teaching intensity as measured by the ratio of the number of interns and residents per bed. Prior to BBA 97, the number 

of residents that could be counted for IME purposes included only 

those in the hospital inpatient and outpatient departments. Effective October 1, 1997, under certain circumstances a hospital may 

now count residents in non-hospital sites for the purposes of IME. 

Medicare’s DGME payment to teaching hospital is based on its updated cost per resident (subject to a locality adjustment and certain 

payment corridors), the weighted number of approved full-timeequivalent (FTE) residents, and Medicare’s share of inpatient days 

in the hospital. Generally, the resident counts of both IME and 

DGME payments are based on the number of residents in approved 

allopathic and osteopathic teaching programs that were reported by 

the hospital for the cost reporting period ending in calendar year 

1996. The DGME resident limit is based on the unweighted resident counts. Hospitals that established new training programs beVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00206 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
207

fore August 5, 1997 are partially exempt from the cap. Other exceptions apply to certain hospitals including those with new programs established after that date. Hospitals in rural areas (and 

non-rural hospitals operating training programs in rural areas) can 

be reimbursed for 130 percent of the number of residents allowed 

by their cap. Under certain conditions, an affiliated group of hospitals under a specific arrangement may combine their resident 

limits into an aggregate limit. Subject to these resident limits, a 

teaching hospital’s IME and DGME payments are based on a threeyear rolling average of resident counts, that is, the resident count 

will be based on the average of the resident count in the current 

year and the two preceding years. The rolling average calculation 

includes podiatry and dental residents. 

EXPLANATION OF PROVISION

A teaching hospital’s total number of potentially Medicare-reimbursed resident positions would be reduced for cost reporting periods, starting January 1, 2004, if the resident reference level is less 

than its applicable resident limit. If so, the reduction would equal 

to 75 percent of the difference between the hospital’s limit and its 

resident reference level. The resident reference level would be the 

highest number of allopathic and osteopathic resident positions (before the application of any weighting factors) for the hospital during the reference period. A hospital’s reference period would be the 

3 most recent consecutive cost reporting periods for which a hospital’s cost reports have been settled (or in the absence of such settled cost reports, submitted reports) on or before September 30, 

2002. The Secretary would be able to adjust a hospital’s resident 

reference level, upon the timely request for such an adjustment, for 

the cost reporting period that includes July 1, 2003. 

The Secretary would be authorized to increase the applicable 

resident limits for other hospitals by an aggregate number that 

does not exceed the overall reduction in such limits. No increase 

would be permitted for any portion of cost reporting period that occurs before July 1, 2003 or before the date of a hospital’s application for such an increase. No increase would be permitted unless 

the hospital has applied for such an increase by December 1, 2005. 

The Secretary would consider the need for an increase in the 

physician specialty and the location involved. The Secretary would 

first distribute the increased resident count to programs in hospitals located in rural areas and hospitals that are not in large 

urban areas on a first-come-first-serve basis. The hospital would 

have to demonstrate that the resident positions would be filled; not 

more than 25 positions would be given to any one hospital. These 

hospitals would be reimbursed for DGME for the increase in resident positions at the locality adjusted national average per resident 

amount. Changes in a hospital’s resident count established under 

this section would increase a hospital’s IME payments. These provisions would not apply to reductions in residency programs that 

occurred as part of the voluntary reduction program or would affect 

the ability of certain hospitals to establish a new medical residency 

training programs. The Secretary would be required to submit a report, including recommendations, on whether to extend the application deadline for increases in resident limits no later than July 1, 

2005. 

208

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

An unintended effect of the resident cap was to lock in a maldistribution of DGME and IME resident training positions in the 

country. Due to the strong link between the location of a resident’s 

training and their eventual practice, it is critical to get more residents into training programs in rural areas and small urban cities. 

This provision redistributes unused residency slots, over a five-year 

period, to hospitals that have either reached their cap or have been 

providing DGME residencies without Medicare funding. 

Section 407. Two-Year Extension of Hold Harmless Provisions for 

Small Rural Hospitals and Sole Community Hospitals Under 

Prospective Payment System for Hospital Outpatient Department Services 

CURRENT LAW

The PPS for hospital outpatient departments (HOPDs) was implemented in August 2000 for most acute care hospitals. Under the 

HOPD PPS, Medicare pays for covered services using a fee schedule based on ambulatory payment classifications (APCs). Rural hospitals with no more than 100 beds are paid no less under this PPS 

system than they would have received under the prior reimbursement system for covered HOPD services because of hold harmless 

provisions. The hold harmless provisions apply to services provided 

before January 1, 2004. 

EXPLANATION OF PROVISION

The hold harmless provisions governing HOPD reimbursement 

for small rural hospitals would be extended to January 1, 2006. 

The hold harmless provisions would be extended to sole community 

hospitals located in a rural area starting for services furnished on 

or after January 1, 2004 until January 1, 2006. The Secretary 

would be required to conduct a study to determine if the costs by 

APC groups incurred by rural providers exceed such costs incurred 

by urban providers. If appropriate, the Secretary would provide a 

payment adjustment to reflect the higher costs of rural providers 

by January 1, 2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

During the proposed rule for the start of the HOPD PPS, CMS 

found that rural hospital costs were higher than other hospitals. 

CMS did not recommend adjusting payments due to the poor quality of the data. This continues the hold harmless from any negative 

effect from the PPS for small rural hospitals and extends it to sole 

community hospitals until the Secretary reexamines this issue. 

209

Section 408. Exclusion of Certain Rural Health Clinic and Federally Qualified Health Center Services from the Prospective Payment System for Skilled Nursing Facilities 

CURRENT LAW

Under the PPS, skilled nursing facilities (SNFs) are paid a predetermined amount to cover all services provided in a day, including the costs associated with room and board, nursing, therapy, 

and drugs; the daily payment would vary depending upon a patient’s therapy, nursing and special care needs as established by 

one of 44 resource utilization groups (RUGs). Certain services and 

items provided a SNF resident, such as physicians’ services, specified ambulance services, chemotherapy items and services, and certain outpatient services from a Medicare-participating hospital or 

critical access hospital, are excluded from the SNF PPS and paid 

separately under Part B. 

EXPLANATION OF PROVISION

Services provided by a rural health clinic (RHCs) and a federally 

qualified health center (FQHC) after January 1, 2004 would be excluded from SNF PPS, if such services were excluded if furnished 

by an physician or practitioner who was not affiliated with a RHC 

or FQHC.

EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2004. 

REASON FOR CHANGE

In some rural areas, local physicians may be employed in a rural 

health clinic or federally qualified health clinic. This would allow 

them to get paid for their professional services to skilled nursing 

patients like other physicians. 

Section 409. Recognition of Attending Nurse Practitioners as Attending Physicians To Serve Hospice Patients 

CURRENT LAW

Medicare covers hospice services to care for the terminal illnesses 

of the beneficiary. In general, beneficiaries who elect the hospice 

benefit give up other Medicare services that seek to treat the terminal illness or that duplicate services provided by the hospice. 

Services are provided primarily in the patient’s home by a Medicare-approved hospice. Reasonable and necessary medical and support services for the management of the terminal illness are furnished under a written plan-of-care established and periodically reviewed by the patient’s attending physician and the hospice. To be 

eligible for Medicare’s hospice care, a beneficiary must be certified 

as terminally ill by an attending physician and the medical director 

or other physician at the hospice and elect hospice treatment. An 

attending physician who may be an employee of the hospice is identified by the patient as having the most significant role in the determination and delivery of his or her medical care when the patient makes an election to receive hospice care. 

210

EXPLANATION OF PROVISION

A beneficiary would be able to identify a nurse practitioner (who 

is not employed by the hospice) as an attending physician. The 

nurse practitioner would not be able to certify the beneficiary as 

terminally ill. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In rural areas, the independent nurse practitioner provides a significant amount of the care to patients up to and during their terminal illness. This allows them to continue in their clinical role 

with the patient. 

Section 410. Improvement in Payments To Retain Emergency Capacity for Ambulance Services in Rural Areas 

CURRENT LAW

Traditionally, Medicare has paid suppliers of ambulance services 

on a reasonable charge basis and paid provider-based ambulances 

on a reasonable cost basis. BBA 97 provided for the establishment 

of a national fee schedule, which was to be implemented in phases. 

The required fee schedule became effective April 1, 2002 with full 

implementation by January 2006. In the transition period, a gradually decreasing portion of the payment is to be based on the prior 

payment methodology (either reasonable costs or reasonable 

charges which were subject to national limitation amounts). 

The fee schedule payment amount equals the base rate for the 

level of service plus payment for mileage and specified adjustment 

factors. Additional mileage payments are made in rural areas. 

BIPA increased payment for rural ambulance mileage for distances 

greater than 17 miles and up to 50 miles for services provided before January 1, 2004. The amount of the increase was at least onehalf of the payment per mile established in the fee schedule for the 

first 17 miles of transport. 

EXPLANATION OF PROVISION

The Secretary would be required to increase the base rate of the 

fee schedule for ground ambulance services that originate in a 

qualified rural area to account for the higher average costs incurred by providers furnishing a low volume of services. A qualified 

rural area is a county that has not been assigned to a metropolitan 

statistical area (MSA) with a population density of Medicare beneficiaries in the lowest quartile of all rural county populations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The current adjustment may overpay rural ambulances in more 

populated areas and underpays them in less populated areas. Recent analyses by the General Accounting Office suggest that it is 

fixed costs—represented by the base rate—not mileage that are the 

211

significant factor for increased costs in rural areas. In particular, 

the ambulances in the lowest 25 percent of rural counties may have 

less than one trip per day.

Section 411. Two-Year Increase for Home Health Services Furnished 

in a Rural Area 

CURRENT LAW

The Medicare home health PPS, implemented on October 1, 

2000, provides a standardized payment for a 60–day episode of care 

furnished to a Medicare beneficiary. Medicare’s payment is adjusted to reflect the type and intensity of care furnished and area 

wages as measured by the hospital wage index. BIPA increased 

PPS payments by 10 percent for home health services furnished in 

the home of beneficiaries living in rural areas during the two-year 

period beginning April 1, 2001, through March 31, 2003, without 

regard to certain budget-neutrality provisions applying to home 

health PPS. The temporary additional payment is not included in 

the base for determination of payment updates. 

EXPLANATION OF PROVISION

The provision would extend a five percent additional payment for 

home health care services furnished in a rural area during FY 2004 

and 2005 without regard to certain budget-neutrality requirements. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC recommends extending the five percent add-on for oneyear while further analysis is done on rural agency home health 

margins. The two-year extension is to provide Congress with time 

to evaluate that information and decide what action is needed, if 

any. 

Section 412. Providing Safe Harbor for Certain Collaborative Efforts that Benefit Medically Underserved Populations 

CURRENT LAW

People who knowingly and willfully offer or pay a kickback, a 

bribe, or rebate to directly or indirectly induce referrals or the provision of services under a Federal program may be subject to financial penalties and imprisonment. Certain exceptions or safe harbors 

that are not considered violations of the anti-kickback statute have 

been established. 

EXPLANATION OF PROVISION

Remuneration in the form of a contract, lease, grant, loan or 

other agreement between a public or non-profit private health center and an individual or entity providing goods or services to the 

health center would not be a violation of the anti-kickback statute 

if such an agreement would contribute to the ability of the health 

center to maintain or increase the availability or quality of services 

provided to a medically underserved population. The Secretary 

would be required to establish standards, on an expedited basis, reVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00211 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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lated to this safe harbor that would consider whether the arrangement: (1) results in savings of Federal grant funds or increased revenues to the health center, (2) expands or limits a patient’s freedom of choice, and (3) protects a health care professional’s independence regarding the provision of medically appropriate treatment. The Secretary would also be able to include other standards 

that are consistent with Congressional intent in enacting this exception. The Secretary would be required to publish an interim 

final rule in the Federal Register no later than 180 days from enactment that would establish these standards. The rule would be 

effective immediately, subject to change after a public comment period of not more than 60 days. 

EFFECTIVE DATE

Upon enactment 

REASON FOR CHANGE

This would finalize policy under development at the Department 

of Health and Human Services. 

Section 413. GAO Study of Geographic Differences 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

GAO would be required to study geographic differences in payment amounts in the physician fee schedule including: (1) an assessment of the validity of each component of the geographic adjustment factors; (2) an evaluation of the measures and the frequency with which they are revised; and (3) an evaluation of the 

methods used to establish the costs of professional liability insurance including the variation between physician specialties and 

among different states, the update to the geographic cost of practice index, and the relative weights for the malpractice component. 

The study, including recommendations concerning use of more current data and use of cost data rather than price proxies, would be 

due to Congress within 1 year of enactment. 

EFFECTIVE DATE

Upon enactment.

Section 414. Treatment of Missing Cost Reporting Periods for Sole 

Community Hospitals 

CURRENT LAW

Sole community hospitals (SCHs) are hospitals that, because of 

factors such as isolated location, weather conditions, travel conditions, or absence of other hospitals, are the sole source of inpatient 

services reasonably available in a geographic area, or are located 

more than 35 road miles from another hospital. The primary advantage of an SCH classification is that these hospitals receive 

Medicare payments based on the current national PPS national 

standardize amount or on hospital-specific per discharge costs from 

either FY 1982, FY1987 or FY1996 updated to the current year, 

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whatever amount would provide the highest Medicare reimbursement. The FY1996 base year option became effective for discharges 

on or after FY2001 on a phased in basis and would be fully implemented for SCH discharges on or after FY2004. 

EXPLANATION OF PROVISION

A hospital would not be able to be denied treatment as a SCH 

or receive payment as a SCH because data are unavailable for any 

cost reporting period due to changes in ownership, changes in fiscal 

intermediaries, or other extraordinary circumstances, so long as 

data from at least one applicable base cost reporting period is 

available. 

EFFECTIVE DATE

The provision would apply to cost reporting periods beginning on 

or after January 1, 2004. 

REASON FOR CHANGE

During changes in fiscal intermediaries or in a change of ownership, historical information on a provider can be lost or misplaced. 

The purpose of the sole community hospital program is to provide 

for additional payment to protect access, which should not be stymied due to human error. Since sole community hospitals are paid 

the higher of any of the base years or the Federal rate, this does 

not result in preferential payments for these hospitals compared to 

other sole community hospitals. 

Section 415. Extension of Telemedicine Demonstration Project 

CURRENT LAW

BBA 97 authorized a telemedicine demonstration project for 

beneficiaries with diabetes mellitus in medically underserved rural 

or inner-city areas. BBRA required the Secretary to award the 

demonstration to the best technical proposal as of the bill’s enactment date, no later than three months after enactment without additional review. BBRA also clarified that qualified medically underserved rural or urban inner-city areas are federally designated 

medically underserved areas or Health Provider Shortage Areas 

(HPSAs) at the time of enrollment in the project. Furthermore, it 

made changes in the project’s data requirements, and limited beneficiary cost-sharing. The demonstration would expire in February 

2004. 

EXPLANATION OF PROVISION

This provision would extend the demonstration for an additional 

four years. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Difficulty finding appropriate participants delayed the demonstration’s start. This extension would provide additional time to 

fully evaluate the clinical effectiveness of the program, and to deVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00213 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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termine the long-term effectiveness of the approach. It would also 

provide more time to collect clinical data to evaluate the project’s 

cost-effectiveness. 

Section 416. Adjustment to the Medicare Inpatient Hospital PPS 

Wage Index to Revise the Labor-Related Share of Such Index 

CURRENT LAW

Hospitals’ DRG payments are adjusted by the hospital wage 

index. The adjusted portion of the payment is determined by the 

labor share. The labor share has three components: wages (50.7 

percent), fringe benefits (11 percent), and rest is the so-called labor 

related costs. 

EXPLANATION OF PROVISION

It reduces the labor share down to 62 percent of wages and 

fringe benefits for those areas with wage index values under 1.0. 

All other areas are held harmless from the change in the labor 

share. 

EFFECTIVE DATE

October 1, 2003. 

REASON FOR CHANGE

MedPAC and others have questioned whether some or all of the 

labor related costs in the labor share should be included. This 

eliminates these costs from the labor share for the areas that benefit from such a change.

Section 417. Medicare Incentive Payment Program Improvements 

for Physician Scarcity 

CURRENT LAW

Under the Medicare Incentive Program, physicians receive a 10 

percent bonus payment for services provided in health professional 

shortage areas. Physicians are responsible for indicating their eligibility for this bonus on their billing forms. 

EXPLANATION OF PROVISION

This provision would establish a new five percent bonus payment 

program for physicians providing care to Medicare beneficiaries in 

physician scarcity areas. The Secretary would calculate two measures of scarcity. A primary care scarcity area would be determined 

based on the number of primary care physicians per Medicare beneficiary—the primary care ratio. A specialty care scarcity area 

would be based on the number of specialty care physicians per 

Medicare beneficiary—the specialty care ratio. The number of physicians would be based on physicians who actively practice medicine or osteopathy, and would exclude physicians whose practice is 

exclusively for the Federal Government, physicians who are retired, or physicians who only provide administrative services. 

The Secretary would rank each county or area based on its primary care ratio. Primary care scarcity counties or areas would be 

those counties or areas with the lowest primary care ratios, such 

that 20 percent of Medicare beneficiaries reside in these counties, 

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when each county or area is weighted by the number of Medicare 

beneficiaries in the county or area. Specialty care scarcity counties 

or areas would be identified in the same manner, using the specialty care ratio. There would be no administrative or judicial review of the identification of counties or areas, or of a specialty of 

any physician. 

To the extent feasible, the Secretary would treat a rural census 

tract of a metropolitan statistical area, as determined under the 

most recent modification of the Goldsmith Modification, as an 

equivalent area for purposes of qualifying as a primary care scarcity area or specialty care scarcity area. 

The Secretary would be required to publish a list of all areas 

which would qualify as primary care scarcity counties or specialty 

care scarcity counties as part of the proposed and final rules to implement the physician fee schedule. 

The provision would also include improvement to the Medicare 

Incentive Payment Program, which provides a 10 percent bonus to 

physicians in shortage areas. The Secretary would be required to 

establish procedures under which the Secretary, and not the physician furnishing the service, would be responsible for determining 

when a bonus payment should be made. As part of the physician 

proposed and final rule for the physician fee schedule, the Secretary would be required to include a list of all areas which would 

qualify as a health professional shortage area for the upcoming 

year. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The new five percent bonus for physicians in either primary care 

scarcity counties or specialty care scarcity counties would increase 

financial incentives for physicians to provide care to Medicare 

beneficiaries in these areas with a shortage of physicians. This 

bonus payment would make it easier to recruit and retain physicians in these scarcity areas. 

Improvements to the Medicare Incentive Program would shift responsibility for identifying eligibility for the 10 percent bonus from 

physicians to the Secretary. 

E. TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

Section 501. Revision of Acute Hospital Payment Updates 

CURRENT LAW

Each year, Medicare’s operating payments to hospitals are increased or updated by a factor that is determined in part by the 

projected annual change in the hospital market basket. Congress 

establishes the update for Medicare’s inpatient PPS for operating 

costs, often several years in advance. 

216

EXPLANATION OF PROVISION

Acute hospitals would receive a market basket update minus 0.4 

percent for three years. This results in an average 3.1 percent update for FY2004 through FY2006, equivalent to market basket 

minus 0.4 percent. The Secretary is also directed to compile and 

clarify the procedures and policies for billing for blood and blood 

costs in the hospital outpatient setting as well as the operation of 

the collection of the blood deductible. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC unanimously recommended that Congress increase payments by 3.1 percent instead of the scheduled 3.5 percent. This results in a $3 billion increase in hospital payments for FY 2004. 

This is 0.4 percent less than current law due to expected increases 

in productivity. According to MedPAC, the modest expected productivity increase for hospitals is lower than would be considered to 

be sufficient for many private industries. 

There is little precedent for hospitals to receive a full market 

basket increase. Congress has only given hospitals the full inflationary increase twice since the start of the hospital prospective 

payment system. Congress has legislated multiple-year changes in 

every Medicare bill except in the Omnibus Budget Reconciliation 

Act of 1989. Finally, this is a comparatively generous provision 

since Congress has typically reduced the inflationary offset by 1.2 

percent—three times greater than the 0.4 percent recommended by 

MedPAC and presented in the bill. 

The proposal replaces a historical saw tooth pattern of updates 

ranging from zero to full market basket to put hospitals’ Medicare 

payments on a predictable stable funding path. 

Section 502. Recognition of New Medical Technologies Under Inpatient Hospital PPS 

CURRENT LAW

BIPA established that Medicare’s inpatient hospital payment system should include a mechanism to recognize the costs of new medical services and technologies for discharges beginning on or after 

October 1, 2001. The additional hospital payments can be made by 

means of new technology groups, an add-on payment, a payment 

adjustment, or other mechanism, but cannot be a separate fee 

schedule and must be budget-neutral. A medical service or technology will be considered to be new if it meets criteria established 

by the Secretary after notice and the opportunity for public comment. CMS published the final regulation implementing these provisions on September 7, 2001. This regulation changed the meeting 

schedule for decisions on the creation and implementation of new 

billing codes (ICD–9–CM codes). The regulation also established 

that technology providing a substantial improvement to existing 

treatments would qualify for additional payments. The add-on payment for eligible new technology would occur when the standard diagnosis-related group (DRG) payment was inadequate; this threshVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00216 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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old was established as one standard deviation above the mean 

standardized DRG. In these cases, the add-on payment for new 

technology would be the lesser of (a) 50 percent of the costs of the 

new technology, or (b) 50 percent of the amount by which the costs 

exceeded the standard DRG payment; however, if the new technology payments are estimated to exceed the budgeted target 

amount of one percent of the total operating inpatient payments, 

the add-on payments are reduced prospectively. 

Medicare pays hospitals additional amounts for atypical cases 

that have extraordinarily high costs compared to most discharges 

classified in the same DRG. The additional payment amount is 

equal to 80 percent of the difference between the hospital’s entire 

cost for the stay and the threshold amount. 

EXPLANATION OF PROVISION

The Secretary would be required to add new diagnosis and procedure codes in April 1 of each year that would not be required to 

affect Medicare’s payment or DRG classification until the fiscal 

year that begins after that date. The Secretary would not be able 

to deny a service or technology treatment as a new technology because the service (or technology) has been in use prior to the 2-to3 year period before it was issued a billing code and a sample of 

specific discharges where the service has been used can be identified. When establishing whether DRG payments are inadequate, 

the Secretary would be required to apply a threshold that is 75 percent of one standard deviation for the DRG involved. 

The Secretary would be required to provide additional clarification in regulating the criteria used to determine whether a new 

service represents an advance in technology that substantially improves the existing diagnosis or treatment. The Secretary would be 

required to deem that a technology provides a substantial improvement on an existing treatment if the technology in question: (1) is 

a drug or a biological that is designated under section 506 of the 

Federal Food, Drug, and Cosmetic Act, approved under section 

314.510 or 601.41 of Title 21, Code of Federal Regulations, designated for priority review when the marketing application was 

filed, or (2) is a medical device for which an exemption has been 

granted under section 520(m) of such Act, or for which priority or 

expedited review has been provided under section 515(d)(5). For 

other technologies that may be substantial improvements, the Secretary would be required to: (1) maintain and update a public list 

of pending applications for specific services and technologies to be 

evaluated for eligibility for additional payment; (2) accept comments, recommendations, and data from the public regarding 

whether a service or technology represents a substantial improvement; and (3) provide for a meeting at which organizations representing physicians, beneficiaries, manufacturers or other interested parties may present comments, recommendations, and data 

to the clinical staff of CMS regarding whether a service or technology represents a substantial improvement. These actions would 

occur prior to the publication of the proposed regulation. 

Before establishing an add-on payment as the appropriate reimbursement mechanism, the Secretary would be directed to identify 

one or more DRGs and assign the technology to that DRG, taking 

into account similar clinical or anatomical characteristics and the 

218

relative cost of the technology. The Secretary would assign an eligible technology into a DRG where the average cost of care most 

closely approximates the cost of the new technology. In such a case, 

no add-on payment would be made; the application of the budgetneutrality requirement with respect to annual DRG reclassifications and recalculation of associated DRG weights would not be affected. The Secretary would be required to increase the percentage 

associated with add-on payments from 50 percent to the marginal 

rate or the percentage that Medicare reimburses inpatient outlier 

cases. 

The Secretary would be directed to automatically reconsider an 

application as a new technology that was denied for FY2003 as a 

FY2004 application under these new provisions. If such an application were granted, the maximum time period otherwise permitted 

for such classification as a new technology would be extended by 

12 months.

EFFECTIVE DATE

These provisions would be effective for classifications beginning 

in FY2004. 

REASON FOR CHANGE

CMS has only approved one new technology since these provisions were passed. This provision would allow more technologies to 

be covered and recognizes that the breakthrough technologies are 

new costs to the system. 

Section 503. Increase in Federal Rate for Hospitals in Puerto Rico 

CURRENT LAW

Under Medicare’s prospective payment system for inpatient services, a separate standardized amount is used to establish payments 

for discharges from short-term general hospitals in Puerto Rico. 

BBA 97 provides for an adjustment of the Puerto Rico rate from 

a blended amount based on 25 percent of the federal national 

amount and 75 percent of the local amount to a blended amount 

based on a 50/50 split between national and local amounts. 

EXPLANATION OF PROVISION

Hospitals in Puerto Rico would receive Medicare payments based 

on a 50/50 split between federal and local amounts before October 

1, 2003. From FY2004–FY2007, an increasing amount of the payment rate would be based on federal national rates as follows: during FY2004, payment would be 59 percent national and 41 percent 

local; this would change to 67 percent national and 33 percent local 

during FY2005 and 75 percent national and 25 percent local during 

FY2006 and subsequent years. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Puerto Ricans pay the full Hospital Insurance payroll tax but 

they are not afforded equal Medicare payments to their hospitals. 

219

This partially redresses the inequality between the rates, and is 

consistent with the MedPAC recommendation. 

Section 504. Wage Index Adjustment Reclassification Reform 

CURRENT LAW

Acute hospitals may apply to the Medicare Geographic Classification Review Board (MGCRB) for a change in classification from a 

rural area to an urban area, or reassignment from one urban area 

to another urban area, based on the level of wages. The MGCRB 

was created to determine whether a hospital should be redesignated to an area of close proximity for purposes of using that area’s 

standardized amount, wage index, or both. If the MGCRB grants 

reclassification, the new wage index would be used to calculate 

Medicare’s payment for inpatient and outpatient services. Generally, hospitals must demonstrate a close proximity to the areas 

where they seek to be reclassified. A hospital can meet this criteria 

if one of two conditions are met: (1) an urban hospital is no more 

than 15 miles and a rural hospital is no more than 35 miles from 

the area where it wants to be reclassified, or (2) at least 50 percent 

of the hospital’s employees are residents of the area. A rural referral center (RRC) or a sole community hospital (SCH) or a hospital 

that is both a RRC and a SCH does not have to meet the proximity 

criteria. After establishing appropriate proximity, a hospital may 

qualify for the payment rate of another area if it proves that its 

incurred costs are comparable to those of hospitals in that area 

under established criteria. To use an area’s wage index, a rural 

hospital must demonstrate that its average hourly wage is equal to 

at least 82 percent of the average hourly wage of hospitals in the 

area to which it seeks redesignation; an urban hospital must demonstrate that its average hourly wage is at least 84 percent of such 

an area. In addition, an urban hospital cannot be reclassified unless its average hourly wage is at least 108 percent of the average 

hourly wage of the area in which it is located. This standard is 106 

percent for rural hospitals seeking reclassification to another area. 

For redesignations starting in FY2003, the average hourly wage 

comparisons used to determine whether a hospital can use another 

area’s wage index are based on 3 years worth of lagged data submitted by hospitals as part of their cost report. For instance, 

FY2003 wage index reclassifications were based on weighted threeyear averages of average hourly wages using data from FY1997, 

FY1998, and FY1999 cost reports. Wage index reclassifications are 

effective for 3 years unless the hospital notifies the MCGRB and 

withdraws or terminates its reclassification. 

EXPLANATION OF PROVISION

The Secretary would be required to establish an application process and payment adjustment to recognize the commuting patterns 

of hospital employees. A hospital that qualified for such a payment 

adjustment would have average hourly wages that exceed the average wages of the area in which it is located and have at least ten 

percent of its employees living in one or more areas that have higher wage index values. This qualifying hospital would have its wage 

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age of its employees who live in these areas. The process would be 

based on the MGCRB reclassification process and schedule with respect to data submitted. Such an adjustment would be effective for 

three years unless a hospital withdraws or terminates its payment. 

A hospital that receives a commuting wage adjustment would not 

be eligible for reclassification into another area by the MCGRB for 

the purposes of using its wage index or standardized amount. 

These commuting wage adjustments would not affect the computation of the wage index of the area in which the hospital is located 

or any other area. It would also be exempt from certain budget 

neutrality requirements. 

ENACTMENT DATE

Upon enactment. 

REASON FOR CHANGE

Labor market areas may differ from the distance requirements in 

the regulations on reclassification. Thus, using commuting patterns 

of employees more clearly reflects the underlying labor market that 

hospitals confront. This policy will have the effect of blurring the 

current hard line of payment adjustments between two adjacent 

MSAs. 

Section 505. MedPAC Report on Specialty Hospitals 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

MedPAC would be required to conduct a study of specialty hospitals compared with other similar general acute hospitals including the number and extent of patients referred by physicians with 

an investment interest in the facility, the quality of care furnished, 

the impact of the specialty hospital on the acute general hospital, 

and the differences in the scope of services, Medicaid utilization 

and the amount of uncompensated care that is furnished. The report, including recommendations, would be due to Congress no 

later than 1 year from enactment. 

ENACTMENT DATE

Upon enactment. 

Subtitle B—Other Services 

Section 511. Payment for Covered Skilled Nursing Facility Services 

CURRENT LAW

Medicare uses a system of daily rates to pay for care in a skilled 

nursing facility (SNF). There are 44 daily rate categories, known 

as resource utilization groups (RUGs), and each group reflects a 

different case mix and intensity of services, such as skilled nursing 

care and/or various therapies and other services. 

221

EXPLANATION OF PROVISION

The per diem RUG payment for a SNF resident with acquired 

immune deficiency syndrome (AIDS) would be increased by 128 

percent. This payment increase would not apply after the date 

when the Secretary certifies that the SNF case mix adjustment 

adequately compensates for the facility’s increased costs associated 

with caring for a resident with AIDS. 

ENACTMENT DATE

The provision would be effective for services on or after October 

1, 2003. 

REASON FOR CHANGE

According to prior work by the Urban Institute, AIDS patients 

have much higher costs than other patients in the same resource 

utilization groups in skilled nursing facilities. The adjustment is 

based on that data analysis. 

Section 512. Coverage of Hospice Consultation Services 

CURRENT LAW

Current law authorized coverage of hospice services, in lieu of 

certain other Medicare benefits, for terminally ill beneficiaries who 

elect such coverage. 

EXPLANATION OF PROVISION

Coverage of certain physicians’ services for certain terminally ill 

individuals would be authorized. Persons entitled to these services 

would be individuals who have not elected the hospice benefit and 

have not previously received these physicians’ services. Covered 

services would be those furnished by a physician who is the medical director or employee of a hospice program. Services would include evaluating the individual’s need for pain and symptom management, counseling the individual with respect to end-of-life issues 

and care options, and advising the individual regarding advanced 

care planning. Payment for such services would equal the amount 

established for similar services under the physician fee schedule, 

excluding the practice expense component. 

EFFECTIVE DATE

The provision would apply to consultation services provided by a 

hospice program on or after January 1, 2004.

REASON FOR CHANGE

Many patients, especially those with congestive heart failure, are 

not educated about the option of receiving hospice services to alleviate their pain and suffering. Moreover, hospice lengths of stay 

keep dropping, suggesting that patients are referred too late in 

their illness. This provision would encourage physicians to talk 

more with patients about hospice. 

222

F. TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services 

Section 601. Revision of Updates for Physicians’ Services 

CURRENT LAW

Medicare pays for services of physicians and certain non-physician practitioners on the basis of a fee schedule. The fee schedule, 

in place since 1992, is intended to relate payments for a given service to the actual resources used in providing that service. The fee 

schedule assigns relative values to services. These relative values 

reflect physician work (i.e., the time, skill, and intensity it takes 

to provide the service), practice expenses, and malpractice costs. 

The relative values are adjusted for geographic variations in costs. 

The adjusted relative values are then converted into a dollar payment amount by a conversion factor. 

The law provides a specific formula for calculating the annual 

update to the conversion factor. The intent of the formula is to 

place a restraint on overall increases in spending for physicians’ 

services. Several factors enter into the calculation of the formula. 

These include: (1) the sustainable growth rate (SGR), which is essentially a target for Medicare spending growth for physicians’ 

services, (2) the Medicare economic index (MEI), which measures 

inflation in the inputs needed to produce physicians’ services, and 

(3) an adjustment that modifies the update, which would otherwise 

be allowed by the MEI, to bring spending in line with the SGR target. The SGR target is not a limit on expenditures. Rather, the fee 

schedule update reflects the success or failure in meeting the target. If expenditures exceed the target, the update for a future year 

is reduced. 

The annual percentage update to the conversion factor equals the 

MEI, subject to an adjustment (known as the update adjustment 

factor) to match target spending for physicians’ services under the 

SGR system. (During a transition period, 2001–2005, an additional 

adjustment is made to achieve budget neutrality.) The update adjustment sets the conversion factor at a level so that projected 

spending for the year would meet allowed spending by the end of 

the year. Allowed spending for the year is calculated using the 

SGR. However, in no case can the update adjustment factor be less 

than minus seven percent or more than plus three percent. 

The update adjustment factor is the sum of: (1) the prior year adjustment component, and (2) the cumulative adjustment component. The prior year adjustment component is determined by: (1) 

computing the difference between allowed expenditures for physicians’ services for the prior year and the amount of actual expenditures for that year, (2) dividing this amount by the actual expenditures for that year, and (3) multiplying that amount by 0.75. The 

cumulative adjustment component is determined by: (1) computing 

the difference between allowed expenditures for physicians’ services 

from April 1, 1996 through the end of the prior year and the 

amount of actual expenditures during such period, (2) dividing that 

difference by actual expenditures for the prior year as increased by 

the SGR for the year for which the update adjustment factor is to 

be determined, and (3) multiplying that amount by 0.33. 

223

The law also specifies a formula for calculating the SGR that is 

based on changes in four factors: (1) the estimated change in fees, 

(2) the estimated change in average number of Part B enrollees 

(excluding Medicare+Choice beneficiaries), (3) the estimated projected growth in real gross domestic product (GDP) per capita, and 

(4) the estimated change in expenditure due to changes in law or 

regulations. This formula is designed to adjust for how well actual 

expenditures meet SGR target expenditures. 

Provisions in the Consolidated Appropriations Resolution of 2003 

(P.L. 108–7) permitted redeterminations of SGR for prior years to 

correct for faulty data for the number of FFS beneficiaries in 1998 

and 1999. As a result, the conversion factor for 2003 was increased 

1.6 percent over the 2002 level. Other aspects of the formula for 

the annual payment rate were not addressed. 

CMS estimates an update of ¥4.2 percent for 2004, followed by 

a smaller negative update in 2005. 

EXPLANATION OF PROVISION

The update to the conversion factor for 2004 and 2005 would be 

not less than 1.5 percent. 

The formula for calculating the sustainable growth rate would be 

modified. Starting in 2003, the GDP factor would be based on the 

annual average change over the preceding 10 years (a 10-year rolling average.) The current GDP factor measures the 1-year change 

from the preceding year. 

EFFECTIVE DATE

Upon enactment. The 10-year rolling average calculation of the 

GDP would apply to computations of the SGR starting in 2003. 

REASON FOR CHANGE

CMS actuaries project a ¥4.2 percent update for 2004 and a 

smaller negative update for 2005. This provision would prevent 

those negative updates from occurring, and provide for modest increases in physician payment rates. These modest increases would 

ensure continuing access to physician services for Medicare beneficiaries.

The provision also includes a 10-year rolling average calculation 

of GDP as a modest change to the update formula. This change 

would promote stability in the physician updates over time by limiting the volatility of the SGR payments, which now oscillate dramatically based on year-to-year changes in economic performance. 

Section 602. Studies on Access to Physicians Services 

CURRENT LAW

Periodic analyses by the Physician Payment Review Commission, 

MedPAC, and CMS showed that access to physicians’ services remained generally adequate for most beneficiaries through 1999. 

Detailed data is not available for a subsequent period; however, 

several recent surveys show a decline in the percentage of physicians accepting new Medicare patients. 

224

EXPLANATION OF PROVISION

GAO would be required to conduct a study on access of Medicare 

beneficiaries to physicians’ services under Medicare. The study 

would include an assessment of beneficiaries’ use of services 

through an analysis of claims data. It would also examine changes 

in use of physicians’ services over time. Further, it would examine 

the extent to which physicians are not accepting new Medicare 

beneficiaries as patients. GAO would be required to submit a report to Congress on this study within 18 months of enactment. The 

report would include a determination whether data from claims 

submitted by physicians indicate potential access problems for 

beneficiaries in certain geographic areas. The report would also include a determination whether access by beneficiaries to physicians’ services has improved, remained constant, or deteriorated 

over time. 

The Secretary would be required to request the Institute of Medicine to conduct a study on the adequacy of the supply of physicians 

(including specialists) in the country and the factors that affect 

supply. The Secretary would be required to submit the results of 

the study in a report to Congress no later than 2 years of the date 

of enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 603. MedPAC Report on Payment for Physicians’ Services 

CURRENT LAW

Medicare pays for physicians’ services on the basis of a fee schedule. The fee schedule assigns relative values to services. These relative values reflect physician work, practice expenses and malpractice expenses. Resource-based practice expense relative values 

were phased-in beginning in 1999. Beginning in 2002, the values 

were totally resource-based. 

Certain services have a professional component and a technical 

component. The technical component does not include a relative 

value for physician work. A global value includes both the professional and technical components. The physician must bill for the 

global value if the physician furnishes both the professional component and the technical component. 

EXPLANATION OF PROVISION

MedPAC would be required to report to Congress on the effects 

of refinements to the practice expense component in the case of 

services for which there are no physician work relative value units. 

The report is to examine the following by specialty: (1) the effects 

of refinements on payments for physicians services, (2) interaction 

of the practice expense component with other components of and 

adjustments to payment for physicians’ services, (3) appropriateness of the amount of compensation by reason of such refinements, 

(4) effect of such refinements on access to care by Medicare beneficiaries to physicians’ services, and (5) effect of such refinements 

on physician participation under the Medicare program. The report 

would be due within one year of enactment. 

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EFFECTIVE DATE

Upon enactment. 

Subtitle B—Preventive Services 

Section 611. Coverage of an Initial Preventive Physical Examination 

CURRENT LAW

Medicare covers a number of preventive services. However, it 

does not cover routine physical examinations. 

EXPLANATION OF PROVISION

Medicare would cover an initial free preventive physical examination. The physical examination would be defined as physicians’ 

services consisting of a physical examination with the goal of 

health promotion and disease detection. It would include items and 

services (excluding clinical laboratory tests) consistent with the recommendations of the United States Preventive Services Task Force 

as determined by the Secretary. A covered initial preventive physical examination would be one performed no later than six months 

after the individual’s initial coverage date under Part B. Initial 

preventive physical exams would be included in the definition of 

physicians’ services for purposes of the physician fee schedule. The 

Part B deductible and coinsurance would be waived for initial preventive physical exams. 

EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2004 for those individuals whose coverage begins on or after 

such date.

REASON FOR CHANGE

The US Preventive Services Task Force has recommended coverage of a preventive physical exam. An initial physical exam for 

new Medicare beneficiaries would permit identification of any 

health problems and allow for initiation of appropriate treatment, 

thereby reducing more acute and expensive interactions with the 

health care system in the future. 

Section 612. Coverage of Cholesterol and Blood Lipid Screening 

CURRENT LAW

Medicare covers a number of preventive services. However, it 

does not cover cholesterol and blood lipid screening. 

EXPLANATION OF PROVISION

Medicare coverage of cholesterol and blood lipid screening would 

be authorized. The screening would be defined as diagnostic testing 

of cholesterol and other lipid levels of the blood for the purpose of 

early detection of abnormal cholesterol and other lipid levels. The 

Secretary would be required to establish standards regarding the 

frequency and type of these screening tests, but not more often 

than once every two years. 

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EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2005. 

REASON FOR CHANGE

The US Preventive Services Task Force has recommended coverage of cholesterol and blood lipid screening for the elderly. This 

preventive care benefit would allow for early detection and treatment of health problems. 

Section 613. Waiver of Deductible for Colorectal Cancer Screening 

Tests 

CURRENT LAW

Covered colorectal screening tests for prevention purposes include: (1) an annual fecal-occult blood test for individuals age 50 

and older, (2) flexible sigmoidoscopy every four years for individuals age 50 and older, (3) colonoscopy for high-risk individuals 

every two years and for other individuals every 10 years, and (4) 

screening barium enemas every four years for individuals age 50 

and older who are not at high risk of developing colorectal cancer 

or every two years for high risk individuals. Payment is made according to the applicable payment system for the provider performing the test. 

Colorectal cancer screening tests are subject to beneficiary cost 

sharing amounts, including an annual deductible and coinsurance 

amount. 

EXPLANATION OF PROVISION

The Part B deductibles would be waived for colorectal cancer 

screening tests. 

EFFECTIVE DATE

The provision would apply to items and services furnished on or 

after January 1, 2004. 

REASON FOR CHANGE

Beneficiaries have not availed themselves of preventive colorectal 

cancer screening tests to the extent anticipated after Medicare coverage of these tests became available under BBA 97. This provision 

would waive the deductible to increase beneficiary use of these important screening tests. 

Section 614. Improved Payment for Certain Mammography Services 

CURRENT LAW

Screening mammography coverage includes the radiological procedure as well as the physician’s interpretation of the results of the 

procedure. The usual Part B deductible is waived for tests. Payment is made under the physician fee schedule. 

Certain services paid under fee schedules or other payment systems including ambulance services, services for patients with endstage renal disease paid under the ESRD composite rate, professional services of physicians and non-physician practitioners paid 

227

under the physician fee schedule, and laboratory services paid 

under the clinical diagnostic laboratory fee schedule are excluded 

from Medicare’s HOPD PPS. 

EXPLANATION OF PROVISION

Unilateral and bilateral diagnostic mammography as well as 

screening mammography services would be excluded from the 

HOPD PPS. The Secretary would be required to provide an appropriate adjustment to the physician fee schedule for the technical 

component of the diagnostic mammography based on the most recent cost data available. This adjustment would be applied to services provided on or after January 1, 2004. 

EFFECTIVE DATE

The provision would apply to mammography performed on or 

after January 1, 2004. 

REASON FOR CHANGE

Mammography services are paid at a much lower rate under the 

HOPD PPS than in the physician office. This establishes a level 

playing field across sites of service, thereby increasing beneficiary 

access to important preventive services. 

Subtitle C—Other Services 

Section 621. Hospital Outpatient Department (HOPD) Payment Reform 

(a) Payment for Drugs 

CURRENT LAW

Under the HOPD PPS, the unit of payment is the individual 

service or procedure as assigned to one of about 570 ambulatory 

payment classifications (APCs) groups. Services are classified into 

APCs based on their Health Care Common Procedure Coding System (HCPCS), a standardized coding system used to identify products, supplies, and services for claims processing and payment purposes. To the extent possible, integral services and items including 

drugs are bundled or packaged within each APC. For instance, an 

APC for a surgical procedure would include operating and recovery 

room services, anesthesia and surgical supplies. Medicare’s payment for HOPD services is calculated by multiplying the relative 

weight associated with an APC by a geographically adjusted conversion factor. The conversion factor is updated on a calendar year 

schedule and the annual updates are based on the hospital market 

basket (MB). Currently, the CY 2004 HOPD update would equal 

the projected change in the MB. 

Medicare pays for covered outpatient drugs in one of three ways: 

(1) as a transitional pass-through, (2) as a separate APC, or (3) 

packaged into an APC with other services. 

Transitional pass-through payments are supplemental payments 

to cover the incremental cost associated with certain medical devices, drugs and biologicals that are inputs to an existing service. 

The additional payment for a given item is established for two or 

three years and then the costs are incorporated into the APC relVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00227 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ative weights. BBRA specified that pass-through payments would 

be made for current orphan drugs, as designated under section 526 

of the Federal Food, Drug, and Cosmetic Act; current cancer therapy drugs, biologicals, and brachytherapy; current 

radiophamaceutical drugs and biological products; and new drugs 

and biological agents. 

Generally, CMS has established that a pass-through payment for 

an eligible drug is based on the difference between 95 percent of 

its average wholesale price and the portion of the otherwise applicable APC payment rate attributable to the existing drug, subject 

to a budget neutrality provision. The pass-through amount for new 

drugs with a substitute drug recognized in a separate drug APC 

payment is the difference between 95 percent of new drug AWP 

and the payment rate for the comparable dose of the associated 

drug APC. 

Hospital costs for these drugs are used to establish the beneficiary copayment amounts as well as to project the amount of 

pass-through spending to calculate the uniform reduction to payments under the budget neutrality constraint. These hospital costs 

are imputed by multiplying the drug’s AWP by the applicable cost 

to charge ratio, which varies by the class of drug. Although transitional pass-through payments are subject to a budget neutrality requirement, the applicable budget neutrality requirement (2.5 percent through CY2003) was not effective until April 2002. 

Current drugs and biologicals that have been in transitional 

pass-through status on or prior to January 1, 2000, were removed 

from that payment status effective January 1, 2003. CMS established separate APC payments for certain drugs, including orphan 

drugs, blood and blood products, and selected higher cost drugs in 

CY2003. CMS established a threshold of $150 for a drug to qualify 

for a separate APC payment as a higher-cost drug. Other drugs 

that had qualified for a transitional pass-through payment were 

packaged in to procedural APCs. For example, in some instances, 

brachytherapy seeds (radioactive isotopes used in cancer treatments) were packaged into payments for brachytherapy procedures. 

Essentially, the payment rates for these drug-related APCs are 

based on a relative weight calculated in the same way as procedural APCs are calculated. 

Temporary HCPCS codes are used exclusively to bill passthrough payments for new technology items paid under the HOPD 

PPS. These codes cannot be used to bill other Medicare payment 

systems. These codes are added, changed or deleted on a quarterly 

basis to expedite the processing of requests for pass-through status. 

EXPLANATION OF PROVISION

Starting for services furnished on or after January 1, 2004, certain covered HOPD drugs would be paid no more than 95 percent 

of AWP or less than the transition percentage of the AWP from 

CY2004 through CY2006. In subsequent years, payment would be 

equal to average price for the drug in the area and year established 

by the competitive acquisition program under 1847A. The covered 

HOPD drugs affected by this provision are radiopharmaceuticals 

and outpatient drugs that were paid on a pass-through basis on or 

before December 31, 2002. These would not include drugs for which 

pass-through payments are first made on or after January 1, 2003, 

229

or those drugs for which a temporary HCPCS code has not been assigned. Drugs for which a temporary HCPCS code has not been assigned would be reimbursed at 95 percent of AWP. 

The transition percentage to AWP for sole-source drugs manufactured by one entity is 83 percent in CY2004, 77 percent in CY2005, 

and 71 percent in CY2006. The transition percentage to AWP for 

innovator multiple source drugs is 81.5 percent in CY2004, 75 percent in CY2005, and 68 percent in CY2006. The transition percentage to AWP for multiple source drugs with generic drug competitors is no more than 46 percent in CY2004 through CY2006. Generally, a multiple source drug is a covered drug for which there are 

two or more therapeutically equivalent drug products. An innovator 

multiple source drug is a multiple source drug that was originally 

marketed under an original new drug application approved by the 

Food and Drug Administration (FDA). A sole source drug is not a 

multiple source drug. The additional expenditures resulting from 

these provisions would not be subject to the budget neutrality requirement.

Starting in CY2004, the Secretary would be required to lower the 

threshold for establishing a separate APC group for higher cost 

drugs from $150 to $50. These separate drug APC groups would 

not be eligible for outlier payments because their payment already 

increases when the dose increases. 

Starting in CY2004, Medicare’s transitional pass-through payments for drugs and biologicals covered under a competitive acquisition contract would reflect the amount paid under that contract, 

not 95 percent of AWP. 

REASON FOR CHANGE

A GAO study found significant problems with the reimbursement 

for drugs and biologicals under the hospital outpatient system. 

Some drugs were reimbursed a small amount of AWP while others 

were paid far in excess of AWP. Hospital charges were not designed to specifically capture the resource costs for specific items. 

Some hospitals charge a flat markup on all drugs; some hospitals 

charge a lower markup on low cost drugs compared to high cost 

drugs while others do the opposite. As a result, the APC drug 

prices ranged from paying 0.2 percent of AWP to 29,000 percent of 

95 percent AWP, and paid the median generic drugs more than 

sole source drugs. This provision establishes a glide path to the 

hospital acquisition cost numbers from the Kathpol survey undertaken by CMS. Thereafter, a level playing field with drug prices 

across sites of service would be established. CMS is asked to collect 

data from hospitals on their acquisition to be used to adjust the 

rates if necessary. 

(b) Special Payment for Brachytherapy 

CURRENT LAW

Current drugs and biologicals that have been in transitional 

pass-through status on or prior to January 1, 2000 were removed 

from that payment status effective January 1, 2003. CMS established separate APC payments for certain drugs, including orphan 

drugs, blood and blood products, and selected higher cost drugs in 

CY2003. CMS established a threshold of $150 per claim for a drug 

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to qualify for a separate APC payment as a higher-cost drug. Other 

drugs that had qualified for a transitional pass-through payment 

were packaged into procedural APCs. For example, in some instances, brachytherapy seeds (radioactive isotopes used in cancer 

treatments) were packaged into payments for brachytherapy procedures. Essentially, the payment rates for these drug-related APCs 

are based on a relative weight calculated in the same way as procedural APCs are calculated. 

EXPLANATION OF PROVISION

From January 1, 2004 through December 31, 2006, Medicare’s 

payments for brachytherapy devices would equal the hospital’s 

charges adjusted to costs. The Secretary would be required to create separate APCs to pay for these devices that reflect to the number, isotope, and radioactive intensity of such devices. This would 

include separate groups for palladium-103 and iodine-125 devices. 

GAO would be required to study the appropriateness of payments 

for brachytherapy devices and submit a report including recommendations to Congress no later than January 1, 2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The amount of seeds necessary to treat the patient can vary significantly. This changes the payment methodology to reflect differences in clinical resources. 

(c) Functional Equivalence 

CURRENT LAW

In the November 1, 2002, Federal Register final rule, CMS decided that a new anemia treatment for cancer patients was no 

longer eligible for pass-though payments because it was functionally equivalent (although not structurally identical or therapeutically equivalent) to an existing treatment. The transitional passthrough rate for the drug was reduced to zero starting for services 

in 2003. 

EXPLANATION OF PROVISION

The Secretary would be prohibited from applying a functional 

equivalence standard or any similar standard that deems a particular drug or biological to be similar or identical to another drug 

(and therefore ineligible for pass-through payment status) without 

first developing these standards by regulation. Such regulation 

would be required to: (1) be published after a public comment period, (2) contain criteria that provides for coordination with the 

Food and Drug Administration, and (3) be based on scientific studies that demonstrate the clinical relationship between the drugs in 

question. This provision would apply to the application of a functional equivalent determination on or after the date of enactment. 

The provision prohibits the application of this standard to a drug 

or biological prior to June 13, 2003. 

231

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The concept of functional equivalence is new to the Medicare program and should be open to comment by Congress and the public 

through proposed rulemaking. The FDA should be involved since 

these are scientific issues for which CMS lacks expertise.

(d) Hospital Acquisition Cost Study 

CURRENT LAW

CMS estimates hospital costs to establish beneficiary copayment 

amounts as well as to project the amount of pass-through spending 

to calculate the uniform reduction to payments under the budget 

neutrality constraint. These hospital costs are imputed by multiplying AWP for the drug by the applicable cost to charge ratio, 

which varies by the class of drug. 

EXPLANATION OF PROVISION

The Secretary would be required to study the hospital acquisition 

costs related to covered outpatient drugs that cost $50 and more 

that are reimbursed under the HOPD PPS. The study would encompass a representative sample of urban and rural hospitals. The 

report should include recommendations on the usefulness of the 

cost data and frequency of subsequent data collection and would be 

due to Congress no later than January 1, 2006. The report should 

also discuss whether the data is appropriate for making adjustments to payments made under the competitive acquisition contract established by section 1847A and whether separate estimates 

should be made for overhead costs (i.e. handling and administering 

drugs). 

EFFECTIVE DATE

Upon enactment. 

Section 622. Payment for Ambulance Services 

CURRENT LAW

Traditionally, Medicare has paid suppliers of ambulance services 

on a reasonable charge basis and paid provider-based ambulances 

on a reasonable cost basis. BBA 97 provided for the establishment 

of a national fee schedule, which was to implemented in phases, in 

an efficient and fair manner. The required fee schedule became effective April 1, 2002, with full implementation by January 2006. In 

the transition period, a gradually decreasing portion of the payment is to be based on the prior payment methodology (either reasonable costs or reasonable charges). 

The fee schedule payment amount equals the base rate for the 

level of service plus payment for mileage and specified adjustment 

factors. Additional mileage payments are made in rural areas. 

BIPA increased payment for rural ambulance mileage for distances 

greater than 17 miles and up to 50 miles for services provided before January 1, 2004. The amount of the increase was at least oneVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00231 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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half of the payment per mile established in the fee schedule for the 

first 17 miles of transport. 

EXPLANATION OF PROVISION

The phase-in methodology and schedule for full implementation 

of the ambulance fee schedule would be modified. The calculation 

of ambulance fees in the phase-in period would incorporate a decreasing portion of the payment based on regional fee schedules 

calculated for each of nine census regions for those regions that 

lose financially under the fee schedule. Generally, the regional fee 

schedules would be based on the same methodology and data used 

to construct the national fee schedule. For services provided in 

2004, the blended rate would be based on 20 percent of the national fee schedule and 80 percent of the regional fee schedule; in 

2005 blended rate would be based on a 40 percent national and 60 

percent regional split; in 2006, the blended rate would be based on 

a 60 percent national and 40 percent regional split; from 2007–

2009, the blended rate would be based on an 80 percent national 

and 20 percent regional split; and in 2010 and subsequently, the 

ambulance fee schedule would be based on the national fee schedule. 

Medicare’s payments for ground ambulance services would be increased by one quarter of the amount otherwise established for 

trips longer than 50 miles occurring on or after January 1, 2004 

and before January 1 2009. The payment increase would apply regardless of where the transportation originated. GAO would be required to submit an initial report to Congress on the access and 

supply of ambulance services in regions and states where ambulance payments are reduced by December 31, 2005. GAO would be 

required to submit a final report to Congress by January 1, 2004. 

EFFECTIVE DATE

The provision would apply to ambulance services furnished on or 

after January 1, 2004. 

REASON FOR CHANGE

New PPS systems cannot capture all the reasons for past regional differences in cost. This proposal is modeled on the transition of the hospital inpatient PPS and acts to slow down the losses 

in regions that lose significantly under the new fee schedule. 

Section 623. Renal Dialysis Services 

(a) Demonstration of Alternative Delivery Models 

CURRENT LAW

The Secretary announced a demonstration project establishing a 

disease-management program that would allow organizations experienced with treating end-stage renal disease (ESRD) patients to 

develop financing and delivery approaches to better meet the needs 

of beneficiaries with ESRD. CMS is soliciting a variety of types of 

organizations to coordinate care to patients with ESRD, encourage 

the provision of disease-management services for these patients, 

collect clinical performance data and provide incentives for more effective care. 

233

EXPLANATION OF PROVISION

The provision would require the Secretary to establish an advisory board for the ESRD disease management demonstration. The 

advisory board would be comprised of representatives patient organizations, clinicians, MedPAC, the National Kidney Foundation, 

the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health, ESRD networks, Medicare contractors to monitor quality of care, providers of services 

and renal dialysis facilities furnishing end-stage renal disease services, economists, and researchers. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision would allow more patient oversight of the demonstration of changes to the payments system for such a frail population. 

(b) Restoring Composite Rate Exceptions for Pediatric Facilities 

CURRENT LAW

Prior to BIPA, an increase in the composite rate would trigger 

an opportunity for facilities to request an exception to the composite rate in order to receive higher payments. BIPA prohibited 

the Secretary from granting new exceptions to the composite rate 

from applications received after July 1, 2001. 

EXPLANATION OF PROVISION

The prohibition on exceptions would not apply to pediatric ESRD 

facilities as of October 1, 2002. Pediatric facilities would be defined 

as a renal facility with 50 percent of its patients under 18 years 

old. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Pediatric patients require more nursing oversight and more time 

to receive dialysis treatment. This would recognize the higher costs 

of facilities that treat these patients. 

(c) Increase in Renal Dialysis Composite Rate for Services 

Furnished in 2004 

CURRENT LAW

Dialysis facilities providing care to beneficiaries with end-stage 

renal disease (ESRD) receive a fixed prospectively determined payment amount (the composite rate) for each dialysis treatment. 

BBRA increased the composite rates by 1.2 percent for dialysis 

services furnished in both 2000 and 2001. BIPA subsequently increased the mandated 2001 update to 2.4 percent, an increase that 

was to be implemented on the following schedule in order to avoid 

234

a disruption in claims processing: for services furnished from January through March, 2001, the 1.2 percent increase specified by 

BBRA applied; for the remainder of 2001, a transition increase of 

2.79 percent applied. Effective January 1, 2002, the composite rates 

reflected the 2.4 percent increase. There is no rate increase scheduled for ESRD composite payment rate in 2004. 

EXPLANATION OF PROVISION

The provision would increase the ESRD composite payment rate 

by 1.6 percent for 2004. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Medicare Payment Advisory Commission recommended this 

increase in the composite rate for 2004. 

Section 624. One-Year Moratorium on Therapy Caps; Provisions Relating to Reports 

CURRENT LAW

BBA 97 established annual payment limits per beneficiary for all 

outpatient therapy services provided by non-hospital providers. The 

limits applied to services provided by independent therapists as 

well as to those provided by comprehensive outpatient rehabilitation facilities (CORFs) and other rehabilitation agencies. There are 

two beneficiary limits. The first is a $1,500 per beneficiary annual 

cap for all outpatient physical therapy services and speech language pathology services. The second is a $1,500 per beneficiary 

annual cap for all outpatient occupational therapy services. Beginning in 2002, the amount increases by the Medicare Economic 

Index (MEI), rounded to the nearest multiple of $10. The limits do 

not apply to outpatient services provided by hospitals. BBRA 99 

percent suspended application of the therapy limits in 2000 and 

2001. BIPA extended the suspension through 2002. Although the 

therapy caps were scheduled for implementation in January 2003, 

they are not yet being enforced. CMS has scheduled implementation for July 2003. 

Therapy patients must be under the care of a physician. The 

physician or therapist must develop a treatment plan, and the physician must review the plan periodically. 

BBA 97 required the Secretary to report to Congress by January 

1, 2001, on recommendations for a revised coverage policy of outpatient physical therapy and occupational therapy services based 

on a classification of individuals by diagnostic category and prior 

use of services, in both inpatient and outpatient settings, in place 

of uniform dollar limitations. BIPA required the Secretary to conduct a study on the implications of eliminating Medicare’s in-room 

supervision requirement for physical therapy assistants supervised 

by physical therapists its implication on the physical therapy cap. 

A report on the study was due within 18 months of enactment. 

235

EXPLANATION OF PROVISION

Application of the therapy caps would be suspended during CY 

2004. The Secretary would be required to submit the reports required by BBA 97 and BIPA by December 31, 2003. The Secretary 

would be required to request the Institute of Medicine to identify 

conditions or diseases that should justify conducting an assessment 

of the need to waive the therapy caps. The Secretary would be required to submit to Congress a preliminary report on the conditions 

and diseases identified by July 1, 2004. A final report, including 

recommendations, would be due by October 1, 2004. 

GAO would be required to conduct a study on access to physical 

therapist services in states authorizing access to such services 

without a physician referral compared to states that require such 

a physician referral. The study would: (1) examine the use of and 

referral patterns for physical therapist services for patients age 50 

and older in states that authorize such services without a physician 

referral and in states that require such a referral, (2) examine the 

use of and referral patterns for physical therapist services for patients who are Medicare beneficiaries, (3) examine the physical 

therapist services within the facilities of the Department of Defense, and (4) analyze the potential impact on beneficiaries and on 

Medicare expenditures of eliminating the need for a physician referral for physical therapist services under the Medicare program. 

GAO would be required to submit a report to Congress on the 

study within one year of enactment. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Secretary has not provided a recommendation to Congress of 

criteria, with respect to conditions and diseases, under which a 

waiver of therapy caps would apply for individual Medicare beneficiaries. The implementation of therapy caps would be waived for 

2004 because the Secretary has failed to provide a recommendation. The Secretary would have until October 1, 2004 to provide a 

recommendation to Congress. 

Section 625. Adjustment to Payments for Services Furnished in Ambulatory Surgical Centers 

CURRENT LAW

Medicare uses a fee schedule to pay for the facility services related to a surgery provided in an ACS. The associated physician 

services (surgery and anesthesia) are reimbursed under the physician fee schedule. CMS maintains the list of approved ASC procedures that is required to be updated every 2 years. The Secretary 

is required to update ASC rates based on a survey of the actual audited costs incurred by a representative sample of ASCs every 5 

years beginning no later than January 1, 1995. Between revisions, 

the rates are to be updated annually on a calendar year schedule 

using the CPI–U. From FY1998 through FY2002, the update was 

established as the CPI–U minus 2.0 percentage points, but not less 

than zero. 

236

EXPLANATION OF PROVISION

The update would be reduced two percentage points for five 

years. ASCs would get an increase calculated as the CPI–U minus 

2.0 percentage points (but not less than zero) in each of the fiscal 

years from 2004 through 2008. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC made three recommendations regarding ASCs, including a freeze on payments for 2004. This update would allow ASCs 

a small increase in payments while a more permanent solution is 

developed. The Committee urges CMS and ASCs to complete the 

collection of recent ASC charge and cost data, so that the ASC payment system can be analyzed and revised. Furthermore, the Committee recognizes the inconsistency in payments to ASCs and 

HOPD PPS rates for the same procedures. ASCs are urged to cooperate with CMS in providing recent charge and cost data to prevent changes to ASC payments that might not be supported if full 

data were available. 

Section 626. Payment for Certain Shoes and Inserts under the Fee 

Schedule for Orthotics and Prosthetics 

CURRENT LAW

Subject to specified limits and under certain circumstances, 

Medicare would pay for extra-depth shoes with inserts or custom 

molded shoes with inserts for an individual with severe diabetic 

foot disease. Coverage is limited to one of the following within a 

calendar year: (1) one pair of custom-molded shoes (including inserts provided with such shoes) and two additional pairs of inserts, 

or (2) one pair of extra-depth shoes (not including inserts provided 

with such shoes) and three pairs of inserts. An individual may substitute modifications of custom-molded or extra-depth shoes instead 

of obtaining one pair of inserts, other than the initial pair of inserts. Footwear must be fitted and furnished by a podiatrist or 

other qualified individual such as a pedorthist, orthotist, or prosthetist. The certifying physician may not furnish the therapeutic 

shoe unless the physician is the only qualified individual in the 

area. 

Payment is made on a reasonable charge basis, subject to upper 

limits established by the Secretary. These limits are based on 1988 

amounts that were set forth in Section 1833(o) of the Act and then 

adjusted by the same percentage increases allowed for DME fees 

except that if the updated limit is not a multiple of $1, it is rounded to the nearest multiple of $1. The Secretary or a carrier may 

establish lower payment limits than established by statute if shoes 

and inserts of an appropriate quality are readily available at lower 

amounts. 

Although updates in payment for diabetic shoes is related to that 

used to increase the DME fee schedule, the shoes are not subject 

to DME coverage rules or the DME fee schedule. In addition, diaVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00236 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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betic shoes are neither considered DME nor orthotics, but a separate category of coverage under Medicare Part B. 

EXPLANATION OF PROVISION

Payment for diabetic shoes would be limited by the amount that 

would be paid if they were considered to be a prosthetic or orthotic 

device. The Secretary or a carrier would be able to establish lower 

payment limits than these amounts if shoes and inserts of an appropriate quality are readily available at lower amounts. The Secretary would be required to establish a payment amount for an individual substituting modifications to the covered shoe that would 

assure that there is no net increase in Medicare expenditures. 

EFFECTIVE DATE

The provision would apply to items furnished on or after January 

1, 2004. 

REASON FOR CHANGE

The payment for shoes was determined based on an arbitrary 

amount set in the statute. The amount exceeded the retail price for 

some comparable items. This treats diabetic shoes the same as all 

other durable medical equipment. 

Section 627. Waiver of Part B Late Enrollment Penalty for Certain 

Military Retirees; Special Enrollment Period 

CURRENT LAW

A late enrollment penalty is imposed on beneficiaries who do not 

enroll in Medicare Part B upon becoming eligible for Medicare. 

EXPLANATION OF PROVISION

Congress enacted TRICARE for Life, which re-established 

TRICARE health care coverage as a wraparound to Medicare for 

military retirees, age 65 and older. To take advantage of the 

TRICARE for Life program, military retirees must be enrolled in 

Medicare Part B. There is a late enrollment penalty for military retirees who do not enroll in Medicare Part B upon becoming eligible 

for Medicare. This provision would waive the late enrollment penalty for military retirees, 65 and older, who enroll(ed) in the 

TRICARE for Life program from 2001–2004. 

The Secretary would also be required to provide a special enrollment period for these military retirees beginning as soon as possible after enactment and ending December 31, 2004. For the individual who enrolls during the special enrollment period, coverage 

would begin on the first day of the month, following the month in 

which the individual enrolled. 

EFFECTIVE DATE

The provision would apply to premiums for months beginning 

with January 2004. A method would be established to provide rebates of premium penalties paid for by military retirees for months 

on or after January 2004. 

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REASON FOR CHANGE

The Floyd A. Spence National Defense Authorization Act for FY 

2001 opened TRICARE to Medicare-eligible military retirees for the 

first time, allowing them to keep their military health benefits past 

the age of 65. This benefit became available for the first time on 

January 1, 2001. 

This provision would eliminate two barriers prevent many retirees from accessing these benefits. First, many retirees who received 

military care in military health facilities on a space-available basis 

did not purchase Part B coverage when initially eligible. Upon late 

enrollment, they must pay a 10 percent penalty for each year that 

enrollment was delayed. Second, because Medicare enrollment is 

only available during an annual open enrollment season, from January 1 to March 31 each year, many retirees would have to wait 

until 2004 to secure coverage. 

The waiver of the late-enrollment penalty and provision for a 

special enrollment period would remove these barriers. 

Section 628. Part B Deductible 

CURRENT LAW

Under Part B, Medicare generally pays 80 percent of the approved amount for covered services after the beneficiary pays an 

annual deductible of $100. The Part B deductible has set at $100 

since 1991. 

EXPLANATION OF PROVISION

The Medicare Part B deductible would rise from $100 in 2003 to 

$104 in 2004, and grow with Medicare inflation thereafter. As a result, the Part B deductible would grow at the same rate as expenditures per capita for Part B services. The amount would be rounded 

to the nearest dollar. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

In 1966, Medicare’s $50 Part B deductible equaled about 45 percent of Part B charges. Today’s $100 deductible equals about three 

percent of such charges. Indexing the Part B deductible to grow at 

the same rate as total Part B spending per beneficiary would maintain the deductible at 3 percent of such charges over time. 

An unchanged Part B deductible is a benefit increase over time, 

as costs of medical care rise. Beneficiaries pay about 25 percent of 

this benefit increase, through increased Part B premiums; taxpayers finance the remaining 75 percent. The Part B deductible 

has increased only three times since the beginning of Medicare, 

when it was $50. The deductible has since been increased to $60 

in 1973, $75 in 1982, and $100 in 1991. About one-half of beneficiaries are insulated from Part B deductibles through Medigap, 

Medicaid, or employer-sponsored supplemental insurance that covers the Part B deductible. 

239

Section 629. Extension of Coverage of Intravenous Immune Globulin 

(IVIG) for the Treatment of Primary Immune Deficiency Diseases in the Home 

CURRENT LAW

Currently, Medicare provides reimbursement under Part B for 

the infusion of IVIG in a hospital outpatient or physician office setting. 

EXPLANATION OF CHANGE

The proposal would permit patients with primary immune deficiency to receive IVIG at home instead of in the currently covered 

settings. Unlike the other settings, however, home coverage would 

include only the cost of the drug; patients would be responsible for 

the cost of a nurse or other health care professional to administer 

the infusion. 

EFFECTIVE DATE

Applies to items furnished on or after January 1, 2004. 

REASON FOR CHANGE

Primary immune deficiency diseases are inherited disorders in 

which parts of the body’s immune system are missing or do not 

function properly. These disorders affect more than 50,000 Americans. In order to maintain their health, most primary immune deficiency patients require monthly infusions of a plasma derivative 

known as intravenous immune globulin (IVIG). Without this life 

saving therapy, primary immune deficient patients would be subject to serious infection, illness and premature death. 

Given their compromised immune systems, these patients are 

particularly vulnerable to the many infections to which individuals 

in a hospital or other health care facility are exposed. Home coverage of these infusions for appropriate patients would reduce this 

health risk and be significantly more convenient. 

The Balanced Budget Refinement Act directed the Department of 

Health and Human Services to study the feasibility of allowing the 

existing covered drug to be reimbursed when delivered in the 

home. The study, conducted by the Lewin Group, examined issues 

such as cost, safety, access to care, and the practices of private insurers. The study concluded home coverage of IVIG is appropriate. 

G. TITLE VII—PROVISIONS RELATING TO PARTS A AND B 

Subtitle A—Home Health Services 

Section 701. Update in Home Health Services 

CURRENT LAW

Home health service payments are increased on a federal fiscal 

year basis that begins in October. The FY 2004 statutory update 

would be the full increase in the market basket index. 

EXPLANATION OF PROVISION

This provision would increase home health agency payments by 

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centage points for 2004 through 2006. The update for subsequent 

years would be the full market basket percentage increase. The 

provision would also change the time frame for the update from the 

federal fiscal year to a calendar year basis. The home health prospective payment rates would not increase for the October 1 

through December 31, 2003, period. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Medicare Payment Advisory Commission recommended that 

Congress should eliminate the update to payment rates for home 

health services for fiscal year 2004. The Medicare margins for all 

agencies are 23.3 percent, even given the October 1, 2003 reduction. The mb-0.4 provides substantial payment increases for home 

heath agencies. However, they would be lower than current law 

and would provide stability.

Section 702. Establishment of Reduced Copayment for a Home 

Health Service Episode of Care for Certain Beneficiaries 

CURRENT LAW

The home health benefit does not have any cost sharing requirement. 

EXPLANATION OF PROVISION

This provision would establish a beneficiary copayment for each 

60–day episode of care beginning January 1, 2004. The amount of 

the copayment would be 1.5 percent of the national average payment per episode in a calendar year, as projected by the Secretary 

before the beginning of the year. The copayment amount would be 

rounded to the nearest multiple of five dollars. For 2004, the copayment would be $40 unless the Secretary provides the results of the 

statutory formula in a timely manner. Medicare payment for each 

episode would be reduced to reflect the copayment amount. Qualified Medicare beneficiaries (low-income beneficiaries for whom 

Medicaid pays Medicare premiums, deductibles, and coinsurance), 

beneficiaries dually eligible for Medicare and Medicaid, and beneficiaries receiving five or fewer home health visits per episode of 

care would not face any cost-sharing requirements. Administrative 

and judicial review of the calculated copayment amounts would be 

prohibited. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Unlike almost all Part B services, the Medicare home health benefit does not have a copayment. The typical beneficiary receives 

about $3,000 worth of free home health care (CBO estimate). At 

the same time, home health spending is increasing rapidly rising 

almost 13 percent a year between 2004 and 2012 (CBO). In fact, 

the Congressional Budget Office estimates home health spending 

241

will have almost tripled in size in that same period. When spending increases, so do beneficiary premiums because they are tied to 

program’s costs. 

Part of the reason for the spending increases it because it is difficult to determine if the beneficiary really needs home health 

(GAO and CMS). Requiring even nominal copays encourages beneficiaries to use care more prudently. 

For the 90 percent of beneficiaries that have supplemental policies or other coverage, the Medicare program collects the copayments by automatically crossing over the claim to their insurance 

companies. Thus, the copayments generate little administrative 

cost for an agency. 

Section 703. MedPAC Study of Medicare Margins of Home Health 

Agencies 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The provision would require MedPAC to study payment margins 

of home health agencies paid under the Medicare prospective payment system. The study would examine whether systematic differences in payment margins were related to differences in case 

mix, as measured by home health resource groups (HHRGs). 

MedPAC would be required to submit a report to Congress on the 

study within two years of enactment. 

EFFECTIVE DATE

Upon enactment. 

Subtitle B—Direct Graduate Medical Education 

Section 711. Extension of Update Limitation on High Cost Programs 

CURRENT LAW

Medicare pays hospitals for its share of direct graduate medical 

education (DGME) costs in approved programs using a count of the 

hospitals number of full-time equivalent residents and a hospitalspecific historic cost per resident, updated for inflation. BBRA 

changed Medicare’s methodology for calculating DGME payments 

to teaching hospitals to incorporate a new benchmark set at the national average amount based on FY1997 hospital specific per resident amounts. Starting in FY2001, hospitals received no less than 

70 percent of a geographically adjusted national average amount. 

BIPA increased this floor to 85 percent of the locality adjusted, updated, and weighted national per resident amounts starting for cost 

report periods beginning during FY2002. Hospitals with per resident amounts above 140 percent of the geographically adjusted national average amount had payments frozen at current levels for 

FY2001 and FY2002, and in FY2003–FY2005 would receive an update equal to the Consumer Price Index (CPI) increase minus two 

percentage points. Currently, hospitals with per resident amounts 

between 85 percent and 140 percent of the geographically adjusted 

242

national average would continue to receive payments based on 

their hospital-specific per resident amounts updated for inflation. 

EXPLANATION OF PROVISION

The hospitals with per resident amounts above 140 percent of the 

geographically adjusted national average amount would not get an 

update from FY2004 through FY2013.

EFFECTIVE DATE

Upon enactment 

REASON FOR CHANGE

The DGME amounts in these high cost hospitals are far higher 

that can be explained by the cost of living and legitimate difference 

in overhead. High quality medical training is delivered in most facilities for a fraction of the cost of high-cost institutions. The Medicare payments to these institutions have nothing to do with actual 

costs of training these physicians. 

Subtitle C—Chronic Care Improvement 

Section 721. Voluntary Chronic Care Improvement Under Traditional Fee-for-Service 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process for providing chronic care improvement programs for Medicare beneficiaries in FFS Medicare (Parts A and B) who have certain chronic 

conditions such as congestive heart failure, diabetes, chronic obstructive pulmonary disease, stroke or other diseases as identified 

by the Secretary. The Secretary would establish administrative regions, Chronic Care Improvement Administrative regions (CCIAs) 

within the United States for chronic care improvement programs. 

Within each CCIA, the Secretary would select at least two contractors under a competitive bidding process on the basis of the ability 

of each bidder to achieve improved health outcomes of the participating beneficiaries and improved financial outcomes of the Medicare program. A contractor would be a disease improvement organization, health insurer, provider organization, group of physicians, 

or any other legal entity that the Secretary determines appropriate. 

Contractors would be required to meet certain clinical, quality improvement, financial, and other requirements specified by the Secretary either directly or indirectly through the use of subcontractors. The Secretary would be able to phase-in implementation of 

the program beginning one-year after enactment. 

Each program would be required to have a method for identifying 

targeted Medicare beneficiaries who would be offered participation 

in the program. The Secretary would be required to assist the program in identifying beneficiaries. Each beneficiary would be assigned to only one contractor that would be responsible for guiding 

beneficiaries in managing their health including all co-morbidities. 

Initial contact with a Medicare beneficiary would be from the SecVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00242 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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retary who would provide information about the program, including 

a description of advantages in participating. The Secretary would 

inform the beneficiary that the contractor would contact the beneficiary directly concerning participation, the voluntary nature of 

program participation, and a means of declining to participate or 

decline being contacted by the program. Each program would be required to develop an individualized, goal-oriented chronic care improvement plan with the beneficiary. The chronic care improvement plan would be required to contain: a single point of contact 

to coordinate care; self-improvement education for the individual 

and support education for health care providers, primary caregivers, and family members; coordination between prescription 

drug benefits, home health, and other health care services; collaboration with physicians and other providers to enhance communication of relevant clinical information; the use of monitoring technologies, where appropriate; and information about hospice care, 

pain and palliative care, and end-of-life care, as appropriate. In developing the chronic care improvement plan, programs would be required to use decision support tools such as evidence-based practice 

guidelines and a clinical information database to track and monitor 

each beneficiary across care settings and evaluate outcomes. The 

program would be required to meet any additional requirements 

that the Secretary finds appropriate. Programs would be accredited 

by qualified organizations to be deemed to have met such requirements as specified by the Secretary. 

Contractor payments for each chronic care improvement program 

would be required to result in Medicare program outlays that 

would otherwise have been incurred in the absence of the program 

for the three-year contract period. The Secretary would be required 

to assure that there would be no net aggregate increase in Medicare payments, in entering into a contract for the program over the 

three-year period. Contracts for chronic care improvement programs would be treated as a risk-sharing arrangement. In addition, 

payment to contractors would be subject to the contractor meeting 

clinical and financial performance standards established by the 

Secretary. 

Program contractors would be required to report to the Secretary 

on the quality of care and efficacy of the program in terms of process measures (such as reductions in errors and re-hospitalization 

rates), beneficiary and provider satisfaction, health outcomes, and 

financial outcomes. The Secretary would be required to submit to 

Congress annual reports on the program including information on 

progress made toward national coverage, common delivery models, 

and information on improvements in health outcomes, as well as financial efficiencies resulting from the program. The Secretary 

would also be required to conduct a randomized clinical trial to assess the potential for cost reductions under Medicare by comparing 

costs of beneficiaries enrolled in chronic care improvement programs and beneficiaries who are eligible to participate but are not 

enrolled. 

Appropriations of such sums as necessary to provide for contracts 

with chronic care improvement programs would be authorized from 

the Medicare Trust Funds. 

244

EFFECTIVE DATE

The provision would be effective upon enactment and the Secretary would be required to begin implementing the chronic care 

improvement programs no later than one-year after enactment.

REASON FOR CHANGE

Under current law, FFS Medicare does not offer coordinated care 

programs for the chronically ill. Chronic care management is an 

important issue, because 84 percent of seniors have one or more 

chronic conditions. In addition, individuals with chronic conditions 

account for 80 percent of all health care spending, with two-thirds 

of Medicare spending being spent on seniors with five or more 

chronic conditions. CMS has run demonstration programs in the 

Medicare program, particularly for high cost or especially frail 

adults. CMS is currently managing more than a dozen demonstration programs on disease and case management. A permanent program should be established within FFS Medicare that offers chronic care management to high-cost chronically ill seniors. 

Section 722. Chronic Care Improvement Under Medicare Advantage 

and Enhanced Fee-for-Service Programs 

CURRENT LAW

Under the Medicare+Choice program, organizations are required 

to have quality assurance programs that include measuring outcomes, monitoring and evaluating high volume and high risk services and the care of acute and chronic conditions, and evaluating 

the effectiveness of the efforts. 

EXPLANATION OF PROVISION

Each Medicare Advantage plan offered would be required to have 

a chronic care improvement program for enrollees with multiple or 

sufficiently severe chronic conditions such as congestive heart failure, diabetes, chronic obstructive pulmonary disease, stroke or 

other disease as identified by the Secretary. The program would be 

required to have a method for monitoring and identifying enrollees 

with multiple or sufficiently severe chronic conditions and to develop with an enrollee’s consent an individualized, goal-oriented 

chronic care improvement plan. 

The chronic care improvement plan would be required to include: 

a single point of contact to coordinate care; self-improvement education for the individual and support education for health care providers, primary caregivers, and family members; coordination between prescription drug benefits, home health, and other health 

care services; collaboration with physicians and other providers to 

enhance communication of relevant clinical information; the use of 

monitoring technologies, where appropriate; and information about 

hospice care, pain and palliative care, and end-of-life care, as appropriate. In developing the chronic care improvement plan, programs would be required to use decision support tools such as evidence-based practice guidelines and a clinical information database 

to track and monitor each beneficiary across care settings and 

evaluate health outcomes. The program would be required to meet 

any additional requirements that the Secretary finds appropriate. 

245

Programs that have been accredited by qualified organizations 

would be deemed to have met such requirements as specified by 

the Secretary. 

Each Medicare Advantage organization would be required to report to the Secretary on the quality of care and efficacy of the 

chronic care improvement program. 

EFFECTIVE DATE

The provision would apply for contract years beginning on or 

after one year after enactment. 

REASON FOR CHANGE

Many Medicare Health Maintenance Organizations (HMOs) already provide chronic care management programs. These programs 

target high-cost beneficiaries suffering from one or more chronic 

conditions and coordinate their care within plan. This requirement 

for private plans would continue the chronic care/disease management programs most Medicare HMOs already have in place. 

Section 723. Institute of Medicine Report 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to contract with the Institute of 

Medicine of the National Academy of Sciences to study the barriers 

to effective integrated chronic care improvement for Medicare beneficiaries with multiple or severe chronic conditions across settings 

and over time. The study would examine the statutory and regulatory barriers to coordinating care across settings for Medicare 

beneficiaries in transition from one setting to another. The Institute of Medicine would be required to submit the report of the 

study to the Secretary and Congress no later than 18 months after 

enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 724. MedPAC Report 

CURRENT LAW

No provision.

EXPLANATION OF PROVISION

MedPAC would be required to evaluate the chronic care improvement program. The evaluation would include a description of the 

status concerning implementation of the program, the quality of 

health care services provided to individuals participating in the 

program, and the cost savings attributed to implementation. The 

report of the evaluation would be submitted to Congress not later 

than two years after implementation of the program. 

246

EFFECTIVE DATE

Upon enactment. 

Subtitle D—Other Provisions 

Section 731. Modifications to MedPAC 

CURRENT LAW

The Medicare Payment Advisory Commission is a 17-member 

body that reports and makes recommendations to Congress regarding Medicare payment policies. The Comptroller General is required to establish a public disclosure system for Commissioners to 

disclose financial and other potential conflicts of interest. 

EXPLANATION OF PROVISION

MedPAC would be required to examine the budgetary consequences of a recommendation before making the recommendation 

and to review the factors affecting the efficient provision of expenditures for services in different health care sectors under FFS Medicare. MedPAC would be required to submit two additional reports 

no later than June 1, 2003. The first report would study the need 

for current data, and the sources of current data available, to determine the solvency and financial circumstances of hospitals and 

other Medicare providers. MedPAC would be required to examine 

data on uncompensated care, as well as the share of uncompensated care accounted for by the expenses for treating illegal aliens. 

The second report would address investments and capital financing 

of hospitals participating under Medicare and access to capital financing for private and not-for-profit hospitals. The provision 

would also require that members of the Commission be treated as 

employees of Congress for purposes of financial disclosure requirements. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Congress needs to ensure that the Commission remains the objective impartial agency that it is today. Moreover, the Commission 

cannot be removed from the same constraints that Congress itself 

must face through considerations of the budget. 

Section 732. Demonstration Project for Medical Adult Day Care 

Services 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subject to earlier provisions, the Secretary would be required to 

establish a demonstration project under which a home health agency, directly or under arrangement with a medical adult day care facility, provide medical adult day care services as a substitute for 

a portion of home health services otherwise provided in a beneVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00246 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ficiary’s home. Such services would have to be provided as part of 

a plan for an episode of care for home health services established 

for a beneficiary. Payment for the episode would equal 95 percent 

of the amount that would otherwise apply. In no case would the 

agency or facility be able to charge the beneficiary separately for 

the medical adult day care services. The Secretary would reduce 

payments made under the home health prospective payment system to offset any amounts spent on the demonstration project. The 

three-year demonstration project would be conducted at not more 

than five sites, selected by the Secretary, in states that license or 

certify providers of medical adult day care services. Participation of 

up to 15,000 Medicare beneficiaries would be on a voluntary basis. 

When selecting participants, the Secretary would give preference 

to home health agencies that are currently licensed to furnish medical adult day care services and have furnished such services to 

Medicare beneficiaries on a continuous basis for a prior two-year 

period. A medical adult day care facility would: (1) have been licensed or certified by a State to furnish medical adult day care 

services for a continuous two-year period, (2) have been engaged in 

providing skilled nursing services or other therapeutic services directly or under arrangement with a home health agency, and (3) 

would meet quality standards and other requirements as established by the Secretary. The Secretary would be able to waive necessary Medicare requirements except that beneficiaries must be 

homebound in order to be eligible for home health services. 

The Secretary would be required to evaluate the project’s clinical 

and cost effectiveness and submit a report to Congress no later 

than 30 months after its commencement. The report would include: 

(1) an analysis of patient outcomes and comparative costs relative 

to beneficiaries who receive only home health services for the same 

health conditions, and (2) recommendations concerning the extension, expansion, or termination of the project. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

This demonstration would test the delivery of home health services in a group setting. While many of these patients are very frail, 

social interaction may prove to have a clinical benefit. At the same 

time, the current quality standards remain for delivering home 

health care. 

Section 733. Improvements in National and Local Coverage Determination Process To Respond to Changes in Technology 

(a) National and Local Coverage Determination Process 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (a) would require the Secretary to make available to 

the public the general guidelines used in making national coverage 

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quired to include the way in which the Secretary considers evidence to assess whether a procedure or device is reasonable or necessary. The provision would establish a time frame for decisions regarding national coverage determinations of six months after a request when a technology assessment is not required and 12 months 

when a technology assessment is required and in which a clinical 

trial is not requested. Following the six- or 12-month period, the 

Secretary would be required to make a draft of the proposed decision available in the HHS website or by other means; to provide 

a 30-day public comment period; to make a final decision on the request with 60 days following the conclusion of the public comment 

period; and make the clinical evidence and data used in making the 

decision available to the public. In instances where the Medicare 

Coverage Advisory Committee does not review a request for a national coverage determination, the Secretary would be required to 

consult with appropriate outside clinical experts. 

The Secretary would also be required to develop a plan to evaluate new local coverage determinations to decide which local decisions should be adopted nationally and to decide to what extent 

greater consistency can be achieved among local coverage decisions, 

to require the Medicare contractors within an area to consult on 

new local coverage policies, and to disseminate information on local 

coverage determination among Medicare contractors to reduce duplication of effort. 

EFFECTIVE DATE

The provision would be effective for determinations as of January 

1, 2004. 

REASON FOR CHANGE

The General Accounting Office reported in April 2003 problems 

with both the national coverage and local coverage process. Even 

though CMS assigned a 90-day process for coverage decisions, the 

average time was seven months with several taking over a year. 

GAO recommended establishing new time frames and a public 

process. GAO also found the local coverage process resulted in inequities for beneficiaries and wasteful duplication of administrative 

costs. 

(b) Medicare Coverage of Routine Costs Associated With Certain Clinical Trials 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (b) would provide for the coverage of the routine costs 

of care for Medicare beneficiaries participating in clinical trials 

that are conducted in accordance with an investigational device exemption approved under section 530(g) of the Federal Food, Drug, 

and Cosmetic Act. 

249

EFFECTIVE DATE

The provision would be effective for clinical trials begun before, 

on, or after the date of enactment and to items and services furnished on or after enactment. 

REASON FOR CHANGE

There is a discontinuity between the coverage of clinical trials 

using breakthrough devices and the coverage afforded other routine 

clinical trials. This provision would resolve this problem. 

(c) Issuance of Temporary National Codes 

CURRENT LAW

The Secretary issues temporary national Health Care Common 

Procedure Coding System (HCPCS) codes under Medicare Part B 

that are used until permanent codes are established. 

EXPLANATION OF PROVISION

Subsection (c) would require that the Secretary implement revised procedures for the issuance of temporary national HCPCS 

codes.

EFFECTIVE DATE

The provision would be effective not later than one year after enactment. 

REASON FOR CHANGE

Coding for HCPCs under Part B is a patchwork with temporary 

codes allowed for some services and not for others. This would create national uniformity. 

Section 734. Extension of Treatment for Certain Physician Pathology Services Under Medicare 

CURRENT LAW

In general, independent laboratories cannot directly bill for the 

technical component of pathology services provided to Medicare 

beneficiaries who are inpatients or outpatients of acute care hospitals. BIPA permitted independent laboratories with existing arrangements with acute hospitals to bill Medicare separately for the 

technical component of pathology services provided to the hospitals’ 

inpatients and outpatients. The arrangement between the hospital 

and the independent laboratory had to be in effect as of July 22, 

1999. The direct payments for these services apply to services furnished during a two-year period starting on January 1, 2001 and 

ending December 31, 2002. 

EXPLANATION OF PROVISION

Medicare would make direct payments for the technical component for these pathology services. A change in hospital ownership 

would not affect these direct billing arrangements. 

EFFECTIVE DATE

Upon enactment. 

250

REASON FOR CHANGE

Many hospitals do not have on-site pathology services and this 

provision would continue the prior arrangements. 

H. TITLE VIII—MEDICARE BENEFITS ADMINISTRATION

Section 801. Establishment of Medicare Benefits Administration 

CURRENT LAW

The authority for administering the Medicare program resides 

with the Secretary of Health and Human Services. The Secretary 

originally created the agency that administers the Medicare and 

Medicaid programs in 1977 under his administrative authority. 

Regulations regarding Medicare are required to be promulgated by 

the Secretary. The Medicare statute requires the President to appoint the Administrator of CMS (formerly known as the Health 

Care Financing Administration) with the advice and consent of the 

Senate. Title V of the U.S. Codes sets the MBA Administrator’s salary at level IV of the Executive Schedule. The Medicare statute requires the CMS Administrator to appoint a Chief Actuary who reports directly to such Administrator and receives pay at the highest 

rate of basic pay for the Senior Executive Service. 

EXPLANATION OF PROVISION

The section would amend Title XVIII to add a new Section 1809 

that, under subsection (a), would establish a new Medicare Benefits 

Administration (MBA) within the Department of Health and 

Human Services. 

Subsection (b) would provide for an Administrator and Deputy 

Administrator of the MBA. The President with the advice and consent of the Senate would appoint both for 4-year terms. If a successor did not take office at the end of the term, the Administrator 

would continue in office until the successor enters the office. In 

that event, the confirmed successor’s term would be the balance of 

the 4-year period. The Administrator would be paid at level III of 

the Executive Schedule and the Deputy Administrator at level IV 

of the Executive Schedule. The Administrator would be responsible 

for the exercise of all powers and the discharge of duties of the 

MBA and has authority and control over all personnel. The provision would permit the Administrator to prescribe such rules and 

regulations as the Administrator determined necessary or appropriate to carry out the functions of MBA, subject to the Administrative Procedure Act. The Administrator would be able to establish 

different organizational units within the MBA except for any unit, 

component, or provision specifically provided for by section 1809. 

The Administrator may assign duties, delegate, or authorize re-delegations of authority to MBA officers and employees as needed. 

The Secretary shall ensure appropriate coordination between the 

Administrators of MBA and CMS to administer the Medicare program. The provision also would establish a position of Chief Actuary within the MBA who would be appointed by the Administrator 

and paid at the highest rate of basic pay for the Senior Executive 

Service. The Chief Actuary would exercise such duties as are appropriate for the office of Chief Actuary and in accordance with 

professional standards of actuarial independence. 

251

Subsection (c) would prescribe the duties of the Administrator 

and administrative provisions relating to the MBA. In administering parts C, D, and E of Medicare, the Administrator would be 

required to negotiate, enter into, and enforce contracts with PDP 

and MA–EFFS sponsors. The Administrator would be required to 

carry out any duty provided for under Part C, D, or E, including 

implementation of the prescription drug discount card program and 

demonstration programs (carried out in whole or in part under 

Part C, D, or E). The provision specifically prohibits the Administrator from requiring a particular formulary or instituting a price 

structure for the reimbursement of covered drugs; from interfering 

in any way with negotiations between PDP and MA–EFFS sponsors, drug manufacturers, wholesalers, or other suppliers of covered 

drugs; and from otherwise interfering with the competitive nature 

of providing prescription drug coverage. The Administrator would 

be required to submit a report to Congress and the President on 

the administration of parts C, D, and E during the previous year 

by not later than March 31 of each year.

The Administrator, with the approval of the Secretary, would be 

permitted to hire staff to administer the activities of MBA without 

regard to chapter 31 of title 5 of the U.S. Code B other than sections 3110, the prohibition against officials hiring relatives, and 

3112, the hiring preferences given to veterans. The Administrator 

would be required to employ staff with appropriate and necessary 

experience in negotiating contracts in the private sector. The staff 

of MBA would be paid without regard to chapter 51 (other than 

section 5101 requiring classification of positions according to certain principles) and chapter 53 (other than section 5301 relating to 

the principles of pay systems) of title 5 of the U.S. Code. The rate 

of compensation for staff of MBA would not be able to exceed level 

IV of the Executive Schedule. The Administrator would be limited 

in the number of full-time-equivalent (FTEs) employees for the 

MBA to the number of FTEs within CMS performing the functions 

being transferred at the time of enactment. The Secretary, the Administrator of MBA, and the Administrator of CMS would be required to establish an appropriate transition of responsibility to redelegate the administration of Medicare part C from CMS to MBA. 

The provision requires the Secretary to ensure that the Administrator of CMS transfers such information and data as the Administrator of MBA requires to carry out the duties of MBA. 

Subsection (d) would require the Secretary to establish an Office 

of Beneficiary Assistance within MBA to coordinate Medicare beneficiary outreach and education activities, and provide Medicare 

benefit and appeals information to Medicare beneficiaries under 

parts C, D, and E. 

Subsection (e) would establish the Medicare Policy Advisory 

Board (the Board) within the MBA to advise, consult with, and 

make recommendations to the Administrator regarding the administration and payment policies of parts C, D, and E. The Board 

would be required to report to Congress and to the Administrator 

of MBA such reports as the Board determines appropriate and may 

contain recommendations that the Board considers appropriate regarding legislative or administrative changes to improve the administration of parts C, D, and E including: increasing competition 

under part C, D, or E for services furnished to beneficiaries; imVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00251 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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proving efforts to provide beneficiaries information and education 

about Medicare, parts C, D, and E, and Medicare enrollment; evaluating implementation of risk adjustment under parts C and E; 

and improving competition and access to plans under parts C, D, 

and E. The reports would be required to be published in the Federal Register. The reports would be submitted directly to Congress 

and no officer or agency of the government would be allowed to require the Board to submit a report for approval, comments, or review prior to submission to Congress. Not later than 90 days after 

a report is submitted to the Administrator, the Administrator 

would be required to submit to Congress and the President an 

analysis of the recommendations made by the Board. The analysis 

would be required to be published in the Federal Register. 

The Board would be made up of 7 members serving three-year 

terms, with three members appointed by the President, two appointed by the Speaker of the House of Representatives, and two 

appointed by the President pro tempore of the Senate. Board members may be reappointed but may not serve for more than 8 years. 

The Board shall elect the Chair to serve for three years. The Board 

is required to meet at least three times a year and at the call of 

the Chair. 

The Board is required to have a director who, with the approval 

of the Board, may appoint staff without regard to certain sections 

of chapter 31 of title 5 of the United States Code (which addresses 

authority for employment). In addition, the director and staff may 

be paid without regard to certain provisions of chapter 51 and 53 

of title 5 which are related to classification and pay rates and pay 

systems B although the rate of compensation is capped at level IV 

of the Executive Schedule. The Board may contract with and compensate government and private agencies or persons to carry out 

its duties without regard to section 3709 of the Revised Statutes 

(41 U.S.C. (5). 

Subsection (f) authorizes an appropriation of such sums as are 

necessary from the Federal Hospital Insurance Trust Fund and 

from the Federal Supplementary Medical Insurance Trust Fund 

(including the Prescription Drug Account) to carry out section 1808. 

EFFECTIVE DATE

The provision would be effective upon enactment; however, the 

enrollment and eligibility functions and implementation of parts C 

and E would be effective January 1, 2006. 

REASON FOR CHANGE

A new agency, the Medicare Benefits Administration, would provide a more flexible and contemporary structure that is citizen-centered, results-oriented, and market-based. The administration of 

Parts C, D, and E would be separated from the administration of 

other parts of Medicare to ensure appropriate conduct of those 

parts of Medicare involving contracts with private organizations. 

Implementing the M+C program in the past, CMS’s decisions 

have made it difficult for private plans to participate in the program. Indeed, CMS has an inherent conflict of interest in administering traditional FFS while regulating the private plans. Placing 

the administration of Parts C, D, and E under a new MBA would 

create an agency whose main responsibility is the implementation 

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and operation of successful private plan programs that enhance 

beneficiary choice. 

The MBA would reshape the federal bureaucracy to better coordinate health plans and the prescription drug benefit, and replace a 

current system that is inefficient and outdated. 

Civil service law reforms would permit the MBA to hire the best 

possible staff, with private sector experience in negotiating with 

plans. The MBA would have the ability to create a modern workforce by paying for performance, disciplining bad workers without 

lengthy appeals, and hiring employees more quickly. These changes 

would promote general government efficiency.

(c) Miscellaneous Administrative Provisions 

CURRENT LAW

The Board of Trustees of the Medicare Trust Funds is composed 

of the Commissioner of Social Security, the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and 

Human Services and two members of the public. The Administrator 

of the Centers for Medicare & Medicaid Services serves as the Secretary of the Board of Trustees. 

Title 5 of the U.S. Code sets the Administrator’s salary at level 

IV of the Executive Schedule. 

EXPLANATION OF PROVISION

Paragraph (1) would add the Administrator of MBA as an ex officio member of the Board of Trustees of the Medicare Trust Funds. 

Paragraph (2) would increase the pay level for the Administrator 

of CMS from level IV of the Executive Schedule to level III. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Administrator of the MBA should be a member of the Board 

of Trustees to represent that part of Medicare involving contracts 

with private entities. The Administrator of CMS should be paid at 

the same level as the Administrator of the MBA. 

I. TITLE IX—REGULATORY RELIEF

Subtitle A—Regulatory Reform 

Section 901. Construction; Definition of Supplier 

CURRENT LAW

Section 1861 of the Social Security Act contains definitions of 

services, institutions, and so forth under Medicare. Supplier is not 

explicitly defined. 

EXPLANATION OF PROVISION

Nothing in this title would be construed as compromising or affecting existing legal remedies for addressing fraud or abuse, 

whether it be criminal prosecution, civil enforcement or administrative remedies (including the False Claims Act) or to prevent or imVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00253 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
254

pede HHS from its efforts to eliminate waste, fraud, or abuse in 

Medicare. The provision also would clarify that consolidation of the 

Medicare administrative contractors does not consolidate the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. The provision would also 

clarify that term. A supplier means a physician or other practitioner, a facility or other entity (other than a provider of services) 

furnishing items or services under Medicare. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Committees are committed to extending needed regulatory 

relief to providers and suppliers while at the same time protecting 

taxpayers from waste, fraud and abuse. 

Section 902. Issuance of Regulations 

CURRENT LAW

The Secretary must publish a list of all manual instructions, interpretative rules, statements of policy, and guidelines that are 

promulgated to carry out Medicare law in the Federal Register no 

less frequently than every three months. 

There is no explicit statutory instruction on logical outgrowth. 

The courts have repeatedly held that new matter in final regulations must be a logical outgrowth of the proposed rule and is an 

inherent aspect of notice and comment rulemaking. 

EXPLANATION OF PROVISION

The provision would require the Secretary, in consultation with 

the Director of the Office of Management and Budget, to establish 

and publish a regular timeline for the publication of final regulations based on the previous publication of a proposed rule or an interim final regulation. The timeframe established would not be permitted to be longer than three years, except under extraordinary 

circumstances. If the Secretary were to vary the timeline he established, the provision would require him to publish a notice in the 

Federal Register the new timeline and an explanation of the variation. In the case of interim final regulations, the provision would 

require that if the Secretary did not meet his established timeframe, then the interim final regulation would not be able to continue in effect unless the Secretary published a notice of continuation of the regulation that included an explanation of why the regular timeline had not been complied with. 

The provision also would require that a provision of a final regulation that is not a logical outgrowth of the proposed regulation or 

interim final regulation would be treated as a proposed regulation. 

The provision would not be able to take effect until public comment 

occurred and the provision published as a final regulation.

EFFECTIVE DATE

The provision regarding the establishment of regulatory timeframes would be effective upon enactment and would require the 

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Secretary to provide for an appropriate transition to take into account the backlog of previously published interim final regulation. 

The provision regarding logical outgrowth would be effective for 

final regulations published on or after enactment. 

REASON FOR CHANGE

The volume of Medicare regulations issued by CMS can be difficult for health care providers and suppliers, particularly small 

providers and suppliers, to monitor. By requiring regulations to be 

released on a certain date, providers and suppliers would be better 

able to keep informed of program changes. The Secretary may stagger the notice and comment periods of regulations issued on the 

same day, so that the comment deadlines for these regulations do 

not occur simultaneously, in order to ensure that interested parties 

have the opportunity to comment on multiple regulations. 

The collective impact provision ensures that the Department 

would consider the overall impact of any changes it is making on 

categories of providers and suppliers. If the Department determines 

that many changes affecting a particular category of providers or 

suppliers are underway, the Department should consult with representatives of that category to determine whether providers and 

suppliers would be better able to make the systems changes needed 

to accommodate those changes if all the new regulations were released simultaneously or staggered. Because of the burden implementing multiple regulations simultaneously can cause, the Secretary needs to coordinate new regulations based on an analysis of 

the collective impact the regulatory changes will have on any given 

category of provider or supplier. 

Section 903. Compliance With Changes in Regulations and Policies 

CURRENT LAW

No explicit statutory instruction. As a result of case law, there 

is a strong presumption against retroactive rulemaking. In Bowen 

v. Georgetown University Hospital, the Supreme Court ruled that 

there must be explicit statutory authority to engage in retroactive 

rulemaking. 

EXPLANATION OF PROVISION

The provision would bar retroactive application of any substantive changes in regulation, manual instructions, interpretative 

rules, statements of policy, or guidelines unless the Secretary determines retroactive application is needed to comply with the statute or is in the public interest. No substantive change would go 

into effect until 30 days after the change is issued or published unless it would be needed to comply with statutory changes or was 

in the public interest. Compliance actions would be able to be 

taken for items and services furnished only on or after the effective 

date of the change. If a provider or supplier follows written guidance provided by the Secretary or a Medicare contractor when furnishing items or services or submitting a claim and the guidance 

is inaccurate, the provider or supplier would not be subject to sanction or repayment of overpayment (unless the inaccurate information was due to a clerical or technical operational error). 

256

EFFECTIVE DATE

The prohibition of retroactive application of substantive changes 

would apply to changes issued on or after the date of enactment. 

The provisions affecting compliance with substantive changes 

would apply to compliance actions undertaken on or after the date 

of enactment. The reliance on guidance would take effect upon enactment but would not apply to any sanction for which notice was 

provided on or before the date of enactment. 

REASON FOR CHANGE

This provision would ensure that Medicare’s rules are not generally applied retroactively. It would also ensure providers and suppliers have sufficient time to make any changes to systems needed 

to comply with changes in regulations. This provision would ensure 

that providers and suppliers, who, in good faith, based on the information received from contractors, would not be vulnerable to recovery if it turns out that the contractor was in error. Providers 

should be able to rely on the directions or guidance provided by 

their Medicare contractors. 

Section 904. Reports and Studies Relating to Regulatory Reform 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The GAO would be required to study the feasibility and appropriateness of the Secretary providing legally binding advisory opinions on appropriate interpretation and application of Medicare regulations. The report would be due to Congress one year after enactment. 

The Secretary would be required to report to Congress every two 

years on the administration of Medicare and areas of inconsistency 

or conflict among various provisions under law and regulation. The 

report would include recommendations for legislation or administrative action that the Secretary determines appropriate to further 

reduce such inconsistency or conflicts. The first report would be 

due to Congress two years after enactment. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

The Committees are interested in receiving additional information regarding both advisory opinions and inconsistencies in Medicare regulations. 

Subtitle B—Contracting Reform 

Section 911. Increased Flexibility in Medicare Administration 

CURRENT LAW

The Secretary is authorized to enter into agreements with fiscal 

intermediaries nominated by different provider associations to 

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make Medicare payments for health care services furnished by institutional providers. For Medicare part B claims, the Secretary is 

authorized to enter into contracts only with health insurers (or carriers) to make Medicare payments to physicians, practitioners and 

other health care suppliers. Section 1834(a)(12) of the Act authorizes separate regional carriers for the payment of durable medical 

equipment (DME) claims. The Secretary is also authorized to contract for certain program safeguard activities under the Medicare 

Integrity Program (MIP). 

Certain terms and conditions of the contracting agreements for 

fiscal intermediaries (FIs) and carriers are specified in the Medicare statute. Medicare regulations coupled with long-standing 

agency practices have further limited the way that contracts for 

claims administration services can be established. 

Certain functions and responsibilities of the fiscal intermediaries 

and carriers are specified in the statute as well. The Secretary may 

not require that carriers or intermediaries match data obtained in 

its other activities with Medicare data in order to identify beneficiaries who have other insurance coverage as part of the Medicare 

Secondary Payer (MSP) program. With the exception of prior authorization of DME claims, an entity may not perform activities (or 

receive related payments) under a claims processing contract to the 

extent that the activities are carried out pursuant to a MIP contract. Performance standards with respect to the timeliness of reviews, fair hearings, reconsiderations and exemption decisions are 

established as well. 

A Medicare contract with an intermediary or carrier may require 

any of its employees certifying or making payments provide a surety bond to the United States in an amount established by the Secretary. Neither the contractor nor the contractor’s employee who 

certifies the amount of Medicare payments is liable for erroneous 

payments in the absence of gross negligence or intent to defraud 

the United States. Neither the contractor nor the contractor’s employee who disburses payments is liable for erroneous payments in 

the absence of gross negligence or intent to defraud the United 

States, if such payments are based upon a voucher signed by the 

certifying employee. 

EXPLANATION OF PROVISION

This provision would add Section 1874A to the Social Security 

Act and would permit the Secretary to competitively contract with 

any eligible entity to serve as a Medicare contractor. The provision 

would eliminate the distinction between Part A contractors (fiscal 

intermediaries) and Part B contractors (carriers) and take the separate authorities for fiscal intermediaries and carriers and merge 

them into a single authority for the new contractor. These new contractors would be called Medicare Administrative Contractors 

(MACs) and would assume all the functions of the current fiscal 

intermediaries and carriers: determining the amount of Medicare 

payments required to be made to providers and suppliers, making 

the payments, providing education and outreach to beneficiaries, 

providers and suppliers, communicating with providers and suppliers, and additional functions as are necessary. 

The Secretary would be permitted to renew the MAC contracts 

annually for up to 5 years. All contracts would be required to be 

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re-competed at least every 5 years using competitive processes. 

Federal Acquisition Regulations (FAR) would apply to these contracts except to the extent any provisions are inconsistent with a 

specific Medicare requirement, including incentive contracts. The 

contracts would be required to contain performance requirements 

that would be developed by the Secretary who could consult with 

beneficiary, provider, and supplier organizations, would be consistent with written statements of work and would be used for 

evaluating contractor performance. MAC would be required to furnish the Secretary such timely information as he may require and 

to maintain and provide access to records the Secretary finds necessary. The Secretary could require a surety bond from the MAC 

or certain officers or employees as the Secretary finds appropriate. 

The Secretary would be prohibited from requiring that the MAC 

match data from other activities for Medicare secondary payer purposes. 

The provision would limit liability of certifying and disbursing officers and the Medicare Administrative Contractors except in cases 

of reckless disregard or the intent to defraud the United States. 

This limitation on liability would not limit liability under the False 

Claims Act. The provision also establishes circumstances where 

contractors and their employees would be indemnified, both in the 

contract and as the Secretary determines appropriate. 

The provision would make numerous conforming amendments as 

the authorities for the fiscal intermediaries and carriers are stricken. 

The Secretary would be required to submit a report to Congress 

and the GAO by no later than October 1, 2004, that describes the 

plan for implementing these provisions. The GAO is required to 

evaluate the Secretary’s plan and, within six months of receiving 

the plan, report on the evaluation to Congress and make any recommendations the Comptroller General believes appropriate. The 

Secretary is also required to report to Congress by October 1, 2008 

on the status of implementing the contracting reform provisions including the number of contracts that have been competitively bid, 

the distribution of functions among contracts and contractors, a 

timeline for complete transition to full competition, and a detailed 

description of how the Secretary has modified oversight and management of Medicare contractors to adapt to full competition.

Competitive bidding for the MACs would be required to begin for 

annual contract periods that begin on or after October 1, 2011. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Medicare’s current contracting represents an antiquated, inefficient, and closed system based on cozy relationships between the 

government, contractors and providers. 

Medicare contracting is antiquated because contractors may not 

provide service for the entire Medicare program, or particular functions within the program; rather Fiscal Intermediaries administer 

claims for facilities and carriers administer claims for all other providers. It has failed to keep pace with integrated claims administration practices in the private sector. 

259

Medicare contracting is inefficient because Medicare does not 

award contracts through competitive procedures, but rather on provider nomination. 

Medicare contracting is closed. All but one of the contractors 

today have been with Medicare since the program’s inception 36 

years ago, and only insurers can provide contracting services. 

This provision permits greater flexibility in contracting for administrative services between the Secretary and the Medicare contractors (entities that process claims under part A and part B of 

the Medicare program), including the flexibility to separately contract for all or parts of the contractor functions. The Secretary also 

may contract with a wider range of entities, so that the most efficient and effective contractor can be selected. 

These amendments require the Secretary to contract competitively at least once every five years for the administration of benefits under parts A and B. In conjunction with the elimination of 

cost contracts, it is intended to create incentives for improved service to beneficiaries and to providers of services and suppliers. 

These amendments provide a basis for a unified contracting system for the administration of parts A and B, identical to the recent 

Congressionally mandated structure of the Medicare Integrity Program contractors. Consolidation of contracting duties as set forth in 

this legislation does not constitute consolidation of the Hospital Insurance and Medical Supplementary Insurance Trust Funds, or reflect any position on that issue. In addition, the elimination of provider nomination, which hospitals have rarely been allowed to exercise in recent years, is essential for bringing full and open competition into the contracting functions of the Medicare program. 

The provision establishes a basis for a unified contracting system, identical to the structure implemented for the Medicare Integrity Program contractors. It is important to note, however, that 

consolidation of contracting duties as set forth in this legislation 

does not constitute consolidation of the Hospital Insurance and 

Medical Supplementary Insurance Trust Funds, or reflect any position on that issue. In addition, the Secretary would have the flexibility to choose the best contractor(s) to provide telephone information on suppliers, which is intended to reduce administrative costs 

and improve quality. Since the carrier fair hearing requirement 

was eliminated in previous legislation, the requirements for the 

hearing are eliminated in order to conform to existing law. 

Section 912. Requirements for Information Security for Medicare 

Administrative Contractors 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Medicare administrative contractors (as well as fiscal intermediaries and carriers until the MACs are established) would be 

required to implement a contractor-wide information security program to provide information security for the operation and assets 

of the contractor for Medicare functions. The information security 

program would be required to meet certain requirements for information security programs imposed on Federal agencies under title 

260

44 of the United States Code. Medicare administrative contractors 

would be required to undergo an annual independent evaluation of 

their information security programs. Existing contractors would be 

required to undergo the first independent evaluation within one 

year after the date the contractor begins implementing the information security program and new contractors would be required to 

have such a program in place before beginning the claim determination and payment activities. The results of the independent 

evaluations would be submitted to the Secretary and the HHS Inspector General. The Inspector General of HHS would be required 

to report to Congress annually on the results of the evaluations. 

The Secretary would be required to address the results of the evaluations in required management reports. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The increased reliance by the Federal government on the Internet and related telecommunications technologies has resulted in 

enhanced inter-connectivity and interdependencies associated with 

Federal computer systems and between federal and private computer systems. Over the past several years, this inter-connectivity 

or networking has resulted in increased security vulnerabilities 

that have put at greater risk computer systems and data that are 

critical to ensuring national and economic security and public 

health and welfare, including sensitive, non-public information that 

is collected and maintained by CMS and its business partners.

On May 23, 2001, the Committee on Energy and Commerce held 

a hearing to investigate the extent to which sensitive, non-public 

information related to collecting and processing Medicare claims 

was adequately secure on the computer networks operated by CMS 

and its business partners, including Medicare contractors. That investigation revealed significant weaknesses, which the agency has 

been working to address. Some of the computer security concerns 

identified include weak password management, inadequate access 

controls, excessive user privileges, improper network configurations, and inadequate testing of critical systems. In addition, the 

OIG conducted assessments of financial controls—including electronic data processing controls—at CMS and its major Medicare 

contractors; in every year since 1997, the OIG has identified computer security controls as a material weakness at CMS and its contractors. 

Section 812 is intended to assist CMS in identifying and working 

with contractors to address potential security deficiencies in order 

to ensure that sensitive, non-public information related to the processing of Medicare claims is adequately secure from unauthorized 

access, misuse, or destruction. 

261

Subtitle C—Education and Outreach 

Section 921. Provider Education and Technical Assistance 

(a) Coordination of Education Funding 

CURRENT LAW

Medicare provider education activities are funded through the 

program management appropriation and through Education and 

Training component of the Medicare Integrity Program (MIP). Both 

claims processing contractors (fiscal intermediaries and carriers) 

and MIP contractors may undertake provider education activities. 

EXPLANATION OF PROVISIONS

The provision would add Section 1889 to the Social Security Act, 

which would require the Secretary to coordinate the educational activities through the Medicare contractors to maximize the effectiveness of education efforts for providers and suppliers and to report 

to Congress with a description and evaluation of the steps taken 

to coordinate provider education funding. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision is intended to ensure that federal spending on provider education is coordinated and used as efficiently as possible to 

maximize the value obtained from the investment. It is not intended to change the proportion of Medicare Integrity Program 

funds spent on provider education. 

(b) Incentives To Improve Contractor Performance 

CURRENT LAW

No specific statutory provision. Since FY1996, as part of the 

audit required by the Chief Financial Officers Act, an annual estimate of improper payments under FFS has been established. As a 

recent initiative, CMS is implementing a comprehensive error ratetesting program to produce national, contractor specific, benefit category specific and provider specific paid claim error rates. 

EXPLANATION OF PROVISIONS

The Secretary would be required to use specific claims payment 

error rates (or similar methodology) to provide incentives for contractors to implement effective education and outreach programs 

for providers and suppliers and would require the Comptroller General to study the adequacy of the methodology and make recommendations to the Secretary and the Secretary to report to Congress regarding how he intends to used the methodology in assessing Medicare contractor performance. 

EFFECTIVE DATE

Upon enactment. 

262

REASON FOR CHANGE

This provision would ensure that the Department monitors contractor performance for claims payment error rates, and it would 

identify best practices for provider education—all with the goal of 

reducing payment errors and helping providers and suppliers better comply with program requirements. It is the Committees’ intent 

that, in consultation with representatives of providers and suppliers, the Secretary shall identify and encourage best practices developed by contractors for educating providers and suppliers. 

(c) Provision of Access to and Prompt Responses From Medicare Administrative Contractors 

CURRENT LAW

No specific statutory provision. Statutory provisions generally instruct carriers to assist providers and others who furnish services 

in developing procedures relating to utilization practices and to 

serve as a channel of communication relating information on program administration. Fiscal intermediaries are generally instructed 

to: (1) provide consultative services to institutions and other agencies to enable them to establish and maintain fiscal records necessary for program participation and payment, and (2) serve as a 

center for any information as well as a channel for communication 

with providers. 

EXPLANATION OF PROVISIONS

The Secretary would be required to develop a strategy for communicating with beneficiaries, providers and suppliers. Medicare 

contractors would be required to provide responses to written inquiries that are clear, concise and accurate within 45 business days 

of the receipt of the inquiry. The Secretary would be required to 

ensure that Medicare contractors have a toll-free telephone number 

where beneficiaries, providers and suppliers may obtain information regarding billing, coding, claims, coverage, and other appropriate Medicare information. Medicare contractors would be required to maintain a system for identifying the person supplying 

information to beneficiaries, providers and supplier and to monitor 

the accuracy, consistency, and timeliness of the information provided. The Secretary would be required to establish and make public standards to monitor the accuracy, consistency, and timeliness 

of written and telephone responses of Medicare contractors as well 

as to evaluate the contractors against these standards. 

EFFECTIVE DATE

The provision would be effective October 1, 2004. 

REASON FOR CHANGE

This provision is intended to improve contractor accountability to 

make contractors more responsive to providers and suppliers, and 

to increase the accuracy and reliability of the information provided 

in response to the questions received. 

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(d) Improved Provider Education and Training 

CURRENT LAW

In FY2003, approximately $122 million was budget by CMS for 

provider education and training. 

EXPLANATION OF PROVISION

The provision would authorize $25 million to be appropriated 

from the Medicare Trust Funds for fiscal years 2005 and 2006, and 

such sums as necessary for succeeding fiscal years for Medicare 

contractors to increase education and training activities for providers and suppliers. Medicare contractors would be required to tailor education and training activities to meet the special needs of 

small providers or suppliers. The provision defines a small provider 

as an institution with fewer than 25 full-time equivalents (FTEs) 

and a small supplier as one with fewer than 10 FTEs. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision acknowledges that contractors are being instructed to significantly improve their provider education and 

training efforts, and accordingly authorizes new funds to be available for those purposes. 

(e) Requirement To Maintain Internet Sites 

CURRENT LAW

No statutory provision. CMS and Medicare contractors currently 

maintain Internet sites. 

EXPLANATION OF PROVISION

The provision would require that the Secretary and the Medicare 

contractors maintain Internet sites to answer frequently asked 

questions and provide published materials of the contractors beginning October 1, 2004. 

EFFECTIVE DATE

The provision would be effective October 1, 2004. 

REASON FOR CHANGE

This provision would facilitate greater ease of provider and supplier access to information provided by Medicare’s contractors. 

(f) Additional Provider Education Provisions 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The provision would bar Medicare contractors from using a 

record of attendance (or non-attendance) at educational activities to 

264

select or track providers or suppliers in conducting any type of 

audit or prepayment review.

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision addresses a concern raised by providers and suppliers that their participation in educational forums has been used 

to trigger audits. Participation in educational forums should be encouraged not discouraged. 

Nothing in this section or section 1893(g) shall be construed as 

preventing the disclosure by a Medicare contractor of information 

on attendance at education activities for law enforcement purposes. 

Nothing in this section or section 1893(g) shall be construed as providing for the disclosure by a Medicare contractor of the claims 

processing screens or computer edits used for identifying claims 

that would be subject to review. 

Section 922. Small Provider Technical Assistance Demonstration 

Program 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a demonstration 

program to provide technical assistance to small providers and suppliers, when they have requested the assistance, to improve compliance with Medicare requirements. If errors are found, the Secretary would be barred from recovering any overpayments barring 

evidence of fraud and if the problem that is the subject of the compliance review has been satisfactorily corrected within 30 days and 

the problem remains corrected. A GAO study is required not later 

than two years after the demonstration program begins. Appropriations would be authorized for $1 million for FY 2005 and $6 million 

for FY 2006 to carry out the demonstration. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Many large providers and suppliers have contracts with private 

consulting firms to help them navigate their interactions with the 

Medicare program. This type of assistance can be prohibitively expensive for small providers and suppliers—but they too are required to comply with complex program rules and regulations. This 

provision creates a new demonstration program to facilitate small 

provider and supplier access to expert technical assistance. The 

demonstration would also test whether encouraging technical assistance on the front-end (to help providers and suppliers play by 

the rules) could save the program money in the long-term by promoting greater program compliance. 

265

Section 923. Medicare Provider Ombudsman; Medicare Beneficiary 

Ombudsman 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

A Medicare Provider Ombudsman would be required to be appointed by the Secretary and located within the Department of 

Health and Human Services. The Provider Ombudsman would be 

required to provide confidential assistance to providers and suppliers regarding complaints, grievances, requests for information, 

and resolution of unclear or conflicting guidance about Medicare. 

The Ombudsman would submit recommendations to the Secretary 

regarding improving the administration of Medicare, addressing recurring patterns of confusion under Medicare, and ways to provide 

for an appropriate and consistent response in cases of self-identified overpayments by providers and suppliers. Such sums as necessary would be authorized to be appropriated for FY2004 and subsequent years. 

A Medicare Beneficiary Ombudsman would be required to be appointed by the Secretary and located within HHS. The Beneficiary 

Ombudsman would be required to have expertise and experience in 

health care, education of, and assistance to Medicare beneficiaries. 

The Beneficiary Ombudsman would be required to receive complaints, grievances, and requests for information submitted by 

Medicare beneficiaries. The Beneficiary Ombudsman would also be 

required to assist beneficiaries in collecting relevant information to 

seek an appeal of a decision or determination made by the Secretary, a Medicare contractor, or a Medicare+Choice organization 

and assisting a beneficiary with any problems arising from un-enrolling in a Medicare+Choice plan. The Beneficiary Ombudsman 

would be required to work with state health insurance counseling 

programs. 

Appropriations would be authorized to be appropriated in such 

sums, as are necessary for fiscal year 2004 and each succeeding fiscal year to carry out the ombudsmen provisions. 

This provision would also require the use of 1–800–Medicare for 

all individuals seeking information about, or assistance with Medicare. Rather than listing individual telephone numbers for Medicare contractors in the Medicare handbook, only 1–800–Medicare 

would be shown. The Comptroller General would be required to 

study the accuracy and consistency of information provided by the 

1–800–Medicare line and to assess whether the information sufficiently answers the questions of beneficiaries. The report on the 

study would be required to be submitted to Congress no later than 

one year after enactment.

EFFECTIVE DATE

The Secretary would be required to appoint both ombudsmen no 

later than one year from the date of enactment. 

266

REASON FOR CHANGE

Providers are currently confronted with a morass of bureaucracy 

and regulation, with no clear individual to assist them. The new 

ombudsman would help providers navigate Medicare’s complicated 

rules and regulations. 

Medicare Provider Ombudsman shall make recommendations to 

the Secretary concerning how to respond to recurring patterns of 

confusion in the Medicare program. Such a recommendation may 

include calling for the suspension of the imposition of provider 

sanctions (except those sanctions relating to the quality of care) or 

where there is widespread confusion in program administration. 

Nothing in this section shall be construed as allowing for the suspension of provider sanctions relating to the quality of care, regardless of whether widespread confusion in the Medicare program exists. 

Beneficiaries confront a morass of bureaucracy and regulation, 

with no clear individual to assist them. This new ombudsman 

would help beneficiaries navigate Medicare’s complicated rules and 

regulations. 

The Committees acknowledge that implementing these new functions would have a cost and have accordingly authorized necessary 

appropriations. 

The beneficiary handbook currently provides a multitude of 

phone numbers, which is very confusing for beneficiaries, rather 

than a single number that can triage and transfer beneficiaries to 

the appropriate person or entity. This provision would promote better access to information for beneficiaries. 

Section 924. Beneficiary Outreach Demonstration Program 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (a) would require the Secretary to conduct a threeyear demonstration program where Medicare specialists would provide assistance to beneficiaries in at least six local Social Security 

offices (two would be located in rural areas) that have a high volume of visits by Medicare beneficiaries. The Secretary would be required to evaluate the results of the demonstration regarding the 

feasibility and cost-effectiveness of permanently out-stationing 

Medicare specialists at local Social Security offices and report to 

Congress. 

Subsection (b) would require that the Secretary establish a demonstration project to test the administrative feasibility of providing 

a process for Medicare beneficiaries, providers, suppliers and other 

individuals or entities furnishing items or services under Medicare 

to request and receive a determination as to whether the item or 

service is covered under Medicare by reasons of medical necessity, 

before the item or service involved is furnished to the beneficiary. 

The Secretary would be required to evaluate the demonstration 

and report to Congress by January 1, 2006. 

267

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision makes Medicare experts available in six Social Security Administration offices to assist beneficiaries and answer 

their questions. The demonstration would test whether such 

outsourced Medicare specialists improve beneficiary utilization, understanding of the program, and beneficiary satisfaction. 

Section 925. Inclusion of Additional Information in Notices to Beneficiaries About Skilled Nursing Facility Benefits 

CURRENT LAW

Although the statute requires that beneficiaries receive a statement listing the items and services for which payment has been 

made, there is no explicit statutory instruction that requires the 

notice to include information about the number of days of coverage 

remaining in either the hospital or skilled nursing facility (SNF) 

benefit or the spell of illness. 

EXPLANATION OF PROVISION

The Secretary would be required to provide information about 

the number of days of coverage remaining under the SNF benefit 

and the spell of illness involved in the explanation of Medicare benefits. 

EFFECTIVE DATE

The provision would apply to notices provided on and after the 

calendar quarter beginning more than six months after enactment.

Section 926. Information on Medicare-Certified Skilled Nursing Facilities in Hospital Discharge Plans 

CURRENT LAW

The hospital discharge planning process requires evaluation of a 

patient’s likely need for post-hospital services including hospice and 

home care. 

EXPLANATION OF PROVISION

The Secretary would be required to make information publicly 

available regarding whether SNFs are participating in the Medicare program. Hospital discharge planning would be required to 

evaluate a patient’s need for SNF care. 

EFFECTIVE DATE

The provision would apply to discharge plans made on or after 

the date specified by the Secretary, but no later than six months 

after the Secretary provides information regarding SNFs that participate in the Medicare program. 

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Subtitle D—Appeals and Recovery 

Section 931. Transfer of Responsibility for Medicare Appeals 

CURRENT LAW

Denials of claims for Medicare payment may be appealed by 

beneficiaries (or providers who are representing the beneficiary) or 

in certain circumstances, providers or suppliers directly. The third 

level of appeal is to an Administrative Law Judge (ALJ). The Social 

Security Administration employs ALJs that hear Medicare cases, a 

legacy from the inception of the Medicare program, when Medicare 

was part of Social Security. 

EXPLANATION OF PROVISION

The Commissioner of SSA and the Secretary would be required 

to develop a plan to transfer the functions of the ALJs who are responsible for hearing Medicare cases from SSA to HHS. This plan 

would be due to Congress no later than October 1, 2004. A GAO 

evaluation of the plan would be due within six months of the plan’s 

submission. ALJ functions would be transferred no earlier than 

July 1, 2005 and no later than October 1, 2005. 

The Secretary would be required to place the ALJs in an administrative office that is organizationally and functionally separate 

from the Centers for Medicare & Medicaid Services and the ALJs 

would be required to report to, and be under the general supervision of the Secretary. No other official within the Department 

would be permitted to supervise the ALJs. The Secretary would be 

required to provide for appropriate geographic distribution of ALJs, 

would have the authority to hire ALJs and support staff, and would 

be required to enter into arrangements with the Commissioner, as 

appropriate, to share office space, support staff and other resources 

with appropriate reimbursement. 

Such sums are authorized to be appropriated as are necessary for 

FY2005 and each subsequent fiscal year to increase the number of 

ALJs, improve education and training of ALJs and to increase the 

staff of the Departmental Appeals Board (the final level of appeal). 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Office of Inspector General has identified moving the functions of the Medicare Administrative Law Judges to the Department of Health and Human Services as an important priority in 

improving the appeals system. This provision makes that transition 

and increases the emphasis on providing training Administrative 

Law Judges and their staffs to increase their expertise in Medicare’s rules and regulations. The Commissioner of SSA and the 

Secretary are instructed to work together on the transition plans 

in order to assure that the transition does not adversely affect the 

SSA ALJ appeals system. 

The transition plan shall include information on the following: 

• Workload—The number of such administrative law judges 

and support staff required now and in the future to hear and 

decide such cases in a timely manner, taking into account the 

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current and anticipated claims volume, appeals, number of 

beneficiaries, and statutory changes; 

• Cost Projections—Funding levels required under this subsection to hear such cases in a timely manner; 

• Transition Timetable—A timetable for the transition; 

• Regulations—The establishment of specific regulations to 

govern the appeals process; 

• Case Tracking—The development of a unified case tracking 

system that will facilitate the maintenance and transfer of 

case-specific data across both the fee-for-service and managed 

care components of the Medicare program; 

• Feasibility of Precedential Authority—The feasibility of developing a process to give binding, precedential authority to decisions of the Departmental Appeals Board in the Department 

of Health and Human Services that address broad legal issues; 

and 

• Access to Administrative Law Judges—The feasibility of filing appeals with administrative law judges electronically, and 

the feasibility of conducting hearings using tele- or videoconference technologies.

Section 932. Process for Expedited Access to Review 

CURRENT LAW

In general, administrative appeals must be exhausted prior to judicial review. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process where a 

provider, supplier, or a beneficiary may obtain access to judicial review when a 3-member review panel (composed of ALJs, members 

of the Departmental Appeals Board, or qualified individuals from 

qualified independent contractors designated by the Secretary) determines, within 60 days of a complete written request, that it does 

not have the authority to decide the question of law or regulation 

and where material facts are not in dispute. The decision would not 

be subject to review by the Secretary. Interest would be assessed 

on any amount in controversy and would be awarded by the reviewing court in favor of the prevailing party. This expedited access 

to judicial review would also be permitted for cases where the Secretary does not enter into or renew provider agreements. 

Expedited review would also be established for certain remedies 

imposed against SNFs including denied payments and imposition 

of temporary management. The Secretary would be required to develop a process for reinstating approval of nurse aide training programs that have been terminated (before the end of the mandatory 

two-year disapproval period). The appropriation of such sums as 

needed for FY2005 and subsequent years would be authorized to 

reduce by 50 percent the average time for administrative determinations, to increase the number of ALJs and appellate staff at 

the DAB, and to educate these judges and their staffs on long-term 

care issues. 

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EFFECTIVE DATE

This provision would be effective for appeals filed on or after October 1, 2004. 

REASON FOR CHANGE. 

The provisions in 402 (a–c) on expedited access to judicial review 

ensure that if a review board certifies that there are no material 

facts in dispute and that the appeals process does not have authority to resolve the question at issue, the provider, supplier, or beneficiary may take their case to court in an expedited manner. This 

would facilitate more prompt resolution of challenges to the underlying validity of CMS regulations and determinations. To the extent that any part of an appeal poses a factual dispute that is being 

adjudicated before an administrative tribunal, this provision would 

not authorize the severance of the legal issues from the underlying 

factual dispute. 

Section 933. Revisions to Medicare Appeals Process 

(a) Requiring Full and Early Presentation of Evidence 

CURRENT LAW

No provision. New evidence can be presented at any stage of the 

appeals process. 

EXPLANATION OF PROVISION

The provision would require providers and suppliers to present 

all evidence at the reconsideration that is conducted by a QIC unless good cause precludes the introduction of the evidence. 

EFFECTIVE DATE

October 1, 2004. 

REASON FOR CHANGE

The Office of Inspector General identified this change as a priority to promote more expeditious resolution of appeals of denied 

claims. This provision requires prompt introduction of evidence relevant to a provider appeal. When deciding whether there is good 

cause to introduce new evidence, the adjudicator should ensure, 

after consideration of the totality of the circumstances that disallowing the introduction of such new evidence would unfairly prejudice the case. The totality of the circumstances may include, but 

is not limited to, the following: evidence is not yet available; the 

appellant was not represented at a lower level of appeal; the appellant was not aware of her rights; or the appellant did not understand the proceeding. 

(b) Use of Patients’ Medical Records 

CURRENT LAW

No provision. 

271

EXPLANATION OF PROVISION

The provision would provide for the use of beneficiaries’ medical 

records in qualified independent contractors reconsiderations. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

In the determination of whether an item or service is reasonable 

and necessary for an individual, a beneficiary’s medical records 

should be considered with other relevant information. 

(c) Notice Requirements for Medicare Appeals 

CURRENT LAW

No statutory provision. Determinations and denials of appeals 

currently include the policy, regulatory, or statutory reason for the 

denial and information on how to appeal the denial. The Benefits 

Improvement and Protection Act (BIPA) of 2000 changed the appeals process and created a new independent review (the qualified 

independent contractors or QICs), which has not yet been implemented. 

EXPLANATION OF PROVISION

The provision would require that notice of and decisions from determinations, redeterminations, reconsiderations, ALJ appeals, and 

DAB appeals be written in a manner understandable to a beneficiary and that includes, as appropriate, reasons for the determination or decision and notice of the right to appeal decisions and 

the process for further appeal. The initial determination of a claim 

would also be specifically required to include: the reasons for the 

determination, including whether a local review policy or coverage 

determination was used and the procedures for obtaining additional information (including, upon request, the specific provision of 

the policy manual, or regulation used in making the determination). Redeterminations, the first level of appeal, would also specifically be required to include: the specific reasons for the decision; 

as appropriate a summary of the clinical or scientific evidence used 

in making the redetermination; and a description of the procedures 

for obtaining additional information concerning the redetermination (including, upon request, the specific provision of the policy 

manual, or regulation used in making the determination). 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Currently, Medicare only provides beneficiaries with a brief 

statement about the initial determination of her claim on the Medicare Summary Notice. This provision provides additional information to beneficiaries (or providers who appeal on their behalf) about 

Medicare’s denial of their claim for benefits; the reasons for the denial, and the rights to further appeal so that beneficiaries can have 

272

a clear and concise understanding of decisions affecting their medical care. 

(d) Qualified Independent Contractors 

CURRENT LAW

BIPA established a new and independent second level of appeal 

called the qualified independent contractors. BIPA called for at 

least 12 QICs. The QICs have not yet been implemented. 

EXPLANATION OF PROVISION

The provision would clarify eligibility requirements for qualified 

independent contractors and their reviewer employees including 

medical and legal expertise, independence requirements, and the 

prohibition on compensation being linked to decisions rendered. 

The required number of qualified independent contractors would be 

reduced from not fewer than twelve to not fewer than four. 

EFFECTIVE DATE

The provisions regarding the eligibility requirements of QICs and 

QIC reviews would be effective as if included in the enactment of 

BIPA. 

REASON FOR CHANGE

The BIPA 2000 law laid out broad provisions for revision of the 

Medicare appeals process. These provisions strengthen the appeals 

process by enhancing the criteria related to the independence and 

expertise of the reviewers and review entities. 

Section 934. Prepayment Review 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS has instructed the contractors to use random prepayment reviews to develop contractor-wide and program-wide error 

rates. Non-random payment reviews are permitted in certain circumstances laid out in instructions to the contractors. 

EXPLANATION OF PROVISION

Medicare contractors would be permitted to conduct random prepayment reviews only to develop a contractor-wide or program-wide 

error rate or such additional circumstances as the Secretary provides for in regulations that were developed in consultation with 

providers and suppliers. Random prepayment review would only be 

permitted in accordance with standard protocol developed by the 

Secretary. Nonrandom payment reviews would be permitted only 

when there was a likelihood of sustained or high level of payment 

error. The Secretary would be required to issue regulations regarding the termination and termination dates of non-random prepayment review. Variation in termination dates would be permitted 

depending upon the differences in the circumstances triggering prepayment review. 

273

EFFECTIVE DATE

The Secretary would be required to issue the required regulations not later than one year after enactment. The provision regarding the use of standard protocols when conducting prepayment 

reviews would apply to random prepayment reviews conducted on 

or after the date specified by the Secretary (but not later than one 

year after enactment). The remaining provisions would be effective 

one year after enactment. 

REASON FOR CHANGE

These provisions build greater consistency and predictability into 

Medicare’s rules for prepayment review, while protecting program 

integrity. 

Section 935. Recovery of Overpayments 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS negotiates extended repayment plans with providers that 

need additional time to repay Medicare overpayments. 

EXPLANATION OF PROVISION

In situations where repaying an Medicare overpayment within 30 

days would be a hardship for a provider or supplier, the Secretary 

would be required to enter into an extended repayment plan of at 

least six months duration. The repayment plan would not be permitted to go beyond three years (or five years in the case of extreme hardship, as determined by the Secretary). Interest would be 

required to accrue on the balance through the repayment period. 

Hardship would be defined if, for providers that file cost reports, 

the aggregate amount of the overpayment exceeded 10 percent of 

the amount paid by Medicare to the provider for the time period 

covered by the most recently submitted cost report. In the case of 

a provider or supplier that is not required to file a cost report, 

hardship would be defined if the aggregate amount of the overpayment exceeded 10 percent of the amount paid under Medicare for 

the previous calendar year. The Secretary would be required to develop rules for the case of a provider or supplier that was not paid 

under Medicare during the previous year or for only a portion of 

the year. Any other repayment plans that a provider or supplier 

has with the Secretary, would not be taken into account by the Secretary in calculating hardship. If the Secretary has reason to suspect that the provider or supplier may file for bankruptcy or otherwise cease to do business or discontinue participation in Medicare 

or there is an indication of fraud or abuse, the Secretary would not 

be obligated to enter into an extended repayment plan with the 

provider or supplier. If a provider or supplier fails to make a payment according to the repayment plan, the Secretary would be permitted to immediately seek to offset or recover the total outstanding balance of the repayment plan, including interest. 

The Secretary would be prohibited from recouping any overpayments until a reconsideration-level appeal (or a redetermination by 

the fiscal intermediary or carrier if the QICs are not yet in place) 

was decided, if a reconsideration was requested. Interest would be 

274

required to be paid to the provider if the appeal was successful (beginning from the time the overpayment is recouped) or that interest would be required to be paid to the Secretary if the appeal was 

unsuccessful (and if the overpayment was not paid to the Secretary). 

Extrapolation would be limited to those circumstances where 

there is a sustained or high level of payment error, as defined by 

the Secretary in regulation, or document educational intervention 

has failed to correct the payment error. 

Medicare contractors would be permitted to request the periodic 

production of records or supporting documentation for a limited 

sample of submitted claims to ensure that the previous practice is 

not continuing in the case of a provider or supplier with prior overpayments. 

The Secretary would be able to use consent settlements to settle 

projected overpayments under certain conditions. Specifically the 

Secretary would be required to communicate with the provider or 

supplier that medical record review has indicated an overpayment 

exists, the nature of the problems identified, the steps needed to 

address the problems, and afford the provider or supplier 45 days 

to furnish additional information regarding the medical records for 

the claims reviewed. If, after reviewing the additional information 

an overpayment continues to exist, the Secretary would be required 

to provide notice and an explanation of the determination and then 

may offer the provider two mechanisms to resolve the overpayment: either an opportunity for a statistically valid random sample 

or a consent settlement (without waiving any appeal rights). 

The Secretary would be required to establish a process to provide 

notice to certain providers and suppliers in cases where billing 

codes were over-utilized by members of that class in certain areas, 

in consultation with organizations that represent the affected provider or supplier class. 

If post-payment audits were conducted, the Medicare contractor 

would be required to provide the provider or supplier with written 

notice of the intent to conduct the audit. The contractor would further be required to give the provider or supplier a full and understandable explanation of the findings of the audit and permit the 

development of an appropriate corrective action plan, inform the 

provider or supplier of appeal rights and consent settlement options, and give the provider or supplier the opportunity to provide 

additional information to the contractor, unless notice or findings 

would compromise any law enforcement activities. 

The Secretary would be required to establish a standard methodology for Medicare contractors to use in selecting a sample of 

claims for review in cases of abnormal billing patterns.

EFFECTIVE DATE

In general, the provisions would be effective upon enactment. 

The limitation on extrapolation would apply to samples initiated 

after the date that is one year after the date of enactment. The 

Secretary would be required to establish the process for notice of 

over-utilization of billing codes not later than one year after enactment. The Secretary would be required to establish a standard 

methodology for selecting sample claims for abnormal billing patterns not later than one year after enactment. 

275

REASON FOR CHANGE

These provisions build greater consistency and predictability into 

Medicare’s rules for recovery of overpayments, while protecting program integrity. 

Section 936. Provider Enrollment Process; Right of Appeal 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS has established provider enrollment processes in instructions to the contractors. 

EXPLANATION OF PROVISION

The Secretary would be required to establish in regulation a provider enrollment process with hearing rights in the case of a denial 

or non-renewal. The process would be required to include deadlines 

for actions on applications for enrollment and enrollment renewals. 

The Secretary would be required to monitor the performance of the 

Medicare contractors in meeting the deadlines he establishes. Before changing provider enrollment forms, the Secretary would be 

required to consult with providers and suppliers. The provision 

would also establish hearing rights in cases where the applications 

have been denied. 

EFFECTIVE DATE

The enrollment process would be required to be established within six months of enactment. The consultation process on provider 

enrollment forms would be required for changes in the form beginning January 1, 2004. The provision of hearing rights would apply 

to denials that occur one year after enactment or an earlier date 

specified by the Secretary. 

REASON FOR CHANGE

This provision gives providers and suppliers an opportunity to 

appeal denials of their applications to participate in the Medicare 

program. 

Section 937. Process for Correction of Minor Errors and Omissions 

on Claims without Pursuing Appeals Process 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

This provision would require the Secretary to establish a process 

so providers and suppliers could correct minor errors in claims that 

were submitted for payment. 

EFFECTIVE DATE

The proposal would require that the process be developed not 

later than one year after enactment. 

276

REASON FOR CHANGE

Many of the providers and suppliers who testified before the Subcommittee or contacted members directly emphasized the need to 

create a process in which they could correct claims that were denied because they were incomplete or contained minor errors without having to pursue a formal appeal. This provision instructs the 

Secretary to create such a process, which will alleviate pressure on 

the appeals system. The Committees would be concerned, however, 

if this process were to become an incentive for providers to knowingly or negligently submit incomplete information. 

The Committees intend that the process for correction of minor 

errors and omissions on claims cover both the submission of prepayment and post-payment review claims. For example, if in the 

case of a home health claim, the physician has signed the plan of 

care and/or physician’s order but has not dated it, the claim shall 

be returned to the home health agency and may be resubmitted by 

the home health agency with any incomplete or missing information without having to appeal the claim. 

Section 938. Prior Determination Process for Certain Items and 

Services; Advance Beneficiary Notices 

CURRENT LAW

Medicare law prohibits payment for items and services that are 

not medically reasonable and necessary for the diagnosis or treatment of an illness or an injury. Under certain circumstances, however, Medicare will pay for non-covered services that have been 

provided if both the beneficiary and the provider of the services did 

not know and could not have reasonably been expected to know 

that Medicare payment would not be made for these services.

A provider may be held liable for providing uncovered services, 

if, for example, specific requirements are published by the Medicare contractor or the provider has received a denial or reduction 

of payment on the same or similar service. In cases where the provider believes that the service may not be covered as reasonable 

and necessary, an acceptable advance notice of Medicare’s possible 

denial of payment must be given to the patient if the provider does 

not want to accept financial responsibility for the service. The notice must be given in writing, in advance of providing the service; 

include the patient’s name, date and description of service as well 

as reasons why the service would not be covered; and must be 

signed and dated by the patient to indicate that the beneficiary will 

assume financial liability for the service if Medicare payment is denied or reduced. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process through 

regulation where physicians and beneficiaries can establish whether Medicare covers certain categories of items and services before 

such services are provided. An eligible requestor would be a physician, but only in case of items and services for which the physician 

is paid directly and a Medicare beneficiary who receives an advance beneficiary notice from a physician would receive direct payment for that service. The provisions would establish that: (1) such 

277

prior determinations would be binding on the Medicare contractor, 

absent fraud or misrepresentation of facts, (2) the right to redetermination in the case of a denial, (3) the applicability of existing 

deadlines with respect to those redeterminations, (4) that contractors’ advance determinations (and redeterminations) are not subject to further administrative or judicial review, and (5) an individual retains all rights to usual administrative or judicial review 

after receiving the service or receiving a determination that a service would not be covered. These provisions would not affect a Medicare beneficiary’s right not to seek an advance determination. The 

prior determination process would be established in time to address 

such requests that are filed by 18 months of enactment. The Secretary would be required to collect data on the advance determinations and to establish a beneficiary outreach and education program. GAO is required to report on the use of the advance beneficiary notice and prior determination process within 18 months of 

its implementation. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Committees believe that when there is a question of whether 

Medicare will cover certain care for a beneficiary, the beneficiary 

should have the right to find out what would be covered before getting the service and risking financial liability. Doctors also should 

be able to make such a request on behalf of a particular patient. 

This provision is particularly important for seniors and disabled individuals who tend to be risk adverse and live on fixed incomes. 

Subtitle V—Miscellaneous 

Section 941. Policy Development Regarding Evaluation and Management (E&M) Documentation Guidelines 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would not be permitted to implement any new documentation guidelines for, or clinical examples of, evaluation and 

management (E&M) physician services unless the Secretary: (1) developed the guidelines in collaboration with practicing physicians 

(both generalists and specialists) and provided for an assessment of 

the proposed guidelines by the physician community, (2) established a plan containing specific goals, including a schedule, for improving the use of the guidelines, (3) conducted pilot projects to test 

modifications to the guidelines, (4) finds the guidelines have met 

established objectives, and (5) established and implemented an 

education program on the use of the guidelines with appropriate 

outreach. The Secretary would make changes to existing E&M 

guidelines to reduce paperwork burdens on physicians. The provision establishes objectives for modifications of the E&M guidelines: 

(1) identify clinically relevant documentation needed to code accurately and assess coding levels accurately, (2) decrease the nonVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00277 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
278

clinically pertinent documentation in the medical record, (3) increase reviewers accuracy, and (4) educate physicians and reviewers. 

The pilot projects would be required to be conducted on a voluntary basis in consultation with practicing physicians (both generalists and specialists) and be of sufficient length to educate physicians and contractors on E&M guidelines. A range of different 

projects would be established and include at least one project: 

using a physician peer review method, using an alternative method 

based on face-to-face encounter time with the patient, in a rural 

area, outside a rural area, and where physicians bill under physician services in a teaching setting and non-teaching setting. The 

projects would examine the effect of modified E&M guidelines on 

different types of physician practices in terms of the cost of compliance. Data collected under these projects would not be the basis for 

overpayment demands or post-payment audits. This protection 

would apply to claims filed as part of the project, would last the 

duration of the project, and would last for as long as the provider 

participated in the project. Each pilot conducted would examine the 

effect of the new E&M documentation guidelines on different types 

of physician practices (including those with fewer than 10 full-time 

equivalent employees) and the costs of physician compliance including education implementation, auditing, and monitoring. The Secretary would be required to submit periodic reports to Congress on 

these pilot projects. 

The provision would require a study of an alternative system for 

documenting physician claims. Specifically the Secretary would be 

required to study developing a simpler system for documenting 

claims for evaluation and management services and to consider 

systems other than current coding and documentation requirements. The Secretary would be required to consult with practicing 

physicians in designing and carrying out the study. This study 

would be due to Congress no later than October 1, 2005. MedPAC 

would be required to analyze the results of the study and report 

to Congress. The Secretary would also be required to study the appropriateness of coding in cases of extended office visits in which 

no diagnosis is made and report to Congress no later than October 

1, 2005. The Secretary would be required to include in the report 

recommendations on how to code appropriately for these visits in 

a manner that takes into account the amount of time the physician 

spent with the patient. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision is designed to promote greater consultation with 

practicing physicians with regard to the complicated evaluation 

and management and coding requirements governing Medicare 

payment for physician services. 

279

Section 942. Improvement in Oversight of Technology and Coverage 

(a) Council for Technology and Innovation 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a Council for Technology and Innovation within CMS. The council would be composed 

of senior CMS staff and clinicians with a chairperson designated by 

the Secretary who reports to the CMS Administrator. The Chairperson would serve as the Executive Coordinator for Technology 

and Innovation would be the single point of contact for outside 

groups and entities regarding Medicare coverage, coding, and payment processes. The Council would coordinate Medicare’s coverage, 

coding, and payment processes as well as information exchange 

with other entities with respect to new technologies and procedures, including drug therapies. 

If the National Committee on Vital and Health Statistics has not 

made a recommendation to the Secretary by enactment regarding 

implementation of the ICD–10 coding system for diagnosis and procedures, the Secretary may adopt such standards one year after the 

date of enactment. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

After the FDA pre-market approval, the Medicare program does 

a second evaluation of breakthrough technologies to determine effectiveness and cost of those technologies compared to existing 

technologies. The review is necessary and appropriate, but it can 

take months between FDA approval and the availability of new 

technology for Medicare beneficiaries. By coordinating FDA and 

CMS approval of breakthrough medical devices, where feasible, 

this provision is intended to facilitate a more efficient process for 

the coverage of certain new technology by the Medicare program. 

The ICD–9 coding system was adopted in 1979, and remains in 

effect for diagnosis and procedure coding in hospital inpatient and 

outpatient settings. ICD–9 has ‘‘run out’’ of codes for certain new 

procedures. For example, no code was available for the anthrax attack in 2001. NCVHS began investigating adoption of an updated 

coding system—ICD–10—in 1990. ICD–10 is more clinically accurate, and has available codes for new technologies and procedures. 

In 1996, as part of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, Congress required NCVHS to make a 

recommendation on adoption prior to Secretarial approval. To date, 

NCVHS still has not issued a recommendation. 

ICD–9 has run out of codes for new technologies and procedures. 

ICD–10 has room for those procedures, which would improve accuracy in claims processing. Every developed country in the world except the US and Israel has adopted ICD–10 as the standard coding 

system because it is superior to ICD–9. Some hospitals are eager 

to adopt ICD–10 because ultimately they believe it would improve 

280

efficiency. The Committee agrees, although nothing in this provision requires the Secretary to adopt the ICD–10 in any health care 

setting. 

(b) Methods for Determining Payment Basis for New Lab 

Tests 

CURRENT LAW

Outpatient clinical diagnostic laboratory tests are paid on the 

basis of area wide fee schedules. The law establishes cap on the 

payment amounts, which is currently set at 74 percent of the median for all fee schedules for that test. The cap is set at 100 percent 

of the median for tests performed after January 1, 2001 that the 

Secretary determines are new tests for which no limitation amount 

has previously been established. 

EXPLANATION OF PROVISION

The Secretary would be required to establish procedures (by regulation) for determining the basis for and amount of payments for 

new clinical diagnostic laboratory tests. New laboratory tests would 

be defined as those assigned a new, or substantially revised Health 

Care Procedure Coding System (HCPCS) code on or after January 

1, 2005. The Secretary, as part of this procedure, would be required 

to: (1) provide a list (on an Internet site or other appropriate 

venue) of tests for which payments are being established in that 

year, (2) publish a notice of a meeting in the Federal Register on 

the day the list becomes available, (3) hold the public meeting no 

earlier than 30 days after the notice to receive public comments 

and recommendations, (4) take into account the comments, recommendations and accompanying data in both proposed and final 

payment determinations. The Secretary would set forth the criteria 

for making these determinations; make public the available data 

considered in making such determinations; and could convene other 

public meetings as necessary. 

EFFECTIVE DATE

Effective for codes assigned on or after January 1, 2005. 

(c) GAO Study on Improvements in External Data Collection 

for Use in the Medicare Inpatient Payment System 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

GAO would be required to study which external data could be 

collected by CMS in a shorter time frame for use in calculating 

payments for inpatient hospital services. GAO could evaluate feasibility and appropriateness of using quarterly samples or special 

surveys and would include an analysis of whether other executive 

agencies would be better suited to collect this information. The report would be due to Congress no later than October 1, 2004. 

EFFECTIVE DATE

Upon enactment. 

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Section 943. Treatment of Hospitals for Certain Services Under 

Medicare Secondary Payer (MSP) Provisions 

CURRENT LAW

In certain instances when a beneficiary has other insurance coverage, Medicare becomes the secondary insurance. Medicare Secondary Payer is the Medicare program’s coordination of benefits 

with other insurers. Section 1862(b)(6) of the Social Security Act 

requires an entity furnishing a Part B service to obtain information 

from the beneficiary on whether other insurance coverage is available. 

EXPLANATION OF PROVISION

The Secretary would not require a hospital or a critical access 

hospital to ask questions or obtain information relating to the 

Medicare secondary payer provisions in the case of reference laboratory services if the same requirements are not imposed upon 

those provided by an independent laboratory. Reference laboratory 

services would be those clinical laboratory diagnostic tests and interpretations of it that are furnished without a face-to-face encounter between the beneficiary and the hospital where the hospital 

submits a claim for the services. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Hospitals would not have to directly contact each beneficiary on 

their retirement date, black lung status and other insurance information for reference laboratory services. While current law provisions for a claim containing valid insurance information are maintained, this provision is intended to reduce the amount of paperwork and regulatory burden related to the provision of these reference laboratory services by hospital-based entities. 

Section 944. EMTALA Improvements 

CURRENT LAW

Medicare requires participating hospitals that operate an emergency room to provide necessary screening and stabilization services to a patient in order to determine whether an emergency medical situation exists prior to asking about insurance status of the 

patient. 

Hospitals that are found to be in violation of Emergency Medical 

Treatment and Active Labor Act (EMTALA) requirements may face 

civil monetary penalties and termination of their provider agreement. Prior to imposing a civil monetary penalty, the Secretary is 

required to request a peer review organization (PRO), currently 

called quality improvement organizations (QIOs), to assess whether 

the involved beneficiary had an emergency condition, which had 

not been stabilized and provide a report on its findings. Except in 

the case where a delay would jeopardize the health or safety, the 

Secretary provides a 60-day period for the requested PRO review. 

282

EMTALA is enforced by general guidelines issued by CMS. Patients who present to the emergency room and request services (or 

another person does so on their behalf) are required to be screened 

and stabilized. 

EXPLANATION OF PROVISIONS

Emergency room services provided to screen and stabilize a 

Medicare beneficiary furnished after January 1, 2004, would be 

evaluated as reasonable and necessary on the basis of the information available to the treating physician or practitioner at the time 

the services were ordered; this would include the patient’s presenting symptoms or complaint and not the patient’s principal diagnosis. The Secretary would not be able to consider the frequency 

with which the item or service was provided to the patient before 

or after the time of admission or visit.

The Secretary would be required to establish a procedure to notify hospitals and physicians when an EMTALA investigation is 

closed. 

Except in the case where a delay would jeopardize the health and 

safety of individuals, the Secretary would be required to request a 

PRO review before making a compliance determination that would 

terminate a hospital’s Medicare participation because of EMTALA 

violations and provide a period of 5 business days for such review. 

The PRO shall provide a copy of the report on its findings to the 

hospital or physician that is consistent with existing confidentiality 

requirements. This provision would apply to terminations initiated 

on or after enactment. 

The provision also clarifies the responsibility of the hospital 

when the individual does not request examination or treatment for 

an emergency condition. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Providers have reported that some Medicare contractors are looking at final diagnoses (not presenting symptoms) in applying local 

medical review policies (LMRPs) that match particular tests to particular diagnoses—if a test does not match a listed diagnosis, payment is denied. Other claims are reportedly being denied based on 

LMRPs that set frequency limits for certain tests—if the test’s use 

in the emergency room exceeds a frequency limit, payment is denied. In its January 2001 report entitled The Emergency Medical 

Treatment and Labor Act: The Enforcement Process, at the OIG 

recommended that CMS ensure that peer review occurs before a 

provider is terminated from the Medicare program for an EMTALA 

violation. This section implements that recommendation, making 

the current discretionary PRO review process mandatory in cases 

that involve a question of medical judgment. Finally, it clarifies 

CMS guidelines for persons or individuals who arrive at the emergency room for non-emergency services. 

283

Section 945. Emergency Medical Treatment and Active Labor 

(EMTALA) Task Force 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a 17-member technical advisory group under specified requirements to review issues 

related to EMTALA. The advisory group would be comprised of: the 

CMS Administrator; the OIG; four hospital representatives who 

have EMTALA experience, (including 1 person from a public hospital and two of whom have not experienced EMTALA violations); 

five practicing physicians with EMTALA experience; two patient 

representatives; two regional CMS staff involved in EMTALA investigations; one representative from a state survey organization 

and one from a PRO. The Secretary would select qualified individuals who are nominated by organizations representing providers 

and patients. 

The advisory group would be required to: (1) elect a member to 

as chairperson, (2) schedule its first meeting at the direction of the 

Secretary and meet at least twice a year subsequently, (3) terminate 30 months after the date of its first meeting, and (4) be exempt from the Federal Advisory Committee Act. The advisory 

group would review EMTALA regulations; provide advice and recommendations to the Secretary; solicit public comments from interested parties; and disseminate information on the application of the 

EMTALA regulations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In its January 2001 report entitled The Emergency Medical 

Treatment and Labor Act: The Enforcement Process, the OIG recommended that CMS establish an EMTALA technical advisory 

group that includes all EMTALA stakeholders to help the agency 

resolve any emerging issues related to implementation of the law. 

Some of these current issues include specialists who refuse to service on call panels and inconsistencies between Stat and Federal law 

governing emergency medical services. In its June 2001 report entitled Emergency Care: EMTALA Implementations and Enforcement 

Issues, the GAO also concluded that the establishment of a technical advisory group could help CMS work with hospitals and physicians to achieve the goals of EMTALA and avoid creating unnecessary burdens for providers. This section implements the OIG recommendation, establishing a 19-member technical advisory group 

within HHS. 

284

Section 946. Authorizing Use of Arrangements To Provide Core Hospice Services in Certain Circumstances 

CURRENT LAW

A hospice is a public agency or private organization, which is primarily engaged in providing and making available certain care to 

a terminally ill Medicare beneficiary under a written plan. 

EXPLANATION OF PROVISIONS

A hospice would be permitted to: (1) enter into arrangements 

with another hospice program to provide care in extraordinary, exigent or other non-routine circumstances, such as unanticipated 

high patient loads, staffing shortages due to illness, or temporary 

travel by a patient outside the hospice’s service area, and (2) bill 

and be paid for the hospice care provided under these arrangements.

EFFECTIVE DATE

For hospice care provided on or after enactment. 

REASON FOR CHANGE

Hospice programs would be allowed to use personnel from other 

hospice programs to provide services to hospice patients. The program is given the flexibility so that a hospice program could continue to serve a patient if he or she was temporarily out of the area 

due to travel. Otherwise, the provision of the care to the patient 

might be delayed by the paperwork and requirements in starting 

up a new service at another agency. It is the intent of Congress 

that the originating hospice maintains control over the billing and 

quality of care. 

Section 947. Application of OSHA Bloodborne Pathogens Standards 

to Certain Hospitals 

CURRENT LAW

Section 1866 establishes certain conditions of participation that 

providers must meet in order to participate in Medicare. 

EXPLANATION OF PROVISION

Public hospitals that are not otherwise subject to the Occupational Safety and Health Act of 1970 would be required to comply 

with the Bloodborne Pathogens standard under section 1910.1030 

of title 29 of the Code of Federal Regulations. A hospital that fails 

to comply with the requirement would be subject to a civil monetary penalty, but would not be terminated from participating in 

Medicare. 

EFFECTIVE DATE

The provision would apply to hospitals as of July 1, 2004. 

REASON FOR CHANGE

Last year, Congress enacted legislation that requires hospitals to 

utilize safe needles. However, that legislation only applies to nongovernment hospitals. Twenty-four states have similar requireVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00284 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
285

ments on public hospitals. This provision would protect the health 

and safety of health care workers in those facilities by requiring 

public hospitals in the other 26 states and the District of Columbia 

to comply with this important standard. 

Section 948. BIPA-Related Technical Amendments and Corrections 

CURRENT LAW

BIPA established an advisory process for national coverage determinations where panels of experts formed by advisory committees 

could forward their recommendations directly to the Secretary 

without prior approval of the advisory committee or the Executive 

Committee. 

EXPLANATION OF PROVISION

The statutory reference in BIPA would be changed from the Social Security Act to the Public Health Service Act. Other BIPA references would be changed from a policy to a determinations. 

EFFECTIVE DATE

The provision would be effective as if included in BIPA. 

Section 949. Conforming Authority To Waive A Program Exclusion 

CURRENT LAW

The Secretary is required to exclude individuals and entities 

from participation in Federal Health Programs that are (1) convicted of a criminal offense related to health care delivery under 

Medicare or under State health programs, (2) convicted of a criminal offense related to patient abuse or neglect under Federal or 

State law, (3) convicted of a felony relating to fraud, theft, or financial misconduct relating to a health care finance program or operated by the Federal, State or local government, or (4) convicted of 

a felony related to a controlled substance. 

EXPLANATION OF PROVISIONS

The Administrator of a Federal health program would be permitted to waive certain 5-year exclusions if the exclusion of a sole 

community physician or source of specialized services in a community would impose a hardship. The mandatory exclusions that 

could be waived would be those related to convictions associated 

with program-related crimes, health care fraud and controlled substances. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Office of Inspector General requested this technical correction.

286

Section 950. Treatment of Certain Dental Claims 

CURRENT LAW

The Medicare benefit does not include most dental services. Some 

insurers may require a claim denial from Medicare before accepting 

the dental claim for payment review, even if Medicare does not 

cover the service. 

EXPLANATION OF PROVISION

A group health plan providing supplemental or secondary coverage to Medicare beneficiaries would not be able to require dentists to obtain a claim denial from Medicare for non-covered dental 

services before paying the claim. 

EFFECTIVE DATE

The provision would be effective 60 days after enactment. 

REASON FOR CHANGE

The Committees are concerned about private insurers requiring 

dentists to submit claims to Medicare for non-covered services before making a determination for coverage under the group health 

plan. Because of this requirement, dentists have been forced to enroll in the Medicare program to submit claims for services that are 

categorically excluded from Medicare coverage. Dentists view Medicare’s enrollment application process as overly burdensome, particularly in light of the fact that Medicare does not cover most dental services. This provision would alleviate the enrollment burden 

placed on dentists providing services clearly excluded from Medicare coverage, consistent with the overarching goal of this legislation to reduce regulatory burdens. 

Section 951. Furnishing Hospitals With Information To Compute 

DSH Formula 

CURRENT LAW

Disproportionate share hospital (DSH) payments under Medicare 

are calculated using a formula that includes the number of patient 

days for patients eligible for Medicaid. 

EXPLANATION OF PROVISION

The provision would require the Secretary to arrange for the information such as number of paid or unpaid Medicaid days, and 

the number of dual eligibles that hospitals need to calculate the 

Medicare DSH payment formula. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Hospitals find it difficult to compute certain critical numbers for 

the purposes of Medicare DSH such as unpaid days used by Medicaid eligibles or Medicare dual eligibles. This helps ensure accuracy for hospitals and for the Trust Fund. 

287

Section 952. Revisions to Reassignment Provisions 

CURRENT LAW

Under certain circumstances, a person or entity other than the 

individual providing the service may receive Medicare payments. 

EXPLANATION OF PROVISION

Entities, as defined by the Secretary, could receive Medicare payments for services provided by a physician or other person if the 

service was provided under a contractual arrangement and if the 

arrangement included joint and several liability (liability for several parties) for overpayment and the entities meet program integrity specifications determined by the Secretary. 

EFFECTIVE DATE

The provision would be effective for payments made on or after 

one year after the date of enactment. 

Section 953. Other Provisions 

CURRENT LAW

No provisions. 

EXPLANATION OF PROVISION

GAO Report on Physician Compensation. No later than six 

months from enactment, GAO would be required to report to Congress on the appropriateness of the updates in the conversion factor 

including the appropriateness of the sustainable growth rate (SGR) 

formula for 2002 and subsequently. The report would examine the 

stability and the predictability of the updates and rate as well as 

the alternatives for use of the SGR in the updates. No later than 

12 months from enactment, GAO would be required to report to 

Congress on all aspects of physician compensation for Medicare 

services. The report would review the alternatives for the physician 

fee schedule.

Annual Publication of List of National Coverage Determinations.

The Secretary would be required to publish an annual list of national coverage determinations made under Medicare in the previous year. Included would be information on how to get more information about the determinations. The list would be published in 

an appropriate annual publication that is publicly available. 

GAO Report on Flexibility in Applying Home Health Conditions 

of Participation to Patients Who Are Not Medicare Beneficiaries.

The GAO would be required to report to Congress on the implications if the Medicare conditions of participation for home health 

agencies were applied flexibly with respect to groups or types of patients who are not Medicare beneficiaries. The report would include 

an analysis of the potential impact of this flexibility on clinical operations and the recipients of such services and an analysis of 

methods for monitoring the quality of care provided to these recipients. The report would be due no later than six month after enactment. 

OIG Report on Notices Relating to Use of Hospital Lifetime Reserve Days. The Inspector General of HHS would be required to reVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00287 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
288

port to Congress on the extent to which hospitals provide notice to 

Medicare beneficiaries, in accordance with applicable requirements, 

before they use the 60 lifetime reserve days under the hospital benefit. The report would also include the appropriateness and feasibility of hospitals providing a notice to beneficiaries before they exhaust the lifetime reserve days. The report would be due no later 

than one year after enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 954. Temporary Suspension of OASIS Requirement for Collection of Data on Non-Medicare and Non-Medicaid Claims 

CURRENT LAW

Under the Conditions of Participation, home health agencies are 

required to complete the OASIS form on all patients. 

EXPLANATION OF PROVISION

The OASIS data collected on non-Medicare or non-Medicaid patients is not collected or used by the Federal government. This provision suspends collection until the Secretary has published final 

regulations regarding the collection and use of this data. Moreover 

it requires a study of how the data is used by the agencies as well 

as recommendations from quality assessment experts. Agencies 

may continue collecting the data during the suspension. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Data mandates on the collection of data on non-Medicare and 

non-Medicaid patients by the Federal government should be carefully reviewed for privacy issues by the agency.

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 2473. 

MOTION TO REPORT THE BILL

The bill, H.R. 2473, as amended, was ordered favorably reported 

by a rollcall vote of 25 yeas to 15 nays (with a quorum being 

present). The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

289

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

VOTES ON AMENDMENTS

An amendment in the nature of a substitute by Chairman Thomas was agreed to by a rollcall vote of 25 yeas to 15 nays. The vote 

was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

A rollcall vote was conducted on the following amendments to the 

Chairman’s amendment in the nature of a substitute. 

An amendment by Mr. Cardin, which would amend section 

1860D–5(d) of the Social Security Act as proposed to be inserted by 

section 101, to require the U.S. Department of Health and Human 

Services to takes such steps as may be necessary to qualify and 

serve as a prescription drug plan sponsor and to offer a prescription drug plan that offers standard coverage throughout the United 

States, was defeated by a rollcall vote of 15 yeas to 23 nays. The 

vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

290

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An amendment by Mr. McDermott, to strike Subtitle C of Title 

II, eliminating the privatization of plans, was defeated by a rollcall 

vote of 14 yeas to 23 nays. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An amendment by Mrs. Johnson, which would amend section 

1848(c)(2)(H) of the Social Security Act, as proposed to be added by 

section 303(a)(1)(B), to direct the Secretary of Health and Human 

Services to expedite the process for adjusting existing CPT codes 

for costs associated with the administration of covered drugs, was 

agreed to by a rollcall vote of 32 yeas to 5 nays. The vote was as 

follows:

291

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Mr. Doggett, which would amend section 

1860D–3(c) of the Social Security Act as proposed to be inserted by 

section 101, to require each participating manufacturer of a covered 

outpatient drug to enter into arrangements with prescription drug 

plan sponsors or entities offering an MA–EFF prescription plan, 

was defeated by a rollcall vote of 12 yeas to 23 nays The vote was 

as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... ........... ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An en bloc amendment by Mr. Collins, which would add at the 

end of section 1851(j) of the Social Security Act, as added by section 

102(a), to apply fee-for-service Medicare+Choice rules to prescription drug benefits; and as added by section 221(d), to provide the 

same treatment for premiums for MA private fee-for-service plans, 

292

was agreed to by a rollcall vote of 24 yeas to 12 nays, with 2 voting 

present. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... ........... X 

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... ........... X 

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Messrs. Nussle and Pomeroy, which would 

add the following new sections at the end of Title IV: Sec. 416—

Adjustment to the Medicare Inpatient Hospital PPS Wage Index to 

Revise the Labor-Related Share of Such Index; and Sec. 417—

Medicare Incentive Payment Program Improvements for Physician 

Scarcity, was agreed to by a rollcall vote of 39 yeas to 0 nays, with 

1 voting present. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... ........... X

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

A substitute amendment by Mr. Stark was defeated by a rollcall 

vote of 14 yeas to 26 nays. The vote was as follows:

293

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

IV. BUDGET EFFECTS OF THE BILL 

The Congressional Budget Office has not submitted a final score 

of the legislation at the time of the filing of this report (July 15, 

2003).

V. OTHER MATTERS REQUIRED TO BE DISCUSSED 

UNDER HOUSE RULES 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee reports that the need for 

this legislation was confirmed by the oversight hearings of the Subcommittee on Health. The hearings were as follows: 

The Subcommittee on Health held a series of hearings on Medicare Reform during the 108th Congress to examine the implications 

of different proposals aimed at helping seniors gain more affordable 

access to prescription drugs. A list of these hearings may be found 

in this report in Section I. Introduction, Part C. Legislative History 

(Page xx). 

B. SUMMARY OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

In compliance with clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the primary 

purpose of H.R. 2473 is to create a prescription drug benefit into 

the Medicare program while modernizing other aspects of the program. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

In compliance with clause 3(d)(1) of rule XIII of the Rules of the 

House of Representatives, relating to constitutional Authority, the 

Committee states that the Committee’s action in reporting the bill 

is derived from Article I of the Constitution, Section 8 (‘‘The ConVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00293 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
294

gress shall have power to lay and collect taxes, duties, imposts, and 

excises, to pay the debts and to provide for * * * the General Welfare of the United States * * *’’). 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

Legislative Counsel has not prepared a Ramseyer at the time of 

the filing of this report (July 15, 2003).

(295)

VII. DISSENTING VIEWS 

We oppose the Republican Medicare bill reported by the Committee on Ways and Means. This is not a bill designed to ensure 

that seniors and people with disabilities get a long overdue Medicare prescription drug benefit that is available and affordable to 

all. Instead, it is an effort by the Republican Majority to complete 

their ideological mission to have Medicare ‘‘wither on the vine’’. 

Despite the legislation’s paltry benefit and fundamentally flawed 

structure, our committee could have reported a bill supported by a 

strong bipartisan majority with only two simple changes that we 

offered as amendments. But Republicans rejected our efforts to find 

a compromise. This absolute refusal to negotiate reinforces our firm 

belief that privatizing Medicare is their real goal in this so-called 

reform effort. 

Prescription drug coverage 

This legislation has a grossly inadequate drug benefit that was 

designed to fit into the Republican budget, not the budget of America’s elderly and disabled citizens. If the majority hadn’t squandered trillions on tax breaks for the wealthy, we would have had 

more resources to improve this benefit. 

Unlike Medicare Part B, where every beneficiary pays the same 

premium, the premium for prescription drug coverage would not be 

set in the statute. Although Republicans claim that the premium 

for this coverage will be $35 per person per month, that is merely 

a guesstimate. Premiums could be much higher and will vary in 

different areas of the country and even among plans in the same 

area. Private insurance premiums in the commercial market are 

rising at double-digit percentages each year, with most insurers citing prescription drugs as the primary driver. Unstable premiums 

translate into an unreliable benefit for senior citizens and other 

Medicare beneficiaries who are living on fixed incomes. In addition, after the initial coverage limit of $2,000, beneficiaries are forced to pay 100 percent of the cost until total drug 

spending reaches $4,900, after which the plan will pick up the 

costs. This patchwork quilt of coverage doesn’t exist today in any 

other public or private plan. Almost half of all beneficiaries—48 

percent—will fall into this gap and only 10 percent will have drug 

needs high enough to get the catastrophic coverage on the other 

side of the gap. This means that a senior citizen with average drug 

spending in 2006 would find themselves with coverage for their 

medications until August, after which they would receive no coverage for the rest of the year while still paying a sizeable premium. 

This legislation also would tie the level of benefits to income. The 

point at which catastrophic coverage would begin would be based 

on a beneficiary’s income. People in the highest category would 

have no coverage from $2,000 to $13,200 in drug spending. If they 

296

needed more than $13,200 worth of drugs, coverage would begin 

again. Given that wealthier beneficiaries have already paid more 

through the payroll taxes during their working years, this double 

taxation of Medicare benefits should be rejected. Even worse, however, is that this misguided policy would require the IRS and the 

Department of Health and Human Services (HHS) to share sensitive income data on beneficiaries for the first time. HHS would 

then have to give information to the plan to indicate the level of 

the benefit for each beneficiary, a de facto disclosure of income. It 

appears that beneficiaries who refuse to authorize the sharing of 

this information might be excluded from the drug coverage. It’s an 

offensive invasion of privacy that undermines the social insurance 

nature of Medicare and it ought to be rejected. 

While Republicans purport to protect those on the lower-ends of 

the income scale, even those provisions fall far short. Help for even 

the poorest seniors—those with incomes below $8,980—is contingent on meeting an assets test. This means that they will not get 

the extra help if they have even modest savings ($4,000 or more). 

Data suggest that more than one-third of otherwise eligible low-income beneficiaries would be excluded as a result of this hidden 

hatchet. 

Republican Members of the Ways and Means Committee and the 

President of the United States are fond of saying that Medicare 

beneficiaries should get the same choices as Members of Congress 

do with respect to prescription drug coverage. They like to say that 

as a rhetorical point, but their rhetoric doesn’t match the reality 

of this bill. As Members of Congress, we get our health insurance 

through the Federal Employees Health Benefits Plan like all federal employees. There isn’t a single plan option in FEHBP as bad 

as the one they’re promoting for seniors in Medicare. 

We’re also very concerned that the Republican Medicare bill will 

cause employers to drop retiree prescription drug coverage. The 

Congressional Budget Office informed us at the mark-up that those 

concerns are real. They estimate that 32% of employers who are 

currently providing retiree prescription drug benefits will drop that 

coverage if this bill becomes law as written. That needs to be fixed 

in this bill as well. We should be using this opportunity to reinforce 

the better coverage that is out there, not erode it. 

While there are many other problems in this legislation, we are 

also particularly troubled by the fact that it does nothing to guarantee lower prices. In fact, it includes language that actually prohibits the Secretary of Health and Human Services from ‘‘interfering’’ in negotiations between private plans and drug companies. 

This is an extraordinary prohibition that affects Medicare beneficiaries and taxpayers alike. It is fiscally irresponsible. 

Fundamental flaws 

All of these are very serious concerns, but we would still be willing to accept this bill as a good faith effort to add a prescription 

drug benefit to Medicare if Republicans would accept two changes. 

First, the bill must be amended to include a uniform, defined prescription drug benefit that is universally available through Medicare. Second, the bill must reject proposals to privatize the program. These two changes are critical. 

297

No real Medicare drug benefit 

The lack of a uniform nationally available, defined prescription 

drug benefit in Medicare in the Republican bill is a fundamental 

flaw. The bill relies solely on private plans to provide the new prescription drug benefit. Unlike every other benefit in Medicare—doctor’s visits, hospitalizations, and physical therapy as examples—a 

beneficiary would not have coverage through Medicare for prescription drugs. Instead, a Medicare enrollee would be ‘‘entitled’’ to purchase a private prescription drug plan at varying prices around the 

country, provided one was even available—and affordable—in their 

community. That is not an entitlement at all. 

On top of that, we’re concerned the bill won’t work. Beneficiaries 

who want to remain in traditional Medicare would theoretically 

purchase new private drug-only plans; all others would get their 

prescription drugs through HMOs, PPOs and other managed care 

plans. The bill would divide the country into regions and would require that beneficiaries have the choice of two private drug plans 

(only one of which need be a drug-only plan) in each of those regions. But, there is no provision in the bill to account for the possibility that two plans simply won’t appear in each region! It may be 

that no plans appear. As President Bush’s Medicare Administrator, 

Tom Scully, has said, these drug-only plans ‘‘don’t exist in nature 

and won’t work in practice.’’ We have yet to see any proof from the 

Republican authors of this program or insurance companies that 

these plans will materialize. In fact, Wall Street analysts, insurance companies and pharmaceutical benefit managers have cast 

considerable doubt on this scheme. The legislation would allow the 

government to try to bribe the plans to participate, but if they 

turned down that offer, there is no backup plan and beneficiaries 

would have no place to buy coverage. 

Even worse, if two plans do appear, but the HMO offers a more 

affordable benefit than the drug-only plan, beneficiaries in traditional Medicare may be left with no option but to give up Medicare 

and enroll in an HMO to get prescription drug coverage. That’s 

wrong. We repeatedly inquired about what would happen in such 

a situation, but failed to get any suitable answer from the Republicans. 

Democratic amendments 

Add a guaranteed Medicare benefit. The first key change necessary for us to support the Republican Medicare bill is to provide 

a guaranteed drug benefit managed by Medicare in the same way 

that we manage Medicare Part A (hospital services) and Medicare 

Part B (physician services). We can accept that private plans be allowed to compete to provide Medicare benefits, but only if beneficiaries in traditional Medicare are not disadvantaged as a result. 

All our amendment would do is add a stable, defined drug benefit 

in Medicare that is available everywhere in the country. The Republican private plans could still operate as envisioned under this 

program, but a Medicare option with a national, defined benefit 

would also be in place in every community, regardless of how many 

private plans were offering coverage in the area. That’s the promise 

of Medicare today with respect to health services and it should hold 

true for medications as well. 

298

Republicans shouldn’t be threatened by this amendment. If the 

private sector truly is more efficient and able to offer better options 

than government-run Medicare, people will leave the traditional 

Medicare plan and join the private sector options developed in this 

Republican bill. 

This is a sensible amendment that does nothing more than maintain the promise of Medicare since its inception in 1965 and carry 

that promise into the future. However, Republicans opposed this 

amendment on a strictly party line basis. 

Eliminate privatization of Medicare. The second fundamental 

concern we have with the Republican bill is its goal to privatize 

Medicare. Make no mistake about it. The ultimate goal of this bill 

is to end Medicare’s entitlement to defined benefits. Providing a 

drug benefit to seniors is simply the window dressing. It includes 

a whole scheme starting in 2010 that will end Medicare as a defined benefit universally available at a uniform price for all of 

America’s seniors and people with disabilities. Instead, seniors’ 

ability to get the health care they need would depend upon their 

ability to afford a plan that meets their needs. Beneficiaries who 

need or want to stay in traditional Medicare will have to pay more 

to do so. 

Remember, Medicare was created because the private health care 

system would not provide affordable health insurance coverage for 

seniors. We shouldn’t be turning back the clock to those times. But 

that’s exactly what the Republican bill—as written—will do. 

The Bipartisan Commission on the Future of Medicare already 

rejected this proposal. At that time, the Medicare Actuary estimated that converting Medicare to a competitive model of this nature would result in premium increases in traditional Medicare of 

47%. 

Increasing Medicare premiums at that rate would absolutely 

force seniors to leave the program—they wouldn’t be able to afford 

to stay. They would have to go into the ‘‘competitive’’ side of the 

program and join HMOs, PPOs or other similar private plans. 

These private options restrict choice of physicians, hospitals and 

other providers and enforce limitations that don’t exist in traditional Medicare. America’s seniors don’t want to be forced into private health plans that don’t meet their needs and, more importantly, limit their choice of physician and doctor. We won’t support 

any bill that takes away the security of Medicare. This section 

needs to go. Again, we offered an amendment to eliminate it. We 

were defeated on a party line vote. 

Eliminate sweetheart deal for drug companies. This bill creates 

a new bureaucracy to work with the private plans. Embedded in 

the section establishing this new agency is a provision that actually 

prohibits the Secretary of Health and Human Services from ‘‘interfering’’ in negotiations between private plans and drug companies. 

This is an unprecedented restriction of authority for a government 

program of this magnitude. With hundreds of billions of federal dollars at stake, Republicans put their friends in the pharmaceutical 

industry ahead of taxpayers. 

During the anthrax crisis, Secretary Thompson negotiated with 

the manufacturer of the antibiotic Cipro and cut prices by more 

than half. The VA negotiates directly for prescription drugs it purVerDate Jan 31 2003 14:51 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00298 Fmt 6604 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
299

chases on behalf of veterans. Even the office that is responsible for 

the Federal Employees Health Benefits plan does not have its 

hands tied in this fashion. This is an extraordinary prohibition that 

affects Medicare beneficiaries and taxpayers alike. We offered an 

amendment to delete it. But this, too, was defeated on a largely 

party-line vote. 

The Republican bill fails senior citizens 

Democrats have supported Medicare from day one—and have 

consistently worked to improve it. We want a prescription drug 

benefit added to the program. But, we won’t go along with allowing 

the promise of a drug benefit become the Trojan Horse that ends 

Medicare as we know it. We are willing to work with House Republicans on a more limited benefit than we know is needed, but they 

have to be willing to protect the promise of Medicare. The bill reported out of our Committee fails that test, and is a bad deal for 

America’s senior citizens and the individuals with disabilities who 

depend on Medicare.

C. B. RANGEL. 

ROBERT T. MATSUI. 

JIM MCDERMOTT. 

WILLIAM J. JEFFERSON. 

STEPHANIE TUBBS JONES. 

SANDER LEVIN. 

BEN CARDIN. 

MAX SANDLIN. 

PETE STARK. 

MIKE MCNULTY. 

JOHN TANNER. 

XAVIER BECERRA. 

RICHARD E. NEAL. 

JERRY KLECZKA. 

JOHN LEWIS.

Æ

2

The Congressional Budget Office has not submitted a final score 

of the legislation at the time of the filing of this report (July 

15, 2003) ..........................................................................................

V. Other Matters Required To Be Discussed Under House Rules ................. 00

A. Committee Oversight Findings and Recommendations ................ 00

B. Summary of General Performance Goals and Objectives ............. 00

C. Constitutional Authority Statement ............................................... 00

VI. Changes in Existing Law Made by the Bill, as Reported ...........................

Legislative Counsel has not prepared a Ramseyer at the time 

of the filing of this report (July 15, 2003) .................................... 00

VII. Views ............................................................................................................... 00

The amendment is as follows: 

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; AMENDMENTS TO SOCIAL SECURITY ACT; REFERENCES TO BIPA 

AND SECRETARY; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Medicare Prescription Drug and 

Modernization Act of 2003’’. 

(b) AMENDMENTS TO SOCIAL SECURITY ACT.—Except as otherwise specifically provided, whenever in this Act an amendment is expressed in terms of an amendment 

to or repeal of a section or other provision, the reference shall be considered to be 

made to that section or other provision of the Social Security Act. 

(c) BIPA; SECRETARY.—In this Act: 

(1) BIPA.—The term ‘‘BIPA’’ means the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, as enacted into law by section 

1(a)(6) of Public Law 106–554. 

(2) SECRETARY.—The term ‘‘Secretary’’ means the Secretary of Health and 

Human Services. 

(d) TABLE OF CONTENTS.—The table of contents of this Act is as follows:

Sec. 1. Short title; amendments to Social Security Act; references to BIPA and Secretary; table of contents. 

TITLE I—MEDICARE PRESCRIPTION DRUG BENEFIT 

Sec. 101. Establishment of a medicare prescription drug benefit. 

‘‘PART D—VOLUNTARY PRESCRIPTION DRUG BENEFIT PROGRAM

‘‘Sec. 1860D–1. Benefits; eligibility; enrollment; and coverage period. 

‘‘Sec. 1860D–2. Requirements for qualified prescription drug coverage. 

‘‘Sec. 1860D–3. Beneficiary protections for qualified prescription drug coverage. 

‘‘Sec. 1860D–4. Requirements for and contracts with prescription drug plan (PDP) sponsors. 

‘‘Sec. 1860D–5. Process for beneficiaries to select qualified prescription drug coverage. 

‘‘Sec. 1860D–6. Submission of bids and premiums. 

‘‘Sec. 1860D–7. Premium and cost-sharing subsidies for low-income individuals. 

‘‘Sec. 1860D–8. Subsidies for all medicare beneficiaries for qualified prescription drug coverage. 

‘‘Sec. 1860D–9. Medicare Prescription Drug Trust Fund. 

‘‘Sec. 1860D–10. Definitions; application to medicare advantage and EFFS programs; treatment of references to provisions in part C. 

Sec. 102. Offering of qualified prescription drug coverage under Medicare Advantage and enhanced fee-for-service (EFFS) program. 

Sec. 103. Medicaid amendments. 

‘‘Sec. 1935. Special provisions relating to medicare prescription drug benefit. 

Sec. 104. Medigap transition. 

Sec. 105. Medicare prescription drug discount card endorsement program. 

Sec. 106. Disclosure of return information for purposes of carrying out medicare catastrophic prescription drug 

program. 

Sec. 107. State pharmaceutical assistance transition commission. 

TITLE II—MEDICARE ENHANCED FEE-FOR-SERVICE AND MEDICARE ADVANTAGE PROGRAMS; 

MEDICARE COMPETITION 

Sec. 200. Medicare modernization and revitalization. 

Subtitle A—Medicare Enhanced Fee-for-Service Program 

Sec. 201. Establishment of enhanced fee-for-service (EFFS) program under medicare. 

‘‘PART E—ENHANCED FEE-FOR-SERVICE PROGRAM

‘‘Sec. 1860E–1. Offering of enhanced fee-for-service plans throughout the United States. 

‘‘Sec. 1860E–2. Offering of enhanced fee-for-service (EFFS) plans. 

‘‘Sec. 1860E–3. Submission of bids; beneficiary savings; payment of plans. 

‘‘Sec. 1860E–4. Premiums; organizational and financial requirements; establishment of standards; contracts 

with EFFS organizations. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM

Sec. 211. Implementation of medicare advantage program. 

Sec. 212. Medicare advantage improvements. 

3

CHAPTER 2—IMPLEMENTATION OF COMPETITION PROGRAM

Sec. 221. Competition program beginning in 2006. 

CHAPTER 3—ADDITIONAL REFORMS

Sec. 231. Making permanent change in medicare advantage reporting deadlines and annual, coordinated election period. 

Sec. 232. Avoiding duplicative State regulation. 

Sec. 233. Specialized medicare advantage plans for special needs beneficiaries. 

Sec. 234. Medicare MSAs. 

Sec. 235. Extension of reasonable cost contracts. 

Sec. 236. Extension of municipal health service demonstration projects. 

Subtitle C—Application of FEHBP-Style Competitive Reforms 

Sec. 241. Application of FEHBP-style competitive reform beginning in 2010. 

TITLE III—COMBATTING WASTE, FRAUD, AND ABUSE 

Sec. 301. Medicare secondary payor (MSP) provisions. 

Sec. 302. Competitive acquisition of certain items and services. 

Sec. 303. Competitive acquisition of covered outpatient drugs and biologicals. 

Sec. 304. Demonstration project for use of recovery audit contractors. 

TITLE IV—RURAL HEALTH CARE IMPROVEMENTS 

Sec. 401. Enhanced disproportionate share hospital (DSH) treatment for rural hospitals and urban hospitals 

with fewer than 100 beds. 

Sec. 402. Immediate establishment of uniform standardized amount in rural and small urban areas. 

Sec. 403. Establishment of essential rural hospital classification. 

Sec. 404. More frequent update in weights used in hospital market basket. 

Sec. 405. Improvements to critical access hospital program. 

Sec. 406. Redistribution of unused resident positions. 

Sec. 407. Two-year extension of hold harmless provisions for small rural hospitals and sole community hospitals 

under prospective payment system for hospital outpatient department services. 

Sec. 408. Exclusion of certain rural health clinic and federally qualified health center services from the prospective payment system for skilled nursing facilities. 

Sec. 409. Recognition of attending nurse practitioners as attending physicians to serve hospice patients. 

Sec. 410. Improvement in payments to retain emergency capacity for ambulance services in rural areas. 

Sec. 411. Two-year increase for home health services furnished in a rural area. 

Sec. 412. Providing safe harbor for certain collaborative efforts that benefit medically underserved populations. 

Sec. 413. GAO study of geographic differences in payments for physicians’ services. 

Sec. 414. Treatment of missing cost reporting periods for sole community hospitals. 

Sec. 415. Extension of telemedicine demonstration project. 

Sec. 416. Adjustment to the medicare inpatient hospital PPS wage index to revise the labor-related share of 

such index. 

Sec. 417. Medicare incentive payment program improvements for physician scarcity. 

TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

Sec. 501. Revision of acute care hospital payment updates. 

Sec. 502. Recognition of new medical technologies under inpatient hospital PPS. 

Sec. 503. Increase in Federal rate for hospitals in Puerto Rico. 

Sec. 504. Wage index adjustment reclassification reform . 

Sec. 505. MedPAC report on specialty hospitals. 

Subtitle B—Other Provisions 

Sec. 511. Payment for covered skilled nursing facility services. 

Sec. 512. Coverage of hospice consultation services. 

TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services 

Sec. 601. Revision of updates for physicians’ services. 

Sec. 602. Studies on access to physicians’ services. 

Sec. 603. MedPAC report on payment for physicians’ services. 

SUBTITLE B—PREVENTIVE SERVICES

Sec. 611. Coverage of an initial preventive physical examination. 

Sec. 612. Coverage of cholesterol and blood lipid screening. 

Sec. 613. Waiver of deductible for colorectal cancer screening tests. 

Sec. 614. Improved payment for certain mammography services. 

Subtitle C—Other Services 

Sec. 621. Hospital outpatient department (HOPD) payment reform. 

Sec. 622. Payment for ambulance services. 

Sec. 623. Renal dialysis services. 

Sec. 624. One-year moratorium on therapy caps; provisions relating to reports. 

Sec. 625. Adjustment to payments for services furnished in ambulatory surgical centers. 

Sec. 626. Payment for certain shoes and inserts under the fee schedule for orthotics and prosthetics. 

Sec. 627. Waiver of part B late enrollment penalty for certain military retirees; special enrollment period. 

Sec. 628. Part B deductible. 

Sec. 629. Extension of coverage of intravenous immune globulin (IVIG) for the treatment of primary immune 

deficiency diseases in the home. 

TITLE VII—PROVISIONS RELATING TO PARTS A AND B 

Subtitle A—Home Health Services 

Sec. 701. Update in home health services. 

4

Sec. 702. Establishment of reduced copayment for a home health service episode of care for certain beneficiaries. 

Sec. 703. MedPAC study on medicare margins of home health agencies. 

Subtitle B—Direct Graduate Medical Education 

Sec. 711. Extension of update limitation on high cost programs. 

Subtitle C—Chronic Care Improvement 

Sec. 721. Voluntary chronic care improvement under traditional fee-for-service. 

Sec. 722. Chronic care improvement under medicare advantage and enhanced fee-for-service programs. 

Sec. 723. Institute of Medicine report. 

Sec. 724. MedPAC report. 

Subtitle D—Other Provisions 

Sec. 731. Modifications to medicare payment advisory commission (MedPAC). 

Sec. 732. Demonstration project for medical adult day care services. 

Sec. 733. Improvements in national and local coverage determination process to respond to changes in technology. 

Sec. 734. Treatment of certain physician pathology services. 

TITLE VIII—MEDICARE BENEFITS ADMINISTRATION 

Sec. 801. Establishment of Medicare Benefits Administration. 

TITLE IX—REGULATORY REDUCTION AND CONTRACTING REFORM 

Subtitle A—Regulatory Reform 

Sec. 901. Construction; definition of supplier. 

‘‘Supplier 

Sec. 902. Issuance of regulations. 

Sec. 903. Compliance with changes in regulations and policies. 

Sec. 904. Reports and studies relating to regulatory reform. 

Subtitle B—Contracting Reform 

Sec. 911. Increased flexibility in medicare administration. 

Sec. 912. Requirements for information security for medicare administrative contractors. 

Subtitle C—Education and Outreach 

Sec. 921. Provider education and technical assistance. 

‘‘Sec. 1889. Provider education and technical assistance. 

Sec. 922. Small provider technical assistance demonstration program. 

Sec. 923. Medicare Provider Ombudsman; Medicare Beneficiary Ombudsman. 

Sec. 924. Beneficiary outreach demonstration program. 

Sec. 925. Inclusion of additional information in notices to beneficiaries about skilled nursing facility benefits. 

Sec. 926. Information on medicare-certified skilled nursing facilities in hospital discharge plans. 

Subtitle D—Appeals and Recovery 

Sec. 931. Transfer of responsibility for medicare appeals. 

Sec. 932. Process for expedited access to review. 

Sec. 933. Revisions to medicare appeals process. 

Sec. 934. Prepayment review. 

Sec. 935. Recovery of overpayments. 

Sec. 936. Provider enrollment process; right of appeal. 

Sec. 937. Process for correction of minor errors and omissions without pursuing appeals process. 

Sec. 938. Prior determination process for certain items and services; advance beneficiary notices. 

Subtitle V—Miscellaneous Provisions 

Sec. 941. Policy development regarding evaluation and management (E & M) documentation guidelines. 

Sec. 942. Improvement in oversight of technology and coverage. 

Sec. 943. Treatment of hospitals for certain services under medicare secondary payor (MSP) provisions. 

Sec. 944. EMTALA improvements. 

Sec. 945. Emergency Medical Treatment and Active Labor Act (EMTALA) technical advisory group. 

Sec. 946. Authorizing use of arrangements to provide core hospice services in certain circumstances. 

Sec. 947. Application of osha bloodborne pathogens standard to certain hospitals. 

Sec. 948. BIPA-related technical amendments and corrections. 

Sec. 949. Conforming authority to waive a program exclusion. 

Sec. 950. Treatment of certain dental claims. 

Sec. 951. Furnishing hospitals with information to compute dsh formula. 

Sec. 952. Revisions to reassignment provisions. 

Sec. 953. Other provisions. 

Sec. 954. Temporary suspension of OASIS requirement for collection of data on non-medicare and non-medicaid 

patients.

TITLE I—MEDICARE PRESCRIPTION DRUG 

BENEFIT 

SEC. 101. ESTABLISHMENT OF A MEDICARE PRESCRIPTION DRUG BENEFIT. 

(a) IN GENERAL.—Title XVIII is amended—

(1) by redesignating part D as part F; and 

(2) by inserting after part C the following new part:

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‘‘PART D—VOLUNTARY PRESCRIPTION DRUG BENEFIT PROGRAM

‘‘SEC. 1860D–1. BENEFITS; ELIGIBILITY; ENROLLMENT; AND COVERAGE PERIOD. 

‘‘(a) PROVISION OF QUALIFIED PRESCRIPTION DRUG COVERAGE THROUGH ENROLLMENT IN PLANS.—Subject to the succeeding provisions of this part, each individual 

who is entitled to benefits under part A or is enrolled under part B is entitled to 

obtain qualified prescription drug coverage (described in section 1860D–2(a)) as follows:

‘‘(1) MEDICARE-RELATED PLANS.—

‘‘(A) MEDICARE ADVANTAGE.—If the individual is eligible to enroll in a 

Medicare Advantage plan that provides qualified prescription drug coverage 

under section 1851(j), the individual may enroll in such plan and obtain 

coverage through such plan. 

‘‘(B) EFFS PLANS.—If the individual is eligible to enroll in an EFFS plan 

that provides qualified prescription drug coverage under part E under section 1860E–2(d), the individual may enroll in such plan and obtain coverage 

through such plan. 

‘‘(C) MA-EFFS PLAN; MA-EFFS RX PLAN.—For purposes of this part, the 

term ‘MA-EFFS plan’ means a Medicare Advantage plan under part C and 

an EFFS plan under part E and the term ‘MA-EFFS Rx plan’ means a MAEFFS plan insofar as such plan provides qualified prescription drug coverage. 

‘‘(2) PRESCRIPTION DRUG PLAN.—If the individual is not enrolled in a MAEFFS plan , the individual may enroll under this part in a prescription drug 

plan (as defined in section 1860D–10(a)(5)). 

Such individuals shall have a choice of such plans under section 1860D–5(d). 

‘‘(b) GENERAL ELECTION PROCEDURES.—

‘‘(1) IN GENERAL.—An individual eligible to make an election under subsection 

(a) may elect to enroll in a prescription drug plan under this part, or elect the 

option of qualified prescription drug coverage under a MA-EFFS Rx plan under 

part C or part E, and to change such election only in such manner and form 

as may be prescribed by regulations of the Administrator of the Medicare Benefits Administration (appointed under section 1809(b)) (in this part referred to 

as the ‘Medicare Benefits Administrator’) and only during an election period 

prescribed in or under this subsection. 

‘‘(2) ELECTION PERIODS.—

‘‘(A) IN GENERAL.—Except as provided in this paragraph, the election periods under this subsection shall be the same as the coverage election periods under the Medicare Advantage and EFFS programs under section 

1851(e), including—

‘‘(i) annual coordinated election periods; and 

‘‘(ii) special election periods. 

In applying the last sentence of section 1851(e)(4) (relating to discontinuance of an election during the first year of eligibility) under this subparagraph, in the case of an election described in such section in which the individual had elected or is provided qualified prescription drug coverage at the 

time of such first enrollment, the individual shall be permitted to enroll in 

a prescription drug plan under this part at the time of the election of coverage under the original fee-for-service plan. 

‘‘(B) INITIAL ELECTION PERIODS.—

‘‘(i) INDIVIDUALS CURRENTLY COVERED.—In the case of an individual 

who is entitled to benefits under part A or enrolled under part B as 

of October 1, 2005, there shall be an initial election period of 6 months 

beginning on that date. 

‘‘(ii) INDIVIDUAL COVERED IN FUTURE.—In the case of an individual 

who is first entitled to benefits under part A or enrolled under part B 

after such date, there shall be an initial election period which is the 

same as the initial enrollment period under section 1837(d). 

‘‘(C) ADDITIONAL SPECIAL ELECTION PERIODS.—The Administrator shall establish special election periods—

‘‘(i) in cases of individuals who have and involuntarily lose prescription drug coverage described in subsection (c)(2)(C); 

‘‘(ii) in cases described in section 1837(h) (relating to errors in enrollment), in the same manner as such section applies to part B; 

‘‘(iii) in the case of an individual who meets such exceptional conditions (including conditions provided under section 1851(e)(4)(D)) as the 

Administrator may provide; and 

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‘‘(iv) in cases of individuals (as determined by the Administrator) who 

become eligible for prescription drug assistance under title XIX under 

section 1935(d). 

‘‘(3) INFORMATION ON PLANS.—Information described in section 1860D–3(b)(1) 

on prescription drug plans shall be made available during election periods. 

‘‘(c) GUARANTEED ISSUE; COMMUNITY RATING; AND NONDISCRIMINATION.—

‘‘(1) GUARANTEED ISSUE.—

‘‘(A) IN GENERAL.—An eligible individual who is eligible to elect qualified 

prescription drug coverage under a prescription drug plan or MA-EFFS Rx 

plan at a time during which elections are accepted under this part with respect to the plan shall not be denied enrollment based on any health statusrelated factor (described in section 2702(a)(1) of the Public Health Service 

Act) or any other factor. 

‘‘(B) MEDICARE ADVANTAGE LIMITATIONS PERMITTED.—The provisions of 

paragraphs (2) and (3) (other than subparagraph (C)(i), relating to default 

enrollment) of section 1851(g) (relating to priority and limitation on termination of election) shall apply to PDP sponsors under this subsection. 

‘‘(2) COMMUNITY-RATED PREMIUM.—

‘‘(A) IN GENERAL.—In the case of an individual who enrolls under a prescription drug plan or in a MA-EFFS Rx plan during the individual’s initial 

enrollment period under this part or maintains (as determined under subparagraph (C)) continuous prescription drug coverage since the date the individual first qualifies to elect prescription drug coverage under this part, 

a PDP sponsor or entity offering a prescription drug plan or MA-EFFS Rx 

plan and in which the individual is enrolled may not deny, limit, or condition the coverage or provision of covered prescription drug benefits or vary 

or increase the premium under the plan based on any health status-related 

factor described in section 2702(a)(1) of the Public Health Service Act or 

any other factor. 

‘‘(B) LATE ENROLLMENT PENALTY.—In the case of an individual who does 

not maintain such continuous prescription drug coverage (as described in 

subparagraph (C)), a PDP sponsor or an entity offering a MA-EFFS Rx plan 

may (notwithstanding any provision in this title) adjust the premium otherwise applicable or impose a pre-existing condition exclusion with respect to 

qualified prescription drug coverage in a manner that reflects additional actuarial risk involved. Such a risk shall be established through an appropriate actuarial opinion of the type described in subparagraphs (A) through 

(C) of section 2103(c)(4). 

‘‘(C) CONTINUOUS PRESCRIPTION DRUG COVERAGE.—An individual is considered for purposes of this part to be maintaining continuous prescription 

drug coverage on and after the date the individual first qualifies to elect 

prescription drug coverage under this part if the individual establishes that 

as of such date the individual is covered under any of the following prescription drug coverage and before the date that is the last day of the 63-

day period that begins on the date of termination of the particular prescription drug coverage involved (regardless of whether the individual subsequently obtains any of the following prescription drug coverage): 

‘‘(i) COVERAGE UNDER PRESCRIPTION DRUG PLAN OR MA-EFFS RX

PLAN.—Qualified prescription drug coverage under a prescription drug 

plan or under a MA-EFFS Rx plan. 

‘‘(ii) MEDICAID PRESCRIPTION DRUG COVERAGE.—Prescription drug coverage under a medicaid plan under title XIX, including through the 

Program of All-inclusive Care for the Elderly (PACE) under section 

1934, through a social health maintenance organization (referred to in 

section 4104(c) of the Balanced Budget Act of 1997), or through a demonstration project under part C that demonstrates the application of 

capitation payment rates for frail elderly medicare beneficiaries 

through the use of an interdisciplinary team and through the provision 

of primary care services to such beneficiaries by means of such a team 

at the nursing facility involved. 

‘‘(iii) PRESCRIPTION DRUG COVERAGE UNDER GROUP HEALTH PLAN.—

Any outpatient prescription drug coverage under a group health plan, 

including a health benefits plan under the Federal Employees Health 

Benefit Plan under chapter 89 of title 5, United States Code, and a 

qualified retiree prescription drug plan as defined in section 1860D–

8(f)(1), but only if (subject to subparagraph (E)(ii)) the coverage provides benefits at least equivalent to the benefits under a qualified prescription drug plan. 

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‘‘(iv) PRESCRIPTION DRUG COVERAGE UNDER CERTAIN MEDIGAP POLICIES.—Coverage under a medicare supplemental policy under section 

1882 that provides benefits for prescription drugs (whether or not such 

coverage conforms to the standards for packages of benefits under section 1882(p)(1)), but only if the policy was in effect on January 1, 2006, 

and if (subject to subparagraph (E)(ii)) the coverage provides benefits 

at least equivalent to the benefits under a qualified prescription drug 

plan. 

‘‘(v) STATE PHARMACEUTICAL ASSISTANCE PROGRAM.—Coverage of prescription drugs under a State pharmaceutical assistance program, but 

only if (subject to subparagraph (E)(ii)) the coverage provides benefits 

at least equivalent to the benefits under a qualified prescription drug 

plan. 

‘‘(vi) VETERANS’ COVERAGE OF PRESCRIPTION DRUGS.—Coverage of prescription drugs for veterans under chapter 17 of title 38, United States 

Code, but only if (subject to subparagraph (E)(ii)) the coverage provides 

benefits at least equivalent to the benefits under a qualified prescription drug plan. 

‘‘(D) CERTIFICATION.—For purposes of carrying out this paragraph, the 

certifications of the type described in sections 2701(e) of the Public Health 

Service Act and in section 9801(e) of the Internal Revenue Code shall also 

include a statement for the period of coverage of whether the individual involved had prescription drug coverage described in subparagraph (C). 

‘‘(E) DISCLOSURE.—

‘‘(i) IN GENERAL.—Each entity that offers coverage of the type described in clause (iii), (iv), (v), or (vi) of subparagraph (C) shall provide 

for disclosure, consistent with standards established by the Administrator, of whether such coverage provides benefits at least equivalent 

to the benefits under a qualified prescription drug plan. 

‘‘(ii) WAIVER OF LIMITATIONS.—An individual may apply to the Administrator to waive the requirement that coverage of such type provide benefits at least equivalent to the benefits under a qualified prescription drug plan, if the individual establishes that the individual 

was not adequately informed that such coverage did not provide such 

level of benefits. 

‘‘(F) CONSTRUCTION.—Nothing in this section shall be construed as preventing the disenrollment of an individual from a prescription drug plan or 

a MA-EFFS Rx plan based on the termination of an election described in 

section 1851(g)(3), including for non-payment of premiums or for other reasons specified in subsection (d)(3), which takes into account a grace period 

described in section 1851(g)(3)(B)(i). 

‘‘(3) NONDISCRIMINATION.—A PDP sponsor that offers a prescription drug plan 

in an area designated under section 1860D–4(b)(5) shall make such plan available to all eligible individuals residing in the area without regard to their 

health or economic status or their place of residence within the area. 

‘‘(d) EFFECTIVE DATE OF ELECTIONS.—

‘‘(1) IN GENERAL.—Except as provided in this section, the Administrator shall 

provide that elections under subsection (b) take effect at the same time as the 

Administrator provides that similar elections under section 1851(e) take effect 

under section 1851(f). 

‘‘(2) NO ELECTION EFFECTIVE BEFORE 2006.—In no case shall any election take 

effect before January 1, 2006. 

‘‘(3) TERMINATION.—The Administrator shall provide for the termination of an 

election in the case of—

‘‘(A) termination of coverage under both part A and part B; and 

‘‘(B) termination of elections described in section 1851(g)(3) (including 

failure to pay required premiums). 

‘‘SEC. 1860D–2. REQUIREMENTS FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) REQUIREMENTS.—

‘‘(1) IN GENERAL.—For purposes of this part and part C and part E, the term 

‘qualified prescription drug coverage’ means either of the following: 

‘‘(A) STANDARD COVERAGE WITH ACCESS TO NEGOTIATED PRICES.—Standard 

coverage (as defined in subsection (b)) and access to negotiated prices under 

subsection (d). 

‘‘(B) ACTUARIALLY EQUIVALENT COVERAGE WITH ACCESS TO NEGOTIATED

PRICES.—Coverage of covered outpatient drugs which meets the alternative 

coverage requirements of subsection (c) and access to negotiated prices 

8

under subsection (d), but only if it is approved by the Administrator, as provided under subsection (c). 

‘‘(2) PERMITTING ADDITIONAL OUTPATIENT PRESCRIPTION DRUG COVERAGE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), nothing in this part shall 

be construed as preventing qualified prescription drug coverage from including coverage of covered outpatient drugs that exceeds the coverage required under paragraph (1), but any such additional coverage shall be limited to coverage of covered outpatient drugs. 

‘‘(B) DISAPPROVAL AUTHORITY.—The Administrator shall review the offering of qualified prescription drug coverage under this part or part C or E. 

If the Administrator finds, in the case of a qualified prescription drug coverage under a prescription drug plan or a MA-EFFS Rx plan, that the organization or sponsor offering the coverage is engaged in activities intended 

to discourage enrollment of classes of eligible medicare beneficiaries obtaining coverage through the plan on the basis of their higher likelihood of utilizing prescription drug coverage, the Administrator may terminate the contract with the sponsor or organization under this part or part C or E. 

‘‘(3) APPLICATION OF SECONDARY PAYOR PROVISIONS.—The provisions of section 

1852(a)(4) shall apply under this part in the same manner as they apply under 

part C. 

‘‘(b) STANDARD COVERAGE.—For purposes of this part, the ‘standard coverage’ is 

coverage of covered outpatient drugs (as defined in subsection (f)) that meets the 

following requirements: 

‘‘(1) DEDUCTIBLE.—The coverage has an annual deductible—

‘‘(A) for 2006, that is equal to $250; or 

‘‘(B) for a subsequent year, that is equal to the amount specified under 

this paragraph for the previous year increased by the percentage specified 

in paragraph (5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $10 

shall be rounded to the nearest multiple of $10. 

‘‘(2) 80:20 BENEFIT STRUCTURE.—

‘‘(A) 20 PERCENT COINSURANCE.—The coverage has cost-sharing (for costs 

above the annual deductible specified in paragraph (1) and up to the initial 

coverage limit under paragraph (3)) that is—

‘‘(i) equal to 20 percent; or 

‘‘(ii) is actuarially equivalent (using processes established under subsection (e)) to an average expected payment of 20 percent of such costs. 

‘‘(B) USE OF TIERS.—Nothing in this part shall be construed as preventing 

a PDP sponsor from applying tiered copayments, so long as such tiered copayments are consistent with subparagraph (A).

‘‘(3) INITIAL COVERAGE LIMIT.—Subject to paragraph (4), the coverage has an 

initial coverage limit on the maximum costs that may be recognized for payment purposes—

‘‘(A) for 2006, that is equal to $2,000; or 

‘‘(B) for a subsequent year, that is equal to the amount specified in this 

paragraph for the previous year, increased by the annual percentage increase described in paragraph (5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $25 

shall be rounded to the nearest multiple of $25.

‘‘(4) CATASTROPHIC PROTECTION.—

‘‘(A) IN GENERAL.—Notwithstanding paragraph (3), the coverage provides 

benefits with no cost-sharing after the individual has incurred costs (as described in subparagraph (C)) for covered outpatient drugs in a year equal 

to the annual out-of-pocket threshold specified in subparagraph (B). 

‘‘(B) ANNUAL OUT-OF-POCKET THRESHOLD.—

‘‘(i) IN GENERAL.—For purposes of this part, the ‘annual out-of-pocket 

threshold’ specified in this subparagraph is equal to $3,500 (subject to 

adjustment under clause (ii) and subparagraph (D)). 

‘‘(ii) INFLATION INCREASE.—For a year after 2006, the dollar amount 

specified in clause (i) shall be increased by the annual percentage increase described in paragraph (5) for the year involved. Any amount determined under the previous sentence that is not a multiple of $100 

shall be rounded to the nearest multiple of $100. 

‘‘(C) APPLICATION.—In applying subparagraph (A)—

‘‘(i) incurred costs shall only include costs incurred for the annual deductible (described in paragraph (1)), cost-sharing (described in paragraph (2)), and amounts for which benefits are not provided because of 

the application of the initial coverage limit described in paragraph (3); 

and 

9

‘‘(ii) such costs shall be treated as incurred only if they are paid by 

the individual (or by another individual, such as a family member, on 

behalf of the individual), under section 1860D–7, under title XIX, or 

under a State pharmaceutical assistance program and the individual 

(or other individual) is not reimbursed through insurance or otherwise, 

a group health plan, or other third-party payment arrangement (other 

than under such title or such program) for such costs. 

‘‘(D) ADJUSTMENT OF ANNUAL OUT-OF-POCKET THRESHOLDS.— ‘‘(i) IN GENERAL.—For each enrollee in a prescription drug plan or in 

a MA-EFFS Rx plan whose adjusted gross income exceeds the income 

threshold as defined in clause (ii) for a year, the annual out-of-pocket 

threshold otherwise determined under subparagraph (B) for such year 

shall be increased by an amount equal to the percentage specified in 

clause (iii), multiplied by the lesser of—

‘‘(I) the amount of such excess; or 

‘‘(II) the amount by which the income threshold limit exceeds the 

income threshold. 

Any amount determined under the previous sentence that is not a multiple of $100 shall be rounded to the nearest multiple of $100. 

‘‘(ii) INCOME THRESHOLD.—For purposes of clause (i)—

‘‘(I) IN GENERAL.—Subject to subclause (II), the term ‘income 

threshold’ means $60,000 and the term ‘income threshold limit’ 

means $200,000. 

‘‘(II) INCOME INFLATION ADJUSTMENT.—In the case of a year beginning after 2006, each of the dollar amounts in subclause (I) 

shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 

1(f)(3) of the Internal Revenue Code of 1986 for such year, determined by substituting ‘calendar year 2005’ for ‘calendar year 1992’. 

If any amount increased under the previous sentence is not a multiple of $100, such amount shall be rounded to the nearest multiple 

of $100. 

‘‘(iii) PERCENTAGE.—The percentage specified in this clause for a year 

is a fraction (expressed as a percentage) equal to—

‘‘(I) the annual out-of-pocket threshold for a year under subparagraph (B) (determined without regard to this subparagraph), divided by 

‘‘(II) the income threshold under clause (ii) for that year. 

If any percentage determined under the previous sentence that is not 

a multiple of 1⁄10th of 1 percentage point, such percentage shall be 

rounded to the nearest multiple of 1⁄10th of 1 percentage point. 

‘‘(iv) USE OF MOST RECENT RETURN INFORMATION.—For purposes of 

clause (i) for an enrollee for a year, except as provided in clause (v), 

the adjusted gross income of an individual shall be based on the most 

recent information disclosed to the Secretary under section 6109(l)(19) 

of the Internal Revenue Code of 1986 before the beginning of that year. 

‘‘(v) INDIVIDUAL ELECTION TO PRESENT MOST RECENT INFORMATION REGARDING INCOME.—The Secretary shall provide, in coordination with 

the Secretary of the Treasury, a procedure under which, for purposes 

of applying this subparagraph for a calendar year, instead of using the 

information described in clause (iv), an enrollee may elect to use more 

recent information, including information with respect to a taxable year 

ending in such calendar year. Such process shall—

‘‘(I) require the enrollee to provide the Secretary with a copy of 

the relevant portion of the more recent return to be used under 

this clause; 

‘‘(II) provide for the Medicare Beneficiary Ombudsman (under 

section 1810) offering assistance to such enrollees in presenting 

such information and the toll-free number under such section being 

a point of contact for beneficiaries to inquire as to how to present 

such information; 

‘‘(III) provide for the verification of the information in such return by the Secretary of the Treasury under section 6103(l)(19) of 

the Internal Revenue Code of 1986; and 

‘‘(IV) provide for the payment by the Secretary (in a manner 

specified by the Secretary) to the enrollee of an amount equal to 

the excess of the benefit payments that would have been payable 

under the plan if the more recent return information were used, 

over the benefit payments that were made under the plan. 

10

In the case of a payment under subclause (III) for an enrollee under 

a prescription drug plan, the PDP sponsor of the plan shall pay to the 

Secretary the amount so paid, less the applicable reinsurance amount 

that would have applied under section 1860D–8(c)(1)(B) if such payment had been treated as an allowable cost under such section. Such 

plan payment shall be deposited in the Treasury to the credit of the 

Medicare Prescription Drug Account in the Federal Supplementary 

Medical Insurance Trust Fund (under section 1841). 

‘‘(vi) DISSEMINATION OF INFORMATION ON PROCESS.—The Secretary 

shall provide, through the annual medicare handbook under section 

1804(a), for a general description of the adjustment of annual out-ofpocket thresholds provided under this subparagraph, including the 

process for adjustment based upon more recent information and the 

confidentiality provisions of subparagraph (F), and shall provide for dissemination of a table for each year that sets forth the amount of the 

adjustment that is made under clause (i) based on the amount of an 

enrollee’s adjusted gross income. 

‘‘(E) REQUESTING INFORMATION ON ENROLLEES.— ‘‘(i) IN GENERAL.—The Secretary shall, periodically as required to 

carry out subparagraph (D), transmit to the Secretary of the Treasury 

a list of the names and TINs of enrollees in prescription drug plans (or 

in MA-EFFS Rx plans) and request that such Secretary disclose to the 

Secretary information under subparagraph (A) of section 6103(l)(19) of 

the Internal Revenue Code of 1986 with respect to those enrollees for 

a specified taxable year for application in a particular calendar year. 

‘‘(ii) DISCLOSURE TO PLAN SPONSORS.—In the case of a specified taxpayer (as defined in section 6103(l)(19)(B) of the Internal Revenue Code 

of 1986) who is enrolled in a prescription drug plan or in an MA-EFFS 

Rx plan, the Secretary shall disclose to the entity that offers the plan 

the annual out-of-pocket threshold applicable to such individual under 

subparagraph (D). 

‘‘(F) MAINTAINING CONFIDENTIALITY OF INFORMATION.—

‘‘(i) IN GENERAL.—The amount of any increase in an annual out-ofpocket threshold under subparagraph (D) may not be disclosed by the 

Secretary except to a PDP sponsor or entity that offers a MA-EFFS Rx 

plan to the extent necessary to carry out this part. 

‘‘(ii) CRIMINAL AND CIVIL PENALTIES FOR UNAUTHORIZED DISCLOSURE.—A person who makes an unauthorized disclosure of information 

disclosed under section 6103(l)(19) of the Internal Revenue Code of 

1986 (including disclosure of any increase in an annual out-of-pocket 

threshold under subparagraph (D)) shall be subject to penalty to the extent provided under—

‘‘(I) section 7213 of such Code (relating to criminal penalty for 

unauthorized disclosure of information); 

‘‘(II) section 7213A of such Code (relating to criminal penalty for 

unauthorized inspection of returns or return information); 

‘‘(III) section 7431 of such Code (relating to civil damages for unauthorized inspection or disclosure of returns and return information); 

‘‘(IV) any other provision of the Internal Revenue Code of 1986; 

or 

‘‘(V) any other provision of law. 

‘‘(iii) APPLICATION OF ADDITIONAL CIVIL MONETARY PENALTY FOR UNAUTHORIZED DISCLOSURES.—In addition to any penalty otherwise provided under law, any person who makes an unauthorized disclosure of 

such information shall be subject to a civil monetary penalty of not to 

exceed $10,000 for each such unauthorized disclosure. The provisions of 

section 1128A (other than subsections (a) and (b)) shall apply to civil 

money penalties under this subparagraph in the same manner as they 

apply to a penalty or proceeding under section 1128A(a).

‘‘(5) ANNUAL PERCENTAGE INCREASE.—For purposes of this part, the annual 

percentage increase specified in this paragraph for a year is equal to the annual 

percentage increase in average per capita aggregate expenditures for covered 

outpatient drugs in the United States for medicare beneficiaries, as determined 

by the Administrator for the 12-month period ending in July of the previous 

year.

‘‘(c) ALTERNATIVE COVERAGE REQUIREMENTS.—A prescription drug plan or MAEFFS Rx plan may provide a different prescription drug benefit design from the 

standard coverage described in subsection (b) so long as the Administrator deterVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00010 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
11

mines (based on an actuarial analysis by the Administrator) that the following requirements are met and the plan applies for, and receives, the approval of the Administrator for such benefit design: 

‘‘(1) ASSURING AT LEAST ACTUARIALLY EQUIVALENT COVERAGE.— ‘‘(A) ASSURING EQUIVALENT VALUE OF TOTAL COVERAGE.—The actuarial 

value of the total coverage (as determined under subsection (e)) is at least 

equal to the actuarial value (as so determined) of standard coverage. 

‘‘(B) ASSURING EQUIVALENT UNSUBSIDIZED VALUE OF COVERAGE.—The unsubsidized value of the coverage is at least equal to the unsubsidized value 

of standard coverage. For purposes of this subparagraph, the unsubsidized 

value of coverage is the amount by which the actuarial value of the coverage (as determined under subsection (e)) exceeds the actuarial value of 

the subsidy payments under section 1860D–8 with respect to such coverage. 

‘‘(C) ASSURING STANDARD PAYMENT FOR COSTS AT INITIAL COVERAGE

LIMIT.—The coverage is designed, based upon an actuarially representative 

pattern of utilization (as determined under subsection (e)), to provide for 

the payment, with respect to costs incurred that are equal to the initial coverage limit under subsection (b)(3), of an amount equal to at least the product of—

‘‘(i) the amount by which the initial coverage limit described in subsection (b)(3) exceeds the deductible described in subsection (b)(1); and 

‘‘(ii) 100 percent minus the cost-sharing percentage specified in subsection (b)(2)(A)(i). 

‘‘(2) CATASTROPHIC PROTECTION.—The coverage provides for beneficiaries the 

catastrophic protection described in subsection (b)(4). 

‘‘(d) ACCESS TO NEGOTIATED PRICES.—

‘‘(1) IN GENERAL.—Under qualified prescription drug coverage offered by a 

PDP sponsor or an entity offering a MA-EFFS Rx plan, the sponsor or entity 

shall provide beneficiaries with access to negotiated prices (including applicable 

discounts) used for payment for covered outpatient drugs, regardless of the fact 

that no benefits may be payable under the coverage with respect to such drugs 

because of the application of cost-sharing or an initial coverage limit (described 

in subsection (b)(3)). Insofar as a State elects to provide medical assistance 

under title XIX to a beneficiary enrolled under such title and under a prescription drug plan or MA-EFFS Rx plan for a drug based on the prices negotiated 

by a prescription drug plan or MA-EFFS Rx plan under this part, the requirements of section 1927 shall not apply to such drugs. The prices negotiated by 

a prescription drug plan under this part, by a MA-EFFS Rx plan with respect 

to covered outpatient drugs, or by a qualified retiree prescription drug plan (as 

defined in section 1860D–8(f)(1)) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part B, shall (notwithstanding any other provision of law) not be taken into account for the purposes 

of establishing the best price under section 1927(c)(1)(C). 

‘‘(2) DISCLOSURE.—The PDP sponsor or entity offering a MA-EFFS Rx plan 

shall disclose to the Administrator (in a manner specified by the Administrator) 

the extent to which discounts or rebates or other remuneration or price concessions made available to the sponsor or organization by a manufacturer are 

passed through to enrollees through pharmacies and other dispensers or otherwise. The provisions of section 1927(b)(3)(D) shall apply to information disclosed 

to the Administrator under this paragraph in the same manner as such provisions apply to information disclosed under such section. 

‘‘(3) AUDITS AND REPORTS.—To protect against fraud and abuse and to ensure 

proper disclosures and accounting under this part, in addition to any protections 

against fraud and abuse provided under section 1860D–4(b)(3)(C), the Administrator may periodically audit the financial statements and records of PDP sponsor or entities offering a MA-EFFS Rx plan.

‘‘(e) ACTUARIAL VALUATION; DETERMINATION OF ANNUAL PERCENTAGE INCREASES.—

‘‘(1) PROCESSES.—For purposes of this section, the Administrator shall establish processes and methods—

‘‘(A) for determining the actuarial valuation of prescription drug coverage, 

including—

‘‘(i) an actuarial valuation of standard coverage and of the reinsurance subsidy payments under section 1860D–8; 

‘‘(ii) the use of generally accepted actuarial principles and methodologies; and 

‘‘(iii) applying the same methodology for determinations of alternative 

coverage under subsection (c) as is used with respect to determinations 

of standard coverage under subsection (b); and 

12

‘‘(B) for determining annual percentage increases described in subsection 

(b)(5). 

‘‘(2) USE OF OUTSIDE ACTUARIES.—Under the processes under paragraph 

(1)(A), PDP sponsors and entities offering MA-EFFS Rx plans may use actuarial 

opinions certified by independent, qualified actuaries to establish actuarial values, but the Administrator shall determine whether such actuarial values meet 

the requirements under subsection (c)(1). 

‘‘(f) COVERED OUTPATIENT DRUGS DEFINED.— ‘‘(1) IN GENERAL.—Except as provided in this subsection, for purposes of this 

part, the term ‘covered outpatient drug’ means—

‘‘(A) a drug that may be dispensed only upon a prescription and that is 

described in subparagraph (A)(i) or (A)(ii) of section 1927(k)(2); or 

‘‘(B) a biological product described in clauses (i) through (iii) of subparagraph (B) of such section or insulin described in subparagraph (C) of such 

section, 

and such term includes a vaccine licensed under section 351 of the Public 

Health Service Act and any use of a covered outpatient drug for a medically accepted indication (as defined in section 1927(k)(6)). 

‘‘(2) EXCLUSIONS.— ‘‘(A) IN GENERAL.—Such term does not include drugs or classes of drugs, 

or their medical uses, which may be excluded from coverage or otherwise 

restricted under section 1927(d)(2), other than subparagraph (E) thereof (relating to smoking cessation agents), or under section 1927(d)(3). 

‘‘(B) AVOIDANCE OF DUPLICATE COVERAGE.—A drug prescribed for an individual that would otherwise be a covered outpatient drug under this part 

shall not be so considered if payment for such drug is available under part 

A or B for an individual entitled to benefits under part A and enrolled 

under part B. 

‘‘(3) APPLICATION OF FORMULARY RESTRICTIONS.—A drug prescribed for an individual that would otherwise be a covered outpatient drug under this part 

shall not be so considered under a plan if the plan excludes the drug under a 

formulary and such exclusion is not successfully appealed under section 1860D–

3(f)(2). 

‘‘(4) APPLICATION OF GENERAL EXCLUSION PROVISIONS.—A prescription drug 

plan or MA-EFFS Rx plan may exclude from qualified prescription drug coverage any covered outpatient drug—

‘‘(A) for which payment would not be made if section 1862(a) applied to 

part D; or 

‘‘(B) which are not prescribed in accordance with the plan or this part. 

Such exclusions are determinations subject to reconsideration and appeal pursuant to section 1860D–3(f). 

‘‘SEC. 1860D–3. BENEFICIARY PROTECTIONS FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) GUARANTEED ISSUE, COMMUNITY-RATED PREMIUMS, ACCESS TO NEGOTIATED

PRICES, AND NONDISCRIMINATION.—For provisions requiring guaranteed issue, community-rated premiums, access to negotiated prices, and nondiscrimination, see sections 1860D–1(c)(1), 1860D–1(c)(2), 1860D–2(d), and 1860D–6(b), respectively. 

‘‘(b) DISSEMINATION OF INFORMATION.— ‘‘(1) GENERAL INFORMATION.—A PDP sponsor shall disclose, in a clear, accurate, and standardized form to each enrollee with a prescription drug plan offered by the sponsor under this part at the time of enrollment and at least annually thereafter, the information described in section 1852(c)(1) relating to 

such plan. Such information includes the following: 

‘‘(A) Access to specific covered outpatient drugs, including access through 

pharmacy networks. 

‘‘(B) How any formulary used by the sponsor functions, including the 

drugs included in the formulary. 

‘‘(C) Co-payments and deductible requirements, including the identification of the tiered or other co-payment level applicable to each drug (or class 

of drugs). 

‘‘(D) Grievance and appeals procedures. 

Such information shall also be made available upon request to prospective enrollees. 

‘‘(2) DISCLOSURE UPON REQUEST OF GENERAL COVERAGE, UTILIZATION, AND

GRIEVANCE INFORMATION.—Upon request of an individual eligible to enroll 

under a prescription drug plan, the PDP sponsor shall provide the information 

described in section 1852(c)(2) (other than subparagraph (D)) to such individual. 

‘‘(3) RESPONSE TO BENEFICIARY QUESTIONS.—Each PDP sponsor offering a prescription drug plan shall have a mechanism for providing specific information 

13

to enrollees upon request. The sponsor shall make available on a timely basis, 

through an Internet website and in writing upon request, information on specific changes in its formulary. 

‘‘(4) CLAIMS INFORMATION.—Each PDP sponsor offering a prescription drug 

plan must furnish to each enrollee in a form easily understandable to such enrollees an explanation of benefits (in accordance with section 1806(a) or in a 

comparable manner) and a notice of the benefits in relation to initial coverage 

limit and the annual out-of-pocket threshold applicable to such enrollee for the 

current year, whenever prescription drug benefits are provided under this part 

(except that such notice need not be provided more often than monthly).

‘‘(c) ACCESS TO COVERED BENEFITS.— ‘‘(1) ASSURING PHARMACY ACCESS.— ‘‘(A) PARTICIPATION OF ANY WILLING PHARMACY.—A PDP sponsor and an 

entity offering a MA-EFFS Rx plan shall permit the participation of any 

pharmacy that meets terms and conditions that the plan has established. 

‘‘(B) DISCOUNTS ALLOWED FOR NETWORK PHARMACIES.—A prescription 

drug plan and a MA-EFFS Rx plan may, notwithstanding subparagraph 

(A), reduce coinsurance or copayments for its enrolled beneficiaries below 

the level otherwise provided for covered outpatient drugs dispensed through 

in-network pharmacies, but in no case shall such a reduction result in an 

increase in payments made by the Administrator under section 1860D–8 to 

a plan. 

‘‘(C) CONVENIENT ACCESS FOR NETWORK PHARMACIES.—The PDP sponsor 

of the prescription drug plan and the entity offering a MA-EFFS Rx plan 

shall secure the participation in its network of a sufficient number of pharmacies that dispense (other than by mail order) drugs directly to patients 

to ensure convenient access (consistent with rules of the Administrator). 

The Administrator shall establish convenient access rules under this subparagraph that are no less favorable to enrollees than the rules for convenient access to pharmacies of the Secretary of Defense established as of June 

1, 2003, for purposes of the TRICARE Retail Pharmacy (TRRx) program. 

Such rules shall include adequate emergency access for enrolled beneficiaries. 

‘‘(D) LEVEL PLAYING FIELD.—Such a sponsor shall permit enrollees to receive benefits (which may include a 90-day supply of drugs or biologicals) 

through a community pharmacy, rather than through mail order, with any 

differential in cost paid by such enrollees. 

‘‘(E) NOT REQUIRED TO ACCEPT INSURANCE RISK.—The terms and conditions under subparagraph (A) may not require participating pharmacies to 

accept insurance risk as a condition of participation. 

‘‘(2) USE OF STANDARDIZED TECHNOLOGY.—

‘‘(A) IN GENERAL.—The PDP sponsor of a prescription drug plan and an 

entity offering a MA-EFFS Rx plan shall issue (and reissue, as appropriate) 

such a card (or other technology) that may be used by an enrollee to assure 

access to negotiated prices under section 1860D–2(d) for the purchase of 

prescription drugs for which coverage is not otherwise provided under the 

plan. 

‘‘(B) STANDARDS.—

‘‘(i) DEVELOPMENT.—The Administrator shall provide for the development or utilization of uniform standards relating to a standardized format for the card or other technology referred to in subparagraph (A). 

Such standards shall be compatible with standards established under 

part C of title XI. 

‘‘(ii) APPLICATION OF ADVISORY TASK FORCE.—The advisory task force 

established under subsection (d)(3)(B)(ii) shall provide recommendations to the Administrator under such subsection regarding the standards developed under clause (i). 

‘‘(3) REQUIREMENTS ON DEVELOPMENT AND APPLICATION OF FORMULARIES.—If 

a PDP sponsor of a prescription drug plan or an entity offering a MA-EFFS Rx 

plan uses a formulary, the following requirements must be met: 

‘‘(A) PHARMACY AND THERAPEUTIC (P&T) COMMITTEE.—The sponsor or entity must establish a pharmacy and therapeutic committee that develops and 

reviews the formulary. Such committee shall include at least one practicing 

physician and at least one practicing pharmacist independent and free of 

conflict with respect to the committee both with expertise in the care of elderly or disabled persons and a majority of its members shall consist of individuals who are practicing physicians or practicing pharmacists (or both). 

‘‘(B) FORMULARY DEVELOPMENT.—In developing and reviewing the formulary, the committee shall—

14

‘‘(i) base clinical decisions on the strength of scientific evidence and 

standards of practice, including assessing peer-reviewed medical literature, such as randomized clinical trials, pharmacoeconomic studies, 

outcomes research data, and such other information as the committee 

determines to be appropriate; and 

‘‘(ii) shall take into account whether including in the formulary particular covered outpatient drugs has therapeutic advantages in terms 

of safety and efficacy. 

‘‘(C) INCLUSION OF DRUGS IN ALL THERAPEUTIC CATEGORIES.—The formulary must include drugs within each therapeutic category and class of 

covered outpatient drugs (although not necessarily for all drugs within such 

categories and classes). In establishing such classes, the committee shall 

take into account the standards published in the United States Pharmacopeia-Drug Information. The committee shall make available to the enrollees under the plan through the Internet or otherwise the bases for the exclusion of coverage of any drug from the formulary. 

‘‘(D) PROVIDER AND PATIENT EDUCATION.—The committee shall establish 

policies and procedures to educate and inform health care providers and enrollees concerning the formulary. 

‘‘(E) NOTICE BEFORE REMOVING DRUG FROM FORMULARY FOR CHANGING

PREFERRED OR TIER STATUS OF DRUG.—Any removal of a covered outpatient 

drug from a formulary and any change in the preferred or tier cost-sharing 

status of such a drug shall take effect only after appropriate notice is made 

available to beneficiaries and physicians. 

‘‘(F) PERIODIC EVALUATION OF PROTOCOLS.—In connection with the formulary, a prescription drug plan shall provide for the periodic evaluation 

and analysis of treatment protocols and procedures. 

‘‘(G) GRIEVANCES AND APPEALS RELATING TO APPLICATION OF

FORMULARIES.—For provisions relating to grievances and appeals of coverage, see subsections (e) and (f). 

‘‘(d) COST AND UTILIZATION MANAGEMENT; QUALITY ASSURANCE; MEDICATION

THERAPY MANAGEMENT PROGRAM.—

‘‘(1) IN GENERAL.—The PDP sponsor or entity offering a MA-EFFS Rx plan 

shall have in place, directly or through appropriate arrangements, with respect 

to covered outpatient drugs—

‘‘(A) an effective cost and drug utilization management program, including medically appropriate incentives to use generic drugs and therapeutic 

interchange, when appropriate; 

‘‘(B) quality assurance measures and systems to reduce medical errors 

and adverse drug interactions, including side-effects, and improve medication use, including a medication therapy management program described in 

paragraph (2) and for years beginning with 2007, an electronic prescription 

program described in paragraph (3); and 

‘‘(C) a program to control fraud, abuse, and waste. 

Nothing in this section shall be construed as impairing a PDP sponsor or entity 

from utilizing cost management tools (including differential payments) under all 

methods of operation. 

‘‘(2) MEDICATION THERAPY MANAGEMENT PROGRAM.—

‘‘(A) IN GENERAL.—A medication therapy management program described 

in this paragraph is a program of drug therapy management and medication administration that may be furnished by a pharmacy provider and that 

is designed to assure, with respect to beneficiaries at risk for potential 

medication problems, such as beneficiaries with complex or chronic diseases 

(such as diabetes, asthma, hypertension, and congestive heart failure) or 

multiple prescriptions, that covered outpatient drugs under the prescription 

drug plan are appropriately used to optimize therapeutic outcomes through 

improved medication use and reduce the risk of adverse events, including 

adverse drug interactions. Such programs may distinguish between services 

in ambulatory and institutional settings. 

‘‘(B) ELEMENTS.—Such program may include—

‘‘(i) enhanced beneficiary understanding to promote the appropriate 

use of medications by beneficiaries and to reduce the risk of potential 

adverse events associated with medications, through beneficiary education, counseling, case management, disease state management programs, and other appropriate means; 

‘‘(ii) increased beneficiary adherence with prescription medication 

regimens through medication refill reminders, special packaging, and 

other compliance programs and other appropriate means; and 

15

‘‘(iii) detection of patterns of overuse and underuse of prescription 

drugs. 

‘‘(C) DEVELOPMENT OF PROGRAM IN COOPERATION WITH LICENSED PHAR- MACISTS.—The program shall be developed in cooperation with licensed and 

practicing pharmacists and physicians. 

‘‘(D) CONSIDERATIONS IN PHARMACY FEES.—The PDP sponsor of a prescription drug program and an entity offering a MA-EFFS Rx plan shall 

take into account, in establishing fees for pharmacists and others providing 

services under the medication therapy management program, the resources 

and time used in implementing the program. Each such sponsor or entity 

shall disclose to the Administrator upon request the amount of any such 

management or dispensing fees. 

‘‘(3) ELECTRONIC PRESCRIPTION PROGRAM.— ‘‘(A) IN GENERAL.—An electronic prescription drug program described in 

this paragraph is a program that includes at least the following components, consistent with uniform standards established under subparagraph 

(B): 

‘‘(i) ELECTRONIC TRANSMITTAL OF PRESCRIPTIONS.—Prescriptions must 

be written and transmitted electronically (other than by facsimile), except in emergency cases and other exceptional circumstances recognized by the Administrator. 

‘‘(ii) PROVISION OF INFORMATION TO PRESCRIBING HEALTH CARE PROFESSIONAL.—The program provides for the electronic transmittal to the 

prescribing health care professional of information that includes—

‘‘(I) information (to the extent available and feasible) on the drug 

or drugs being prescribed for that patient and other information relating to the medical history or condition of the patient that may 

be relevant to the appropriate prescription for that patient; 

‘‘(II) cost-effective alternatives (if any) for the use of the drug 

prescribed; and 

‘‘(III) information on the drugs included in the applicable formulary. 

To the extent feasible, such program shall permit the prescribing 

health care professional to provide (and be provided) related information on an interactive, real-time basis. 

‘‘(B) STANDARDS.—

‘‘(i) DEVELOPMENT.—The Administrator shall provide for the development of uniform standards relating to the electronic prescription drug 

program described in subparagraph (A). Such standards shall be compatible with standards established under part C of title XI. 

‘‘(ii) ADVISORY TASK FORCE.—In developing such standards and the 

standards described in subsection (c)(2)(B)(i) the Administrator shall 

establish a task force that includes representatives of physicians, hospitals, pharmacies, beneficiaries, pharmacy benefit managers, individuals with expertise in information technology, and pharmacy benefit 

experts of the Departments of Veterans Affairs and Defense and other 

appropriate Federal agencies to provide recommendations to the Administrator on such standards, including recommendations relating to 

the following: 

‘‘(I) The range of available computerized prescribing software and 

hardware and their costs to develop and implement. 

‘‘(II) The extent to which such standards and systems reduce 

medication errors and can be readily implemented by physicians, 

pharmacies, and hospitals. 

‘‘(III) Efforts to develop uniform standards and a common software platform for the secure electronic communication of medication history, eligibility, benefit, and prescription information. 

‘‘(IV) Efforts to develop and promote universal connectivity and 

interoperability for the secure electronic exchange of such information.

‘‘(V) The cost of implementing such systems in the range of hospital and physician office settings and pharmacies, including hardware, software, and training costs. 

‘‘(VI) Implementation issues as they relate to part C of title XI, 

and current Federal and State prescribing laws and regulations 

and their impact on implementation of computerized prescribing. 

‘‘(iii) DEADLINES.—

‘‘(I) The Administrator shall constitute the task force under 

clause (ii) by not later than April 1, 2004. 

16

‘‘(II) Such task force shall submit recommendations to Administrator by not later than January 1, 2005. 

‘‘(III) The Administrator shall provide for the development and 

promulgation, by not later than January 1, 2006, of national standards relating to the electronic prescription drug program described 

in clause (ii). Such standards shall be issued by a standards organization accredited by the American National Standards Institute 

(ANSI) and shall be compatible with standards established under 

part C of title XI. 

‘‘(4) TREATMENT OF ACCREDITATION.—Section 1852(e)(4) (relating to treatment 

of accreditation) shall apply to prescription drug plans under this part with respect to the following requirements, in the same manner as they apply to plans 

under part C with respect to the requirements described in a clause of section 

1852(e)(4)(B): 

‘‘(A) Paragraph (1) (including quality assurance), including medication 

therapy management program under paragraph (2). 

‘‘(B) Subsection (c)(1) (relating to access to covered benefits). 

‘‘(C) Subsection (g) (relating to confidentiality and accuracy of enrollee 

records). 

‘‘(5) PUBLIC DISCLOSURE OF PHARMACEUTICAL PRICES FOR EQUIVALENT

DRUGS.—Each PDP sponsor and each entity offering a MA-EFFS Rx plan shall 

provide that each pharmacy or other dispenser that arranges for the dispensing 

of a covered outpatient drug shall inform the beneficiary at the time of purchase 

of the drug of any differential between the price of the prescribed drug to the 

enrollee and the price of the lowest cost available generic drug covered under 

the plan that is therapeutically equivalent and bioequivalent.

‘‘(e) GRIEVANCE MECHANISM, COVERAGE DETERMINATIONS, AND RECONSIDERATIONS.—

‘‘(1) IN GENERAL.—Each PDP sponsor shall provide meaningful procedures for 

hearing and resolving grievances between the organization (including any entity 

or individual through which the sponsor provides covered benefits) and enrollees with prescription drug plans of the sponsor under this part in accordance 

with section 1852(f). 

‘‘(2) APPLICATION OF COVERAGE DETERMINATION AND RECONSIDERATION PROVISIONS.—A PDP sponsor shall meet the requirements of paragraphs (1) through 

(3) of section 1852(g) with respect to covered benefits under the prescription 

drug plan it offers under this part in the same manner as such requirements 

apply to an organization with respect to benefits it offers under a plan under 

part C. 

‘‘(3) REQUEST FOR REVIEW OF TIERED FORMULARY DETERMINATIONS.—In the 

case of a prescription drug plan offered by a PDP sponsor or a MA-EFFS Rx 

plan that provides for tiered cost-sharing for drugs included within a formulary 

and provides lower cost-sharing for preferred drugs included within the formulary, an individual who is enrolled in the plan may request coverage of a 

nonpreferred drug under the terms applicable for preferred drugs if the prescribing physician determines that the preferred drug for treatment of the same 

condition either would not be as effective for the individual or would have adverse effects for the individual or both.

‘‘(f) APPEALS.—

‘‘(1) IN GENERAL.—Subject to paragraph (2), a PDP sponsor shall meet the requirements of paragraphs (4) and (5) of section 1852(g) with respect to drugs 

(including a determination related to the application of tiered cost-sharing described in subsection (e)(3)) in the same manner as such requirements apply to 

an organization with respect to benefits it offers under a plan under part C. 

‘‘(2) FORMULARY DETERMINATIONS.—An individual who is enrolled in a prescription drug plan offered by a PDP sponsor or in a MA-EFFS Rx plan may 

appeal to obtain coverage for a covered outpatient drug that is not on a formulary of the sponsor or entity offering the plan if the prescribing physician 

determines that the formulary drug for treatment of the same condition either 

would not be as effective for the individual or would have adverse effects for 

the individual or both. 

‘‘(g) CONFIDENTIALITY AND ACCURACY OF ENROLLEE RECORDS.—A PDP sponsor 

that offers a prescription drug plan shall meet the requirements of section 1852(h) 

with respect to enrollees under the plan in the same manner as such requirements 

apply to an organization with respect to enrollees under part C. A PDP sponsor 

shall be treated as a business associate for purposes of the provisions of subpart E 

of part 164 of title 45, Code of Federal Regulations, adopted pursuant to the authority of the Secretary under section 264(c) of the Health Insurance Portability and Accountability Act of 1996 (42 U.S. C. 1320d-2 note). 

17

‘‘SEC. 1860D–4. REQUIREMENTS FOR AND CONTRACTS WITH PRESCRIPTION DRUG PLAN (PDP) 

SPONSORS. 

‘‘(a) GENERAL REQUIREMENTS.—Each PDP sponsor of a prescription drug plan 

shall meet the following requirements: 

‘‘(1) LICENSURE.—Subject to subsection (c), the sponsor is organized and licensed under State law as a risk-bearing entity eligible to offer health insurance or health benefits coverage in each State in which it offers a prescription 

drug plan. 

‘‘(2) ASSUMPTION OF FINANCIAL RISK FOR UNSUBSIDIZED COVERAGE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B) and section 1860D–

5(d)(2), the entity assumes full financial risk on a prospective basis for 

qualified prescription drug coverage that it offers under a prescription drug 

plan and that is not covered under section 1860D–8. 

‘‘(B) REINSURANCE PERMITTED.—The entity may obtain insurance or make 

other arrangements for the cost of coverage provided to any enrollee. 

‘‘(3) SOLVENCY FOR UNLICENSED SPONSORS.—In the case of a sponsor that is 

not described in paragraph (1), the sponsor shall meet solvency standards established by the Administrator under subsection (d).

‘‘(b) CONTRACT REQUIREMENTS.—

‘‘(1) IN GENERAL.—The Administrator shall not permit the election under section 1860D–1 of a prescription drug plan offered by a PDP sponsor under this 

part, and the sponsor shall not be eligible for payments under section 1860D–

7 or 1860D–8, unless the Administrator has entered into a contract under this 

subsection with the sponsor with respect to the offering of such plan. Such a 

contract with a sponsor may cover more than one prescription drug plan. Such 

contract shall provide that the sponsor agrees to comply with the applicable requirements and standards of this part and the terms and conditions of payment 

as provided for in this part. 

‘‘(2) NEGOTIATION REGARDING TERMS AND CONDITIONS.—The Administrator 

shall have the same authority to negotiate the terms and conditions of prescription drug plans under this part as the Director of the Office of Personnel Management has with respect to health benefits plans under chapter 89 of title 5, 

United States Code. In negotiating the terms and conditions regarding premiums for which information is submitted under section 1860D–6(a)(2), the Administrator shall take into account the subsidy payments under section 1860D–

8. 

‘‘(3) INCORPORATION OF CERTAIN MEDICARE ADVANTAGE CONTRACT REQUIREMENTS.—The following provisions of section 1857 shall apply, subject to subsection (c)(5), to contracts under this section in the same manner as they apply 

to contracts under section 1857(a): 

‘‘(A) MINIMUM ENROLLMENT.—Paragraphs (1) and (3) of section 1857(b). 

‘‘(B) CONTRACT PERIOD AND EFFECTIVENESS.—Paragraphs (1) through (3) 

and (5) of section 1857(c). 

‘‘(C) PROTECTIONS AGAINST FRAUD AND BENEFICIARY PROTECTIONS.—Section 1857(d). 

‘‘(D) ADDITIONAL CONTRACT TERMS.—Section 1857(e); except that in applying section 1857(e)(2) under this part—

‘‘(i) such section shall be applied separately to costs relating to this 

part (from costs under part C and part E); 

‘‘(ii) in no case shall the amount of the fee established under this subparagraph for a plan exceed 20 percent of the maximum amount of the 

fee that may be established under subparagraph (B) of such section; 

and 

‘‘(iii) no fees shall be applied under this subparagraph with respect 

to MA-EFFS Rx plans. 

‘‘(E) INTERMEDIATE SANCTIONS.—Section 1857(g). 

‘‘(F) PROCEDURES FOR TERMINATION.—Section 1857(h). 

‘‘(4) RULES OF APPLICATION FOR INTERMEDIATE SANCTIONS.—In applying paragraph (3)(E)—

‘‘(A) the reference in section 1857(g)(1)(B) to section 1854 is deemed a reference to this part; and 

‘‘(B) the reference in section 1857(g)(1)(F) to section 1852(k)(2)(A)(ii) shall 

not be applied. 

‘‘(5) SERVICE AREA REQUIREMENT.—For purposes of this part, the Administrator shall designate at least 10 areas covering the entire United States and 

shall be consistent with EFFS regions established under section 1860E–1(a)(2). 

‘‘(c) WAIVER OF CERTAIN REQUIREMENTS TO EXPAND CHOICE.—

‘‘(1) IN GENERAL.—In the case of an entity that seeks to offer a prescription 

drug plan in a State, the Administrator shall waive the requirement of subVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
18

section (a)(1) that the entity be licensed in that State if the Administrator determines, based on the application and other evidence presented to the Administrator, that any of the grounds for approval of the application described in paragraph (2) have been met. 

‘‘(2) GROUNDS FOR APPROVAL.—The grounds for approval under this paragraph are the grounds for approval described in subparagraph (B), (C), and (D) 

of section 1855(a)(2), and also include the application by a State of any grounds 

other than those required under Federal law. 

‘‘(3) APPLICATION OF WAIVER PROCEDURES.—With respect to an application for 

a waiver (or a waiver granted) under this subsection, the provisions of subparagraphs (E), (F), and (G) of section 1855(a)(2) shall apply. 

‘‘(4) LICENSURE DOES NOT SUBSTITUTE FOR OR CONSTITUTE CERTIFICATION.—

The fact that an entity is licensed in accordance with subsection (a)(1) does not 

deem the entity to meet other requirements imposed under this part for a PDP 

sponsor. 

‘‘(5) REFERENCES TO CERTAIN PROVISIONS.—For purposes of this subsection, in 

applying provisions of section 1855(a)(2) under this subsection to prescription 

drug plans and PDP sponsors—

‘‘(A) any reference to a waiver application under section 1855 shall be 

treated as a reference to a waiver application under paragraph (1); and 

‘‘(B) any reference to solvency standards shall be treated as a reference 

to solvency standards established under subsection (d). 

‘‘(d) SOLVENCY STANDARDS FOR NON-LICENSED SPONSORS.—

‘‘(1) ESTABLISHMENT.—The Administrator shall establish, by not later than 

October 1, 2004, financial solvency and capital adequacy standards that an entity that does not meet the requirements of subsection (a)(1) must meet to qualify 

as a PDP sponsor under this part. 

‘‘(2) COMPLIANCE WITH STANDARDS.—Each PDP sponsor that is not licensed by 

a State under subsection (a)(1) and for which a waiver application has been approved under subsection (c) shall meet solvency and capital adequacy standards 

established under paragraph (1). The Administrator shall establish certification 

procedures for such PDP sponsors with respect to such solvency standards in 

the manner described in section 1855(c)(2). 

‘‘(e) RELATION TO STATE LAWS.—

‘‘(1) IN GENERAL.—The standards established under this part shall supersede 

any State law or regulation (other than State licensing laws or State laws relating to plan solvency, except as provided in subsection (d)) with respect to prescription drug plans which are offered by PDP sponsors under this part. 

‘‘(2) PROHIBITION OF STATE IMPOSITION OF PREMIUM TAXES.—No State may impose a premium tax or similar tax with respect to premiums paid to PDP sponsors for prescription drug plans under this part, or with respect to any payments made to such a sponsor by the Administrator under this part. 

‘‘SEC. 1860D–5. PROCESS FOR BENEFICIARIES TO SELECT QUALIFIED PRESCRIPTION DRUG 

COVERAGE. 

‘‘(a) IN GENERAL.—The Administrator shall establish a process for the selection 

of the prescription drug plan or MA-EFFS Rx plan through which eligible individuals elect qualified prescription drug coverage under this part. 

‘‘(b) ELEMENTS.—Such process shall include the following: 

‘‘(1) Annual, coordinated election periods, in which such individuals can 

change the qualifying plans through which they obtain coverage, in accordance 

with section 1860D–1(b)(2). 

‘‘(2) Active dissemination of information to promote an informed selection 

among qualifying plans based upon price, quality, and other features, in the 

manner described in (and in coordination with) section 1851(d), including the 

provision of annual comparative information, maintenance of a toll-free hotline, 

and the use of non-Federal entities. 

‘‘(3) Coordination of elections through filing with the entity offering a MAEFFS Rx plan or a PDP sponsor, in the manner described in (and in coordination with) section 1851(c)(2). 

‘‘(4) Informing each enrollee before the beginning of each year of the annual 

out-of-pocket threshold applicable to the enrollee for that year under section 

1860D–2(b)(4) at such time. 

‘‘(c) MA-EFFS RX ENROLLEE MAY ONLY OBTAIN BENEFITS THROUGH THE PLAN.—

An individual who is enrolled under a MA-EFFS Rx plan may only elect to receive 

qualified prescription drug coverage under this part through such plan. 

‘‘(d) ASSURING ACCESS TO A CHOICE OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—

‘‘(1) CHOICE OF AT LEAST TWO PLANS IN EACH AREA.—

19

‘‘(A) IN GENERAL.—The Administrator shall assure that each individual 

who is entitled to benefits under part A or enrolled under part B and who 

is residing in an area in the United States has available, consistent with 

subparagraph (B), a choice of enrollment in at least two qualifying plans 

(as defined in paragraph (5)) in the area in which the individual resides, 

at least one of which is a prescription drug plan. 

‘‘(B) REQUIREMENT FOR DIFFERENT PLAN SPONSORS.—The requirement in 

subparagraph (A) is not satisfied with respect to an area if only one PDP 

sponsor or one entity that offers a MA-EFFS Rx plan offers all the qualifying plans in the area. 

‘‘(2) GUARANTEEING ACCESS TO COVERAGE.—In order to assure access under 

paragraph (1) and consistent with paragraph (3), the Administrator may provide partial underwriting of risk for a PDP sponsor to expand the service area 

under an existing prescription drug plan to adjoining or additional areas or to 

establish such a plan (including offering such a plan on a regional or nationwide 

basis), but only so long as (and to the extent) necessary to assure the access 

guaranteed under paragraph (1). 

‘‘(3) LIMITATION ON AUTHORITY.—In exercising authority under this subsection, the Administrator—

‘‘(A) shall not provide for the full underwriting of financial risk for any 

PDP sponsor; and 

‘‘(B) shall seek to maximize the assumption of financial risk by PDP sponsors or entities offering a MA-EFFS Rx plan. 

‘‘(4) REPORTS.—The Administrator shall, in each annual report to Congress 

under section 1809(f), include information on the exercise of authority under 

this subsection. The Administrator also shall include such recommendations as 

may be appropriate to minimize the exercise of such authority, including minimizing the assumption of financial risk. 

‘‘(5) QUALIFYING PLAN DEFINED.—For purposes of this subsection, the term 

‘qualifying plan’ means a prescription drug plan or a MA-EFFS Rx plan. 

‘‘SEC. 1860D–6. SUBMISSION OF BIDS AND PREMIUMS. 

‘‘(a) SUBMISSION OF BIDS, PREMIUMS, AND RELATED INFORMATION.—

‘‘(1) IN GENERAL.—Each PDP sponsor shall submit to the Administrator the 

information described in paragraph (2) in the same manner as information is 

submitted by an organization under section 1854(a)(1). 

‘‘(2) INFORMATION SUBMITTED.—The information described in this paragraph 

is the following: 

‘‘(A) COVERAGE PROVIDED.—Information on the qualified prescription drug 

coverage to be provided. 

‘‘(B) ACTUARIAL VALUE.—Information on the actuarial value of the coverage. 

‘‘(C) BID AND PREMIUM.—Information on the bid and the premium for the 

coverage, including an actuarial certification of—

‘‘(i) the actuarial basis for such bid and premium; 

‘‘(ii) the portion of such bid and premium attributable to benefits in 

excess of standard coverage; 

‘‘(iii) the reduction in such bid resulting from the reinsurance subsidy 

payments provided under section 1860D–8(a)(2); and 

‘‘(iv) the reduction in such premium resulting from the direct and reinsurance subsidy payments provided under section 1860D–8. 

‘‘(D) ADDITIONAL INFORMATION.—Such other information as the Administrator may require to carry out this part. 

‘‘(3) REVIEW OF INFORMATION; NEGOTIATION AND APPROVAL OF PREMIUMS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), the Administrator shall 

review the information filed under paragraph (2) for the purpose of conducting negotiations under section 1860D–4(b)(2) (relating to using OPMlike authority under the FEHBP). The Administrator, using the information 

provided (including the actuarial certification under paragraph (2)(C)) shall 

approve the premium submitted under this subsection only if the premium 

accurately reflects both (i) the actuarial value of the benefits provided, and 

(ii) the 73 percent average subsidy provided under section 1860D–8 for the 

standard benefit. The Administrator shall apply actuarial principles to approval of a premium under this part in a manner similar to the manner 

in which those principles are applied in establishing the monthly part B 

premium under section 1839. 

‘‘(B) EXCEPTION.—In the case of a plan described in section 1851(a)(2)(C), 

the provisions of subparagraph (A) shall not apply and the provisions of 

paragraph (5)(B) of section 1854(a), prohibiting the review, approval, or disVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00019 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
20

approval of amounts described in such paragraph, shall apply to the negotiation and rejection of the monthly bid amounts and proportion referred to 

in subparagraph (A). 

‘‘(b) UNIFORM BID AND PREMIUM.—

‘‘(1) IN GENERAL.—The bid and premium for a prescription drug plan under 

this section may not vary among enrollees in the plan in the same service area. 

‘‘(2) CONSTRUCTION.—Nothing in paragraph (1) shall be construed as preventing the imposition of a late enrollment penalty under section 1860D–

1(c)(2)(B).

‘‘(c) COLLECTION.—

‘‘(1) BENEFICIARY’S OPTION OF PAYMENT THROUGH WITHHOLDING FROM SOCIAL

SECURITY PAYMENT OR USE OF ELECTRONIC FUNDS TRANSFER MECHANISM.—In accordance with regulations, a PDP sponsor shall permit each enrollee, at the enrollee’s option, to make payment of premiums under this part to the sponsor 

through withholding from benefit payments in the manner provided under section 1840 with respect to monthly premiums under section 1839 or through an 

electronic funds transfer mechanism (such as automatic charges of an account 

at a financial institution or a credit or debit card account) or otherwise. All premium payments that are withheld under this paragraph shall be credited to the 

Medicare Prescription Drug Trust Fund and shall be paid to the PDP sponsor 

involved. 

‘‘(2) OFFSETTING.—Reductions in premiums for coverage under parts A and B 

as a result of a selection of a MA-EFFS Rx plan may be used to reduce the premium otherwise imposed under paragraph (1). 

‘‘(d) ACCEPTANCE OF REFERENCE PREMIUM AMOUNT AS FULL PREMIUM FOR SUBSIDIZED LOW-INCOME INDIVIDUALS IF NO STANDARD (OR EQUIVALENT) COVERAGE IN

AN AREA.—

‘‘(1) IN GENERAL.—If there is no standard prescription drug coverage (as defined in paragraph (2)) offered in an area, in the case of an individual who is 

eligible for a premium subsidy under section 1860D–7 and resides in the area, 

the PDP sponsor of any prescription drug plan offered in the area (and any entity offering a MA-EFFS Rx plan in the area) shall accept the reference premium 

amount (under paragraph (3)) as payment in full for the premium charge for 

qualified prescription drug coverage. 

‘‘(2) STANDARD PRESCRIPTION DRUG COVERAGE DEFINED.—For purposes of this 

subsection, the term ‘standard prescription drug coverage’ means qualified prescription drug coverage that is standard coverage or that has an actuarial value 

equivalent to the actuarial value for standard coverage. 

‘‘(3) REFERENCE PREMIUM AMOUNT DEFINED.—For purposes of this subsection, 

the term ‘reference premium amount’ means, with respect to qualified prescription drug coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value is equivalent to that of standard coverage), 

the plan’s PDP premium; or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the plan’s 

PDP premium multiplied by the ratio of (I) the actuarial value of standard coverage, to (II) the actuarial value of the alternative coverage; 

‘‘(B) an EFFS plan, the EFFS monthly prescription drug beneficiary premium (as defined in section 1860E–4(a)(3)(B)); or 

‘‘(C) a Medicare Advantage, the Medicare Advantage monthly prescription 

drug beneficiary premium (as defined in section 1854(b)(2)(B)). 

For purposes of subparagraph (A), the term ‘PDP premium’ means, with respect 

to a prescription drug plan, the premium amount for enrollment under the plan 

under this part (determined without regard to any low-income subsidy under 

section 1860D–7 or any late enrollment penalty under section 1860D–1(c)(2)(B)). 

‘‘SEC. 1860D–7. PREMIUM AND COST-SHARING SUBSIDIES FOR LOW-INCOME INDIVIDUALS.

‘‘(a) INCOME-RELATED SUBSIDIES FOR INDIVIDUALS WITH INCOME BELOW 150 PERCENT OF FEDERAL POVERTY LEVEL.—

‘‘(1) FULL PREMIUM SUBSIDY AND REDUCTION OF COST-SHARING FOR INDIVIDUALS WITH INCOME BELOW 135 PERCENT OF FEDERAL POVERTY LEVEL.—In the 

case of a subsidy eligible individual (as defined in paragraph (4)) who is determined to have income that does not exceed 135 percent of the Federal poverty 

level, the individual is entitled under this section—

‘‘(A) to an income-related premium subsidy equal to 100 percent of the 

amount described in subsection (b)(1); and 

21

‘‘(B) subject to subsection (c), to the substitution for the beneficiary costsharing described in paragraphs (1) and (2) of section 1860D–2(b) (up to the 

initial coverage limit specified in paragraph (3) of such section) of amounts 

that do not exceed $2 for a multiple source or generic drug (as described 

in section 1927(k)(7)(A)) and $5 for a non-preferred drug.

‘‘(2) SLIDING SCALE PREMIUM SUBSIDY FOR INDIVIDUALS WITH INCOME ABOVE

135, BUT BELOW 150 PERCENT, OF FEDERAL POVERTY LEVEL.—In the case of a subsidy eligible individual who is determined to have income that exceeds 135 percent, but does not exceed 150 percent, of the Federal poverty level, the individual is entitled under this section to an income-related premium subsidy determined on a linear sliding scale ranging from 100 percent of the amount described in subsection (b)(1) for individuals with incomes at 135 percent of such 

level to 0 percent of such amount for individuals with incomes at 150 percent 

of such level. 

‘‘(3) CONSTRUCTION.—Nothing in this section shall be construed as preventing 

a PDP sponsor or entity offering a MA-EFFS Rx plan from reducing to 0 the 

cost-sharing otherwise applicable to generic drugs. 

‘‘(4) DETERMINATION OF ELIGIBILITY.— ‘‘(A) SUBSIDY ELIGIBLE INDIVIDUAL DEFINED.—For purposes of this section, 

subject to subparagraph (D), the term ‘subsidy eligible individual’ means an 

individual who—

‘‘(i) is eligible to elect, and has elected, to obtain qualified prescription drug coverage under this part; 

‘‘(ii) has income below 150 percent of the Federal poverty line; and 

‘‘(iii) meets the resources requirement described in subparagraph (D) 

. 

‘‘(B) DETERMINATIONS.—The determination of whether an individual residing in a State is a subsidy eligible individual and the amount of such 

individual’s income shall be determined under the State medicaid plan for 

the State under section 1935(a) or by the Social Security Administration. 

In the case of a State that does not operate such a medicaid plan (either 

under title XIX or under a statewide waiver granted under section 1115), 

such determination shall be made under arrangements made by the Administrator. There are authorized to be appropriated to the Social Security Administration such sums as may be necessary for the determination of eligibility under this subparagraph. 

‘‘(C) INCOME DETERMINATIONS.—For purposes of applying this section—

‘‘(i) income shall be determined in the manner described in section 

1905(p)(1)(B); and 

‘‘(ii) the term ‘Federal poverty line’ means the official poverty line (as 

defined by the Office of Management and Budget, and revised annually 

in accordance with section 673(2) of the Omnibus Budget Reconciliation 

Act of 1981) applicable to a family of the size involved. 

‘‘(D) RESOURCE STANDARD APPLIED TO BE BASED ON TWICE SSI RESOURCE

STANDARD.—The resource requirement of this subparagraph is that an individual’s resources (as determined under section 1613 for purposes of the 

supplemental security income program) do not exceed—

‘‘(i) for 2006 twice the maximum amount of resources that an individual may have and obtain benefits under that program; and 

‘‘(ii) for a subsequent year the resource limitation established under 

this clause for the previous year increased by the annual percentage increase in the consumer price index (all items; U.S. city average) as of 

September of such previous year. 

Any resource limitation established under clause (ii) that is not a multiple 

of $10 shall be rounded to the nearest multiple of $10. 

‘‘(E) TREATMENT OF TERRITORIAL RESIDENTS.—In the case of an individual 

who is not a resident of the 50 States or the District of Columbia, the individual is not eligible to be a subsidy eligible individual but may be eligible 

for financial assistance with prescription drug expenses under section 

1935(e). 

‘‘(F) TREATMENT OF CONFORMING MEDIGAP POLICIES.—For purposes of this 

section, the term ‘qualified prescription drug coverage’ includes a medicare 

supplemental policy described in section 1860D–8(b)(4). 

‘‘(5) INDEXING DOLLAR AMOUNTS.—

‘‘(A) FOR 2007.—The dollar amounts applied under paragraphs (1)(B) for 

2007 shall be the dollar amounts specified in such paragraph increased by 

the annual percentage increase described in section 1860D–2(b)(5) for 2007. 

‘‘(B) FOR SUBSEQUENT YEARS.—The dollar amounts applied under paragraph (1)(B) for a year after 2007 shall be the amounts (under this paraVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00021 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
22

graph) applied under paragraph (1)(B) for the preceding year increased by 

the annual percentage increase described in section 1860D–2(b)(5) (relating 

to growth in medicare prescription drug costs per beneficiary) for the year 

involved. 

‘‘(b) PREMIUM SUBSIDY AMOUNT.—

‘‘(1) IN GENERAL.—The premium subsidy amount described in this subsection 

for an individual residing in an area is the benchmark premium amount (as defined in paragraph (2)) for qualified prescription drug coverage offered by the 

prescription drug plan or the MA-EFFS Rx plan in which the individual is enrolled. 

‘‘(2) BENCHMARK PREMIUM AMOUNT DEFINED.—For purposes of this subsection, 

the term ‘benchmark premium amount’ means, with respect to qualified prescription drug coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value of which is equivalent to that of standard coverage), the premium amount for enrollment under the plan under this 

part (determined without regard to any subsidy under this section or 

any late enrollment penalty under section 1860D–1(c)(2)(B)); or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the premium 

amount described in clause (i) multiplied by the ratio of (I) the actuarial value of standard coverage, to (II) the actuarial value of the alternative coverage; or 

‘‘(B) a MA-EFFS Rx plan, the portion of the premium amount that is attributable to statutory drug benefits (described in section 

1853(a)(1)(A)(ii)(II)). 

‘‘(c) RULES IN APPLYING COST-SHARING SUBSIDIES.—

‘‘(1) IN GENERAL.—In applying subsection (a)(1)(B), nothing in this part shall 

be construed as preventing a plan or provider from waiving or reducing the 

amount of cost-sharing otherwise applicable. 

‘‘(2) LIMITATION ON CHARGES.—In the case of an individual receiving costsharing subsidies under subsection (a)(1)(B), the PDP sponsor or entity offering 

a MA-EFFS Rx plan may not charge more than $5 per prescription. 

‘‘(3) APPLICATION OF INDEXING RULES.—The provisions of subsection (a)(5) 

shall apply to the dollar amount specified in paragraph (2) in the same manner 

as they apply to the dollar amounts specified in subsections (a)(1)(B). 

‘‘(d) ADMINISTRATION OF SUBSIDY PROGRAM.—The Administrator shall provide a 

process whereby, in the case of an individual who is determined to be a subsidy eligible individual and who is enrolled in prescription drug plan or is enrolled in a MAEFFS Rx plan—

‘‘(1) the Administrator provides for a notification of the PDP sponsor or the 

entity offering the MA-EFFS Rx plan involved that the individual is eligible for 

a subsidy and the amount of the subsidy under subsection (a); 

‘‘(2) the sponsor or entity involved reduces the premiums or cost-sharing otherwise imposed by the amount of the applicable subsidy and submits to the Administrator information on the amount of such reduction; and 

‘‘(3) the Administrator periodically and on a timely basis reimburses the sponsor or entity for the amount of such reductions. 

The reimbursement under paragraph (3) with respect to cost-sharing subsidies may 

be computed on a capitated basis, taking into account the actuarial value of the subsidies and with appropriate adjustments to reflect differences in the risks actually 

involved. 

‘‘(e) RELATION TO MEDICAID PROGRAM.—

‘‘(1) IN GENERAL.—For provisions providing for eligibility determinations, and 

additional financing, under the medicaid program, see section 1935. 

‘‘(2) MEDICAID PROVIDING WRAP AROUND BENEFITS.—The coverage provided 

under this part is primary payor to benefits for prescribed drugs provided under 

the medicaid program under title XIX consistent with section 1935(d)(1). 

‘‘(3) COORDINATION.—The Administrator shall develop and implement a plan 

for the coordination of prescription drug benefits under this part with the benefits provided under the medicaid program under title XIX, with particular attention to insuring coordination of payments and prevention of fraud and abuse. 

In developing and implementing such plan, the Administrator shall involve the 

Secretary, the States, the data processing industry, pharmacists, and pharmaceutical manufacturers, and other experts.

23

‘‘SEC. 1860D–8. SUBSIDIES FOR ALL MEDICARE BENEFICIARIES FOR QUALIFIED PRESCRIPTION DRUG COVERAGE. 

‘‘(a) SUBSIDY PAYMENT.—In order to reduce premium levels applicable to qualified 

prescription drug coverage for all medicare beneficiaries consistent with an overall 

subsidy level of 73 percent, to reduce adverse selection among prescription drug 

plans and MA-EFFS Rx plans, and to promote the participation of PDP sponsors 

under this part, the Administrator shall provide in accordance with this section for 

payment to a qualifying entity (as defined in subsection (b)) of the following subsidies: 

‘‘(1) DIRECT SUBSIDY.—In the case of an enrollee enrolled for a month in a prescription drug plan or a MA-EFFS Rx plan, a direct subsidy equal to 43 percent 

of the national average monthly bid amount (computed under subsection (g)) for 

that month.

‘‘(2) SUBSIDY THROUGH REINSURANCE.—In the case of an enrollee enrolled for 

a month in a prescription drug plan or a MA-EFFS Rx plan, the reinsurance 

payment amount (as defined in subsection (c)), which in the aggregate is 30 percent of the total payments made by qualifying entities for standard coverage 

under the respective plan, for excess costs incurred in providing qualified prescription drug coverage—

‘‘(A) for enrollees with a prescription drug plan under this part; and 

‘‘(B) for enrollees with a MA-EFFS Rx plan. 

‘‘(3) EMPLOYER AND UNION FLEXIBILITY.—In the case of an individual who is 

a participant or beneficiary in a qualified retiree prescription drug plan (as defined in subsection (f)(1)) and who is not enrolled in a prescription drug plan 

or in a MA-EFFS Rx plan, the special subsidy payments under subsection (f)(3). 

This section constitutes budget authority in advance of appropriations Acts and represents the obligation of the Administrator to provide for the payment of amounts 

provided under this section. In applying the percentages under paragraphs (1) and 

(2), there shall be taken into account under the respective paragraphs the portion 

of the employer and union special subsidy payments under subsection (f)(3) that reflect payments that would have been made under the respective paragraphs if such 

paragraphs had applied to qualified retiree prescription drug plans instead of paragraph (3). 

‘‘(b) QUALIFYING ENTITY DEFINED.—For purposes of this section, the term ‘qualifying entity’ means any of the following that has entered into an agreement with 

the Administrator to provide the Administrator with such information as may be required to carry out this section: 

‘‘(1) A PDP sponsor offering a prescription drug plan under this part. 

‘‘(2) An entity that offers a MA-EFFS Rx plan. 

‘‘(3) The sponsor of a qualified retiree prescription drug plan (as defined in 

subsection (f)). 

‘‘(c) REINSURANCE PAYMENT AMOUNT.—

‘‘(1) IN GENERAL.—Subject to subsection (d)(1)(B) and paragraph (4), the reinsurance payment amount under this subsection for a qualifying covered individual (as defined in paragraph (5)) for a coverage year (as defined in subsection 

(h)(2)) is equal to the sum of the following: 

‘‘(A) REINSURANCE BETWEEN INITIAL REINSURANCE THRESHOLD AND THE

INITIAL COVERAGE LIMIT.—For the portion of the individual’s gross covered 

prescription drug costs (as defined in paragraph (3)) for the year that exceeds the initial reinsurance threshold specified in paragraph (4), but does 

not exceed the initial coverage limit specified in section 1860D–2(b)(3), an 

amount equal to 20 percent of the allowable costs (as defined in paragraph 

(2)) attributable to such gross covered prescription drug costs. 

‘‘(B) REINSURANCE ABOVE ANNUAL OUT-OF-POCKET THRESHOLD.—For the 

portion of the individual’s gross covered prescription drug costs for the year 

that exceeds the annual out-of-pocket threshold specified in 1860D–

2(b)(4)(B), an amount equal to 80 percent of the allowable costs attributable 

to such gross covered prescription drug costs. 

‘‘(2) ALLOWABLE COSTS.—For purposes of this section, the term ‘allowable 

costs’ means, with respect to gross covered prescription drug costs under a plan 

described in subsection (b) offered by a qualifying entity, the part of such costs 

that are actually paid (net of discounts, chargebacks, and average percentage 

rebates) under the plan, but in no case more than the part of such costs that 

would have been paid under the plan if the prescription drug coverage under 

the plan were standard coverage. 

‘‘(3) GROSS COVERED PRESCRIPTION DRUG COSTS.—For purposes of this section, 

the term ‘gross covered prescription drug costs’ means, with respect to an enrollee with a qualifying entity under a plan described in subsection (b) during 

a coverage year, the costs incurred under the plan (including costs attributable 

24

to administrative costs) for covered prescription drugs dispensed during the 

year, including costs relating to the deductible, whether paid by the enrollee or 

under the plan, regardless of whether the coverage under the plan exceeds 

standard coverage and regardless of when the payment for such drugs is made. 

‘‘(4) INITIAL REINSURANCE THRESHOLD.—The initial reinsurance threshold 

specified in this paragraph—

‘‘(A) for 2006, is equal to $1,000; or 

‘‘(B) for a subsequent year, is equal to the payment threshold specified 

in this paragraph for the previous year, increased by the annual percentage 

increase described in section 1860D–2(b)(5) for the year involved. 

Any amount determined under subparagraph (B) that is not a multiple of $10 

shall be rounded to the nearest multiple of $10.

‘‘(5) QUALIFYING COVERED INDIVIDUAL DEFINED.—For purposes of this subsection, the term ‘qualifying covered individual’ means an individual who—

‘‘(A) is enrolled with a prescription drug plan under this part; or 

‘‘(B) is enrolled with a MA-EFFS Rx plan. 

‘‘(d) ADJUSTMENT OF PAYMENTS.—

‘‘(1) ADJUSTMENT OF REINSURANCE PAYMENTS TO ASSURE 30 PERCENT LEVEL OF

SUBSIDY THROUGH REINSURANCE.—

‘‘(A) ESTIMATION OF PAYMENTS.—The Administrator shall estimate—

‘‘(i) the total payments to be made (without regard to this subsection) 

during a year under subsections (a)(2) and (c); and 

‘‘(ii) the total payments to be made by qualifying entities for standard 

coverage under plans described in subsection (b) during the year. 

‘‘(B) ADJUSTMENT.—The Administrator shall proportionally adjust the 

payments made under subsections (a)(2) and (c) for a coverage year in such 

manner so that the total of the payments made under such subsections (and 

under subsection (f)(3) insofar as such payments reflect payments that 

would have been made under such subsections if such subsections had applied to qualified retiree prescription drug plans instead of subsections 

(a)(3) and (f)(3)) for the year is equal to 30 percent of the total payments 

described in subparagraph (A)(ii). 

‘‘(2) RISK ADJUSTMENT FOR DIRECT SUBSIDIES.—To the extent the Administrator determines it appropriate to avoid risk selection, the payments made for 

direct subsidies under subsection (a)(1) are subject to adjustment based upon 

risk factors specified by the Administrator. Any such risk adjustment shall be 

designed in a manner as to not result in a change in the aggregate payments 

made under such subsection. 

‘‘(e) PAYMENT METHODS.—

‘‘(1) IN GENERAL.—Payments under this section shall be based on such a 

method as the Administrator determines. The Administrator may establish a 

payment method by which interim payments of amounts under this section are 

made during a year based on the Administrator’s best estimate of amounts that 

will be payable after obtaining all of the information. 

‘‘(2) SOURCE OF PAYMENTS.—Payments under this section shall be made from 

the Medicare Prescription Drug Trust Fund. 

‘‘(f) RULES RELATING TO QUALIFIED RETIREE PRESCRIPTION DRUG PLAN.—

‘‘(1) DEFINITION.—For purposes of this section, the term ‘qualified retiree prescription drug plan’ means employment-based retiree health coverage (as defined in paragraph (4)(A)) if, with respect to an individual who is a participant 

or beneficiary under such coverage and is eligible to be enrolled in a prescription drug plan or a MA-EFFS Rx plan under this part, the following requirements are met: 

‘‘(A) ACTUARIAL EQUIVALENCE TO STANDARD COVERAGE.—The Administrator determines (based on an actuarial analysis by the Administrator) 

that coverage provides at least the same actuarial value as standard coverage. Such determination may be made on an annual basis. 

‘‘(B) AUDITS.—The sponsor (and the plan) shall maintain, and afford the 

Administrator access to, such records as the Administrator may require for 

purposes of audits and other oversight activities necessary to ensure the 

adequacy of prescription drug coverage and the accuracy of payments made. 

‘‘(C) PROVISION OF CERTIFICATION OF PRESCRIPTION DRUG COVERAGE.—The 

sponsor of the plan shall provide for issuance of certifications of the type 

described in section 1860D–1(c)(2)(D). 

‘‘(2) LIMITATION ON BENEFIT ELIGIBILITY.—No payment shall be provided 

under this section with respect to a participant or beneficiary in a qualified retiree prescription drug plan unless the individual is—

‘‘(A) is covered under the plan; and 

25

‘‘(B) is eligible to obtain qualified prescription drug coverage under section 1860D–1 but did not elect such coverage under this part (either 

through a prescription drug plan or through a MA-EFFS Rx plan). 

‘‘(3) EMPLOYER AND UNION SPECIAL SUBSIDY AMOUNTS.— ‘‘(A) IN GENERAL.—For purposes of subsection (a), the special subsidy payment amount under this paragraph for a qualifying covered retiree(as defined in paragraph (6)) for a coverage year (as defined in subsection (h)) enrolled in a qualifying entity described in subsection (b)(3) under a qualified 

retiree prescription drug plan is, for the portion of the individual’s gross 

covered prescription drug costs for the year that exceeds the deductible 

amount specified in subparagraph (B), an amount equal to, subject to subparagraph (D), 28 percent of the allowable costs attributable to such gross 

covered prescription drug costs, but only to the extent such costs exceed the 

deductible under subparagraph (B) and do not exceed the cost limit under 

such subparagraph in the case of any such individual for the plan year. 

‘‘(B) DEDUCTIBLE AND COST LIMIT APPLICABLE.—Subject to subparagraph 

(C)—

‘‘(i) the deductible under this subparagraph is equal to $250 for plan 

years that end in 2006; and ‘‘(ii) the cost limit under this subparagraph is equal to $5,000 for 

plan years that end in 2006. 

‘‘(C) INDEXING.—The deductible and cost limit amounts specified in subparagraphs (B) for a plan year that ends after 2006 shall be adjusted in 

the same manner as the annual deductible under section 1860D–2(b)(1) is 

annually adjusted under such section. 

‘‘(D) ADJUSTMENT CONTINGENCY.—The Secretary may adjust the percentage specified in subparagraph (A) with respect to plan years that end in a 

year in a manner so that the aggregate expenditures in the year under this 

section are the same as the aggregate expenditures that would have been 

made under this section (taking into account the effect of any adjustment 

under subsection (d)(1)(B)) if paragraphs (1) and (2) of subsection (a) had 

applied to qualified prescription drug coverage instead of this paragraph 

and subsection (a)(3).

‘‘(4) RELATED DEFINITIONS.—As used in this section: 

‘‘(A) EMPLOYMENT-BASED RETIREE HEALTH COVERAGE.—The term ‘employment-based retiree health coverage’ means health insurance or other coverage of health care costs for individuals eligible to enroll in a prescription 

drug plan or MA-EFFS Rx plan under this part (or for such individuals and 

their spouses and dependents) under a group health plan (including such 

a plan that is established or maintained under or pursuant to one or more 

collective bargaining agreements) based on their status as retired participants in such plan. 

‘‘(B) QUALIFYING COVERED RETIREE.—The term ‘qualifying covered retiree’ 

means an individual who is eligible to obtain qualified prescription drug 

coverage under section 1860D–1 but did not elect such coverage under this 

part (either through a prescription drug plan or through a MA-EFFS Rx 

plan) but is covered under a qualified retiree prescription drug plan. 

‘‘(C) SPONSOR.—The term ‘sponsor’ means a plan sponsor, as defined in 

section 3(16)(B) of the Employee Retirement Income Security Act of 1974, 

except that, in the case of a single-employer plan (as defined in section 

3(41) of such Act), such term means the employer of the plan participants 

if such employer has been designated as the plan sponsor in all prior summary plan descriptions and annual reports issued with respect to the plan 

under part 1 of subtitle B of title I of such Act. 

‘‘(5) CONSTRUCTION.—Nothing in this subsection shall be construed as—

‘‘(A) precluding an individual who is covered under employment-based retiree health coverage from enrolling in a prescription drug plan or in a MAEFFS plan; 

‘‘(B) precluding such employment-based retiree health coverage or an employer or other person from paying all or any portion of any premium required for coverage under such a prescription drug plan or MA-EFFS plan 

on behalf of such an individual; or 

‘‘(C) preventing such employment-based retiree health coverage from providing coverage for retirees—

‘‘(i) who are covered under a qualified retiree prescription plan that 

is better than standard coverage; or 

‘‘(ii) who are not covered under a qualified retiree prescription plan 

but who are enrolled in a prescription drug plan or a MA-EFFS Rx 

plan, that is supplemental to the benefits provided under such prescripVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00025 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
26

tion drug plan or MA-EFFS Rx plan, except that any such supplemental coverage (not including payment of any premium referred to in 

subparagraph (B)) shall be treated as primary coverage to which section 1862(b)(2)(A)(i) is deemed to apply. 

‘‘(g) COMPUTATION OF NATIONAL AVERAGE MONTHLY BID AMOUNT.—

‘‘(1) IN GENERAL.—For each year (beginning with 2006) the Administrator 

shall compute a national average monthly bid amount equal to the average of 

the benchmark bid amounts for each prescription drug plan and for each MAEFFS Rx plan (as computed under paragraph (2), but excluding plans described 

in section 1851(a)(2)(C))) adjusted under paragraph (4) to take into account reinsurance payments. 

‘‘(2) BENCHMARK BID AMOUNT DEFINED.—For purposes of this subsection, the 

term ‘benchmark bid amount’ means, with respect to qualified prescription drug 

coverage offered under—

‘‘(A) a prescription drug plan that—

‘‘(i) provides standard coverage (or alternative prescription drug coverage the actuarial value of which is equivalent to that of standard coverage), the PDP bid; or 

‘‘(ii) provides alternative prescription drug coverage the actuarial 

value of which is greater than that of standard coverage, the PDP bid 

multiplied by the ratio of (I) the actuarial value of standard coverage, 

to (II) the actuarial value of the alternative coverage; or 

‘‘(B) a MA-EFFS Rx plan, the portion of the bid amount that is attributable to statutory drug benefits (described in section 1853(a)(1)(A)(ii)(II)). 

For purposes of subparagraph (A), the term ‘PDP bid’ means, with respect to 

a prescription drug plan, the bid amount for enrollment under the plan under 

this part (determined without regard to any low-income subsidy under section 

1860D–7 or any late enrollment penalty under section 1860D–1(c)(2)(B)). 

‘‘(3) WEIGHTED AVERAGE.—

‘‘(A) IN GENERAL.—The monthly national average monthly bid amount 

computed under paragraph (1) shall be a weighted average, with the weight 

for each plan being equal to the average number of beneficiaries enrolled 

under such plan in the previous year. 

‘‘(B) SPECIAL RULE FOR 2006.—For purposes of applying this subsection 

for 2006, the Administrator shall establish procedures for determining the 

weighted average under subparagraph (A) for 2005. 

‘‘(4) ADJUSTMENT TO ADD BACK IN VALUE OF REINSURANCE SUBSIDIES.—The adjustment under this paragraph, to take into account reinsurance payments 

under subsection (c) making up 30 percent of total payments, is such an adjustment as will make the national average monthly bid amount represent represent 100 percent, instead of representing 70 percent, of average payments 

under this part.

‘‘(h) COVERAGE YEAR DEFINED.—For purposes of this section, the term ‘coverage 

year’ means a calendar year in which covered outpatient drugs are dispensed if a 

claim for payment is made under the plan for such drugs, regardless of when the 

claim is paid. 

‘‘SEC. 1860D–9. MEDICARE PRESCRIPTION DRUG TRUST FUND. 

‘‘(a) IN GENERAL.—There is created on the books of the Treasury of the United 

States a trust fund to be known as the ‘Medicare Prescription Drug Trust Fund’ (in 

this section referred to as the ‘Trust Fund’). The Trust Fund shall consist of such 

gifts and bequests as may be made as provided in section 201(i)(1), and such 

amounts as may be deposited in, or appropriated to, such fund as provided in this 

part. Except as otherwise provided in this section, the provisions of subsections (b) 

through (i) of section 1841 shall apply to the Trust Fund in the same manner as 

they apply to the Federal Supplementary Medical Insurance Trust Fund under such 

section. 

‘‘(b) PAYMENTS FROM TRUST FUND.—

‘‘(1) IN GENERAL.—The Managing Trustee shall pay from time to time from 

the Trust Fund such amounts as the Administrator certifies are necessary to 

make—

‘‘(A) payments under section 1860D–7 (relating to low-income subsidy 

payments); 

‘‘(B) payments under section 1860D–8 (relating to subsidy payments); and 

‘‘(C) payments with respect to administrative expenses under this part in 

accordance with section 201(g). 

‘‘(2) TRANSFERS TO MEDICAID ACCOUNT FOR INCREASED ADMINISTRATIVE

COSTS.—The Managing Trustee shall transfer from time to time from the Trust 

Fund to the Grants to States for Medicaid account amounts the Administrator 

27

certifies are attributable to increases in payment resulting from the application 

of a higher Federal matching percentage under section 1935(b). 

‘‘(c) DEPOSITS INTO TRUST FUND.—

‘‘(1) LOW-INCOME TRANSFER.—There is hereby transferred to the Trust Fund, 

from amounts appropriated for Grants to States for Medicaid, amounts equivalent to the aggregate amount of the reductions in payments under section 

1903(a)(1) attributable to the application of section 1935(c). 

‘‘(2) APPROPRIATIONS TO COVER GOVERNMENT CONTRIBUTIONS.—There are authorized to be appropriated from time to time, out of any moneys in the Treasury not otherwise appropriated, to the Trust Fund, an amount equivalent to the 

amount of payments made from the Trust Fund under subsection (b), reduced 

by the amount transferred to the Trust Fund under paragraph (1). 

‘‘(d) RELATION TO SOLVENCY REQUIREMENTS.—Any provision of law that relates to 

the solvency of the Trust Fund under this part shall take into account the Trust 

Fund and amounts receivable by, or payable from, the Trust Fund. 

‘‘SEC. 1860D–10. DEFINITIONS; APPLICATION TO MEDICARE ADVANTAGE AND EFFS PROGRAMS; TREATMENT OF REFERENCES TO PROVISIONS IN PART C. 

‘‘(a) DEFINITIONS.—For purposes of this part: 

‘‘(1) COVERED OUTPATIENT DRUGS.—The term ‘covered outpatient drugs’ is defined in section 1860D–2(f). 

‘‘(2) INITIAL COVERAGE LIMIT.—The term ‘initial coverage limit’ means such 

limit as established under section 1860D–2(b)(3), or, in the case of coverage that 

is not standard coverage, the comparable limit (if any) established under the 

coverage. 

‘‘(3) MEDICARE PRESCRIPTION DRUG TRUST FUND.—The term ‘Medicare Prescription Drug Trust Fund’ means the Trust Fund created under section 

1860D–9(a). 

‘‘(4) PDP SPONSOR.—The term ‘PDP sponsor’ means an entity that is certified 

under this part as meeting the requirements and standards of this part for such 

a sponsor. 

‘‘(5) PRESCRIPTION DRUG PLAN.—The term ‘prescription drug plan’ means 

health benefits coverage that—

‘‘(A) is offered under a policy, contract, or plan by a PDP sponsor pursuant to, and in accordance with, a contract between the Administrator and 

the sponsor under section 1860D–4(b); 

‘‘(B) provides qualified prescription drug coverage; and 

‘‘(C) meets the applicable requirements of the section 1860D–3 for a prescription drug plan. 

‘‘(6) QUALIFIED PRESCRIPTION DRUG COVERAGE.—The term ‘qualified prescription drug coverage’ is defined in section 1860D–2(a). 

‘‘(7) STANDARD COVERAGE.—The term ‘standard coverage’ is defined in section 

1860D–2(b). 

‘‘(b) OFFER OF QUALIFIED PRESCRIPTION DRUG COVERAGE UNDER MEDICARE ADVANTAGE AND EFFS PROGRAMS.—

‘‘(1) AS PART OF MEDICARE ADVANTAGE PLAN.—Medicare Advantage organizations are required to offer Medicare Advantage plans that include qualified prescription drug coverage under part C pursuant to section 1851(j). 

‘‘(2) AS PART OF EFFS PLAN.—EFFS organizations are required to offer EFFS 

plans that include qualified prescription drug coverage under part E pursuant 

to section 1860E–2(d). 

‘‘(c) APPLICATION OF PART C PROVISIONS UNDER THIS PART.—For purposes of applying provisions of part C under this part with respect to a prescription drug plan 

and a PDP sponsor, unless otherwise provided in this part such provisions shall be 

applied as if—

‘‘(1) any reference to a Medicare Advantage or other plan included a reference 

to a prescription drug plan; 

‘‘(2) any reference to a provider-sponsored organization included a reference 

to a PDP sponsor; 

‘‘(3) any reference to a contract under section 1857 included a reference to a 

contract under section 1860D–4(b); and 

‘‘(4) any reference to part C included a reference to this part. 

‘‘(d) REPORT ON PHARMACY SERVICES PROVIDED TO NURSING FACILITY PATIENTS.—

‘‘(1) REVIEW.—Within 6 months after the date of the enactment of this section, 

the Secretary shall review the current standards of practice for pharmacy services provided to patients in nursing facilities. 

‘‘(2) EVALUATIONS AND RECOMMENDATIONS.—Specifically in the review under 

paragraph (1), the Secretary shall—

28

‘‘(A) assess the current standards of practice, clinical services, and other 

service requirements generally utilized for pharmacy services in the longterm care setting; 

‘‘(B) evaluate the impact of those standards with respect to patient safety, 

reduction of medication errors and quality of care; and 

‘‘(C) recommend (in the Secretary’s report under paragraph (3)) necessary 

actions and appropriate reimbursement to ensure the provision of prescription drugs to medicare beneficiaries residing in nursing facilities in a manner consistent with existing patient safety and quality of care standards 

under applicable State and Federal laws. 

‘‘(3) REPORT.—The Secretary shall submit a report to the Congress on the Secretary’s findings and recommendations under this subsection, including a detailed description of the Secretary’s plans to implement this part in a manner 

consistent with applicable State and Federal laws designed to protect the safety 

and quality of care of nursing facility patients.’’. 

(b) ADDITIONAL CONFORMING CHANGES.— (1) CONFORMING REFERENCES TO PREVIOUS PART D.—Any reference in law (in 

effect before the date of the enactment of this Act) to part D of title XVIII of 

the Social Security Act is deemed a reference to part F of such title (as in effect 

after such date). 

(2) CONFORMING AMENDMENT PERMITTING WAIVER OF COST-SHARING.—Section 

1128B(b)(3) (42 U.S.C. 1320a–7b(b)(3)) is amended—

(A) by striking ‘‘and’’ at the end of subparagraph (E); 

(B) by striking the period at the end of subparagraph (F) and inserting 

‘‘; and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(G) the waiver or reduction of any cost-sharing imposed under part D of title 

XVIII.’’. 

(3) SUBMISSION OF LEGISLATIVE PROPOSAL.—Not later than 6 months after the 

date of the enactment of this Act, the Secretary of Health and Human Services 

shall submit to the appropriate committees of Congress a legislative proposal 

providing for such technical and conforming amendments in the law as are required by the provisions of this subtitle. 

(c) STUDY ON TRANSITIONING PART B PRESCRIPTION DRUG COVERAGE.—Not later 

than January 1, 2005, the Medicare Benefits Administrator shall submit a report 

to Congress that makes recommendations regarding methods for providing benefits 

under part D of title XVIII of the Social Security Act for outpatient prescription 

drugs for which benefits are provided under part B of such title. 

SEC. 102. OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE UNDER MEDICARE ADVANTAGE AND ENHANCED FEE-FOR-SERVICE (EFFS) PROGRAM. 

(a) MEDICARE ADVANTAGE.—Section 1851 (42 U.S.C. 1395w–21) is amended by 

adding at the end the following new subsection: 

‘‘(j) AVAILABILITY OF PRESCRIPTION DRUG BENEFITS AND SUBSIDIES.— ‘‘(1) OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—A Medicare Advantage organization on and after January 1, 2006—

‘‘(A) may not offer a Medicare Advantage plan described in section 

1851(a)(2)(A) in an area unless either that plan (or another Medicare Advantage plan offered by the organization in that area) includes qualified 

prescription drug coverage; and 

‘‘(B) may not offer the prescription drug coverage (other than that required under parts A and B) to an enrollee under a Medicare Advantage 

plan, unless such drug coverage is at least qualified prescription drug coverage and unless the requirements of this subsection with respect to such 

coverage are met. 

‘‘(2) REQUIREMENT FOR ELECTION OF PART D COVERAGE TO OBTAIN QUALIFIED

PRESCRIPTION DRUG COVERAGE.—For purposes of this part, an individual who 

has not elected qualified prescription drug coverage under section 1860D–1(b) 

shall be treated as being ineligible to enroll in a Medicare Advantage plan 

under this part that offers such coverage. 

‘‘(3) COMPLIANCE WITH CERTAIN ADDITIONAL BENEFICIARY PROTECTIONS FOR

PRESCRIPTION DRUG COVERAGE.—With respect to the offering of qualified prescription drug coverage by a Medicare Advantage organization under this part 

on and after January 1, 2006, the organization and plan shall meet the requirements of subsections (a) through (d) of section 1860D–3 in the same manner as 

they apply to a PDP sponsor and a prescription drug plan under part D and 

shall submit to the Administrator the information described in section 1860D–

6(a)(2). The Administrator shall waive such requirements to the extent the Administrator determines that such requirements duplicate requirements otherwise applicable to the organization or plan under this part. 

29

‘‘(4) AVAILABILITY OF PREMIUM AND COST-SHARING SUBSIDIES.—In the case of 

low-income individuals who are enrolled in a Medicare Advantage plan that provides qualified prescription drug coverage, premium and cost-sharing subsidies 

are provided for such coverage under section 1860D–7. 

‘‘(5) AVAILABILITY OF DIRECT AND REINSURANCE SUBSIDIES TO REDUCE BIDS

AND PREMIUMS.—Medicare Advantage organizations are provided direct and reinsurance subsidy payments for providing qualified prescription drug coverage 

under this part under section 1860D–8. 

‘‘(6) CONSOLIDATION OF DRUG AND NON-DRUG PREMIUMS.—In the case of a 

Medicare Advantage plan that includes qualified prescription drug coverage, 

with respect to an enrollee in such plan there shall be a single premium for 

both drug and non-drug coverage provided under the plan. 

‘‘(7) TRANSITION IN INITIAL ENROLLMENT PERIOD.—Notwithstanding any other 

provision of this part, the annual, coordinated election period under subsection 

(e)(3)(B) for 2006 shall be the 6-month period beginning with November 2005. 

‘‘(8) QUALIFIED PRESCRIPTION DRUG COVERAGE; STANDARD COVERAGE.—For 

purposes of this part, the terms ‘qualified prescription drug coverage’ and 

‘standard coverage’ have the meanings given such terms in section 1860D–2. 

‘‘(9) SPECIAL RULES FOR PRIVATE FEE-FOR-SERVICE PLANS.— With respect to a 

Medicare Advantage plan described in section 1851(a)(2)(C) that offers qualified 

prescription drug coverage—

‘‘(A) REQUIREMENTS REGARDING NEGOTIATED PRICES.—Subsections (a)(1) 

and (d)(1) of section 1860D–2 shall not be construed to require the plan to 

negotiate prices or discounts but shall apply to the extent the plan does so. 

‘‘(B) MODIFICATION OF PHARMACY PARTICIPATION REQUIREMENT.—If the 

plan provides access, without charging additional copayments, to all pharmacies without regard to whether they are participating pharmacies in a 

network, section 1860D-3(c)(1)(A)(iii) shall not apply to the plan. 

‘‘(C) DRUG UTILIZATION MANAGEMENT PROGRAM NOT REQUIRED.—The requirements of section 1860D-3(d)(1)(A) shall not apply to the plan. 

‘‘(D) NON-PARTICIPATING PHARMACY DISCLOSURE EXCEPTION.—If the plan 

provides coverage for drugs purchased from all pharmacies, without entering into contracts or agreements with pharmacies to provide drugs to enrollees covered by the plan, section 1860D-3(d)(5) shall not apply to the 

plan.’’. 

(b) APPLICATION TO EFFS PLANS.—Subsection (d) of section 1860E–2, as added by 

section 201(a), is amended to read as follows: 

‘‘(d) AVAILABILITY OF PRESCRIPTION DRUG BENEFITS AND SUBSIDIES.—

‘‘(1) OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE.—An EFFS organization—

‘‘(A) may not offer an EFFS plan in an area unless either that plan (or 

another EFFS plan offered by the organization in that area) includes qualified prescription drug coverage; and 

‘‘(B) may not offer the prescription drug coverage (other than that required under parts A and B) to an enrollee under an EFFS plan, unless 

such drug coverage is at least qualified prescription drug coverage and unless the requirements of this subsection with respect to such coverage are 

met. 

‘‘(2) REQUIREMENT FOR ELECTION OF PART D COVERAGE TO OBTAIN QUALIFIED

PRESCRIPTION DRUG COVERAGE.—For purposes of this part, an individual who 

has not elected qualified prescription drug coverage under section 1860D–1(b) 

shall be treated as being ineligible to enroll in an EFFS plan under this part 

that offers such coverage. 

‘‘(3) COMPLIANCE WITH CERTAIN ADDITIONAL BENEFICIARY PROTECTIONS FOR

PRESCRIPTION DRUG COVERAGE.—With respect to the offering of qualified prescription drug coverage by an EFFS organization under this part, the organization and plan shall meet the requirements of subsections (a) through (d) of section 1860D–3 in the same manner as they apply to a PDP sponsor and a prescription drug plan under part D and shall submit to the Administrator the information described in section 1860D–6(a)(2). The Administrator shall waive 

such requirements to the extent the Administrator determines that such requirements duplicate requirements otherwise applicable to the organization or 

plan under this part. 

‘‘(4) AVAILABILITY OF PREMIUM AND COST-SHARING SUBSIDIES.—In the case of 

low-income individuals who are enrolled in an EFFS plan that provides qualified prescription drug coverage, premium and cost-sharing subsidies are provided for such coverage under section 1860D–7. 

‘‘(5) AVAILABILITY OF DIRECT AND REINSURANCE SUBSIDIES TO REDUCE BIDS

AND PREMIUMS.—EFFS organizations are provided direct and reinsurance subVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
30

sidy payments for providing qualified prescription drug coverage under this part 

under section 1860D–8. 

‘‘(6) CONSOLIDATION OF DRUG AND NON-DRUG PREMIUMS.—In the case of an 

EFFS plan that includes qualified prescription drug coverage, with respect to 

an enrollee in such plan there shall be a single premium for both drug and nondrug coverage provided under the plan. 

‘‘(7) QUALIFIED PRESCRIPTION DRUG COVERAGE; STANDARD COVERAGE.—For 

purposes of this part, the terms ‘qualified prescription drug coverage’ and 

‘standard coverage’ have the meanings given such terms in section 1860D–2.’’. 

(c) CONFORMING AMENDMENTS.—Section 1851 (42 U.S.C. 1395w–21) is amended—

(1) in subsection (a)(1)—

(A) by inserting ‘‘(other than qualified prescription drug benefits)’’ after 

‘‘benefits’’; 

(B) by striking the period at the end of subparagraph (B) and inserting 

a comma; and 

(C) by adding after and below subparagraph (B) the following: 

‘‘and may elect qualified prescription drug coverage in accordance with section 

1860D–1.’’; and 

(2) in subsection (g)(1), by inserting ‘‘and section 1860D–1(c)(2)(B)’’ after ‘‘in 

this subsection’’. 

(d) EFFECTIVE DATE.—The amendments made by this section apply to coverage 

provided on or after January 1, 2006.

SEC. 103. MEDICAID AMENDMENTS. 

(a) DETERMINATIONS OF ELIGIBILITY FOR LOW-INCOME SUBSIDIES.—

(1) REQUIREMENT.—Section 1902(a) (42 U.S.C. 1396a(a)) is amended—

(A) by striking ‘‘and’’ at the end of paragraph (64); 

(B) by striking the period at the end of paragraph (65) and inserting ‘‘; 

and’’; and 

(C) by inserting after paragraph (65) the following new paragraph: 

‘‘(66) provide for making eligibility determinations under section 1935(a).’’. 

(2) NEW SECTION.—Title XIX is further amended—

(A) by redesignating section 1935 as section 1936; and 

(B) by inserting after section 1934 the following new section: 

‘‘SPECIAL PROVISIONS RELATING TO MEDICARE PRESCRIPTION DRUG BENEFIT

‘‘SEC. 1935. (a) REQUIREMENT FOR MAKING ELIGIBILITY DETERMINATIONS FOR LOWINCOME SUBSIDIES.—As a condition of its State plan under this title under section 

1902(a)(66) and receipt of any Federal financial assistance under section 1903(a), a 

State shall—

‘‘(1) make determinations of eligibility for premium and cost-sharing subsidies 

under (and in accordance with) section 1860D–7; 

‘‘(2) inform the Administrator of the Medicare Benefits Administration of such 

determinations in cases in which such eligibility is established; and 

‘‘(3) otherwise provide such Administrator with such information as may be 

required to carry out part D of title XVIII (including section 1860D–7). 

‘‘(b) PAYMENTS FOR ADDITIONAL ADMINISTRATIVE COSTS.—

‘‘(1) IN GENERAL.—The amounts expended by a State in carrying out subsection (a) are, subject to paragraph (2), expenditures reimbursable under the 

appropriate paragraph of section 1903(a); except that, notwithstanding any 

other provision of such section, the applicable Federal matching rates with respect to such expenditures under such section shall be increased as follows (but 

in no case shall the rate as so increased exceed 100 percent):

‘‘(A) For expenditures attributable to costs incurred during 2005, the otherwise applicable Federal matching rate shall be increased by 10 percent 

of the percentage otherwise payable (but for this subsection) by the State. 

‘‘(B)(i) For expenditures attributable to costs incurred during 2006 and 

each subsequent year through 2013, the otherwise applicable Federal 

matching rate shall be increased by the applicable percent (as defined in 

clause (ii)) of the percentage otherwise payable (but for this subsection) by 

the State. 

‘‘(ii) For purposes of clause (i), the ‘applicable percent’ for—

‘‘(I) 2006 is 20 percent; or 

‘‘(II) a subsequent year is the applicable percent under this clause for 

the previous year increased by 10 percentage points. 

‘‘(C) For expenditures attributable to costs incurred after 2013, the otherwise applicable Federal matching rate shall be increased to 100 percent.

‘‘(2) COORDINATION.—The State shall provide the Administrator with such information as may be necessary to properly allocate administrative expenditures 

31

described in paragraph (1) that may otherwise be made for similar eligibility 

determinations.’’. 

(b) PHASED-IN FEDERAL ASSUMPTION OF MEDICAID RESPONSIBILITY FOR PREMIUM

AND COST-SHARING SUBSIDIES FOR DUALLY ELIGIBLE INDIVIDUALS.— (1) IN GENERAL.—Section 1903(a)(1) (42 U.S.C. 1396b(a)(1)) is amended by inserting before the semicolon the following: ‘‘, reduced by the amount computed 

under section 1935(c)(1) for the State and the quarter’’. 

(2) AMOUNT DESCRIBED.—Section 1935, as inserted by subsection (a)(2), is 

amended by adding at the end the following new subsection: 

‘‘(c) FEDERAL ASSUMPTION OF MEDICAID PRESCRIPTION DRUG COSTS FOR DUALLY- ELIGIBLE BENEFICIARIES.— ‘‘(1) IN GENERAL.—For purposes of section 1903(a)(1), for a State that is one 

of the 50 States or the District of Columbia for a calendar quarter in a year 

(beginning with 2005) the amount computed under this subsection is equal to 

the product of the following: 

‘‘(A) MEDICARE SUBSIDIES.—The total amount of payments made in the 

quarter under section 1860D–7 (relating to premium and cost-sharing prescription drug subsidies for low-income medicare beneficiaries) that are attributable to individuals who are residents of the State and are entitled to 

benefits with respect to prescribed drugs under the State plan under this 

title (including such a plan operating under a waiver under section 1115). 

‘‘(B) STATE MATCHING RATE.—A proportion computed by subtracting from 

100 percent the Federal medical assistance percentage (as defined in section 1905(b)) applicable to the State and the quarter. 

‘‘(C) PHASE-OUT PROPORTION.—The phase-out proportion (as defined in 

paragraph (2)) for the quarter. 

‘‘(2) PHASE-OUT PROPORTION.—For purposes of paragraph (1)(C), the ‘phaseout proportion’ for a calendar quarter in—

‘‘(A) 2006 is 93-1⁄3 percent; 

‘‘(B) a subsequent year before 2021, is the phase-out proportion for calendar quarters in the previous year decreased by 6-2⁄3 percentage points; 

or 

‘‘(C) a year after 2020 is 0 percent.’’. 

(c) MEDICAID PROVIDING WRAP-AROUND BENEFITS.—Section 1935, as so inserted 

and amended, is further amended by adding at the end the following new subsection: 

‘‘(d) ADDITIONAL PROVISIONS.—

‘‘(1) MEDICAID AS SECONDARY PAYOR.—In the case of an individual who is entitled to qualified prescription drug coverage under a prescription drug plan 

under part D of title XVIII (or under a MA-EFFS Rx plan under part C or E 

of such title) and medical assistance for prescribed drugs under this title, medical assistance shall continue to be provided under this title (other than for copayment amounts specified in section 1860D–7(a)(1)(B), notwithstanding section 

1916) for prescribed drugs to the extent payment is not made under the prescription drug plan or MA-EFFS Rx plan selected by the individual. 

‘‘(2) CONDITION.—A State may require, as a condition for the receipt of medical assistance under this title with respect to prescription drug benefits for an 

individual eligible to obtain qualified prescription drug coverage described in 

paragraph (1), that the individual elect qualified prescription drug coverage 

under section 1860D–1.’’. 

(d) TREATMENT OF TERRITORIES.—

(1) IN GENERAL.—Section 1935, as so inserted and amended, is further 

amended—

(A) in subsection (a) in the matter preceding paragraph (1), by inserting 

‘‘subject to subsection (e)’’ after ‘‘section 1903(a)’’; 

(B) in subsection (c)(1), by inserting ‘‘subject to subsection (e)’’ after 

‘‘1903(a)(1)’’; and 

(C) by adding at the end the following new subsection: 

‘‘(e) TREATMENT OF TERRITORIES.—

‘‘(1) IN GENERAL.—In the case of a State, other than the 50 States and the 

District of Columbia—

‘‘(A) the previous provisions of this section shall not apply to residents of 

such State; and 

‘‘(B) if the State establishes a plan described in paragraph (2) (for providing medical assistance with respect to the provision of prescription drugs 

to medicare beneficiaries), the amount otherwise determined under section 

1108(f) (as increased under section 1108(g)) for the State shall be increased 

by the amount specified in paragraph (3). 

‘‘(2) PLAN.—The plan described in this paragraph is a plan that—

32

‘‘(A) provides medical assistance with respect to the provision of covered 

outpatient drugs (as defined in section 1860D–2(f)) to low-income medicare 

beneficiaries; and 

‘‘(B) assures that additional amounts received by the State that are attributable to the operation of this subsection are used only for such assistance. 

‘‘(3) INCREASED AMOUNT.—

‘‘(A) IN GENERAL.—The amount specified in this paragraph for a State for 

a year is equal to the product of—

‘‘(i) the aggregate amount specified in subparagraph (B); and 

‘‘(ii) the amount specified in section 1108(g)(1) for that State, divided 

by the sum of the amounts specified in such section for all such States. 

‘‘(B) AGGREGATE AMOUNT.—The aggregate amount specified in this subparagraph for—

‘‘(i) 2006, is equal to $25,000,000; or 

‘‘(ii) a subsequent year, is equal to the aggregate amount specified in 

this subparagraph for the previous year increased by annual percentage increase specified in section 1860D–2(b)(5) for the year involved. 

‘‘(4) REPORT.—The Administrator shall submit to Congress a report on the application of this subsection and may include in the report such recommendations as the Administrator deems appropriate.’’. 

(2) CONFORMING AMENDMENT.—Section 1108(f) (42 U.S.C. 1308(f)) is amended 

by inserting ‘‘and section 1935(e)(1)(B)’’ after ‘‘Subject to subsection (g)’’. 

(e) AMENDMENT TO BEST PRICE.—Section 1927(c)(1)(C)(i) (42 U.S.C. 1396r–

8(c)(1)(C)(i)) is amended—

(1) by striking ‘‘and’’ at the end of subclause (III); 

(2) by striking the period at the end of subclause (IV) and inserting ‘‘; and’’; 

and 

(3) by adding at the end the following new subclause: 

‘‘(V) any prices charged which are negotiated by a prescription 

drug plan under part D of title XVIII, by a MA-EFFS Rx plan 

under part C or E of such title with respect to covered outpatient 

drugs, or by a qualified retiree prescription drug plan (as defined 

in section 1860D–8(f)(1)) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part 

B of such title.’’. 

SEC. 104. MEDIGAP TRANSITION. 

(a) IN GENERAL.—Section 1882 (42 U.S.C. 1395ss) is amended by adding at the 

end the following new subsection: 

‘‘(v) COVERAGE OF PRESCRIPTION DRUGS.—

‘‘(1) IN GENERAL.—Notwithstanding any other provision of law, except as provided in paragraph (3) no new medicare supplemental policy that provides coverage of expenses for prescription drugs may be issued under this section on or 

after January 1, 2006, to an individual unless it replaces a medicare supplemental policy that was issued to that individual and that provided some coverage of expenses for prescription drugs. Nothing in this subsection shall be 

construed as preventing the policy holder of a medicare supplemental policy 

issued before January 1, 2006, from continuing to receive benefits under such 

policy on and after such date. 

‘‘(2) ISSUANCE OF SUBSTITUTE POLICIES FOR BENEFICIARIES ENROLLED WITH A

PLAN UNDER PART D.—

‘‘(A) IN GENERAL.—The issuer of a medicare supplemental policy—

‘‘(i) may not deny or condition the issuance or effectiveness of a medicare supplemental policy that has a benefit package classified as ‘A’, 

‘B’, ‘C’, ‘D’, ‘E’, ‘F’, or ‘G’ (under the standards established under subsection (p)(2)) and that is offered and is available for issuance to new 

enrollees by such issuer; 

‘‘(ii) may not discriminate in the pricing of such policy, because of 

health status, claims experience, receipt of health care, or medical condition; and 

‘‘(iii) may not impose an exclusion of benefits based on a pre-existing 

condition under such policy, 

in the case of an individual described in subparagraph (B) who seeks to enroll under the policy not later than 63 days after the date of the termination of enrollment described in such paragraph and who submits evidence 

of the date of termination or disenrollment along with the application for 

such medicare supplemental policy. 

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‘‘(B) INDIVIDUAL COVERED.—An individual described in this subparagraph 

is an individual who—

‘‘(i) enrolls in a prescription drug plan under part D; and 

‘‘(ii) at the time of such enrollment was enrolled and terminates enrollment in a medicare supplemental policy which has a benefit package classified as ‘H’, ‘I’, or ‘J’ under the standards referred to in subparagraph (A)(i) or terminates enrollment in a policy to which such 

standards do not apply but which provides benefits for prescription 

drugs. 

‘‘(C) ENFORCEMENT.—The provisions of paragraph (4) of subsection (s) 

shall apply with respect to the requirements of this paragraph in the same 

manner as they apply to the requirements of such subsection. 

‘‘(3) NEW STANDARDS.—In applying subsection (p)(1)(E) (including permitting 

the NAIC to revise its model regulations in response to changes in law) with 

respect to the change in benefits resulting from title I of the Medicare Prescription Drug and Modernization Act of 2003, with respect to policies issued to individuals who are enrolled in a plan under part D, the changes in standards shall 

only provide for substituting (for the benefit packages described in paragraph 

(2)(B)(ii) that included coverage for prescription drugs) two benefit packages 

that may provide for coverage of cost-sharing (other than the prescription drug 

deductible) with respect to qualified prescription drug coverage under such part. 

The two benefit packages shall be consistent with the following: 

‘‘(A) FIRST NEW POLICY.—The policy described in this subparagraph has 

the following benefits, notwithstanding any other provision of this section 

relating to a core benefit package: 

‘‘(i) Coverage of 50 percent of the cost-sharing otherwise applicable 

under parts A and B, except coverage of 100 percent of any cost-sharing 

otherwise applicable for preventive benefits. 

‘‘(ii) No coverage of the part B deductible. 

‘‘(iii) Coverage for all hospital coinsurance for long stays (as in the 

current core benefit package). 

‘‘(iv) A limitation on annual out-of-pocket expenditures under parts A 

and B to $4,000 in 2005 (or, in a subsequent year, to such limitation 

for the previous year increased by an appropriate inflation adjustment 

specified by the Secretary). 

‘‘(B) SECOND NEW POLICY.—The policy described in this subparagraph has 

the same benefits as the policy described in subparagraph (A), except as follows: 

‘‘(i) Substitute ‘75 percent’ for ‘50 percent’ in clause (i) of such subparagraph. 

‘‘(ii) Substitute ‘$2,000’ for ‘$4,000’ in clause (iv) of such subparagraph. 

‘‘(4) CONSTRUCTION.—Any provision in this section or in a medicare supplemental policy relating to guaranteed renewability of coverage shall be deemed 

to have been met through the offering of other coverage under this subsection.’’. 

(b) NAIC REPORT TO CONGRESS ON MEDIGAP MODERNIZATION.—The Secretary 

shall request the National Association of Insurance Commissioners to submit to 

Congress, not later than 18 months after the date of the enactment of this Act, a 

report that includes recommendations on the modernization of coverage under the 

medigap program under section 1882 of the Social Security Act (42 U.S.C. 1395ss). 

SEC. 105. MEDICARE PRESCRIPTION DRUG DISCOUNT CARD ENDORSEMENT PROGRAM. 

(a) IN GENERAL.—Title XVIII is amended by inserting after section 1806 the following new sections: 

‘‘MEDICARE PRESCRIPTION DRUG DISCOUNT CARD ENDORSEMENT PROGRAM

‘‘SEC. 1807. (a) ESTABLISHMENT OF PROGRAM.—

‘‘(1) IN GENERAL.—The Secretary (or the Medicare Benefits Administrator pursuant to section 1809(c)(3)(C)) shall establish a program to endorse prescription 

drug discount card programs (each such program referred to as an ‘endorsed 

program’) that meet the requirements of this section in order to provide access 

to prescription drug discounts for medicare beneficiaries throughout the United 

States. The Secretary shall make available to medicare beneficiaries information regarding endorsed programs under this section. 

‘‘(2) LIMITED PERIOD OF OPERATION.—The Secretary shall begin the program 

under this section as soon as possible, but in no case later than 90 days after 

the date of the enactment of this section. The Secretary shall provide for an appropriate transition and discontinuation of such program at the time medicare 

prescription drug benefits first become available under part D. 

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‘‘(b) REQUIREMENTS FOR CARD ENDORSEMENT PROGRAM.—The Secretary may not 

endorse a prescription drug discount card program under this section unless the 

program meets the following requirements: 

‘‘(1) SAVINGS TO MEDICARE BENEFICIARIES.—The program passes on to medicare beneficiaries who enroll in the program discounts, rebates, and other price 

concessions on prescription drugs, including discounts negotiated with pharmacies and manufacturers. 

‘‘(2) PROHIBITION ON APPLICATION ONLY TO MAIL ORDER.—The program applies 

to drugs that are available other than solely through mail order. 

‘‘(3) BENEFICIARY SERVICES.—The program provides pharmaceutical support 

services, such as education and counseling, and services to prevent adverse drug 

interactions. 

‘‘(4) INFORMATION.—The program makes available to medicare beneficiaries 

through the Internet and otherwise information, including information on enrollment fees, prices charged to beneficiaries, and services offered under the 

program, that the Secretary identifies as being necessary to provide for informed choice by beneficiaries among endorsed programs. 

‘‘(5) DEMONSTRATED EXPERIENCE.—The program is operated directly, or 

through arrangements with affiliated organization, by an entity that has demonstrated experience and expertise in operating such a program or a similar 

program. 

‘‘(6) QUALITY ASSURANCE.—Such operating entity has in place adequate procedures for assuring quality service under the program. 

‘‘(7) ENROLLMENT FEES.—The program may charge an annual enrollment fee, 

but the amount of such annual fee may not exceed $30. A State may pay some 

or all of the fee for individuals residing in the State. 

‘‘(8) CONFIDENTIALITY PROTECTIONS.—The program implements policies and 

procedures to safeguard the use and disclosure of program beneficiaries’ individually identifiable health information in a manner consistent with the Federal 

regulations (concerning the privacy of individually identifiable health information) promulgated under section 264(c) of the Health Insurance Portability and 

Accountability Act of 1996. 

‘‘(9) PERIODIC REPORTS TO SECRETARY.—The entity operating the program 

shall submit to the Secretary periodic reports on performance, utilization, finances, and such other matters as the Secretary may specify. 

‘‘(10) ADDITIONAL BENEFICIARY PROTECTIONS.—The program meets such additional requirements as the Secretary identifies to protect and promote the interest of medicare beneficiaries, including requirements that ensure that beneficiaries are not charged more than the lower of the negotiated retail price or 

the usual and customary price. 

The prices negotiated by a prescription drug discount card program endorsed under 

this section shall (notwithstanding any other provision of law) not be taken into account for the purposes of establishing the best price under section 1927(c)(1)(C). 

‘‘(c) PROGRAM OPERATION.—The Secretary shall operate the program under this 

section consistent with the following: 

‘‘(1) PROMOTION OF INFORMED CHOICE.—In order to promote informed choice 

among endorsed prescription drug discount card programs, the Secretary shall 

provide for the dissemination of information which compares the prices and 

services of such programs in a manner coordinated with the dissemination of 

educational information on Medicare Advantage plans under part C. 

‘‘(2) OVERSIGHT.—The Secretary shall provide appropriate oversight to ensure 

compliance of endorsed programs with the requirements of this section, including verification and disclosure (upon request) of the discounts and services provided, the amount of dispensing fees recognized, and audits under section 

1860D–2(d)(3). 

‘‘(3) USE OF MEDICARE TOLL-FREE NUMBER.—The Secretary shall provide 

through the 1-800-medicare toll free telephone number for the receipt and response to inquiries and complaints concerning the program and programs endorsed under this section. 

‘‘(4) SANCTIONS FOR ABUSIVE PRACTICES.—The Secretary may implement intermediate sanctions or may revoke the endorsement of a program in the case of 

a program that the Secretary determines no longer meets the requirements of 

this section or that has engaged in false or misleading marketing practices. 

‘‘(5) ENROLLMENT PRACTICES.—A medicare beneficiary may not be enrolled in 

more than one endorsed program at any time. A medicare beneficiary may 

change the endorsed program in which the beneficiary is enrolled, but may not 

make such change until the beneficiary has been enrolled in a program for a 

minimum period of time specified by the Secretary. 

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‘‘(d) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated such sums as may be necessary to carry out this section. 

‘‘(e) INTERIM, FINAL REGULATORY AUTHORITY.—In order to carry out this section 

in a timely manner, the Secretary may promulgate regulations that take effect on 

an interim basis, after notice and pending opportunity for public comment. 

‘‘TRANSITIONAL PRESCRIPTION DRUG ASSISTANCE PROGRAM FOR LOW-INCOME

BENEFICIARIES

‘‘SEC. 1807A. (a) PURPOSE.—The purpose of this section is to provide low-income 

medicare beneficiaries with incomes below 150 percent of the Federal poverty level 

immediate assistance in the purchase of covered outpatient prescription drugs during the period before the program under part D becomes effective. 

‘‘(b) APPROPRIATIONS.—For the purpose of carrying out this section, there is appropriated, out of any money in the Treasury not otherwise appropriated— ‘‘(1) for fiscal year 2004, $2,000,000,000; and 

‘‘(2) for fiscal year 2005, $3,000,000,000. 

‘‘(c) ELIGIBILITY.— ‘‘(1) IN GENERAL.—The Secretary shall establish eligibility standards consistent with this subsection. 

‘‘(2) SPECIFICS.—In no case shall an individual be eligible for assistance under 

this section unless the individual—

‘‘(A) is entitled to benefits under part A or enrolled under part B; 

‘‘(B) has income that is at or below 150 percent of the Federal poverty 

line; 

‘‘(C) meets the resources requirement described in section 1905(p)(1)(C); 

‘‘(D) is enrolled under a prescription drug discount card program under 

section 1807 (or under an alternative program authorized under subsection 

(d)(2)); and 

‘‘(E) is not eligible for coverage of, or assistance for, outpatient prescription drugs under any of the following: 

‘‘(i) A medicaid plan under title XIX (including under any waiver approved under section 1115). 

‘‘(ii) Enrollment under a group health plan or health insurance coverage. 

‘‘(iii) Enrollment under a medicare supplemental insurance policy. 

‘‘(iv) Chapter 55 of title 10, United States Code (relating to medical 

and dental care for members of the uniformed services). 

‘‘(v) Chapter 17 of title 38, United States Code (relating to Veterans’ 

medical care). 

‘‘(vi) Enrollment under a plan under chapter 89 of title 5, United 

States Code (relating to the Federal employees’ health benefits program). 

‘‘(vii) The Indian Health Care Improvement Act (25 U.S.C. 1601 et 

seq.). 

‘‘(d) FORM OF ASSISTANCE.— ‘‘(1) IN GENERAL.—Subject to paragraph (2), the assistance under this section 

to an eligible individual shall be in such form as the Secretary shall specify, 

including the use of a debit card mechanism to pay for drugs purchased through 

the use of the prescription drug discount card program to eligible individuals 

who are enrolled in such program. 

‘‘(2) THROUGH ALTERNATIVE STATE PROGRAM.—A State may apply to the Secretary for authorization to provide the assistance under this section to an eligible individual through a State pharmaceutical assistance program or private 

program of pharmaceutical assistance. The Secretary shall not authorize the 

use of such a program unless the Secretary finds that the program—

‘‘(A) was in existence before the date of the enactment of this section; and 

‘‘(B) is reasonably designed to provide for pharmaceutical assistance for 

a number of individuals, and in a scope, that is not less than the number 

of individuals, and minimum required amount, that would occur if the provisions of this paragraph had not applied in the State. 

‘‘(3) RELATIONSHIP TO DISCOUNTS.—The assistance provided under this section 

is in addition to the discount otherwise available to individuals enrolled in prescription drug discount card programs who are not eligible individuals. 

‘‘(4) LIMITATION ON ASSISTANCE.—

‘‘(A) IN GENERAL.—The assistance under this section for an eligible individual shall be limited to assistance—

‘‘(i) for covered outpatient drugs (as defined for purposes of part D) 

and for enrollment fees imposed under prescription drug discount card 

programs; and 

36

‘‘(ii) for expenses incurred—

‘‘(I) on and after the date the individual is both enrolled in the 

prescription drug discount card program and determined to be an 

eligible individual under this section; and 

‘‘(II) before the date benefits are first available under the program under part D. 

‘‘(B) AUTHORITY.—The Secretary shall take such steps as may be necessary to assure compliance with the expenditure limitations described in 

subsection (b). 

‘‘(e) PAYMENT OF FEDERAL SUBSIDY TO SPONSORS.— ‘‘(1) IN GENERAL.—Insofar as assistance is provided under this section through 

programs under section 1807, the Secretary shall make payment (within the 

amounts under subsection (b), less the administrative costs relating to determinations of eligibility) to the sponsor of the prescription drug discount card 

program (or to a State or other entity operating an alternative program under 

subsection (d)(2)) in which an eligible individual is enrolled of the amount of 

the assistance provided by the sponsor pursuant to this section. 

‘‘(2) PERIODIC PAYMENTS.—Payments under this subsection shall be made on 

a monthly or other periodic installment basis, based upon estimates of the Secretary and shall be reduced or increased to the extent of any overpayment or 

underpayment which the Secretary determines was made under this section for 

any prior period and with respect to which adjustment has not already been 

made under this paragraph. 

‘‘(f) DEFINITIONS.—For purposes of this section: 

‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible individual’ means an individual 

who is determined by a State to be eligible for assistance under this section. 

‘‘(2) PRESCRIPTION DRUG DISCOUNT CARD PROGRAM.—The term ‘prescription 

drug discount card program’ means such a program that is endorsed under section 1807. 

‘‘(3) SPONSOR.—The term ‘sponsor’ means the sponsor of a prescription drug 

discount card program, or, in the case of an alternative program authorized 

under subsection (d)(2), the State or other entity operating the program.’’. 

(b) CONFORMING AMENDMENT.—Section 1927(c)(1)(C)(i)(V) (42 U.S.C. 1396r–

8(c)(1)(C)(i)(V)), as added by section 103(e), is amended by striking ‘‘or by a qualified 

retiree prescription drug plan (as defined in section 1860D–8(f)(1))’’ and inserting 

‘‘by a qualified retiree prescription drug plan (as defined in section 1860D–8(f)(1)), 

or by a prescription drug discount card program endorsed under section 1807’’. 

SEC. 106. DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF CARRYING OUT MEDICARE CATASTROPHIC PRESCRIPTION DRUG PROGRAM. 

(a) IN GENERAL.—Subsection (l) of section 6103 of the Internal Revenue Code of 

1986 (relating to disclosure of returns and return information for purposes other 

than tax administration) is amended by adding at the end the following new paragraph: 

‘‘(19) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF CARRYING OUT

MEDICARE CATASTROPHIC PRESCRIPTION DRUG PROGRAM.— ‘‘(A) IN GENERAL.—The Secretary may, upon written request from the 

Secretary of Health and Human Services under section 1860D–2(b)(4)(E)(i) 

of the Social Security Act, disclose to officers and employees of the Department of Health and Human Services with respect to a specified taxpayer 

for the taxable year specified by the Secretary of Health and Human Services in such request—

‘‘(i) the taxpayer identity information with respect to such taxpayer, 

and 

‘‘(ii) the adjusted gross income of such taxpayer for the taxable year 

(or, if less, the income threshold limit specified in section 1860D–

2(b)(4)(D)(ii) for the calendar year specified by such Secretary in such 

request). 

‘‘(B) SPECIFIED TAXPAYER.—For purposes of this paragraph, the term 

‘specified taxpayer’ means any taxpayer who—

‘‘(i) is identified by the Secretary of Health and Human Services in 

the request referred to in subparagraph (A), and 

‘‘(ii) either—

‘‘(I) has an adjusted gross income for the taxable year referred 

to in subparagraph (A) in excess of the income threshold specified 

in section 1860D–2(b)(4)(D)(ii) of such Act for the calendar year referred to in such subparagraph, or 

‘‘(II) is identified by such Secretary under subparagraph (A) as 

being an individual who elected to use more recent information 

under section 1860D–2(b)(4)(D)(v) of such Act. 

37

‘‘(C) JOINT RETURNS.—In the case of a joint return, the Secretary shall, 

for purposes of applying this paragraph, treat each spouse as a separate 

taxpayer having an adjusted gross income equal to one-half of the adjusted 

gross income determined with respect to such return. 

‘‘(D) RESTRICTION ON USE OF DISCLOSED INFORMATION.—Return information disclosed under subparagraph (A) may be used by officers and employees of the Department of Health and Human Services only for the purpose 

of administering the prescription drug benefit under title XVIII of the Social Security Act. Such officers and employees may disclose the annual outof-pocket threshold which applies to an individual under such part to the 

entity that offers the plan referred to in section 1860D–2(b)(4)(E)(ii) of such 

Act in which such individual is enrolled. Such sponsor may use such information only for purposes of administering such benefit.’’. 

(b) CONFIDENTIALITY.—Paragraph (3) of section 6103(a) of such Code is amended 

by striking ‘‘or (16)’’ and inserting ‘‘(16), or (19)’’. 

(c) PROCEDURES AND RECORDKEEPING RELATED TO DISCLOSURES.—Subsection 

(p)(4) of section 6103 of such Code is amended by striking ‘‘any other person described in subsection (l)(16) or (17)’’ each place it appears and inserting ‘‘any other 

person described in subsection (l)(16), (17), or (19)’’. 

(d) UNAUTHORIZED DISCLOSURE.—Paragraph (2) of section 7213(a) of such Code is 

amended by striking ‘‘or (16)’’ and inserting ‘‘(16), or (19)’’. 

(e) UNAUTHORIZED INSPECTION.—Subparagraph (B) of section 7213A(a)(1) of such 

Code is amended by inserting ‘‘or (19)’’ after ‘‘subsection (l)(18)’’.

SEC. 107. STATE PHARMACEUTICAL ASSISTANCE TRANSITION COMMISSION. 

(a) ESTABLISHMENT.—

(1) IN GENERAL.—There is established, as of the first day of the third month 

beginning after the date of the enactment of this Act, a State Pharmaceutical 

Assistance Transition Commission (in this section referred to as the ‘‘Commission’’) to develop a proposal for addressing the unique transitional issues facing 

State pharmaceutical assistance programs, and program participants, due to the 

implementation of the medicare prescription drug program under part D of title 

XVIII of the Social Security Act. 

(2) DEFINITIONS.—For purposes of this section: 

(A) STATE PHARMACEUTICAL ASSISTANCE PROGRAM DEFINED.—The term 

‘‘State pharmaceutical assistance program’’ means a program (other than 

the medicaid program) operated by a State (or under contract with a State) 

that provides as of the date of the enactment of this Act assistance to lowincome medicare beneficiaries for the purchase of prescription drugs. 

(B) PROGRAM PARTICIPANT.—The term ‘‘program participant’’ means a 

low-income medicare beneficiary who is a participant in a State pharmaceutical assistance program. 

(b) COMPOSITION.—The Commission shall include the following: 

(1) A representative of each governor of each State that the Secretary identifies as operating on a statewide basis a State pharmaceutical assistance program that provides for eligibility and benefits that are comparable or more generous than the low-income assistance eligibility and benefits offered under part 

D of title XVIII of the Social Security Act. 

(2) Representatives from other States that the Secretary identifies have in operation other State pharmaceutical assistance programs, as appointed by the 

Secretary. 

(3) Representatives of organizations that have an inherent interest in program participants or the program itself, as appointed by the Secretary but not 

to exceed the number of representatives under paragraphs (1) and (2). 

(4) Representatives of Medicare Advantage organizations and other private 

health insurance plans, as appointed by the Secretary. 

(5) The Secretary (or the Secretary’s designee) and such other members as the 

Secretary may specify 

The Secretary shall designate a member to serve as chair of the Commission and 

the Commission shall meet at the call of the chair. 

(c) DEVELOPMENT OF PROPOSAL.—The Commission shall develop the proposal described in subsection (a) in a manner consistent with the following principles: 

(1) Protection of the interests of program participants in a manner that is the 

least disruptive to such participants and that includes a single point of contact 

for enrollment and processing of benefits. 

(2) Protection of the financial and flexibility interests of States so that States 

are not financially worse off as a result of the enactment of this title. 

(3) Principles of medicare modernization provided under title II of this Act. 

38

(d) REPORT.—By not later than January 1, 2005, the Commission shall submit to 

the President and the Congress a report that contains a detailed proposal (including 

specific legislative or administrative recommendations, if any) and such other recommendations as the Commission deems appropriate. 

(e) SUPPORT.—The Secretary shall provide the Commission with the administrative support services necessary for the Commission to carry out its responsibilities 

under this section. 

(f) TERMINATION.—The Commission shall terminate 30 days after the date of submission of the report under subsection (d).

TITLE II—MEDICARE ENHANCED FEE-FORSERVICE AND MEDICARE ADVANTAGE PROGRAMS; MEDICARE COMPETITION 

SEC. 200. MEDICARE MODERNIZATION AND REVITALIZATION. 

This title provides for—

(1) establishment of the medicare enhanced fee-for-service (EFFS) program 

under which medicare beneficiaries are provided access to a range of enhanced 

fee-for-service (EFFS) plans that may use preferred provider networks to offer 

an enhanced range of benefits; 

(2) establishment of a Medicare Advantage program that offers improved 

managed care plans with coordinated care; and 

(3) competitive bidding, in the style of the Federal Employees Health Benefits 

program (FEHBP), among enhanced fee-for-service plans and Medicare Advantage plans in order to promote greater efficiency and responsiveness to medicare 

beneficiaries.

Subtitle A—Medicare Enhanced Fee-for-Service 

Program 

SEC. 201. ESTABLISHMENT OF ENHANCED FEE-FOR-SERVICE (EFFS) PROGRAM UNDER MEDICARE. 

(a) IN GENERAL.—Title XVIII, as amended by section 101(a), is amended—

(1) by redesignating part E as part F; and 

(2) by inserting after part D the following new part:

‘‘PART E—ENHANCED FEE-FOR-SERVICE PROGRAM

‘‘OFFERING OF ENHANCED FEE-FOR-SERVICE PLANS THROUGHOUT THE UNITED STATES

‘‘SEC. 1860E–1. (a) ESTABLISHMENT OF PROGRAM.—

‘‘(1) IN GENERAL.—The Administrator shall establish under this part beginning January 1, 2006, an enhanced fee-for-service program under which enhanced fee-for-service plans (as defined in subsection (b)) are offered to EFFSeligible individuals (as so defined) in EFFS regions throughout the United 

States. 

‘‘(2) EFFS REGIONS.—For purposes of this part the Administrator shall establish EFFS regions throughout the United States by dividing the entire United 

States into at least 10 such regions. Before establishing such regions, the Administrator shall conduct a market survey and analysis, including an examination of current insurance markets, to determine how the regions should be established. The regions shall be established in a manner to take into consideration maximizing full access for all EFFS-eligible individuals, especially those 

residing in rural areas. 

‘‘(b) DEFINITIONS.—For purposes of this part: 

‘‘(1) EFFS ORGANIZATION.—The ‘EFFS organization’ means an entity that the 

Administrator certifies as meeting the requirements and standards applicable 

to such organization under this part. 

‘‘(2) ENHANCED FEE-FOR-SERVICE PLAN; EFFS PLAN.—The terms ‘enhanced feefor-service plan’ and ‘EFFS plan’ mean health benefits coverage offered under 

a policy, contract, or plan by an EFFS organization pursuant to and in accordance with a contract pursuant to section 1860E–4(c), but only if the plan provides either fee-for-service coverage described in the following subparagraph (A) 

or preferred provider coverage described in the following subparagraph (B): 

‘‘(A) FEE-FOR-SERVICE COVERAGE.—The plan—

39

‘‘(i) reimburses hospitals, physicians, and other providers at a rate 

determined by the plan on a fee-for-service basis without placing the 

provider at financial risk; 

‘‘(ii) does not vary such rates for such a provider based on utilization 

relating to such provider; and 

‘‘(iii) does not restrict the selection of providers among those who are 

lawfully authorized to provide the covered services and agree to accept 

the terms and conditions of payment established by the plan. 

‘‘(B) PREFERRED PROVIDER COVERAGE.—The plan—

‘‘(i) has a network of providers that have agreed to a contractually 

specified reimbursement for covered benefits with the organization offering the plan; and 

‘‘(ii) provides for reimbursement for all covered benefits regardless of 

whether such benefits are provided within such network of providers. 

‘‘(3) EFFS ELIGIBLE INDIVIDUAL.—The term ‘EFFS eligible individual’ means 

an eligible individual described in section 1851(a)(3). 

‘‘(4) EFFS REGION.—The term ‘EFFS region’ means a region established under 

subsection (a)(2). 

‘‘(c) APPLICATION OF CERTAIN ELIGIBILITY, ENROLLMENT, ETC. REQUIREMENTS.—

The provisions of section 1851 (other than subsection (h)(4)(A)) shall apply to EFFS 

plans offered by an EFFS organization in an EFFS region, including subsection (g) 

(relating to guaranteed issue and renewal). 

‘‘OFFERING OF ENHANCED FEE-FOR-SERVICE (EFFS) PLANS

‘‘SEC. 1860E–2. (a) PLAN REQUIREMENTS.—No EFFS plan may be offered under 

this part in an EFFS region unless the requirements of this part are met with respect to the plan and EFFS organization offering the plan. 

‘‘(b) AVAILABLE TO ALL EFFS BENEFICIARIES IN THE ENTIRE REGION.—With respect to an EFFS plan offered in an EFFS region—

‘‘(1) IN GENERAL.—The plan must be offered to all EFFS-eligible individuals 

residing in the region. 

‘‘(2) ASSURING ACCESS TO SERVICES.—The plan shall comply with the requirements of section 1852(d)(4). 

‘‘(c) BENEFITS.—

‘‘(1) IN GENERAL.—Each EFFS plan shall provide to members enrolled in the 

plan under this part benefits, through providers and other persons that meet 

the applicable requirements of this title and part A of title XI—

‘‘(A) for the items and services described in section 1852(a)(1); 

‘‘(B) that are uniform for the plan for all EFFS eligible individuals residing in the same EFFS region; 

‘‘(C) that include a single deductible applicable to benefits under parts A 

and B and include a catastrophic limit on out-of-pocket expenditures for 

such covered benefits; and 

‘‘(D) that include benefits for prescription drug coverage for each enrollee 

who elects under part D to be provided qualified prescription drug coverage 

through the plan.

‘‘(2) DISAPPROVAL AUTHORITY.—The Administrator shall not approve a plan of 

an EFFS organization if the Administrator determines (pursuant to the last 

sentence of section 1852(b)(1)(A)) that the benefits are designed to substantially 

discourage enrollment by certain EFFS eligible individuals with the organization. 

‘‘(d) OUTPATIENT PRESCRIPTION DRUG COVERAGE.—For rules concerning the offering of prescription drug coverage under EFFS plans, see the amendment made by 

section 102(b) of the Medicare Prescription Drug and Modernization Act of 2003. 

‘‘(e) OTHER ADDITIONAL PROVISIONS.—The provisions of section 1852 (other than 

subsection (a)(1)) shall apply under this part to EFFS plans. For the application of 

chronic care improvement provisions, see the amendment made by section 722(b). 

‘‘SUBMISSION OF BIDS; BENEFICIARY SAVINGS; PAYMENT OF PLANS

‘‘SEC. 1860E–3. (a) SUBMISSION OF BIDS.—

‘‘(1) REQUIREMENT.—

‘‘(A) EFFS MONTHLY BID AMOUNT.—For each year (beginning with 2006), 

an EFFS organization shall submit to the Administrator an EFFS monthly 

bid amount for each EFFS plan offered in each region. Each such bid is referred to in this section as the ‘EFFS monthly bid amount’. 

‘‘(B) FORM.—Such bid amounts shall be submitted for each such plan and 

region in a form and manner and time specified by the Administrator, and 

shall include information described in paragraph (3)(A).

40

‘‘(2) UNIFORM BID AMOUNTS.—Each EFFS monthly bid amount submitted 

under paragraph (1) by an EFFS organization under this part for an EFFS plan 

in an EFFS region may not vary among EFFS eligible individuals residing in 

the EFFS region involved. 

‘‘(3) SUBMISSION OF BID AMOUNT INFORMATION BY EFFS ORGANIZATIONS.—

‘‘(A) INFORMATION TO BE SUBMITTED.—The information described in this 

subparagraph is as follows: 

‘‘(i) The EFFS monthly bid amount for provision of all items and 

services under this part, which amount shall be based on average costs 

for a typical beneficiary residing in the region, and the actuarial basis 

for determining such amount. 

‘‘(ii) The proportions of such bid amount that are attributable to—

‘‘(I) the provision of statutory non-drug benefits (such portion referred to in this part as the ‘unadjusted EFFS statutory non-drug 

monthly bid amount’); 

‘‘(II) the provision of statutory prescription drug benefits; and 

‘‘(III) the provision of non-statutory benefits; 

and the actuarial basis for determining such proportions. 

‘‘(iii) Such additional information as the Administrator may require 

to verify the actuarial bases described in clauses (i) and (ii). 

‘‘(B) STATUTORY BENEFITS DEFINED.—For purposes of this part: 

‘‘(i) The term ‘statutory non-drug benefits’ means benefits under section 1852(a)(1). 

‘‘(ii) The term ‘statutory prescription drug benefits’ means benefits 

under part D. 

‘‘(iii) The term ‘statutory benefits’ means statutory prescription drug 

benefits and statutory non-drug benefits.

‘‘(C) ACCEPTANCE AND NEGOTIATION OF BID AMOUNTS.—The Administrator 

has the authority to negotiate regarding monthly bid amounts submitted 

under subparagraph (A) (and the proportion described in subparagraph 

(A)(ii)), and for such purpose, the Administrator has negotiation authority 

that the Director of the Office of Personnel Management has with respect 

to health benefits plans under chapter 89 of title 5, United States Code. 

The Administrator may reject such a bid amount or proportion if the Administrator determines that such amount or proportion is not supported by 

the actuarial bases provided under subparagraph (A). 

‘‘(D) CONTRACT AUTHORITY.—The Administrator may, taking into account 

the unadjusted EFFS statutory non-drug monthly bid amounts accepted 

under subparagraph (C), enter into contracts for the offering of up to 3 

EFFS plans in any region.

‘‘(b) PROVISION OF BENEFICIARY SAVINGS FOR CERTAIN PLANS.—

‘‘(1) BENEFICIARY REBATE RULE.—

‘‘(A) REQUIREMENT.—The EFFS plan shall provide to the enrollee a 

monthly rebate equal to 75 percent of the average per capita savings (if 

any) described in paragraph (2) applicable to the plan and year involved. 

‘‘(B) FORM OF REBATE.—A rebate required under this paragraph shall be 

provided—

‘‘(i) through the crediting of the amount of the rebate towards the 

EFFS monthly prescription drug beneficiary premium (as defined in 

section 1860E–4(a)(3)(B)) and the EFFS monthly supplemental beneficiary premium (as defined in section 1860E–4(a)(3)(C)); 

‘‘(ii) through a direct monthly payment (through electronic funds 

transfer or otherwise); or 

‘‘(iii) through other means approved by the Medicare Benefits Administrator, 

or any combination thereof. 

‘‘(2) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—For purposes 

of paragraph (1)(A), the average per capita monthly savings referred to in such 

paragraph for an EFFS plan and year is computed as follows: 

‘‘(A) DETERMINATION OF REGION-WIDE AVERAGE RISK ADJUSTMENT.—

‘‘(i) IN GENERAL.—The Medicare Benefits Administrator shall determine, at the same time rates are promulgated under section 1853(b)(1) 

(beginning with 2006), for each EFFS region the average of the risk adjustment factors described in subsection (c)(3) to be applied to enrollees 

under this part in that region. In the case of an EFFS region in which 

an EFFS plan was offered in the previous year, the Administrator may 

compute such average based upon risk adjustment factors applied 

under subsection (c)(3) in that region in a previous year. 

41

‘‘(ii) TREATMENT OF NEW REGIONS.—In the case of a region in which 

no EFFS plan was offered in the previous year, the Administrator shall 

estimate such average. In making such estimate, the Administrator 

may use average risk adjustment factors applied to comparable EFFS 

regions or applied on a national basis. 

‘‘(B) DETERMINATION OF RISK ADJUSTED BENCHMARK AND RISK-ADJUSTED

BID.—For each EFFS plan offered in an EFFS region, the Administrator 

shall—

‘‘(i) adjust the EFFS region-specific non-drug monthly benchmark 

amount (as defined in paragraph (3)) by the applicable average risk adjustment factor computed under subparagraph (A); and 

‘‘(ii) adjust the unadjusted EFFS statutory non-drug monthly bid 

amount by such applicable average risk adjustment factor. 

‘‘(C) DETERMINATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—The average per capita monthly savings described in this subparagraph is equal 

to the amount (if any) by which—

‘‘(i) the risk-adjusted benchmark amount computed under subparagraph (B)(i), exceeds 

‘‘(ii) the risk-adjusted bid computed under subparagraph (B)(ii). 

‘‘(3) COMPUTATION OF EFFS REGION-SPECIFIC NON-DRUG MONTHLY BENCHMARK

AMOUNT.—For purposes of this part, the term ‘EFFS region-specific non-drug 

monthly benchmark amount’ means, with respect to an EFFS region for a 

month in a year, an amount equal to 1⁄12 of the average (weighted by number 

of EFFS eligible individuals in each payment area described in section 1853(d)) 

of the annual capitation rate as calculated under section 1853(c)(1) for that 

area. 

‘‘(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—

‘‘(1) NON-DRUG BENEFITS.—Under a contract under section 1860E–4(c) and 

subject to section 1853(g) (as made applicable under subsection (d)), the Administrator shall make monthly payments under this subsection in advance to each 

EFFS organization, with respect to coverage of an individual under this part in 

an EFFS region for a month, in an amount determined as follows: 

‘‘(A) PLANS WITH BIDS BELOW BENCHMARK.—In the case of a plan for 

which there are average per capita monthly savings described in subsection 

(b)(2)(C), the payment under this subsection is equal to the unadjusted 

EFFS statutory non-drug monthly bid amount, adjusted under paragraphs 

(3) and (4), plus the amount of the monthly rebate computed under subsection (b)(1)(A) for that plan and year. 

‘‘(B) PLANS WITH BIDS AT OR ABOVE BENCHMARK.—In the case of a plan 

for which there are no average per capita monthly savings described in subsection (b)(2)(C), the payment amount under this subsection is equal to the 

EFFS region-specific non-drug monthly benchmark amount, adjusted under 

paragraphs (3) and (4). 

‘‘(2) FOR FEDERAL DRUG SUBSIDIES.—In the case in which an enrollee who 

elects under part D to be provided qualified prescription drug coverage through 

the plan, the EFFS organization offering such plan also is entitled—

‘‘(A) to direct subsidy payment under section 1860D–8(a)(1); 

‘‘(B) to reinsurance subsidy payments under section 1860D–8(a)(2); and 

‘‘(C) to reimbursement for premium and cost-sharing reductions for lowincome individuals under section 1860D–7(c)(3). 

‘‘(3) DEMOGRAPHIC RISK ADJUSTMENT, INCLUDING ADJUSTMENT FOR HEALTH

STATUS.—The Administrator shall adjust under paragraph (1)(A) the unadjusted 

EFFS statutory non-drug monthly bid amount and under paragraph (1)(B) the 

EFFS region-specific non-drug monthly benchmark amount for such risk factors 

as age, disability status, gender, institutional status, and such other factors as 

the Administrator determines to be appropriate, including adjustment for 

health status under section 1853(a)(3) (as applied under subsection (d)), so as 

to ensure actuarial equivalence. The Administrator may add to, modify, or substitute for such adjustment factors if such changes will improve the determination of actuarial equivalence. 

‘‘(4) ADJUSTMENT FOR INTRA-REGIONAL GEOGRAPHIC VARIATIONS.—The Administrator shall also adjust such amounts in a manner to take into account variations in payments rates under part C among the different payment areas 

under such part included in each EFFS region. 

‘‘(d) APPLICATION OF ADDITIONAL PAYMENT RULES.—The provisions of section 1853 

(other than subsections (a)(1)(A), (d), and (e)) shall apply to an EFFS plan under 

this part, except as otherwise provided in this section. 

42

‘‘PREMIUMS; ORGANIZATIONAL AND FINANCIAL REQUIREMENTS; ESTABLISHMENT OF

STANDARDS; CONTRACTS WITH EFFS ORGANIZATIONS

‘‘SEC. 1860E–4. (a) PREMIUMS.—

‘‘(1) IN GENERAL.—The provisions of section 1854 (other than subsections 

(a)(6)(C) and (h)), including subsection (b)(5) relating to the consolidation of 

drug and non-drug beneficiary premiums and subsection (c) relating to uniform 

bids and premiums, shall apply to an EFFS plan under this part, subject to 

paragraph (2). 

‘‘(2) CROSS-WALK.—In applying paragraph (1), any reference in section 

1854(b)(1)(A) or 1854(d) to—

‘‘(A) a Medicare Advantage monthly basic beneficiary premium is deemed 

a reference to the EFFS monthly basic beneficiary premium (as defined in 

paragraph (3)(A)); 

‘‘(B) a Medicare Advantage monthly prescription drug beneficiary premium is deemed a reference to the EFFS monthly prescription drug beneficiary premium (as defined in paragraph (3)(B)); and 

‘‘(C) a Medicare Advantage monthly supplemental beneficiary premium is 

deemed a reference to the EFFS monthly supplemental beneficiary premium (as defined in paragraph (3)(C)). 

‘‘(3) DEFINITIONS.—For purposes of this part: 

‘‘(A) EFFS MONTHLY BASIC BENEFICIARY PREMIUM.—The term ‘EFFS 

monthly basic beneficiary premium’ means, with respect to an EFFS plan—

‘‘(i) described in section 1860E–3(c)(1)(A) (relating to plans providing 

rebates), zero; or 

‘‘(ii) described in section 1860E–3(c)(1)(B), the amount (if any) by 

which the unadjusted EFFS statutory non-drug monthly bid amount 

exceeds the EFFS region-specific non-drug monthly benchmark amount 

(as defined in section 1860E–3(b)(3)). 

‘‘(B) EFFS MONTHLY PRESCRIPTION DRUG BENEFICIARY PREMIUM.—The 

term ‘EFFS monthly prescription drug beneficiary premium’ means, with 

respect to an EFFS plan, the portion of the aggregate monthly bid amount 

submitted under clause (i) of section 1860E–3(a)(3)(A) for the year that is 

attributable under such section to the provision of statutory prescription 

drug benefits. 

‘‘(C) EFFS MONTHLY SUPPLEMENTAL BENEFICIARY PREMIUM.—The term 

‘EFFS monthly supplemental beneficiary premium’ means, with respect to 

an EFFS plan, the portion of the aggregate monthly bid amount submitted 

under clause (i) of section 1860E–3(a)(3)(A) for the year that is attributable 

under such section to the provision of nonstatutory benefits.

‘‘(b) ORGANIZATIONAL AND FINANCIAL REQUIREMENTS.—The provisions of section 

1855 shall apply to an EFFS plan offered by an EFFS organization under this part. 

‘‘(c) CONTRACTS WITH EFFS ORGANIZATIONS.—The provisions of section 1857 shall 

apply to an EFFS plan offered by an EFFS organization under this part, except that 

any reference in such section to part C is deemed a reference to this part.’’. 

(b) PROHIBITION ON COVERAGE UNDER MEDIGAP PLANS OF DEDUCTIBLE IMPOSED

UNDER EFFS PLANS.—Section 1882 (42 U.S.C. 1395ss), as amended by section 

104(a), is amended by adding at the end the following new subsection: 

‘‘(w) PROHIBITION ON COVERAGE OF DEDUCTIBLE AND CERTAIN COST-SHARING IM- POSED UNDER EFFS PLANS.—Notwithstanding any other provision of law, no medicare supplemental policy (other than the 2 benefit packages described in subsection 

(v)(3)) may provide for coverage of the single deductible or more than 50 percent 

of other cost-sharing imposed under an EFFS plan under part E.’’. 

(c) CONFORMING PROVISIONS.—Section 1882 of the Social Security Act (42 U.S.C. 

1395ss) shall be administered as if any reference to a Medicare+Choice organization 

offering a Medicare+Choice plan under part C of title XVIII of such Act were a reference both to a Medicare Advantage organization offering a Medicare Advantage 

plan under such part and an EFFS organization offering an EFFS plan under part 

E of such title. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM 

SEC. 211. IMPLEMENTATION OF MEDICARE ADVANTAGE PROGRAM. 

(a) IN GENERAL.—There is hereby established the Medicare Advantage program. 

The Medicare Advantage program shall consist of the program under part C of title 

XVIII of the Social Security Act, as amended by this title. 

43

(b) REFERENCES.—Any reference to the program under part C of title XVIII of the 

Social Security Act shall be deemed a reference to the Medicare Advantage program 

and, with respect to such part, any reference to ‘‘Medicare+Choice’’ is deemed a reference to ‘‘Medicare Advantage’’. 

SEC. 212. MEDICARE ADVANTAGE IMPROVEMENTS. 

(a) EQUALIZING PAYMENTS WITH FEE-FOR-SERVICE.—

(1) IN GENERAL.—Section 1853(c)(1) (42 U.S.C. 1395w–23(c)(1)) is amended by 

adding at the end the following: 

‘‘(D) BASED ON 100 PERCENT OF FEE-FOR-SERVICE COSTS.—

‘‘(i) IN GENERAL.—For 2004, the adjusted average per capita cost for 

the year involved, determined under section 1876(a)(4) for the Medicare 

Advantage payment area for services covered under parts A and B for 

individuals entitled to benefits under part A and enrolled under part 

B who are not enrolled in a Medicare Advantage under this part for 

the year, but adjusted to exclude costs attributable to payments under 

section 1886(h). 

‘‘(ii) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES

TO MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average per capita cost under clause (i) for a year, such cost shall be adjusted to include the Secretary’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the area 

involved under this title if individuals entitled to benefits under this 

title had not received services from facilities of the Department of Veterans Affairs or the Department of Defense.’’.

(2) CONFORMING AMENDMENT.—Such section is further amended, in the matter before subparagraph (A), by striking ‘‘or (C)’’ and inserting ‘‘(C), or (D)’’. 

(b) CHANGE IN BUDGET NEUTRALITY FOR BLEND.—Section 1853(c) (42 U.S.C. 

1395w–23(c)) is amended—

(1) in paragraph (1)(A), by inserting ‘‘(for a year other than 2004)’’ after ‘‘multiplied’’; and 

(2) in paragraph (5), by inserting ‘‘(other than 2004)’’ after ‘‘for each year’’.

(c) INCREASING MINIMUM PERCENTAGE INCREASE TO NATIONAL GROWTH RATE.—

(1) IN GENERAL.—Section 1853(c)(1) (42 U.S.C. 1395w–23(c)(1)) is amended—

(A) in subparagraph (B)(iv), by striking ‘‘and each succeeding year’’ and 

inserting ‘‘, 2003, and 2004’’; 

(B) in subparagraph (C)(iv), by striking ‘‘and each succeeding year’’ and 

inserting ‘‘and 2003’’; and 

(C) by adding at the end of subparagraph (C) the following new clause: 

‘‘(v) For 2004 and each succeeding year, the greater of—

‘‘(I) 102 percent of the annual Medicare Advantage capitation 

rate under this paragraph for the area for the previous year; or 

‘‘(II) the annual Medicare Advantage capitation rate under this 

paragraph for the area for the previous year increased by the national per capita Medicare Advantage growth percentage, described 

in paragraph (6) for that succeeding year, but not taking into account any adjustment under paragraph (6)(C) for a year before 

2004.’’. 

(2) CONFORMING AMENDMENT.—Section 1853(c)(6)(C) (42 U.S.C. 1395w–

23(c)(6)(C)) is amended by inserting before the period at the end the following: 

‘‘, except that for purposes of paragraph (1)(C)(v)(II), no such adjustment shall 

be made for a year before 2004’’.

(d) INCLUSION OF COSTS OF DOD AND VA MILITARY FACILITY SERVICES TO MEDICARE-ELIGIBLE BENEFICIARIES IN CALCULATION OF MEDICARE+CHOICE PAYMENT

RATES.—Section 1853(c)(3) (42 U.S.C. 1395w–23(c)(3)) is amended—

(1) in subparagraph (A), by striking ‘‘subparagraph (B)’’ and inserting ‘‘subparagraphs (B) and (E)’’, and 

(2) by adding at the end the following new subparagraph: 

‘‘(E) INCLUSION OF COSTS OF DOD AND VA MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the area-specific 

Medicare+Choice capitation rate under subparagraph (A) for a year (beginning with 2004), the annual per capita rate of payment for 1997 determined 

under section 1876(a)(1)(C) shall be adjusted to include in the rate the Secretary’s estimate, on a per capita basis, of the amount of additional payments that would have been made in the area involved under this title if 

individuals entitled to benefits under this title had not received services 

from facilities of the Department of Defense or the Department of Veterans 

Affairs.’’. 

44

(e) EXTENDING SPECIAL RULE FOR CERTAIN INPATIENT HOSPITAL STAYS TO REHA- BILITATION HOSPITALS.— (1) IN GENERAL.—Section 1853(g) (42 U.S.C. 1395w–23(g)) is amended—

(A) by inserting ‘‘or from a rehabilitation facility (as defined in section 

1886(j)(1)(A))’’ after ‘‘1886(d)(1)(B))’’; and 

(B) in paragraph (2)(B), by inserting ‘‘or section 1886(j), as the case may 

be,’’ after ‘‘1886(d)’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

contract years beginning on or after January 1, 2004. 

(f) MEDPAC STUDY OF AAPCC.—

(1) STUDY.—The Medicare Payment Advisory Commission shall conduct a 

study that assesses the method used for determining the adjusted average per 

capita cost (AAPCC) under section 1876(a)(4) of the Social Security Act (42 

U.S.C. 1395mm(a)(4)) as applied under section 1853(c)(1)(A) of such Act (as 

amended by subsection (a)). Such study shall include an examination of—

(A) the bases for variation in such costs between different areas, including differences in input prices, utilization, and practice patterns; 

(B) the appropriate geographic area for payment under the Medicare Advantage program under part C of title XVIII of such Act; and 

(C) the accuracy of risk adjustment methods in reflecting differences in 

costs of providing care to different groups of beneficiaries served under such 

program. 

(2) REPORT.—Not later than 18 months after the date of the enactment of this 

Act, the Commission shall submit to Congress a report on the study conducted 

under paragraph (1). 

(g) REPORT ON IMPACT OF INCREASED FINANCIAL ASSISTANCE TO MEDICARE ADVAN- TAGE PLANS.—Not later than July 1, 2006, the Medicare Benefits Administrator 

shall submit to Congress a report that describes the impact of additional financing 

provided under this Act and other Acts (including the Medicare, Medicaid, and 

SCHIP Balanced Budget Refinement Act of 1999 and BIPA) on the availability of 

Medicare Advantage plans in different areas and its impact on lowering premiums 

and increasing benefits under such plans. 

CHAPTER 2—IMPLEMENTATION OF COMPETITION PROGRAM

SEC. 221. COMPETITION PROGRAM BEGINNING IN 2006. 

(a) SUBMISSION OF EFFS-LIKE BIDDING INFORMATION BEGINNING IN 2006.—Section 1854 (42 U.S.C. 1395w–24) is amended—

(1) by amending the section heading to read as follows: 

‘‘PREMIUMS AND BID AMOUNT’’; 

(2) in subsection (a)(1)(A)—

(A) by striking ‘‘(A)’’ and inserting ‘‘(A)(i) if the following year is before 

2006,’’; and 

(B) by inserting before the semicolon at the end the following: ‘‘or (ii) if 

the following year is 2006 or later, the information described in paragraph 

(3) or (6)(A) for the type of plan involved’’; and 

(3) by adding at the end of subsection (a) the following: 

‘‘(6) SUBMISSION OF BID AMOUNTS BY MEDICARE ADVANTAGE ORGANIZATIONS.—

‘‘(A) INFORMATION TO BE SUBMITTED.—The information described in this 

subparagraph is as follows: 

‘‘(i) The monthly aggregate bid amount for provision of all items and 

services under this part, which amount shall be based on average costs 

for a typical beneficiary residing in the area, and the actuarial basis 

for determining such amount. 

‘‘(ii) The proportions of such bid amount that are attributable to—

‘‘(I) the provision of statutory non-drug benefits (such portion referred to in this part as the ‘unadjusted Medicare Advantage statutory non-drug monthly bid amount’); 

‘‘(II) the provision of statutory prescription drug benefits; and 

‘‘(III) the provision of non-statutory benefits; 

and the actuarial basis for determining such proportions. 

‘‘(iii) Such additional information as the Administrator may require 

to verify the actuarial bases described in clauses (i) and (ii). 

‘‘(B) STATUTORY BENEFITS DEFINED.—For purposes of this part: 

‘‘(i) The term ‘statutory non-drug benefits’ means benefits under section 1852(a)(1). 

‘‘(ii) The term ‘statutory prescription drug benefits’ means benefits 

under part D. 

45

‘‘(iii) The term ‘statutory benefits’ means statutory prescription drug 

benefits and statutory non-drug benefits.

‘‘(C) ACCEPTANCE AND NEGOTIATION OF BID AMOUNTS.—

‘‘(i) IN GENERAL.—Subject to clause (ii)—

‘‘(I) the Administrator has the authority to negotiate regarding 

monthly bid amounts submitted under subparagraph (A) (and the 

proportion described in subparagraph (A)(ii)), and for such purpose 

and subject to such clause, the Administrator has negotiation authority that the Director of the Office of Personnel Management 

has with respect to health benefits plans under chapter 89 of title 

5, United States Code; and 

‘‘(II) the Administrator may reject such a bid amount or proportion if the Administrator determines that such amount or proportion is not supported by the actuarial bases provided under subparagraph (A). 

‘‘(ii) EXCEPTION.—In the case of a plan described in section 

1851(a)(2)(C), the provisions of clause (i) shall not apply and the provisions of paragraph (5)(B), prohibiting the review, approval, or disapproval of amounts described in such paragraph, shall apply to the negotiation and rejection of the monthly bid amounts and proportion referred to in subparagraph (A).’’. 

(b) PROVIDING FOR BENEFICIARY SAVINGS FOR CERTAIN PLANS.—

(1) IN GENERAL.—Section 1854(b) (42 U.S.C. 1395w–24(b)) is amended—

(A) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(C) BENEFICIARY REBATE RULE.—

‘‘(i) REQUIREMENT.—The Medicare Advantage plan shall provide to 

the enrollee a monthly rebate equal to 75 percent of the average per 

capita savings (if any) described in paragraph (3) applicable to the plan 

and year involved. 

‘‘(iii) FORM OF REBATE.—A rebate required under this subparagraph 

shall be provided—

‘‘(I) through the crediting of the amount of the rebate towards 

the Medicare Advantage monthly supplementary beneficiary premium or the premium imposed for prescription drug coverage 

under part D; 

‘‘(II) through a direct monthly payment (through electronic funds 

transfer or otherwise); or 

‘‘(III) through other means approved by the Medicare Benefits 

Administrator, 

or any combination thereof.’’; and 

(B) by adding at the end the following new paragraphs: 

‘‘(3) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—For purposes 

of paragraph (1)(C)(i), the average per capita monthly savings referred to in 

such paragraph for a Medicare Advantage plan and year is computed as follows: 

‘‘(A) DETERMINATION OF STATE-WIDE AVERAGE RISK ADJUSTMENT.—

‘‘(i) IN GENERAL.—The Medicare Benefits Administrator shall determine, at the same time rates are promulgated under section 1853(b)(1) 

(beginning with 2006), for each State the average of the risk adjustment factors to be applied under section 1853(a)(1)(A) to payment for 

enrollees in that State. In the case of a State in which a Medicare Advantage plan was offered in the previous year, the Administrator may 

compute such average based upon risk adjustment factors applied in 

that State in a previous year. 

‘‘(ii) TREATMENT OF NEW STATES.—In the case of a State in which no 

Medicare Advantage plan was offered in the previous year, the Administrator shall estimate such average. In making such estimate, the Administrator may use average risk adjustment factors applied to comparable States or applied on a national basis. 

‘‘(B) DETERMINATION OF RISK ADJUSTED BENCHMARK AND RISK-ADJUSTED

BID.—For each Medicare Advantage plan offered in a State, the Administrator shall—

‘‘(i) adjust the Medicare Advantage area-specific non-drug monthly 

benchmark amount (as defined in subsection (j)) by the applicable average risk adjustment factor computed under subparagraph (A); and 

‘‘(ii) adjust the unadjusted Medicare Advantage statutory non-drug 

monthly bid amount by such applicable average risk adjustment factor. 

46

‘‘(C) DETERMINATION OF AVERAGE PER CAPITA MONTHLY SAVINGS.—The average per capita monthly savings described in this subparagraph is equal 

to the amount (if any) by which—

‘‘(i) the risk-adjusted benchmark amount computed under subparagraph (B)(i), exceeds 

‘‘(ii) the risk-adjusted bid computed under subparagraph (B)(ii). 

‘‘(D) AUTHORITY TO DETERMINE RISK ADJUSTMENT FOR AREAS OTHER THAN

STATES.—The Administrator may provide for the determination and application of risk adjustment factors under this paragraph on the basis of areas 

other than States. 

‘‘(4) BENEFICIARY’S OPTION OF PAYMENT THROUGH WITHHOLDING FROM SOCIAL

SECURITY PAYMENT OR USE OF ELECTRONIC FUNDS TRANSFER MECHANISM.—In accordance with regulations, a Medicare Advantage organization shall permit 

each enrollee, at the enrollee’s option, to make payment of premiums under this 

part to the organization indirectly through withholding from benefit payments 

in the manner provided under section 1840 with respect to monthly premiums 

under section 1839 or through an electronic funds transfer mechanism (such as 

automatic charges of an account at a financial institution or a credit or debit 

card account) or otherwise. All premium payments that are withheld under this 

paragraph that are credited to the Federal Supplementary Medical Insurance 

Drug Trust Fund shall be paid to the Medicare Advantage organization involved.’’. 

(2) PROVISION OF SINGLE CONSOLIDATED PREMIUM.—Section 1854(b) (42 U.S.C. 

1395w–24(b)), as amended by paragraph (1), is further amended by adding at 

the end the following new paragraph: 

‘‘(5) SINGLE CONSOLIDATED PREMIUM.—In the case of an enrollee in a Medicare 

Advantage plan who elects under part D to be provided qualified prescription 

drug coverage through the plan, the Administrator shall provide a mechanism 

for the consolidation of the beneficiary premium amount for non-drug benefits 

under this part with the premium amount for prescription drug coverage under 

part D provided through the plan.’’. 

(3) COMPUTATION OF MEDICARE ADVANTAGE AREA-SPECIFIC NON-DRUG BENCHMARK.—Section 1853 (42 U.S.C. 1395w–23) is amended by adding at the end the 

following new subsection: 

‘‘(j) COMPUTATION OF MEDICARE ADVANTAGE AREA-SPECIFIC NON-DRUG MONTHLY

BENCHMARK AMOUNT.—For purposes of this part, the term ‘Medicare Advantage 

area-specific non-drug monthly benchmark amount’ means, with respect to a Medicare Advantage payment area for a month in a year, an amount equal to 1⁄12 of the 

annual Medicare Advantage capitation rate under section 1853(c)(1) for the area for 

the year.’’. 

(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—

(1) IN GENERAL.—Section 1853(a)(1)(A) (42 U.S.C. 1395w–23) is amended by 

striking ‘‘in an amount’’ and all that follows and inserting the following: ‘‘in an 

amount determined as follows: 

‘‘(i) PAYMENT BEFORE 2006.—For years before 2006, the payment 

amount shall be equal to 1⁄12 of the annual Medicare Advantage capitation rate (as calculated under subsection (c)(1)) with respect to that individual for that area, reduced by the amount of any reduction elected 

under section 1854(f )(1)(E) and adjusted under clause (iv). 

‘‘(ii) PAYMENT FOR STATUTORY NON-DRUG BENEFITS BEGINNING WITH

2006.—For years beginning with 2006—

‘‘(I) PLANS WITH BIDS BELOW BENCHMARK.—In the case of a plan 

for which there are average per capita monthly savings described 

in section 1854(b)(3)(C), the payment under this subsection is equal 

to the unadjusted Medicare Advantage statutory non-drug monthly 

bid amount, adjusted under clause (iv), plus the amount of the 

monthly rebate computed under section 1854(b)(1)(C)(i) for that 

plan and year. 

‘‘(II) PLANS WITH BIDS AT OR ABOVE BENCHMARK.—In the case of 

a plan for which there are no average per capita monthly savings 

described in section 1854(b)(3)(C), the payment amount under this 

subsection is equal to the Medicare Advantage area-specific nondrug monthly benchmark amount, adjusted under clause (iv). 

‘‘(iii) FOR FEDERAL DRUG SUBSIDIES.—In the case in which an enrollee 

who elects under part D to be provided qualified prescription drug coverage through the plan, the Medicare Advantage organization offering 

such plan also is entitled—

‘‘(I) to direct subsidy payment under section 1860D–8(a)(1); 

47

‘‘(II) to reinsurance subsidy payments under section 1860D–

8(a)(2); and 

‘‘(III) to reimbursement for premium and cost-sharing reductions 

for low-income individuals under section 1860D–7(c)(3). 

‘‘(iv) DEMOGRAPHIC ADJUSTMENT, INCLUDING ADJUSTMENT FOR

HEALTH STATUS.—The Administrator shall adjust the payment amount 

under clause (i), the unadjusted Medicare Advantage statutory nondrug monthly bid amount under clause (ii)(I), and the Medicare Advantage area-specific non-drug monthly benchmark amount under clause 

(ii)(II) for such risk factors as age, disability status, gender, institutional status, and such other factors as the Administrator determines 

to be appropriate, including adjustment for health status under paragraph (3), so as to ensure actuarial equivalence. The Administrator 

may add to, modify, or substitute for such adjustment factors if such 

changes will improve the determination of actuarial equivalence.’’. 

(d) CONFORMING AMENDMENTS.—

(1) PROTECTION AGAINST BENEFICIARY SELECTION.—Section 1852(b)(1)(A) (42 

U.S.C. 1395w–22(b)(1)(A)) is amended by adding at the end the following: ‘‘The 

Administrator shall not approve a plan of an organization if the Administrator 

determines that the benefits are designed to substantially discourage enrollment by certain Medicare Advantage eligible individuals with the organization.’’. 

(2) CONFORMING AMENDMENT TO PREMIUM TERMINOLOGY.—Section 1854(b)(2) 

(42 U.S.C. 1395w–24(b)(2)) is amended by redesignating subparagraph (C) as 

subparagraph (D) and by striking subparagraphs (A) and (B) and inserting the 

following: 

‘‘(A) MEDICARE ADVANTAGE MONTHLY BASIC BENEFICIARY PREMIUM.—The 

term ‘Medicare Advantage monthly basic beneficiary premium’ means, with 

respect to a Medicare Advantage plan—

‘‘(i) described in section 1853(a)(1)(A)(ii)(I) (relating to plans providing rebates), zero; or 

‘‘(ii) described in section 1853(a)(1)(A)(ii)(II), the amount (if any) by 

which the unadjusted Medicare Advantage statutory non-drug monthly 

bid amount exceeds the Medicare Advantage area-specific non-drug 

monthly benchmark amount. 

‘‘(B) MEDICARE ADVANTAGE MONTHLY PRESCRIPTION DRUG BENEFICIARY

PREMIUM.—The term ‘Medicare Advantage monthly prescription drug beneficiary premium’ means, with respect to a Medicare Advantage plan, that 

portion of the bid amount submitted under clause (i) of subsection (a)(6)(A) 

for the year that is attributable under such section to the provision of statutory prescription drug benefits. 

‘‘(C) MEDICARE ADVANTAGE MONTHLY SUPPLEMENTAL BENEFICIARY PREMIUM.—The term ‘Medicare Advantage monthly supplemental beneficiary 

premium’ means, with respect to a Medicare Advantage plan, the portion 

of the aggregate monthly bid amount submitted under clause (i) of subsection (a)(6)(A) for the year that is attributable under such section to the 

provision of nonstatutory benefits.’’. 

(3) REQUIREMENT FOR UNIFORM PREMIUM AND BID AMOUNTS.—Section 1854(c) 

(42 U.S.C. 1395w–24(c)) is amended to read as follows: 

‘‘(c) UNIFORM PREMIUM AND BID AMOUNTS.—The Medicare Advantage monthly bid 

amount submitted under subsection (a)(6), the Medicare Advantage monthly basic, 

prescription drug, and supplemental beneficiary premiums, and the Medicare Advantage monthly MSA premium charged under subsection (b) of a Medicare Advantage organization under this part may not vary among individuals enrolled in the 

plan.’’. 

(4) PERMITTING BENEFICIARY REBATES.—

(A) Section 1851(h)(4)(A) (42 U.S.C. 1395w–21(h)(4)(A)) is amended by inserting ‘‘except as provided under section 1854(b)(1)(C)’’ after ‘‘or otherwise’’. 

(B) Section 1854(d) (42 U.S.C. 1395w–24(d)) is amended by inserting ‘‘, 

except as provided under subsection (b)(1)(C),’’ after ‘‘and may not provide’’. 

(5) OTHER CONFORMING AMENDMENTS RELATING TO BIDS.—Section 1854 (42 

U.S.C. 1395w–24) is amended—

(A) in the heading of subsection (a), by inserting ‘‘AND BID AMOUNTS’’ 

after ‘‘PREMIUMS’’; and 

(B) in subsection (a)(5)(A), by inserting ‘‘paragraphs (2), (3), and (4) of’’ 

after ‘‘filed under’’. 

(e) ADDITIONAL CONFORMING AMENDMENTS.—

48

(1) ANNUAL DETERMINATION AND ANNOUNCEMENT OF CERTAIN FACTORS.—Section 1853(b)(1) (42 U.S.C. 1395w–23(b)(1)) is amended by striking ‘‘the respective calendar year’’ and all that follows and inserting the following: ‘‘the calendar year concerned with respect to each Medicare Advantage payment area, 

the following: 

‘‘(A) PRE-COMPETITION INFORMATION.—For years before 2006, the following: 

‘‘(i) MEDICARE ADVANTAGE CAPITATION RATES.—The annual Medicare 

Advantage capitation rate for each Medicare Advantage payment area 

for the year. 

‘‘(ii) ADJUSTMENT FACTORS.—The risk and other factors to be used in 

adjusting such rates under subsection (a)(1)(A) for payments for months 

in that year. 

‘‘(B) COMPETITION INFORMATION.—For years beginning with 2006, the following: 

‘‘(i) BENCHMARK.—The Medicare Advantage area-specific non-drug 

benchmark under section 1853(j). 

‘‘(ii) ADJUSTMENT FACTORS.—The adjustment factors applied under 

section 1853(a)(1)(A)(iv) (relating to demographic adjustment), section 

1853(a)(1)(B) (relating to adjustment for end-stage renal disease), and 

section 1853(a)(3) (relating to health status adjustment).’’. 

(2) REPEAL OF PROVISIONS RELATING TO ADJUSTED COMMUNITY RATE (ACR).—

(A) IN GENERAL.—Subsections (e) and (f) of section 1854 (42 U.S.C. 

1395w–24) are repealed. 

(B) CONFORMING AMENDMENTS.—(i) Section 1839(a)(2) (42 U.S.C. 

1395r(a)(2)) is amended by striking ‘‘, and to reflect’’ and all that follows 

and inserting a period. 

(ii) Section 1852(a)(1) (42 U.S.C. 1395w–22(a)(1)) is amended by striking 

‘‘title XI’’ and all that follows and inserting the following: ‘‘title XI those 

items and services (other than hospice care) for which benefits are available 

under parts A and B to individuals residing in the area served by the 

plan.’’. 

(iii) Section 1857(d)(1) (42 U.S.C. 1395w–27(d)(1)) is amended by striking 

‘‘, costs, and computation of the adjusted community rate’’ and inserting 

‘‘and costs’’. 

(f) REFERENCES UNDER PART E.—Section 1859 (42 U.S.C. 1395w–29) is amended 

by adding at the end the following new subsection: 

‘‘(f) APPLICATION UNDER PART E.—In the case of any reference under part E to 

a requirement or provision of this part in the relation to an EFFS plan or organization under such part, except as otherwise specified any such requirement or provision shall be applied to such organization or plan in the same manner as such requirement or provision applies to a Medicare Advantage private fee-for-service plan 

(and the Medicare Advantage organization that offers such plan) under this part.’’. 

(g) EFFECTIVE DATE.—The amendments made by this section shall apply to payments and premiums for months beginning with January 2006. 

CHAPTER 3—ADDITIONAL REFORMS

SEC. 231. MAKING PERMANENT CHANGE IN MEDICARE ADVANTAGE REPORTING DEADLINES 

AND ANNUAL, COORDINATED ELECTION PERIOD. 

(a) CHANGE IN REPORTING DEADLINE.—Section 1854(a)(1) (42 U.S.C. 1395w–

24(a)(1)), as amended by section 532(b)(1) of the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, is amended by striking ‘‘2002, 2003, 

and 2004 (or July 1 of each other year)’’ and inserting ‘‘2002 and each subsequent 

year’’. 

(b) DELAY IN ANNUAL, COORDINATED ELECTION PERIOD.—Section 1851(e)(3)(B) (42 

U.S.C. 1395w–21(e)(3)(B)), as amended by section 532(c)(1)(A) of the Public Health 

Security and Bioterrorism Preparedness and Response Act of 2002, is amended—

(1) by striking ‘‘and after 2005’’; and 

(2) by striking ‘‘, 2004, and 2005’’ and inserting ‘‘and any subsequent year’’. 

(c) ANNUAL ANNOUNCEMENT OF PAYMENT RATES.—Section 1853(b)(1) (42 U.S.C. 

1395w–23(b)(1)), as amended by section 532(d)(1) of the Public Health Security and 

Bioterrorism Preparedness and Response Act of 2002, is amended—

(1) by striking ‘‘and after 2005’’; and 

(2) by striking ‘‘and 2005’’ and inserting ‘‘and each subsequent year’’. 

(d) REQUIRING PROVISION OF AVAILABLE INFORMATION COMPARING PLAN OPTIONS.—The first sentence of section 1851(d)(2)(A)(ii) (42 U.S.C. 1395w–

21(d)(2)(A)(ii)) is amended by inserting before the period the following: ‘‘to the extent 

49

such information is available at the time of preparation of materials for the mailing’’. 

SEC. 232. AVOIDING DUPLICATIVE STATE REGULATION. 

(a) IN GENERAL.—Section 1856(b)(3) (42 U.S.C. 1395w–26(b)(3)) is amended to 

read as follows: 

‘‘(3) RELATION TO STATE LAWS.—The standards established under this subsection shall supersede any State law or regulation (other than State licensing 

laws or State laws relating to plan solvency) with respect to Medicare Advantage plans which are offered by Medicare Advantage organizations under this 

part.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect on 

the date of the enactment of this Act. 

SEC. 233. SPECIALIZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS BENEFICIARIES. 

(a) TREATMENT AS COORDINATED CARE PLAN.—Section 1851(a)(2)(A) (42 U.S.C. 

1395w–21(a)(2)(A)) is amended by adding at the end the following new sentence: 

‘‘Specialized Medicare Advantage plans for special needs beneficiaries (as defined in 

section 1859(b)(4)) may be any type of coordinated care plan.’’. 

(b) SPECIALIZED MEDICARE ADVANTAGE PLAN FOR SPECIAL NEEDS BENEFICIARIES

DEFINED.—Section 1859(b) (42 U.S.C. 1395w–29(b)) is amended by adding at the 

end the following new paragraph: 

‘‘(4) SPECIALIZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS BENEFICIARIES.—

‘‘(A) IN GENERAL.—The term ‘specialized Medicare Advantage plan for 

special needs beneficiaries’ means a Medicare Advantage plan that exclusively serves special needs beneficiaries (as defined in subparagraph (B)). 

‘‘(B) SPECIAL NEEDS BENEFICIARY.—The term ‘special needs beneficiary’ 

means a Medicare Advantage eligible individual who—

‘‘(i) is institutionalized (as defined by the Secretary); 

‘‘(ii) is entitled to medical assistance under a State plan under title 

XIX; or 

‘‘(iii) meets such requirements as the Secretary may determine would 

benefit from enrollment in such a specialized Medicare Advantage plan 

described in subparagraph (A) for individuals with severe or disabling 

chronic conditions.’’. 

(c) RESTRICTION ON ENROLLMENT PERMITTED.—Section 1859 (42 U.S.C. 1395w–29) 

is amended by adding at the end the following new subsection: 

‘‘(f) RESTRICTION ON ENROLLMENT FOR SPECIALIZED MEDICARE ADVANTAGE PLANS

FOR SPECIAL NEEDS BENEFICIARIES.—In the case of a specialized Medicare Advantage plan (as defined in subsection (b)(4)), notwithstanding any other provision of 

this part and in accordance with regulations of the Secretary and for periods before 

January 1, 2007, the plan may restrict the enrollment of individuals under the plan 

to individuals who are within one or more classes of special needs beneficiaries.’’. 

(d) REPORT TO CONGRESS.—Not later than December 31, 2005, the Medicare Benefits Administrator shall submit to Congress a report that assesses the impact of specialized Medicare Advantage plans for special needs beneficiaries on the cost and 

quality of services provided to enrollees. Such report shall include an assessment 

of the costs and savings to the medicare program as a result of amendments made 

by subsections (a), (b), and (c). 

(e) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by subsections (a), (b), and (c) shall 

take effect upon the date of the enactment of this Act. 

(2) DEADLINE FOR ISSUANCE OF REQUIREMENTS FOR SPECIAL NEEDS BENEFICIARIES; TRANSITION.—No later than 6 months after the date of the enactment 

of this Act, the Secretary shall issue interim final regulations to establish requirements for special needs beneficiaries under section 1859(b)(4)(B)(iii) of the 

Social Security Act, as added by subsection (b). 

SEC. 234. MEDICARE MSAS. 

(a) EXEMPTION FROM REPORTING ENROLLEE ENCOUNTER DATA.—

(1) IN GENERAL.—Section 1852(e)(1) (42 U.S.C. 1395w–22(e)(1)) is amended by 

inserting ‘‘(other than MSA plans)’’ after ‘‘plans’’. 

(2) CONFORMING AMENDMENTS.—Section 1852 (42 U.S.C. 1395w–22) is amended—

(A) in subsection (c)(1)(I), by inserting before the period at the end the 

following: ‘‘if required under such section’’; and 

(B) in subparagraphs (A) and (B) of subsection (e)(2), by striking ‘‘, a nonnetwork MSA plan,’’ and ‘‘, NON-NETWORK MSA PLANS,’’ each place it appears. 

50

(b) MAKING PROGRAM PERMANENT AND ELIMINATING CAP.—Section 1851(b)(4) (42 

U.S.C. 1395w–21(b)(4)) is amended—

(1) in the heading, by striking ‘‘ON A DEMONSTRATION BASIS’’; 

(2) by striking the first sentence of subparagraph (A); and 

(3) by striking the second sentence of subparagraph (C). 

(c) APPLYING LIMITATIONS ON BALANCE BILLING.—Section 1852(k)(1) (42 U.S.C. 

1395w–22(k)(1)) is amended by inserting ‘‘or with an organization offering a MSA 

plan’’ after ‘‘section 1851(a)(2)(A)’’. 

(d) ADDITIONAL AMENDMENT.—Section 1851(e)(5)(A) (42 U.S.C. 1395w–21(e)(5)(A)) 

is amended—

(1) by adding ‘‘or’’ at the end of clause (i); 

(2) by striking ‘‘, or’’ at the end of clause (ii) and inserting a semicolon; and 

(3) by striking clause (iii). 

SEC. 235. EXTENSION OF REASONABLE COST CONTRACTS. 

Subparagraph (C) of section 1876(h)(5) (42 U.S.C. 1395mm(h)(5)) is amended to 

read as follows: 

‘‘(C)(i) Subject to clause (ii), may be extended or renewed under this subsection 

indefinitely. 

‘‘(ii) For any period beginning on or after January 1, 2008, a reasonable cost reimbursement contract under this subsection may not be extended or renewed for a 

service area insofar as such area, during the entire previous year, was within the 

service area of 2 or more plans which were coordinated care Medicare Advantage 

plans under part C or 2 or more enhanced fee-for-service plans under part E and 

each of which plan for that previous year for the area involved meets the following 

minimum enrollment requirements: 

‘‘(I) With respect to any portion of the area involved that is within a Metropolitan Statistical Area with a population of more than 250,000 and counties 

contiguous to such Metropolitan Statistical Area, 5,000 individuals. 

‘‘(II) With respect to any other portion of such area, 1,500 individuals.’’. 

SEC. 236. EXTENSION OF MUNICIPAL HEALTH SERVICE DEMONSTRATION PROJECTS. 

Section 9215(a) of the Consolidated Omnibus Budget Reconciliation Act of 1985 

(42 U.S.C. 1395b–1 note), as amended by section 6135 of the Omnibus Budget Reconciliation Act of 1989, section 13557 of the Omnibus Budget Reconciliation Act of 

1993, section 4017 of BBA, section 534 of BBRA (113 Stat. 1501A–390), and section 

633 of BIPA, is amended by striking ‘‘December 31, 2004’’ and inserting ‘‘December 

31, 2009’’.

Subtitle C—Application of FEHBP-Style 

Competitive Reforms

SEC. 241. APPLICATION OF FEHBP-STYLE COMPETITIVE REFORM BEGINNING IN 2010.

(a) IDENTIFICATION OF COMPETITIVE EFFS REGIONS; COMPUTATION OF COMPETITIVE EFFS NON-DRUG BENCHMARKS UNDER EFFS PROGRAM.—

(1) IN GENERAL.—Section 1860E–3, as added by section 201(a), is amended by 

adding at the end the following new subsection: 

‘‘(e) APPLICATION OF COMPETITION.—

‘‘(1) DETERMINATION OF COMPETITIVE EFFS REGIONS.—

‘‘(A) IN GENERAL.—For purposes of this part, the term ‘competitive EFFS 

region’ means, for a year beginning with 2010, an EFFS region that the Administrator finds—

‘‘(i) there will be offered in the region during the annual, coordinated 

election period under section 1851(e)(3)(B) (as applied under section 

1860E–1(c)) before the beginning of the year at least 2 EFFS plans (in 

addition to the fee-for-service program under parts A and B), each offered by a different EFFS organization and each of which met the minimum enrollment requirements of paragraph (1) of section 1857(b) (as 

applied without regard to paragraph (3) thereof) as of March of the previous year; and 

‘‘(ii) during March of the previous year at least the percentage specified in subparagraph (C) of the number of EFFS eligible individuals 

who reside in the region were enrolled in an EFFS plan. 

‘‘(B) PERCENTAGE SPECIFIED.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A), subject to clause 

(ii), the percentage specified in this subparagraph for a year is equal 

the lesser of 20 percent or to the sum of—

51

‘‘(I) the percentage, as estimated by the Administrator, of EFFS 

eligible individuals in the United States who are enrolled in EFFS 

plans during March of the previous year; and 

‘‘(II) the percentage, as estimated by the Administrator, of Medicare Advantage eligible individuals in the United States who are 

enrolled in Medicare Advantage plans during March of the previous year. 

‘‘(ii) EXCEPTION.—In the case of an EFFS region that was a competitive EFFS region for the previous year, the Medicare Benefits Administrator may continue to treat the region as meeting the requirement of 

subparagraph (A)(ii) if the region would meet such requirement but for 

a de minimis reduction below the percentage specified in clause (i). 

‘‘(2) COMPETITIVE EFFS NON-DRUG MONTHLY BENCHMARK AMOUNT.—For purposes of this part, the term ‘competitive EFFS non-drug monthly benchmark 

amount’ means, with respect to an EFFS region for a month in a year and subject to paragraph (8), the sum of the 2 components described in paragraph (3) 

for the region and year. The Administrator shall compute such benchmark 

amount for each competitive EFFS region before the beginning of each annual, 

coordinated election period under section 1851(e)(3)(B) for each year (beginning 

with 2010) in which it is designated as such a region. 

‘‘(3) 2 COMPONENTS.—For purposes of paragraph (2), the 2 components described in this paragraph for an EFFS region and a year are the following: 

‘‘(A) EFFS COMPONENT.—The product of the following: 

‘‘(i) WEIGHTED AVERAGE OF PLAN BIDS IN REGION.—The weighted average of the EFFS plan bids for the region and year (as determined 

under paragraph (4)(A)). 

‘‘(ii) NON-FFS MARKET SHARE.—1 minus the fee-for-service market 

share percentage determined under paragraph (5) for the region and 

the year. 

‘‘(B) FEE-FOR-SERVICE COMPONENT.—The product of the following: 

‘‘(i) FEE-FOR-SERVICE REGION-SPECIFIC NON-DRUG AMOUNT.—The feefor-service region-specific non-drug amount (as defined in paragraph 

(6)) for the region and year. 

‘‘(ii) FEE-FOR-SERVICE MARKET SHARE.—The fee-for-service market 

share percentage (determined under paragraph (5)) for the region and 

the year. 

‘‘(4) DETERMINATION OF WEIGHTED AVERAGE EFFS PLAN BIDS FOR A REGION.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(A)(i), the weighted average of EFFS plan bids for an EFFS region and a year is the sum of the 

following products for EFFS plans described in subparagraph (C) in the region and year: 

‘‘(i) UNADJUSTED EFFS STATUTORY NON-DRUG MONTHLY BID AMOUNT.—

The unadjusted EFFS statutory non-drug monthly bid amount (as defined in subsection (a)(3)(A)(ii)(I)) for the region and year. 

‘‘(ii) PLAN’S SHARE OF EFFS ENROLLMENT IN REGION.—The number of 

individuals described in subparagraph (B), divided by the total number 

of such individuals for all EFFS plans described in subparagraph (C) 

for that region and year. 

‘‘(B) COUNTING OF INDIVIDUALS.—The Administrator shall count, for each 

EFFS plan described in subparagraph (C) for an EFFS region and year, the 

number of individuals who reside in the region and who were enrolled 

under such plan under this part during March of the previous year. 

‘‘(C) EXCLUSION OF PLANS NOT OFFERED IN PREVIOUS YEAR.—For an EFFS 

region and year, the EFFS plans described in this subparagraph are plans 

that are offered in the region and year and were offered in the region in 

March of the previous year. 

‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MARKET SHARE PERCENTAGE.—The Administrator shall determine, for a year and an EFFS region, the proportion (in 

this subsection referred to as the ‘fee-for-service market share percentage’) of 

the EFFS eligible individuals who are residents of the region during March of 

the previous year, of such individuals who were not enrolled in an EFFS plan 

or in a Medicare Advantage plan (or, if greater, such proportion determined for 

individuals nationally). 

‘‘(6) FEE-FOR-SERVICE REGION-SPECIFIC NON-DRUG AMOUNT.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(B)(i) and section 

1839(h)(2)(A), subject to subparagraph (B), the term ‘fee-for-service regionspecific non-drug amount’ means, for a competitive EFFS region and a year, 

the adjusted average per capita cost for the year involved, determined 

under section 1876(a)(4) for such region for services covered under parts A 

52

and B for individuals entitled to benefits under part A and enrolled under 

this part who are not enrolled in an EFFS plan under part E or a Medicare 

Advantage plan under part C for the year, but adjusted to exclude costs attributable to payments under section 1886(h). 

‘‘(B) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average 

per capita cost under subparagraph (A) for a year, such cost shall be adjusted to include the Administrator’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the region 

involved under this title if individuals entitled to benefits under this title 

had not received services from facilities of the Department of Veterans Affairs or the Department of Defense. 

‘‘(7) APPLICATION OF COMPETITION.—In the case of an EFFS region that is a 

competitive EFFS region for a year, for purposes of applying subsections (b) and 

(c)(1) and section 1860E–4(a), any reference to an EFFS region-specific non-drug 

monthly benchmark amount shall be treated as a reference to the competitive 

EFFS non-drug monthly benchmark amount under paragraph (2) for the region 

and year. 

‘‘(8) PHASE-IN OF BENCHMARK FOR EACH REGION.— ‘‘(A) USE OF BLENDED BENCHMARK.—In the case of a region that has not 

been a competitive EFFS region for each of the previous 4 years, the competitive EFFS non-drug monthly benchmark amount shall be equal to the 

sum of the following: 

‘‘(i) NEW COMPETITIVE COMPONENT.—The product of—

‘‘(I) the weighted average phase-in proportion for that area and 

year, as specified in subparagraph (B); and 

‘‘(II) the competitive EFFS non-drug monthly benchmark amount 

for the region and year, determined under paragraph (2) without 

regard to this paragraph. 

‘‘(ii) OLD COMPETITIVE COMPONENT.—The product of—

‘‘(I) 1 minus the weighted average phase-in proportion for that 

region and year; and 

‘‘(II) the EFFS region-specific non-drug benchmark amount for 

the region and the year. 

‘‘(B) COMPUTATION OF WEIGHTED AVERAGE PHASE-IN PROPORTION.—For 

purposes of this paragraph, the ‘weighted average phase-in proportion’ for 

an EFFS region for a year shall be determined as follows: 

‘‘(i) FIRST YEAR (AND REGION NOT COMPETITIVE REGION IN PREVIOUS

YEAR).—If the area was not a competitive EFFS region in the previous 

year, the weighted average phase-in proportion for the region for the 

year is equal to 1⁄5. 

‘‘(ii) COMPETITIVE REGION IN PREVIOUS YEAR.—If the region was a 

competitive EFFS region in the previous year, the weighted average 

phase-in proportion for the region for the year is equal to the weighted 

average phase-in proportion determined under this subparagraph for 

the region for the previous year plus 1⁄5, but in no case more than 1.’’. 

(2) CONFORMING AMENDMENTS.—

(A) Such section 1860E–3 is further amended—

(i) in subsection (b), by adding at the end the following new paragraph: 

‘‘(4) APPLICATION IN COMPETITIVE REGIONS.—For special rules applying 

this subsection in competitive EFFS regions, see subsection (e)(7).’’; 

(ii) in subsection (c)(1), by inserting ‘‘and subsection (e)(7)’’ after ‘‘(as 

made applicable under subsection (d))’’; and 

(iii) in subsection (d) , by striking ‘‘and (e)’’ and inserting ‘‘(e), and 

(k) ’’. 

(B) Section 1860E–4(a)(1), as inserted by section 201(a)(2), is amended by 

inserting ‘‘, except as provided in section 1860E–3(e)(7)’’ after ‘‘paragraph 

(2)’’.

(b) IDENTIFICATION OF COMPETITIVE MEDICARE ADVANTAGE AREAS; APPLICATION

OF COMPETITIVE MEDICARE ADVANTAGE NON-DRUG BENCHMARKS UNDER MEDICARE

ADVANTAGE PROGRAM.—

(1) IN GENERAL.—Section 1853, as amended by section 221(b)(3), is amended 

by adding at the end the following new subsection: 

‘‘(k) APPLICATION OF COMPETITION.—

‘‘(1) DETERMINATION OF COMPETITIVE MEDICARE ADVANTAGE AREAS.—

‘‘(A) IN GENERAL.—For purposes of this part, the terms ‘competitive Medicare Advantage area’ and ‘CMA area’ mean, for a year beginning with 2010, 

an area (which is a metropolitan statistical area or other area with a subVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00052 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
53

stantial number of Medicare Advantage enrollees) that the Administrator 

finds—

‘‘(i) there will be offered during the annual, coordinated election period under section 1851(e)(3)(B) under this part before the beginning of 

the year at least 2 Medicare Advantage plans (in addition to the feefor-service program under parts A and B), each offered by a different 

Medicare Advantage organization and each of which met the minimum 

enrollment requirements of paragraph (1) of section 1857(b) (as applied 

without regard to paragraph (3) thereof) as of March of the previous 

year with respect to the area; and 

‘‘(ii) during March of the previous year at least the percentage specified in subparagraph (B) of the number of Medicare Advantage eligible 

individuals who reside in the area were enrolled in a Medicare Advantage plan. 

‘‘(B) PERCENTAGE SPECIFIED.— ‘‘(i) IN GENERAL.—For purposes of subparagraph (A), subject to clause 

(ii), the percentage specified in this subparagraph for a year is equal 

the lesser of 20 percent or to the sum of—

‘‘(I) the percentage, as estimated by the Administrator, of EFFS 

eligible individuals in the United States who are enrolled in EFFS 

plans during March of the previous year; and 

‘‘(II) the percentage, as estimated by the Administrator, of Medicare Advantage eligible individuals in the United States who are 

enrolled in Medicare Advantage plans during March of the previous year. 

‘‘(ii) EXCEPTION.—In the case of an area that was a competitive area 

for the previous year, the Medicare Benefits Administrator may continue to treat the area as meeting the requirement of subparagraph 

(A)(ii) if the area would meet such requirement but for a de minimis 

reduction below the percentage specified in clause (i). 

‘‘(2) COMPETITIVE MEDICARE ADVANTAGE NON-DRUG MONTHLY BENCHMARK

AMOUNT.—For purposes of this part, the term ‘competitive Medicare Advantage 

non-drug monthly benchmark amount’ means, with respect to a competitive 

Medicare Advantage area for a month in a year subject to paragraph (8), the 

sum of the 2 components described in paragraph (3) for the area and year. The 

Administrator shall compute such benchmark amount for each competitive 

Medicare Advantage area before the beginning of each annual, coordinated election period under section 1851(e)(3)(B) for each year (beginning with 2010) in 

which it is designated as such an area. 

‘‘(3) 2 COMPONENTS.—For purposes of paragraph (2), the 2 components described in this paragraph for a competitive Medicare Advantage area and a year 

are the following: 

‘‘(A) MEDICARE ADVANTAGE COMPONENT.—The product of the following: 

‘‘(i) WEIGHTED AVERAGE OF MEDICARE ADVANTAGE PLAN BIDS IN

AREA.—The weighted average of the plan bids for the area and year (as 

determined under paragraph (4)(A)). 

‘‘(ii) NON-FFS MARKET SHARE.—1 minus the fee-for-service market 

share percentage, determined under paragraph (5) for the area and 

year. 

‘‘(B) FEE-FOR-SERVICE COMPONENT.—The product of the following: 

‘‘(i) FEE-FOR-SERVICE AREA-SPECIFIC NON-DRUG AMOUNT.—The fee-forservice area-specific non-drug amount (as defined in paragraph (6)) for 

the area and year. 

‘‘(ii) FEE-FOR-SERVICE MARKET SHARE.—The fee-for-service market 

share percentage, determined under paragraph (5) for the area and 

year. 

‘‘(4) DETERMINATION OF WEIGHTED AVERAGE MEDICARE ADVANTAGE BIDS FOR

AN AREA.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(A)(i), the weighted average of plan bids for an area and a year is the sum of the following products 

for Medicare Advantage plans described in subparagraph (C) in the area 

and year: 

‘‘(i) MONTHLY MEDICARE ADVANTAGE STATUTORY NON-DRUG BID

AMOUNT.—The unadjusted Medicare Advantage statutory non-drug 

monthly bid amount. 

‘‘(ii) PLAN’S SHARE OF MEDICARE ADVANTAGE ENROLLMENT IN AREA.—

The number of individuals described in subparagraph (B), divided by 

the total number of such individuals for all Medicare Advantage plans 

described in subparagraph (C) for that area and year. 

54

‘‘(B) COUNTING OF INDIVIDUALS.—The Administrator shall count, for each 

Medicare Advantage plan described in subparagraph (C) for an area and 

year, the number of individuals who reside in the area and who were enrolled under such plan under this part during March of the previous year. 

‘‘(C) EXCLUSION OF PLANS NOT OFFERED IN PREVIOUS YEAR.—For an area 

and year, the Medicare Advantage plans described in this subparagraph are 

plans described in the first sentence of section 1851(a)(2)(A) that are offered 

in the area and year and were offered in the area in March of the previous 

year. 

‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MARKET SHARE PERCENTAGE.—The Administrator shall determine, for a year and a competitive Medicare Advantage 

area, the proportion (in this subsection referred to as the ‘fee-for-service market 

share percentage’) of Medicare Advantage eligible individuals residing in the 

area who during March of the previous year were not enrolled in a Medicare 

Advantage plan or in an EFFS plan (or, if greater, such proportion determined 

for individuals nationally). 

‘‘(6) FEE-FOR-SERVICE AREA-SPECIFIC NON-DRUG AMOUNT.—

‘‘(A) IN GENERAL.—For purposes of paragraph (3)(B)(i) and section 

1839(h)(1)(A), subject to subparagraph (B), the term ‘fee-for-service areaspecific non-drug amount’ means, for a competitive Medicare Advantage 

area and a year, the adjusted average per capita cost for the year involved, 

determined under section 1876(a)(4) for such area for services covered 

under parts A and B for individuals entitled to benefits under part A and 

enrolled under this part who are not enrolled in a Medicare Advantage plan 

under part C or an EFFS plan under part E for the year, but adjusted to 

exclude costs attributable to payments under section 1886(h). 

‘‘(B) INCLUSION OF COSTS OF VA AND DOD MILITARY FACILITY SERVICES TO

MEDICARE-ELIGIBLE BENEFICIARIES.—In determining the adjusted average 

per capita cost under subparagraph (A) for a year, such cost shall be adjusted to include the Administrator’s estimate, on a per capita basis, of the 

amount of additional payments that would have been made in the area involved under this title if individuals entitled to benefits under this title had 

not received services from facilities of the Department of Veterans Affairs 

or the Department of Defense. 

‘‘(7) APPLICATION OF COMPETITION.—In the case of an area that is a competitive Medicare Advantage area for a year, for purposes of applying subsection 

(a)(1)(A)(ii) and sections 1854(b)(2)(A)(ii) and 1854(b)(3)(B)(i), any reference to 

a Medicare Advantage area-specific non-drug monthly benchmark amount shall 

be treated as a reference to the competitive Medicare Advantage non-drug 

monthly benchmark amount under paragraph (2) for the area and year. 

‘‘(8) PHASE-IN OF BENCHMARK FOR EACH AREA.—

‘‘(A) USE OF BLENDED BENCHMARK.—In the case of an area that has not 

been a competitive Medicare Advantage area for each of the previous 4 

years, the competitive Medicare Advantage non-drug monthly benchmark 

amount shall be equal to the sum of the following: 

‘‘(i) NEW COMPETITIVE COMPONENT.—The product of—

‘‘(I) the weighted average phase-in proportion for that area and 

year, as specified in subparagraph (B); and 

‘‘(II) the competitive Medicare Advantage non-drug monthly 

benchmark amount for the area and year, determined under paragraph (2) without regard to this paragraph. 

‘‘(ii) OLD COMPETITIVE COMPONENT.—The product of—

‘‘(I) 1 minus the weighted average phase-in proportion for that 

area and year; and 

‘‘(II) the Medicare Advantage area-wide non-drug benchmark 

amount for the area and the year. 

‘‘(B) COMPUTATION OF WEIGHTED AVERAGE PHASE-IN PROPORTION.—For 

purposes of this paragraph, the ‘weighted average phase-in proportion’ for 

a Medicare Advantage payment area for a year shall be determined as follows: 

‘‘(i) FIRST YEAR (AND AREA NOT COMPETITIVE AREA IN PREVIOUS

YEAR).—If the area was not a Medicare Advantage competitive area in 

the previous year, the weighted average phase-in proportion for the 

area for the year is equal to 1⁄5. 

‘‘(ii) COMPETITIVE AREA IN PREVIOUS YEAR.—If the area was a competitive Medicare Advantage area in the previous year, the weighted 

average phase-in proportion for the area for the year is equal to the 

weighted average phase-in proportion determined under this subparaVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00054 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
55

graph for the area for the previous year plus 1⁄5, but in no case more 

than 1. 

‘‘(C) MEDICARE ADVANTAGE AREA-WIDE NON-DRUG BENCHMARK AMOUNT.— For purposes of subparagraph (A)(ii)(II), the term ‘Medicare Advantage 

area-wide non-drug benchmark amount’ means, for an area and year, the 

weighted average of the amounts described in section 1853(j) for Medicare 

Advantage payment area or areas included in the area (based on the number of traditional fee-for-service enrollees in such payment area or areas) 

and year.’’. 

(2) APPLICATION.—Section 1854 (42 U.S.C. 1395w–24) is amended—

(A) in subsection (b)(1)(C)(i), as added by section 221(b)(1)(A), by striking 

‘‘(i) REQUIREMENT.—The’’ and inserting ‘‘(i) REQUIREMENT FOR NON-COM- PETITIVE AREAS.—In the case of a Medicare Advantage payment area that 

is not a competitive Medicare Advantage area designated under section 

1853(k)(1), the’’; 

(B) in subsection (b)(1)(C), as so added, by inserting after clause (i) the 

following new clause: 

‘‘(ii) REQUIREMENT FOR COMPETITIVE MEDICARE ADVANTAGE AREAS.— In the case of a Medicare Advantage payment area that is designated 

as a competitive Medicare Advantage area under section 1853(k)(1), if 

there are average per capita monthly savings described in paragraph 

(6) for a Medicare Advantage plan and year, the Medicare Advantage 

plan shall provide to the enrollee a monthly rebate equal to 75 percent 

of such savings.’’; and 

(C) by adding at the end of subsection (b), as amended by sections 

221(b)(1)(B) and 221(b)(2), the following new paragraph: 

‘‘(6) COMPUTATION OF AVERAGE PER CAPITA MONTHLY SAVINGS FOR COMPETITIVE MEDICARE ADVANTAGE AREAS.—For purposes of paragraph (1)(C)(ii), the average per capita monthly savings referred to in such paragraph for a Medicare 

Advantage plan and year shall be computed in the same manner as the average 

per capita monthly savings is computed under paragraph (3) except that the reference to the Medicare Advantage area-specific non-drug monthly benchmark 

amount in paragraph (3)(B)(i) (or to the benchmark amount as adjusted under 

paragraph (3)(C)(i)) is deemed to be a reference to the competitive Medicare Advantage non-drug monthly benchmark amount (or such amount as adjusted in 

the manner described in paragraph (3)(B)(i)).’’. 

(3) ADDITIONAL CONFORMING AMENDMENTS.—

(A) PAYMENT OF PLANS.—Section 1853(a)(1)(A)(ii), as amended by section 

221(c)(1), is amended—

(i) in subclauses (I) and (II), by inserting ‘‘(or, insofar as such payment area is a competitive Medicare Advantage area, described in section 1854(b)(6))’’ after ‘‘section 1854(b)(3)(C)’’; and 

(ii) in subclause (II), by inserting ‘‘(or, insofar as such payment area 

is a competitive Medicare Advantage area, the competitive Medicare 

Advantage non-drug monthly benchmark amount)’’ after ‘‘Medicare Advantage area-specific non-drug monthly benchmark amount’’; and 

(B) DISCLOSURE OF INFORMATION.—Section 1853(b)(1)(B), as amended by 

section 221(e)(1), is amended to read as follows: 

‘‘(B) COMPETITION INFORMATION.—For years beginning with 2006, the following: 

‘‘(i) BENCHMARKS.—The Medicare Advantage area-specific non-drug 

benchmark under section 1853(j) and, if applicable, the competitive 

Medicare Advantage non-drug benchmark under section 1853(k)(2), for 

the year and competitive Medicare Advantage area involved and the 

national fee-for-service market share percentage for the area and year. 

‘‘(ii) ADJUSTMENT FACTORS.—The adjustment factors applied under 

section 1853(a)(1)(A)(iv) (relating to demographic adjustment), section 

1853(a)(1)(B) (relating to adjustment for end-stage renal disease), and 

section 1853(a)(3) (relating to health status adjustment). 

‘‘(iii) CERTAIN BENCHMARKS AND AMOUNTS.—In the case of a competitive Medicare Advantage area, the Medicare Advantage area-wide nondrug benchmark amount (as defined in subsection (k)(8)(C)) and the 

fee-for-service area-specific non-drug amount (as defined in section 

1853(k)(6)) for the area. 

‘‘(iv) INDIVIDUALS.—The number of individuals counted under subsection (k)(4)(B) and enrolled in each Medicare Advantage plan in the 

area.’’. 

(C) DEFINITION OF MONTHLY BASIC PREMIUM.—Section 1854(b)(2)(A)(ii), as 

amended by section 221(d)(2), is amended by inserting ‘‘(or, in the case of 

56

a competitive Medicare Advantage area, the competitive Medicare Advantage non-drug monthly benchmark amount or, in applying this paragraph 

under part E in the case of a competitive EFFS region, the competitive 

EFFS non-drug monthly benchmark amount)’’ after ‘‘benchmark amount’’. 

(c) PREMIUM ADJUSTMENT.—

(1) IN GENERAL.—Section 1839 (42 U.S.C. 1395r) is amended by adding at the 

end the following new subsection: 

‘‘(h)(1)(A) In the case of an individual who resides in a competitive Medicare Advantage area under section 1853(k)(1) (regardless of whether such area is in a competitive EFFS region under section 1860E–3(e)) and who is not enrolled in a Medicare Advantage plan under part C or in an EFFS plan under part E, the monthly 

premium otherwise applied under this part (determined without regard to subsections (b) and (f) or any adjustment under this subsection) shall be adjusted as 

follows: If the fee-for-service area-specific non-drug amount (as defined in section 

1853(k)(6)) for the competitive Medicare Advantage area in which the individual resides for a month—

‘‘(i) does not exceed the competitive Medicare Advantage non-drug benchmark 

(as determined under paragraph (2) of section 1853(k), without regard to paragraph (8) thereof) for such area, the amount of the premium for the individual 

for the month shall be reduced by an amount equal to the product of the adjustment factor under subparagraph (C) and 75 percent of the amount by which 

such competitive benchmark exceeds such fee-for-service area-specific non-drug 

amount; or 

‘‘(ii) exceeds such competitive Medicare Advantage non-drug benchmark, the 

amount of the premium for the individual for the month shall be adjusted to 

ensure, subject to subparagraph (B), that—

‘‘(I) the sum of the amount of the adjusted premium and the competitive 

Medicare Advantage non-drug benchmark for the area, is equal to 

‘‘(II) the sum of the unadjusted premium plus amount of the fee-for-service area-specific non-drug amount for the area. 

‘‘(B) In no case shall the actual amount of an adjustment under subparagraph 

(A)(ii) exceed the product of the adjustment factor under subparagraph (C) and the 

amount of the adjustment otherwise computed under subparagraph (A)(ii) without 

regard to this subparagraph. 

‘‘(C) The adjustment factor under this subparagraph for an area for a year is 

equal to—

‘‘(i) the number of consecutive years (in the 5-year period ending with the 

year involved) in which such area was a competitive Medicare Advantage area; 

divided by 

‘‘(ii) 5. 

‘‘(2)(A) In the case of an individual who resides in an area that is within a competitive EFFS region under section 1860E–3(e) but is not within a competitive Medicare Advantage area under section 1853(k)(1) and who is not enrolled in a Medicare 

Advantage plan under part C or in an EFFS plan under part E, the monthly premium otherwise applied under this part (determined without regard to subsections 

(b) and (f) or any adjustment under this subsection) shall be adjusted as follows: 

If the fee-for-service region-specific non-drug amount (as defined in section 1860E–

3(e)(6)) for a region for a month—

‘‘(i) does not exceed the competitive EFFS non-drug monthly benchmark 

amount (as determined under paragraph (2) of section 1860E–3(e), without regard to paragraph (8) thereof) for such region, the amount of the premium for 

the individual for the month shall be reduced by an amount equal to the product of the adjustment factor under subparagraph (C) and 75 percent of the 

amount by which such competitive benchmark amount exceeds such fee-forservice region-specific non-drug benchmark amount; or 

‘‘(ii) exceeds such competitive EFFS non-drug monthly benchmark amount, 

the amount of the premium for the individual for the month shall be adjusted 

to ensure, subject to subparagraph (B), that—

‘‘(I) the sum of the amount of the adjusted premium and the competitive 

EFFS non-drug monthly benchmark amount for the region, is equal to 

‘‘(II) the sum of the unadjusted premium plus the amount of the EFFS 

region-specific non-drug monthly bidfor the region. 

‘‘(B) In no case shall the actual amount of an adjustment under subparagraph 

(A)(ii) exceed the product of the adjustment factor under subparagraph (C) and the 

amount of the adjustment otherwise computed under subparagraph (A)(ii) without 

regard to this subparagraph. 

‘‘(C) The adjustment factor under this subparagraph for an EFFS region for a year 

is equal to—

57

‘‘(i) the number of consecutive years (in the 5-year period ending with the 

year involved) in which such region was a competitive EFFS region; divided by 

‘‘(ii) 5. 

‘‘(3) Nothing in this subsection shall be construed as preventing a reduction under 

paragraph (1)(A) or paragraph (2)(A) in the premium otherwise applicable under 

this part to zero or from requiring the provision of a rebate to the extent such premium would otherwise be required to be less than zero. 

‘‘(4) The adjustment in the premium under this subsection shall be effected in 

such manner as the Medicare Benefits Administrator determines appropriate. 

‘‘(5) In order to carry out this subsection (insofar as it is effected through the manner of collection of premiums under 1840(a)), the Medicare Benefits Administrator 

shall transmit to the Commissioner of Social Security—

‘‘(A) at the beginning of each year, the name, social security account number, 

and the amount of the adjustment (if any) under this subsection for each individual enrolled under this part for each month during the year; and 

‘‘(B) periodically throughout the year, information to update the information 

previously transmitted under this paragraph for the year.’’. 

(2) CONFORMING AMENDMENT.—Section 1844(c) (42 U.S.C. 1395w(c)) is 

amended by inserting ‘‘and without regard to any premium adjustment effected 

under section 1839(h)’’ before the period at the end. 

(d) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

January 1, 2010.

TITLE III—COMBATTING WASTE, FRAUD, AND 

ABUSE 

SEC. 301. MEDICARE SECONDARY PAYOR (MSP) PROVISIONS. 

(a) TECHNICAL AMENDMENT CONCERNING SECRETARY’S AUTHORITY TO MAKE CONDITIONAL PAYMENT WHEN CERTAIN PRIMARY PLANS DO NOT PAY PROMPTLY.—

(1) IN GENERAL.—Section 1862(b)(2) (42 U.S.C. 1395y(b)(2)) is amended—

(A) in subparagraph (A)(ii), by striking ‘‘promptly (as determined in accordance with regulations)’’; 

(B) in subparagraph (B)—

(i) by redesignating clauses (i) through (iii) as clauses (ii) through 

(iv), respectively; and 

(ii) by inserting before clause (ii), as so redesignated, the following 

new clause: 

‘‘(i) AUTHORITY TO MAKE CONDITIONAL PAYMENT.—The Secretary may 

make payment under this title with respect to an item or service if a 

primary plan described in subparagraph (A)(ii) has not made or cannot 

reasonably be expected to make payment with respect to such item or 

service promptly (as determined in accordance with regulations). Any 

such payment by the Secretary shall be conditioned on reimbursement 

to the appropriate Trust Fund in accordance with the succeeding provisions of this subsection.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall be effective as if included in the enactment of title III of the Medicare and Medicaid 

Budget Reconciliation Amendments of 1984 (Public Law 98-369). 

(b) CLARIFYING AMENDMENTS TO CONDITIONAL PAYMENT PROVISIONS.—Section 

1862(b)(2) (42 U.S.C. 1395y(b)(2)) is further amended—

(1) in subparagraph (A), in the matter following clause (ii), by inserting the 

following sentence at the end: ‘‘An entity that engages in a business, trade, or 

profession shall be deemed to have a self-insured plan if it carries its own risk 

(whether by a failure to obtain insurance, or otherwise) in whole or in part.’’; 

(2) in subparagraph (B)(ii), as redesignated by subsection (a)(2)(B)—

(A) by striking the first sentence and inserting the following: ‘‘A primary 

plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the Secretary 

under this title with respect to an item or service if it is demonstrated that 

such primary plan has or had a responsibility to make payment with respect to such item or service. A primary plan’s responsibility for such payment may be demonstrated by a judgment, a payment conditioned upon the 

recipient’s compromise, waiver, or release (whether or not there is a determination or admission of liability) of payment for items or services included 

in a claim against the primary plan or the primary plan’s insured, or by 

other means.’’; and 

58

(B) in the final sentence, by striking ‘‘on the date such notice or other information is received’’ and inserting ‘‘on the date notice of, or information 

related to, a primary plan’s responsibility for such payment or other information is received’’; and 

(3) in subparagraph (B)(iii), , as redesignated by subsection (a)(2)(B), by striking the first sentence and inserting the following: ‘‘In order to recover payment 

made under this title for an item or service, the United States may bring an 

action against any or all entities that are or were required or responsible (directly, as an insurer or self-insurer, as a third-party administrator, as an employer that sponsors or contributes to a group health plan, or large group health 

plan, or otherwise) to make payment with respect to the same item or service 

(or any portion thereof) under a primary plan. The United States may, in accordance with paragraph (3)(A) collect double damages against any such entity. 

In addition, the United States may recover under this clause from any entity 

that has received payment from a primary plan or from the proceeds of a primary plan’s payment to any entity.’’. 

(c) CLERICAL AMENDMENTS.—Section 1862(b) (42 U.S.C. 1395y(b)) is amended—

(1) in paragraph (1)(A), by moving the indentation of clauses (ii) through (v) 

2 ems to the left; and 

(2) in paragraph (3)(A), by striking ‘‘such’’ before ‘‘paragraphs’’. 

SEC. 302. COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND SERVICES. 

(a) IN GENERAL.—Section 1847 (42 U.S.C. 1395w–3) is amended to read as follows:

‘‘COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND SERVICES

‘‘SEC. 1847. (a) ESTABLISHMENT OF COMPETITIVE ACQUISITION PROGRAMS.—

‘‘(1) IMPLEMENTATION OF PROGRAMS.—

‘‘(A) IN GENERAL.—The Secretary shall establish and implement programs 

under which competitive acquisition areas are established throughout the 

United States for contract award purposes for the furnishing under this 

part of competitively priced items and services (described in paragraph (2)) 

for which payment is made under this part. Such areas may differ for different items and services. 

‘‘(B) PHASED-IN IMPLEMENTATION.—The programs shall be phased-in—

‘‘(i) among competitive acquisition areas over a period of not longer 

than 3 years in a manner so that the competition under the programs 

occurs in—

‘‘(I) at least 1⁄3 of such areas in 2005; and 

‘‘(II) at least 2⁄3 of such areas in 2006; and 

‘‘(ii) among items and services in a manner such that the programs 

apply to the highest cost and highest volume items and services first. 

‘‘(C) WAIVER OF CERTAIN PROVISIONS.—In carrying out the programs, the 

Secretary may waive such provisions of the Federal Acquisition Regulation 

as are necessary for the efficient implementation of this section, other than 

provisions relating to confidentiality of information and such other provisions as the Secretary determines appropriate. 

‘‘(2) ITEMS AND SERVICES DESCRIBED.—The items and services referred to in 

paragraph (1) are the following: 

‘‘(A) DURABLE MEDICAL EQUIPMENT AND MEDICAL SUPPLIES.—Covered 

items (as defined in section 1834(a)(13)) for which payment is otherwise 

made under section 1834(a), including items used in infusion and drugs and 

supplies used in conjunction with durable medical equipment, but excluding 

class III devices under the Federal Food, Drug, and Cosmetic Act. 

‘‘(B) OTHER EQUIPMENT AND SUPPLIES.—Items, equipment, and supplies 

(as described in section 1842(s)(2)(D) other than enteral nutrients). 

‘‘(C) OFF-THE-SHELF ORTHOTICS.—Orthotics (described in section 

1861(s)(9)) for which payment is otherwise made under section 1834(h) 

which require minimal self-adjustment for appropriate use and does not require expertise in trimming, bending, molding, assembling, or customizing 

to fit to the patient. 

‘‘(3) EXCEPTION AUTHORITY.—In carrying out the programs under this section, 

the Secretary may exempt—

‘‘(A) rural areas and areas with low population density within urban 

areas that are not competitive, unless there is a significant national market 

through mail order for a particular item or service; and 

‘‘(B) items and services for which the application of competitive acquisition is not likely to result in significant savings. 

‘‘(4) SPECIAL RULE FOR CERTAIN RENTED ITEMS OF DURABLE MEDICAL EQUIPMENT.—In the case of a covered item for which payment is made on a rental 

59

basis under section 1834(a), the Secretary shall establish a process by which 

rental agreements for the covered items entered into before the application of 

the competitive acquisition program under this section for the item may be continued notwithstanding this section. In the case of any such continuation, the 

supplier involved shall provide for appropriate servicing and replacement, as required under section 1834(a). 

‘‘(5) PHYSICIAN AUTHORIZATION.—The Secretary may establish a process under 

which a physician may prescribe a particular brand or mode of delivery of an 

item or service if the item or service involved is clinically more appropriate than 

other similar items or services. 

‘‘(6) APPLICATION.—For each competitive acquisition area in which the program is implemented under this subsection with respect to items and services, 

the payment basis determined under the competition conducted under subsection (b) shall be substituted for the payment basis otherwise applied under 

section 1834(a). 

‘‘(b) PROGRAM REQUIREMENTS.—

‘‘(1) IN GENERAL.—The Secretary shall conduct a competition among entities 

supplying items and services described in subsection (a)(2) for each competitive 

acquisition area in which the program is implemented under subsection (a) with 

respect to such items and services. 

‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—

‘‘(A) IN GENERAL.—The Secretary may not award a contract to any entity 

under the competition conducted in an competitive acquisition area pursuant to paragraph (1) to furnish such items or services unless the Secretary 

finds all of the following: 

‘‘(i) The entity meets quality and financial standards specified by the 

Secretary or developed by the Program Advisory and Oversight Committee established under subsection (c). 

‘‘(ii) The total amounts to be paid under the contract (including costs 

associated with the administration of the contract) are expected to be 

less than the total amounts that would otherwise be paid. 

‘‘(iii) Beneficiary access to a choice of multiple suppliers in the area 

is maintained. 

‘‘(iv) Beneficiary liability is limited to 20 percent of the applicable 

contract award price, except in such cases where a supplier has furnished an upgraded item and has executed an advanced beneficiary notice. 

‘‘(B) DEVELOPMENT OF QUALITY STANDARDS FOR DME PRODUCTS.—

‘‘(i) IN GENERAL.—The quality standards specified under subparagraph (A)(i) shall not be less than the quality standards that would otherwise apply if this section did not apply and shall include consumer 

services standards. Not later than July 1, 2004, the Secretary shall establish new quality standards for products subject to competitive acquisition under this section. Such standards shall be applied prospectively 

and shall be published on the website of the Department of Health and 

Human Services. 

‘‘(ii) CONSULTATION WITH PROGRAM ADVISORY AND OVERSIGHT COMMITTEE.—The Secretary shall consult with the Program Advisory and 

Oversight Committee (established under subsection (c)) to review (and 

advise the Secretary concerning) the quality standards referred to in 

clause (i). 

‘‘(3) CONTENTS OF CONTRACT.—

‘‘(A) IN GENERAL.—A contract entered into with an entity under the competition conducted pursuant to paragraph (1) is subject to terms and conditions that the Secretary may specify. 

‘‘(B) TERM OF CONTRACTS.—The Secretary shall recompete contracts 

under this section not less often than once every 3 years. 

‘‘(4) LIMIT ON NUMBER OF CONTRACTORS.—

‘‘(A) IN GENERAL.—The Secretary may limit the number of contractors in 

a competitive acquisition area to the number needed to meet projected demand for items and services covered under the contracts. In awarding contracts, the Secretary shall take into account the ability of bidding entities 

to furnish items or services in sufficient quantities to meet the anticipated 

needs of beneficiaries for such items or services in the geographic area covered under the contract on a timely basis. 

‘‘(B) MULTIPLE WINNERS.—The Secretary shall award contracts to multiple entities submitting bids in each area for an item or service. 

60

‘‘(5) PAYMENT.—Payment under this part for competitively priced items and 

services described in subsection (a)(2) shall be based on the bids submitted and 

accepted under this section for such items and services. 

‘‘(6) PARTICIPATING CONTRACTORS.—Payment shall not be made for items and 

services described in subsection (a)(2) furnished by a contractor and for which 

competition is conducted under this section unless—

‘‘(A) the contractor has submitted a bid for such items and services under 

this section; and 

‘‘(B) the Secretary has awarded a contract to the contractor for such items 

and services under this section. 

In this section, the term ‘bid’ means a request for a proposal for an item or service that includes the cost of the item or service, and where appropriate, any 

services that are attendant to the provision of the item or service. 

‘‘(7) CONSIDERATION IN DETERMINING CATEGORIES FOR BIDS.—The Secretary 

shall consider the similarity of the clinical efficiency and value of specific codes 

and products, including products that may provide a therapeutic advantage to 

beneficiaries, before delineating the categories and products that will be subject 

to bidding. 

‘‘(8) AUTHORITY TO CONTRACT FOR EDUCATION, MONITORING, OUTREACH AND

COMPLAINT SERVICES.—The Secretary may enter into a contract with an appropriate entity to address complaints from beneficiaries who receive items and 

services from an entity with a contract under this section and to conduct appropriate education of and outreach to such beneficiaries and monitoring quality 

of services with respect to the program. 

‘‘(c) PROGRAM ADVISORY AND OVERSIGHT COMMITTEE.—

‘‘(1) ESTABLISHMENT.—There is established a Program Advisory and Oversight 

Committee (hereinafter in this section referred to as the ‘Committee’). 

‘‘(2) MEMBERSHIP; TERMS.—The Committee shall consist of such members as 

the Secretary may appoint who shall serve for such term as the Secretary may 

specify. 

‘‘(3) DUTIES.—

‘‘(A) TECHNICAL ASSISTANCE.—The Committee shall provide advice and 

technical assistance to the Secretary with respect to the following functions: 

‘‘(i) The implementation of the program under this section. 

‘‘(ii) The establishment of requirements for collection of data. 

‘‘(iii) The development of proposals for efficient interaction among 

manufacturers and distributors of the items and services and providers 

and beneficiaries. 

‘‘(B) ADDITIONAL DUTIES.—The Committee shall perform such additional 

functions to assist the Secretary in carrying out this section as the Secretary may specify. 

‘‘(4) INAPPLICABILITY OF FACA.—The provisions of the Federal Advisory Committee Act (5 U.S.C. App.) shall not apply. 

‘‘(d) ANNUAL REPORTS.—The Secretary shall submit to Congress an annual management report on the programs under this section. Each such report shall include 

information on savings, reductions in beneficiary cost-sharing, access to and quality 

of items and services, and beneficiary satisfaction. 

‘‘(e) DEMONSTRATION PROJECT FOR CLINICAL LABORATORY SERVICES.—

‘‘(1) IN GENERAL.—The Secretary shall conduct a demonstration project on the 

application of competitive acquisition under this section to clinical diagnostic 

laboratory tests—

‘‘(A) for which payment is otherwise made under section 1833(h) or 

1834(d)(1) (relating to colorectal cancer screening tests); and 

‘‘(B) which are furnished by entities that did not have a face-to-face encounter with the individual. 

‘‘(2) TERMS AND CONDITIONS.—Such project shall be under the same conditions 

as are applicable to items and services described in subsection (a)(2). 

‘‘(3) REPORT.—The Secretary shall submit to Congress—

‘‘(A) an initial report on the project not later than December 31, 2005; 

and 

‘‘(B) such progress and final reports on the project after such date as the 

Secretary determines appropriate.’’. 

(b) CONFORMING AMENDMENTS.—

(1) DURABLE MEDICAL EQUIPMENT; ELIMINATION OF INHERENT REASONABLENESS AUTHORITY.—Section 1834(a) (42 U.S.C. 1395m(a)) is amended—

(A) in paragraph (1)(B), by striking ‘‘The payment basis’’ and inserting 

‘‘Subject to subparagraph (E)(i), the payment basis’’; 

(B) in paragraph (1)(C), by striking ‘‘This subsection’’ and inserting ‘‘Subject to subparagraph (E)(ii), this subsection’’; 

61

(C) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(E) APPLICATION OF COMPETITIVE ACQUISITION; ELIMINATION OF INHERENT

REASONABLENESS AUTHORITY.—In the case of covered items and services 

that are included in a competitive acquisition program in a competitive acquisition area under section 1847(a)—

‘‘(i) the payment basis under this subsection for such items and services furnished in such area shall be the payment basis determined 

under such competitive acquisition program; and 

‘‘(ii) the Secretary may use information on the payment determined 

under such competitive acquisition programs to adjust the payment 

amount otherwise recognized under subparagraph (B)(ii) for an area 

that is not a competitive acquisition area under section 1847 and in the 

case of such adjustment, paragraph (10)(B) shall not be applied.’’; and 

(D) in paragraph (10)(B), by inserting ‘‘in an area and with respect to covered items and services for which the Secretary does not make a payment 

amount adjustment under paragraph (1)(E)’’ after ‘‘under this subsection’’. 

(2) OFF-THE-SHELF ORTHOTICS; ELIMINATION OF INHERENT REASONABLENESS

AUTHORITY.—Section 1834(h) (42 U.S.C. 1395m(h)) is amended—

(A) in paragraph (1)(B), by striking ‘‘and (E)’’ and inserting ‘‘, (E) , and 

(H)(i)’’; 

(B) in paragraph (1)(D), by striking ‘‘This subsection’’ and inserting ‘‘Subject to subparagraph (H)(ii), this subsection’’; 

(C) by adding at the end of paragraph (1) the following new subparagraph: 

‘‘(H) APPLICATION OF COMPETITIVE ACQUISITION TO ORTHOTICS; ELIMINATION OF INHERENT REASONABLENESS AUTHORITY.—In the case of orthotics 

described in paragraph (2)(B) of section 1847(a) that are included in a competitive acquisition program in a competitive acquisition area under such 

section—

‘‘(i) the payment basis under this subsection for such orthotics furnished in such area shall be the payment basis determined under such 

competitive acquisition program; and 

‘‘(ii) the Secretary may use information on the payment determined 

under such competitive acquisition programs to adjust the payment 

amount otherwise recognized under subparagraph (B)(ii) for an area 

that is not a competitive acquisition area under section 1847, and in 

the case of such adjustment, paragraphs (8) and (9) of section 1842(b) 

shall not be applied.’’. 

(c) REPORT ON ACTIVITIES OF SUPPLIERS.—The Secretary shall conduct a study to 

determine the extent to which (if any) suppliers of covered items of durable medical 

equipment that are subject to the competitive acquisition program under section 

1847 of the Social Security Act, as amended by subsection (a), are soliciting physicians to prescribe certain brands or modes of delivery of covered items based on 

profitability.

SEC. 303. COMPETITIVE ACQUISITION OF COVERED OUTPATIENT DRUGS AND BIOLOGICALS.

(a) ADJUSTMENT TO PHYSICIAN FEE SCHEDULE.—

(1) ADJUSTMENT IN PRACTICE EXPENSE RELATIVE VALUE UNITS.—Section 

1848(c)(2) (42 U.S.C. 1395w–4(c)(2)) is amended—

(A) in subparagraph (B)—

(i) in clause (ii)(II), by striking ‘‘The adjustments’’ and inserting ‘‘Subject to clause (iv), the adjustments’’; and 

(ii) by adding at the end of subparagraph (B), the following new 

clause: 

‘‘(iv) EXCEPTION TO BUDGET NEUTRALITY.—The additional expenditures attributable to clauses (ii) and (iii) of subparagraph (H) shall not 

be taken into account in applying clause (ii)(II) for 2005.’’; and 

(B) by adding at the end the following new subparagraph: 

‘‘(H) ADJUSTMENTS IN PRACTICE EXPENSE RELATIVE VALUE UNITS FOR

2004.—

‘‘(i) IN GENERAL.—As part of the annual process of establishing the 

physician fee schedule under subsection (b) for 2004, the Secretary 

shall increase the practice expense relative value units for 2004 consistent with clauses (ii) and (iii). 

‘‘(ii) USE OF SUPPLEMENTAL SURVEY DATA.—For 2004 for any specialty 

that submitted survey data that included expenses for the administration of drugs and biologicals for which payment is made under section 

1842(o) (or section 1847A), the Secretary shall use such supplemental 

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survey data in carrying out this subparagraph insofar as they are collected and provided by entities and organizations consistent with the 

criteria established by the Secretary pursuant to section 212(a) of the 

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 

1999 and insofar as such data are submitted to the Secretary by the 

date of the enactment of this subparagraph.

‘‘(iii) EXPEDITING CONSIDERATION OF CPT CODES FOR AFFECTED PHYSI- CIAN SPECIALTIES.—The Secretary shall, in cooperation with representatives of physician specialities affected by section 1847A, take such actions as are necessary to expedite considerations of CPT codes, or expand the ability to appropriately bill for physicians’ services under existing CPT codes, for costs associated with the administration of covered outpatient drugs. The Secretary shall consult with representatives 

of advisory physician groups in expediting such considerations. 

‘‘(iv) SUBSEQUENT, BUDGET NEUTRAL ADJUSTMENTS PERMITTED.— Nothing in this subparagraph shall be construed as preventing the Secretary from providing for adjustments in practice expense relative 

value units under (and consistent with) subparagraph (B) for years 

after 2004. 

‘‘(v) CONSULTATION.—Before publishing the notice of proposed rulemaking to carry out this subparagraph, the Secretary shall consult 

with the Comptroller General of the United States and with groups 

representing the physician specialties involved. 

‘‘(vi) TREATMENT AS CHANGE IN LAW AND REGULATION IN SUSTAINABLE

GROWTH RATE DETERMINATION.—The enactment of subparagraph (B)(iv) 

and this subparagraph shall be treated as a change in law for purposes 

of applying subsection (f)(2)(D).’’. 

(2) PROHIBITION OF ADMINISTRATIVE AND JUDICIAL REVIEW.—Section 1848(i)(1) 

(42 U.S.C. 1395w–4(i)(1)) is amended—

(A) by striking ‘‘and’’ at the end of subparagraph (D); 

(B) by striking the period at the end of subparagraph (E) and inserting ‘‘, 

and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(F) adjustments in practice expense relative value units for 2005 under 

subsection (c)(2)(H).’’. 

(3) TREATMENT OF OTHER SERVICES CURRENTLY IN THE NON-PHYSICIAN WORK

POOL.—The Secretary shall make adjustments to the non-physician work pool 

methodology (as such term is used in the regulations promulgated by the Secretary in the Federal Register as of December 31, 2002) for determination of 

practice expense relative value units under the physician fee schedule described 

in section 1848(c)(2)(C)(ii) of the Social Security Act so that the practice expense 

relative value units for services determined under such methodology are not disproportionately reduced relative to the practice expense relative value units of 

other services not determined under such non-physician work pool methodology, 

as the result of amendments made by paragraph (1). 

(4) SUBMISSION OF PRACTICE EXPENSE SURVEY DATA.—Any physician specialty 

may submit survey data related to practice expenses to the Secretary through 

Decmeber 31, 2004. Nothing in this paragraph shall be construed as waiving 

the application of budget neutrality under section 1848 of the Social Security 

Act.

(b) PAYMENT BASED ON COMPETITION.—Title XVIII is amended by inserting after 

section 1847 (42 U.S.C. 1395w–3), as amended by section 302, the following new sections: 

‘‘COMPETITIVE ACQUISITION OF COVERED OUTPATIENT DRUGS AND BIOLOGICALS

‘‘SEC. 1847A. (a) IMPLEMENTATION OF COMPETITIVE ACQUISITION.—

‘‘(1) IMPLEMENTATION OF PROGRAM.—

‘‘(A) IN GENERAL.—The Secretary shall establish and implement a competitive acquisition program under which—

‘‘(i) competitive acquisition areas are established throughout the 

United States for contract award purposes for acquisition of and payment for categories of covered outpatient drugs and biologicals (as defined in paragraph (2)) under this part; and 

‘‘(ii) each physician who does not elect section 1847B to apply makes 

an annual selection, under paragraph (5) of the contractor through 

which drugs and biologicals within a category of drugs and biologicals 

will be acquired and delivered to the physician under this part. 

‘‘(B) IMPLEMENTATION.—The Secretary shall implement the program so 

that the program applies to—

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‘‘(i) the oncology category beginning in 2005; and 

‘‘(ii) the non-oncology category beginning in 2006. 

This section shall not apply in the case of a physician who elects section 

1847B to apply. 

‘‘(C) WAIVER OF CERTAIN PROVISIONS.—In order to promote competition, 

efficient service, and product quality, in carrying out the program the Secretary may waive such provisions of the Federal Acquisition Regulation as 

are necessary for the efficient implementation of this section, other than 

provisions relating to confidentiality of information and such other provisions as the Secretary determines appropriate. 

‘‘(D) EXCLUSION AUTHORITY.—The Secretary may exclude covered outpatient drugs and biologicals (including a class of such drugs and 

biologicals) from the competitive bidding system under this section if the 

drugs or biologicals (or class) are not appropriate for competitive bidding 

due to low volume of utilization by beneficiaries under this part or a unique 

mode or method of delivery or similar reasons.

‘‘(2) COVERED OUTPATIENT DRUGS AND BIOLOGICALS, CATEGORIES, PROGRAM DEFINED.—For purposes of this section—

‘‘(A) COVERED OUTPATIENT DRUGS AND BIOLOGICALS DEFINED.—The term 

‘covered outpatient drugs and biologicals’ means drugs and biologicals to 

which section 1842(o) applies and which are not covered under section 1847 

(relating to competitive acquisition for items of durable medical equipment). 

Such term does not include the following: 

‘‘(i) Blood clotting factors. 

‘‘(ii) Drugs and biologicals furnished to individuals in connection with 

the treatment of end stage renal disease. 

‘‘(iii) Radiopharmaceuticals. 

‘‘(B) 2 CATEGORIES.—Each of the following shall be a separate category of 

covered outpatient drugs and biologicals, as identified by the Secretary: 

‘‘(i) ONCOLOGY CATEGORY.—A category (in this section referred to as 

the ‘oncology category’) consisting of those covered outpatient drugs and 

biologicals that, as determined by the Secretary, are typically primarily 

billed by oncologists or are otherwise used to treat cancer. 

‘‘(ii) NON-ONCOLOGY CATEGORIES.—Such numbers of categories (in 

this section referred to as the ‘non-oncology categories’) consisting of 

covered outpatient drugs and biologicals not described in clause (i), and 

appropriate subcategories of such drugs and biologicals as the Secretary may specify. 

‘‘(C) PROGRAM.—The term ‘program’ means the competitive acquisition 

program under this section. 

‘‘(D) COMPETITIVE ACQUISITION AREA; AREA.—The terms ‘competitive acquisition area’ and ‘area’ mean an appropriate geographic region established by the Secretary under the program. 

‘‘(E) CONTRACTOR.—The term ‘contractor’ means an entity that has entered into a contract with the Secretary under this section. 

‘‘(3) APPLICATION OF PROGRAM PAYMENT METHODOLOGY.—With respect to covered outpatient drugs and biologicals which are supplied under the program in 

an area and which are prescribed by a physician who has not elected section 

1847B to apply—

‘‘(A) the claim for such drugs and biologicals shall be submitted by the 

contractor that supplied the drugs and biologicals; 

‘‘(B) collection of amounts of any deductible and coinsurance applicable 

with respect to such drugs and biologicals shall be the responsibility of such 

contractor and shall not be collected unless the drug or biological is administered to the beneficiary involved; and 

‘‘(C) the payment under this section (and related coinsurance amounts) 

for such drugs and biologicals—

‘‘(i) shall be made only to such contractor; 

‘‘(ii) shall be conditioned upon the administration of such drugs and 

biologicals; and 

‘‘(iii) shall be based on the average of the bid prices for such drugs 

and biologicals in the area, as computed under subsection (d). 

The Secretary shall provide a process for recoupment in the case in which 

payment is made for drugs and biologicals which were billed at the time 

of dispensing but which were not actually administered. 

‘‘(4) CONTRACT REQUIRED.—

‘‘(A) IN GENERAL.—Payment may not be made under this part for covered 

outpatient drugs and biologicals prescribed by a physician who has not 

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elected section 1847B to apply within a category and a competitive acquisition area with respect to which the program applies unless—

‘‘(i) the drugs or biologicals are supplied by a contractor with a contract under this section for such category of drugs and biologicals and 

area; and 

‘‘(ii) the physician has elected such contractor under paragraph (5) for 

such category and area. 

‘‘(B) PHYSICIAN CHOICE.—Subparagraph (A) shall not apply for a category 

of drugs for an area if the physician prescribing the covered outpatient drug 

in such category and area has elected to apply section 1847B instead of this 

section.

‘‘(5) CONTRACTOR SELECTION PROCESS.— ‘‘(A) IN GENERAL.—The Secretary shall provide a process for the selection 

of a contractor, on an annual basis and in such exigent circumstances as 

the Secretary may provide and with respect to each category of covered outpatient drugs and biologicals for an area, by physicians prescribing such 

drugs and biologicals in the area of the contractor under this section that 

will supply the drugs and biologicals within that category and area. Such 

selection shall also include the election described in section 1847B(a). 

‘‘(B) INFORMATION ON CONTRACTORS.—The Secretary shall make available 

to physicians on an ongoing basis, through a directory posted on the Department’s Internet website or otherwise and upon request, a list of the 

contractors under this section in the different competitive acquisition areas. 

‘‘(C) SELECTING PHYSICIAN DEFINED.—For purposes of this section, the 

term ‘selecting physician’ means, with respect to a contractor and category 

and competitive acquisition area, a physician who has not elected section 

1847B to apply and has selected to apply under this section such contractor 

for such category and area. 

‘‘(b) PROGRAM REQUIREMENTS.—

‘‘(1) CONTRACT FOR COVERED OUTPATIENT DRUGS AND BIOLOGICALS.—The Secretary shall conduct a competition among entities for the acquisition of a covered outpatient drug or biological within each HCPCS code within each category 

for each competitive acquisition area. 

‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—

‘‘(A) IN GENERAL.—The Secretary may not award a contract to any entity 

under the competition conducted in a competitive acquisition area pursuant 

to paragraph (1) with respect to the acquisition of covered outpatient drugs 

and biologicals within a category unless the Secretary finds that the entity 

meets all of the following with respect to the contract period involved: 

‘‘(i) CAPACITY TO SUPPLY COVERED OUTPATIENT DRUG OR BIOLOGICAL

WITHIN CATEGORY.—

‘‘(I) IN GENERAL.—The entity has sufficient arrangements to acquire and to deliver covered outpatient drugs and biologicals within 

such category in the area specified in the contract at the bid price 

specified in the contract for all physicians that may elect such entity. 

‘‘(II) SHIPMENT METHODOLOGY.—The entity has arrangements in 

effect for the shipment at least 5 days each week of covered outpatient drugs and biologicals under the contract and for the timely 

delivery (including for emergency situations) of such drugs and 

biologicals in the area under the contract. 

‘‘(ii) QUALITY, SERVICE, FINANCIAL PERFORMANCE AND SOLVENCY

STANDARDS.—The entity meets quality, service, financial performance, 

and solvency standards specified by the Secretary, including—

‘‘(I) the establishment of procedures for the prompt response and 

resolution of physician and beneficiary complaints and inquiries regarding the shipment of covered outpatient drugs and biologicals; 

and 

‘‘(II) a grievance process for the resolution of disputes. 

‘‘(B) ADDITIONAL CONSIDERATIONS.—The Secretary may refuse to award a 

contract under this section, and may terminate such a contract, with an entity based upon—

‘‘(i) the suspension or revocation, by the Federal Government or a 

State government, of the entity’s license for the distribution of drugs 

or biologicals (including controlled substances); or 

‘‘(ii) the exclusion of the entity under section 1128 from participation 

under this title. 

‘‘(C) APPLICATION OF MEDICARE PROVIDER OMBUDSMAN.—For provision 

providing for a program-wide Medicare Provider Ombudsman to review 

65

complaints, see section 1868(b), as added by section 923 of the Medicare 

Prescription Drug and Modernization Act of 2003. 

‘‘(3) AWARDING MULTIPLE CONTRACTS FOR A CATEGORY AND AREA.—In order to 

provide a choice of at least 2 contractors in each competitive acquisition area 

for a category of drugs and biologicals, the Secretary may limit (but not below 

2) the number of qualified entities that are awarded such contracts for any category and area. The Secretary shall select among qualified entities based on the 

following: 

‘‘(A) The bid prices for covered outpatient drugs and biologicals within the 

category and area. 

‘‘(B) Bid price for distribution of such drugs and biologicals. 

‘‘(C) Ability to ensure product integrity. 

‘‘(D) Customer service. 

‘‘(E) Past experience in the distribution of drugs and biologicals, including 

controlled substances. 

‘‘(F) Such other factors as the Secretary may specify. 

‘‘(4) TERMS OF CONTRACTS.—

‘‘(A) IN GENERAL.—A contract entered into with an entity under the competition conducted pursuant to paragraph (1) is subject to terms and conditions that the Secretary may specify consistent with this section. 

‘‘(B) PERIOD OF CONTRACTS.—A contract under this section shall be for a 

term of 2 years, but may be terminated by the Secretary or the entity with 

appropriate, advance notice. 

‘‘(C) INTEGRITY OF DRUG AND BIOLOGICAL DISTRIBUTION SYSTEM.—The Secretary—

‘‘(i) shall require that for all drug and biological products distributed 

by a contractor under this section be acquired directly from the manufacturer or from a distributor that has acquired the products directly 

from the manufacturer; and 

‘‘(ii) may require, in the case of such products that are particularly 

susceptible to counterfeit or diversion, that the contractor comply with 

such additional product integrity safeguards as may be determined to 

be necessary. 

‘‘(D) IMPLEMENTATION OF ANTI-COUNTERFEITING, QUALITY, SAFETY, AND

RECORD KEEPING REQUIREMENTS.—The Secretary shall require each contractor to implement (through its officers, agents, representatives, and employees) requirements relating to the storage and handling of covered outpatient drugs and biologicals and for the establishment and maintenance 

of distribution records for such drugs and biologicals. A contract under this 

section may include requirements relating to the following: 

‘‘(i) Secure facilities. 

‘‘(ii) Safe and appropriate storage of drugs and biologicals. 

‘‘(iii) Examination of drugs and biologicals received and dispensed. 

‘‘(iv) Disposition of damaged and outdated drugs and biologicals. 

‘‘(v) Record keeping and written policies and procedures. 

‘‘(vi) Compliance personnel. 

‘‘(E) COMPLIANCE WITH CODE OF CONDUCT AND FRAUD AND ABUSE RULES.—

Under the contract—

‘‘(i) the contractor shall comply with a code of conduct, specified or 

recognized by the Secretary, that includes standards relating to conflicts of interest; and 

‘‘(ii) the contractor shall comply with all applicable provisions relating to prevention of fraud and abuse, including compliance with applicable guidelines of the Department of Justice and the Inspector General of the Department of Health and Human Services. 

‘‘(F) DIRECT DELIVERY OF DRUGS AND BIOLOGICALS TO PHYSICIANS.—Under 

the contract the contractor shall only supply covered outpatient drugs and 

biologicals directly to the selecting physicians and not directly to beneficiaries, except under circumstances and settings where a beneficiary currently receives a drug or biological in the beneficiary’s home or other nonphysician office setting as the Secretary may provide. The contractor shall 

not deliver drugs and biologicals to a selecting physician except upon receipt of a prescription for such drugs and biologicals, and such necessary 

data as may be required by the Secretary to carry out this section. This section does not require a physician to submit a prescription for each individual treatment and does not change the physician’s flexibility in terms of 

writing a prescription for drugs for a single treatment or a course of treatment. 

66

‘‘(5) PERMITTING ACCESS TO DRUGS AND BIOLOGICALS.—The Secretary shall establish rules under this section under which drugs and biologicals which are acquired through a contractor under this section may be used to resupply inventories of such drugs and biologicals which are administered consistent with safe 

drug practices and with adequate safeguards against fraud and abuse. The previous sentence shall apply—

‘‘(A) in cases in which the drugs or biologicals are immediately required; 

‘‘(B) in cases in which the physician could not have reasonably anticipated the immediate requirement for the drugs or biologicals; 

‘‘(C) in cases in which the contractor could not deliver to the physician 

the drugs or biologicals in a timely manner; and 

‘‘(D) in emergency situations. 

‘‘(6) CONSTRUCTION.—Nothing in this section shall be construed as waiving 

applicable State requirements relating to licensing of pharmacies.

‘‘(c) BIDDING PROCESS.— ‘‘(1) IN GENERAL.—In awarding a contract for a category of drugs and 

biologicals in an area under the program, the Secretary shall consider with respect to each entity seeking to be awarded a contract the prices bid to acquire 

and supply the covered outpatient drugs and biologicals for that category and 

area and the other factors referred to in subsection (b)(3). 

‘‘(2) PRICES BID.—The prices bid by an entity under paragraph (1) shall be the 

prices in effect and available for the supply of contracted drugs and biologicals 

in the area through the entity for the contract period.

‘‘(3) REJECTION OF CONTRACT OFFER.—The Secretary shall reject the contract 

offer of an entity with respect to a category of drugs and biologicals for an area 

if the Secretary estimates that the prices bid, in the aggregate on average, 

would exceed 120 percent of the average sales price (as determined under section 1847B).

‘‘(4) BIDDING ON A NATIONAL OR REGIONAL BASIS.—Nothing in this section 

shall be construed as precluding a bidder from bidding for contracts in all areas 

of the United States or as requiring a bidder to submit a bid for all areas of 

the United States. 

‘‘(5) UNIFORMITY OF BIDS WITHIN AREA.—The amount of the bid submitted 

under a contract offer for any covered outpatient drug or biological for an area 

shall be the same for that drug or biological for all portions of that area. 

‘‘(6) CONFIDENTIALITY OF BIDS.—The provisions of subparagraph (D) of section 

1927(b)(3) shall apply to a bid submitted in a contract offer for a covered outpatient drug or biological under this section in the same manner as it applies 

to information disclosed under such section, except that any reference—

‘‘(A) in that subparagraph to a ‘manufacturer or wholesaler’ is deemed a 

reference to a ‘bidder’ under this section; 

‘‘(B) in that section to ‘prices charged for drugs’ is deemed a reference to 

a ‘bid’ submitted under this section; and 

‘‘(C) in clause (i) of that section to ‘this section’, is deemed a reference to 

‘part B of title XVIII’. 

‘‘(7) INCLUSION OF COSTS.—The bid price submitted in a contract offer for a 

covered outpatient drug or biological shall—

‘‘(A) include all costs related to the delivery of the drug or biological to 

the selecting physician (or other point of delivery); and 

‘‘(B) include the costs of dispensing (including shipping) of such drug or 

biological and management fees, but shall not include any costs related to 

the administration of the drug or biological, or wastage, spillage, or spoilage. 

‘‘(8) PRICE ADJUSTMENTS DURING CONTRACT PERIOD; DISCLOSURE OF COSTS.—

Each contract awarded shall provide for—

‘‘(A) disclosure to the Secretary the contractor’s reasonable, net acquisition costs for periods specified by the Secretary, not more often than quarterly, of the contract; and 

‘‘(B) appropriate price adjustments over the period of the contract to reflect significant increases or decreases in a contractor’s reasonable, net acquisition costs, as so disclosed.

‘‘(d) COMPUTATION OF AVERAGE BID PRICES FOR A CATEGORY AND AREA.—

‘‘(1) IN GENERAL.—For each year or other contract period for each covered outpatient drug or biological and area with respect to which a competition is conducted under the program, the Secretary shall compute an area average of the 

bid prices submitted, in contract offers accepted for the category and area, for 

that year or other contract period. 

‘‘(2) SPECIAL RULES.—The Secretary shall establish rules regarding the use 

under this section of the alternative payment amount provided under section 

67

1847B to the use of a price for specific covered outpatient drugs and biologicals 

in the following cases: 

‘‘(A) NEW DRUGS AND BIOLOGICALS.—A covered outpatient drug or biological for which an average bid price has not been previously determined. 

‘‘(B) OTHER CASES.—Such other exceptional cases as the Secretary may 

specify in regulations. 

Such alternative payment amount shall be based upon actual market price information and in no case shall it exceed the average sales price (as determined 

under section 1847B). 

‘‘(e) COINSURANCE.— ‘‘(1) IN GENERAL.—Coinsurance under this part with respect to a covered outpatient drug or biological for which payment is payable under this section shall 

be based on 20 percent of the payment basis under this section. 

‘‘(2) COLLECTION.—Such coinsurance shall be collected by the contractor that 

supplies the drug or biological involved and, subject to subsection (a)(3)(B), in 

the same manner as coinsurance is collected for durable medical equipment 

under this part. 

‘‘(f) SPECIAL PAYMENT RULES.— ‘‘(1) IN GENERAL.—The Secretary may not provide for an adjustment to reimbursement for covered outpatient drugs and biologicals unless adjustments to 

the practice expense payment adjustment are made on the basis of supplemental surveys under section 1848(c)(2)(H)(ii) of the Social Security Act, as 

added by subsection (a)(1)(B). 

‘‘(B) USE IN EXCLUSION CASES.—If the Secretary excludes a drug or biological (or class of drugs or biologicals) under subsection (a)(1)(D), the Secretary may provide for reimbursement to be made under this part for such 

drugs and biologicals (or class) using the payment methodology under section 1847B or other market based pricing system. 

‘‘(2) COORDINATION RULES.—The provisions of section 1842(h)(3) shall apply to 

a contractor with respect to covered outpatients drugs and biologicals supplied 

by that contractor in the same manner as they apply to a participating supplier. 

In order to administer this section, the Secretary may condition payment under 

this part to a person for the administration of a drug or biological supplied 

under this section upon person’s provision of information on such administration. 

‘‘(3) APPLICATION OF REQUIREMENT FOR ASSIGNMENT.—For provision requiring 

assignment of claims for covered outpatient drugs and biologicals, see section 

1842(o)(3). 

‘‘(4) PROTECTION FOR BENEFICIARY IN CASE OF MEDICAL NECESSITY DENIAL.— For protection of beneficiaries against liability in the case of medical necessity 

determinations, see section 1842(b)(3)(B)(ii)(III). 

‘‘(5) PHYSICIAN ROLE IN APPEALS PROCESS.—The Secretary shall establish a 

procedure under which a physician who prescribes a drug or biological for which 

payment is made under this section has appeal rights that are similar to those 

provided to a physician who prescribes durable medical equipment or a laboratory test. 

‘‘(g) ADVISORY COMMITTEE.—The Secretary shall establish an advisory committee 

that includes representatives of parties affected by the program under this section, 

including physicians, specialty pharmacies, distributors, manufacturers, and beneficiaries. The committee shall advise the Secretary on issues relating to the effective 

implementation of this section. 

‘‘(h) ANNUAL REPORTS.—The Secretary shall submit to Congress an annual report 

in each of 2004, 2005, and 2006, on the program. Each such report shall include 

information on savings, reductions in cost-sharing, access to covered outpatient 

drugs and biologicals, the range of choices of contractors available to providers, and 

beneficiary and provider satisfaction. 

‘‘OPTIONAL USE OF AVERAGE SALES PRICE PAYMENT METHODOLOGY

‘‘SEC. 1847B. (a) IN GENERAL.—In connection with the election made by a physician under section 1847A(a)(5), the physician may elect to apply this section to the 

payment for covered outpatient drugs instead of the payment methodology under 

section 1847A. For purposes of this section, the term ‘covered outpatient drug’ has 

the meaning given such term in section 1847A(a)(2)(A). 

‘‘(b) COMPUTATION OF PAYMENT AMOUNT.—

‘‘(1) IN GENERAL.—If this section applies with respect to a covered outpatient 

drug, the amount payable for the drug (based on a minimum dosage unit) is, 

subject to applicable deductible and coinsurance—

‘‘(A) in the case of a multiple source drug (as defined in subsection 

(c)(6)(C)), the amount determined under paragraph (3); or 

68

‘‘(B) in the case of a single source drug (as defined in subsection (c)(6)(D)), 

the amount determined under paragraph (4). 

‘‘(2) SPECIFICATION OF UNIT.—

‘‘(A) SPECIFICATION BY MANUFACTURER.—The manufacturer of a covered 

outpatient drug shall specify the unit associated with each National Drug 

Code as part of the submission of data under section 1927(b)(3)(A)(iii). 

‘‘(B) UNIT DEFINED.—In this section, the term ‘unit’ means, with respect 

to a covered outpatient drug, the lowest identifiable quantity (such as a 

capsule or tablet, milligram of molecules, or grams) of the drug that is dispensed, exclusive of any diluent without reference to volume measures pertaining to liquids. 

‘‘(3) MULTIPLE SOURCE DRUG.—For all drug products included within the same 

multiple source drug, the amount specified in this paragraph is the volumeweighted average of the average sales prices reported under section 

1927(b)(3)(A)(iii) computed as follows: 

‘‘(A) Compute the sum of the products (for each national drug code assigned to such drug products) of—

‘‘(i) the manufacturer’s average sales price (as defined in subsection 

(c)); and 

‘‘(ii) the total number of units specified under paragraph (2) sold, as 

reported under section 1927(b)(3)(A)(iii). 

‘‘(B) Divide the sum computed under subparagraph (A) by the sum of the 

total number of units under subparagraph (A)(ii) for all national drug codes 

assigned to such drug products. 

‘‘(4) SINGLE SOURCE DRUG.—The amount specified in this paragraph for a single source drug is the lesser of the following: 

‘‘(A) MANUFACTURER’S AVERAGE SALES PRICE.—The manufacturer’s average sales price for a national drug code, as computed using the methodology 

applied under paragraph (3). 

‘‘(B) WHOLESALE ACQUISITION COST (WAC).—The wholesale acquisition cost 

(as defined in subsection (c)(6)(B)) reported for the single source drug. 

‘‘(5) BASIS FOR DETERMINATION.—The payment amount shall be determined 

under this subsection based on information reported under subsection (e) and 

without regard to any special packaging, labeling, or identifiers on the dosage 

form or product or package. 

‘‘(c) MANUFACTURER’S AVERAGE SALES PRICE.—

‘‘(1) IN GENERAL.—For purposes of this subsection, subject to paragraphs (2) 

and (3), the manufacturer’s ‘average sales price’ means, of a covered outpatient 

drug for a NDC code for a calendar quarter for a manufacturer for a unit—

‘‘(A) the manufacturer’s total sales (as defined by the Secretary in regulations for purposes of section 1927(c)(1)) in the United States for such drug 

in the calendar quarter; divided by 

‘‘(B) the total number of such units of such drug sold by the manufacturer 

in such quarter. 

‘‘(2) CERTAIN SALES EXEMPTED FROM COMPUTATION.—In calculating the manufacturer’s average sales price under this subsection, the following sales shall be 

excluded: 

‘‘(A) SALES EXEMPT FROM BEST PRICE.—Sales exempt from the inclusion 

in the determination of ‘best price’ under section 1927(c)(1)(C)(i). 

‘‘(B) SALES AT NOMINAL CHARGE.—Such other sales as the Secretary identifies by regulation as sales to an entity that are nominal in price or do not 

reflect a market price paid by an entity to which payment is made under 

this section. 

‘‘(3) SALE PRICE NET OF DISCOUNTS.—In calculating the manufacturer’s average sales price under this subsection, such price shall be determined taking into 

account volume discounts, prompt pay discounts, cash discounts, the free goods 

that are contingent on any purchase requirement, chargebacks, and rebates 

(other than rebates under section 1927), that result in a reduction of the cost 

to the purchaser. A rebate to a payor or other entity that does not take title 

to a covered outpatient drug shall not be taken into account in determining 

such price unless the manufacturer has an agreement with the payor or other 

entity under which the purchaser’s price for the drug is reduced as a consequence of such rebate. 

‘‘(4) AUTHORITY TO DISREGARD AVERAGE SALES PRICE DURING FIRST QUARTER

OF SALES.—In the case of a covered outpatient drug during an initial period (not 

to exceed a full calendar quarter) in which data on the prices for sales for the 

drug is not sufficiently available from the manufacturer to compute an average 

sales price for the drug, the Secretary may determine the amount payable 

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under this section for the drug without considering the manufacturer’s average 

sales price of that manufacturer for that drug. 

‘‘(5) FREQUENCY OF DETERMINATIONS.— ‘‘(A) IN GENERAL ON A QUARTERLY BASIS.—The manufacturer’s average 

sales price, for a covered outpatient drug of a manufacturer, shall be determined by such manufacturer under this subsection on a quarterly basis. In 

making such determination insofar as there is a lag in the reporting of the 

information on rebates and chargebacks under paragraph (3) so that adequate data are not available on a timely basis, the manufacturer shall 

apply a methodology established by the Secretary based on a 12-month rolling average for the manufacturer to estimate costs attributable to rebates 

and chargebacks. 

‘‘(B) UPDATES IN RATES.—The payment rates under subsection (b)(1) and 

(b)(2)(A) shall be updated by the Secretary on a quarterly basis and shall 

be applied based upon the manufacturer’s average sales price determined 

for the most recent calendar quarter. 

‘‘(C) USE OF CONTRACTORS; IMPLEMENTATION.—The Secretary may use a 

carrier, fiscal intermediary, or other contractor to determine the payment 

amount under subsection (b). Notwithstanding any other provision of law, 

the Secretary may implement, by program memorandum or otherwise, any 

of the provisions of this section. 

‘‘(6) DEFINITIONS AND OTHER RULES.—In this section: 

‘‘(A) MANUFACTURER.—The term ‘manufacturer’ means, with respect to a 

covered outpatient drug, the manufacturer (as defined in section 1927(k)(5)) 

whose national drug code appears on such drug. 

‘‘(ii) WHOLESALE ACQUISITION COST.—The term ‘wholesale acquisition cost’ 

means, with respect to a covered outpatient drug, the manufacturer’s list 

price for the drug to wholesalers or direct purchasers in the United States, 

not including prompt pay or other discounts, rebates or reductions in price, 

for the most recent month for which the information is available, as reported in wholesale price guides or other publications of drug pricing data. 

‘‘(C) MULTIPLE SOURCE DRUG.—The term ‘multiple source drug’ means, for 

a calendar quarter, a covered outpatient drug for which there are 2 or more 

drug products which—

‘‘(i) are rated as therapeutically equivalent (under the Food and Drug 

Administration’s most recent publication of ‘Approved Drug Products 

with Therapeutic Equivalence Evaluations’), 

‘‘(ii) except as provided in subparagraph (E), are pharmaceutically 

equivalent and bioequivalent, as determined under subparagraph (F) 

and as determined by the Food and Drug Administration, and 

‘‘(iii) are sold or marketed in the United States during the quarter. 

‘‘(D) SINGLE SOURCE DRUG.—The term ‘single source drug’ means a covered outpatient drug which is not a multiple source drug and which is produced or distributed under an original new drug application approved by 

the Food and Drug Administration, including a drug product marketed by 

any cross-licensed producers or distributors operating under the new drug 

application, or which is a biological. 

‘‘(E) EXCEPTION FROM PHARMACEUTICAL EQUIVALENCE AND BIOEQUIVALENCE REQUIREMENT.—Subparagraph (C)(ii) shall not apply if the Food and 

Drug Administration changes by regulation the requirement that, for purposes of the publication described in subparagraph (C)(i), in order for drug 

products to be rated as therapeutically equivalent, they must be pharmaceutically equivalent and bioequivalent, as defined in subparagraph (F). 

‘‘(F) DETERMINATION OF PHARMACEUTICAL EQUIVALENCE AND BIOEQUIVALENCE.—For purposes of this paragraph—

‘‘(i) drug products are pharmaceutically equivalent if the products 

contain identical amounts of the same active drug ingredient in the 

same dosage form and meet compendial or other applicable standards 

of strength, quality, purity, and identity; and 

‘‘(ii) drugs are bioequivalent if they do not present a known or potential bioequivalence problem, or, if they do present such a problem, they 

are shown to meet an appropriate standard of bioequivalence. 

‘‘(G) INCLUSION OF VACCINES.—In applying provisions of section 1927 

under this section, ‘other than a vaccine’ is deemed deleted from section 

1927(k)(2)(B). 

‘‘(d) MONITORING PRICE INFORMATION.—

‘‘(1) IN GENERAL.—The Secretary shall monitor available pricing information, 

including information on average sales price and average manufacturer price. 

‘‘(2) RESPONSE TO SIGNIFICANT DISCREPANCIES.—

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‘‘(A) REPORT TO CONGRESS.—If the Secretary finds that there are significant discrepancies among such prices and that the manufacturer’s average 

sales price does not reflect a broad-based market price or a reasonable approximation of the acquisition cost of the covered outpatient drug involved 

to purchasers reimbursed under this section, the Secretary shall submit to 

Congress a report. 

‘‘(B) CONFIDENTIALITY OF INFORMATION REPORTED.—Consistent with requirements relating to maintaining the confidentiality of information reported on manufacturer’s average prices under section 1927(b)(3)(D), such 

report shall include details regarding such discrepancies and recommendations on how to best address such discrepancies. Such report shall not disclose average manufacturer prices or average sales prices. 

‘‘(C) RECOMMENDATIONS.—Such recommendations may include other 

changes in payment methodology. 

‘‘(D) AUTHORITY TO MODIFY PAYMENT METHODOLOGY BY RULE.—Upon submission of such report, the Secretary may commence a rulemaking to 

change such percent or payment methodologies under paragraph (1)(D) and 

(2) as applied to the covered outpatient drug involved under this section. 

‘‘(3) RESPONSE TO PUBLIC HEALTH EMERGENCY.—In the case of a public health 

emergency under section 319 of the Public Health Service Act in which there 

is a documented inability to access covered outpatient drugs, and a concomitant 

increase in the price, of a drug which is not reflected in the manufacturer’s average sales price for one or more quarters, the Secretary may use the wholesale 

acquisition cost (or other reasonable measure of drug price) instead of the manufacturer’s average sales price for such quarters and for subsequent quarters 

until the price and availability of the drug has stabilized and is substantially 

reflected in the applicable manufacturer’s average sales price. 

‘‘(4) ANNUAL REPORT TO CONGRESS.—The Secretary shall submit to the Committees on Energy and Commerce and Ways and Means of the House of Representatives and the Committee on Finance of the Senate an annual report on 

the operation of this section. Such report shall be submitted in coordination 

with the submission of reports under section 1927(i). Such report shall include 

information on the following: 

‘‘(A) Trends in average sales price under subsection (b). 

‘‘(B) Administrative costs associated with compliance with this section. 

‘‘(C) Total value of payments made under this section. 

‘‘(D) Comparison of the average manufacturer price as applied under section 1927 for a covered outpatient drug with the manufacturer’s average 

sales price for the drug under this section. 

‘‘(e) REPORTS ON PRICING INFORMATION.—

‘‘(1) REFERENCE TO REPORTING REQUIREMENT ON AVERAGE SALES PRICE.—For 

requirements for reporting the manufacturer’s average sales price (and, if required to make payment, the manufacturer’s wholesale acquisition cost) for the 

covered outpatient drug, see section 1927(b)(3). 

‘‘(2) MEDPAC REVIEW.—The Medicare Payment Advisory Commission shall 

periodically review the payment methodology established under this section and 

submit to Congress such recommendations on such methodology as it deems appropriate as part of its annual reports to Congress. 

‘‘(3) CONSTRUCTION.—Nothing in this subsection shall be construed as authorizing the Secretary to review for purposes of this section information reported 

only under section 1927(b)(3). 

‘‘(f) RESTRICTION ON ADMINISTRATIVE AND JUDICIAL REVIEW.—There shall be no administrative or judicial review under section 1869, section 1878, or otherwise, of determinations of manufacturer’s average sales price under subsection (c).’’. 

(c) CONTINUATION OF PAYMENT METHODOLOGY FOR RADIOPHARMACEUTICALS.—

Nothing in the amendments made by this section shall be construed as changing 

the payment methodology under part B of title XVIII of the Social Security Act for 

radiopharmaceuticals, including the use by carriers of invoice pricing methodology.

(d) CONFORMING AMENDMENTS.—

(1) IN GENERAL.—Section 1842(o) (42 U.S.C. 1395u(o)) is amended—

(A) in paragraph (1), by inserting ‘‘, subject to section 1847A and 1847B,’’ 

before ‘‘the amount payable for the drug or biological’’; and 

(B) by adding at the end of paragraph (2) the following: ‘‘This paragraph 

shall not apply in the case of payment under section 1847A or 1847B.’’. 

(2) NO CHANGE IN COVERAGE BASIS.—Section 1861(s)(2)(A) (42 U.S.C. 

1395x(s)(2)(A)) is amended by inserting ‘‘(or would have been so included but 

for the application of section 1847A or 1847B)’’ after ‘‘included in the physicians’ 

bills’’. 

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(3) PAYMENT.—Section 1833(a)(1)(S) (42 U.S.C. 1395l(a)(1)(S)) is amended by 

inserting ‘‘(or, if applicable, under section 1847A or 1847B)’’ after ‘‘1842(o)’’. 

(4) CONSOLIDATED REPORTING OF PRICING INFORMATION.—Section 1927 (42 

U.S.C. 1396r–8) is amended—

(A) in subsection (a)(1), by inserting ‘‘or under part B of title XVIII’’ after 

‘‘section 1903(a)’’; 

(B) in subsection (b)(3)(A)—

(i) in clause (i), by striking ‘‘and’’ at the end; 

(ii) in clause (ii), by striking the period and inserting ‘‘; and’’; and 

(iii) by adding at the end the following new clause: 

‘‘(iii) for calendar quarters beginning on or after April 1, 2004, in conjunction with reporting required under clause (i) and by national drug 

code (NDC)—

‘‘(I) the manufacturer’s average sales price (as defined in section 

1847B(c)) and the total number of units specified under section 

1847B(b)(2)(A); 

‘‘(II) if required to make payment under section 1847B, the manufacturer’s wholesale acquisition cost, as defined in subsection 

(c)(6) of such section; and 

‘‘(III) information on those sales that were made at a nominal 

price or otherwise described in section 1847B(c)(2)(B), which information is subject to audit by the Inspector General of the Department of Health and Human Services; 

for a covered outpatient drug for which payment is made under section 

1847B.’’; 

(C) in subsection (b)(3)(B)—

(i) in the heading, by inserting ‘‘AND MANUFACTURER’S AVERAGE SALES

PRICE’’ after ‘‘PRICE’’; and 

(ii) by inserting ‘‘and manufacturer’s average sales prices (including 

wholesale acquisition cost) if required to make payment’’ after ‘‘manufacturer prices’’; and 

(D) in subsection (b)(3)(D)(i), by inserting ‘‘and section 1847B’’ after ‘‘this 

section’’. 

(e) GAO STUDY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to assess the impact of the amendments made by this section on the delivery of services, including their impact on—

(A) beneficiary access to drugs and biologicals for which payment is made 

under part B of title XVIII of the Social Security Act; and 

(B) the site of delivery of such services. 

(2) REPORT.—Not later than 2 years after the year in which the amendment 

made by subsection (a)(1) first takes effect, the Comptroller General shall submit to Congress a report on the study conducted under paragraph (1). 

(f) MEDPAC RECOMMENDATIONS ON BLOOD CLOTTING FACTORS.—The Medicare 

Payment Advisory Commission shall submit to Congress, in its annual report in 

2004, specific recommendations regarding a payment amount (or amounts) for blood 

clotting factors and its administration under the medicare program. 

(g) ESTABLISHMENT OF PHARMACEUTICAL MANAGEMENT FEE WHERE DRUGS PROVIDED THROUGH A CONTRACTOR.—Section 1848(a) (42 U.S.C. 1395w–4(a)) is amended by adding at the end the following new paragraph: 

‘‘(5) RECOGNITION OF PHARMACEUTICAL MANAGEMENT FEE IN CERTAIN CASES.—

In establishing the fee schedule under this section, the Secretary shall provide 

for a separate payment with respect to physicians’ services consisting of the 

unique administrative and management costs associated with covered drugs 

and biologicals which are furnished to physicians through a contractor under 

section 1847A (compared with such costs if such drugs and biologicals were acquired directly by such physicians).’’. 

SEC. 304. DEMONSTRATION PROJECT FOR USE OF RECOVERY AUDIT CONTRACTORS. 

(a) IN GENERAL.—The Secretary of Health and Human Services shall conduct a 

demonstration project under this section (in this section referred to as the ‘‘project’’) 

to demonstrate the use of recovery audit contractors under the Medicare Integrity 

Program in identifying underpayments and overpayments and recouping overpayments under the medicare program for services for which payment is made under 

part A or part B of title XVIII of the Social Security Act. Under the project—

(1) payment may be made to such a contractor on a contingent basis; 

(2) a percentage of the amount recovered may be retained by the Secretary 

and shall be available to the program management account of the Centers for 

Medicare & Medicaid Services; and 

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(3) the Secretary shall examine the efficacy of such use with respect to duplicative payments, accuracy of coding, and other payment policies in which inaccurate payments arise. 

(b) SCOPE AND DURATION.—

(1) SCOPE.—The project shall cover at least 2 States that are among the 

States with—

(A) the highest per capita utilization rates of medicare services, and 

(B) at least 3 contractors. 

(2) DURATION.—The project shall last for not longer than 3 years. 

(c) WAIVER.—The Secretary of Health and Human Services shall waive such provisions of title XVIII of the Social Security Act as may be necessary to provide for 

payment for services under the project in accordance with subsection (a). 

(d) QUALIFICATIONS OF CONTRACTORS.—

(1) IN GENERAL.—The Secretary shall enter into a recovery audit contract 

under this section with an entity only if the entity has staff that has the appropriate clinical knowledge of and experience with the payment rules and regulations under the medicare program or the entity has or will contract with another entity that has such knowledgeable and experienced staff. 

(2) INELIGIBILITY OF CERTAIN CONTRACTORS.—The Secretary may not enter 

into a recovery audit contract under this section with an entity to the extent 

that the entity is a fiscal intermediary under section 1816 of the Social Security 

Act (42 U.S.C. 1395h), a carrier under section 1842 of such Act (42 U.S.C. 

1395u), or a Medicare Administrative Contractor under section 1874A of such 

Act. 

(3) PREFERENCE FOR ENTITIES WITH DEMONSTRATED PROFICIENCY WITH PRIVATE INSURERS.—In awarding contracts to recovery audit contractors under this 

section, the Secretary shall give preference to those risk entities that the Secretary determines have demonstrated more than 3 years direct management experience and a proficiency in recovery audits with private insurers or under the 

medicaid program under title XIX of such Act. 

(e) CONSTRUCTION RELATING TO CONDUCT OF INVESTIGATION OF FRAUD.—A recovery of an overpayment to a provider by a recovery audit contractor shall not be construed to prohibit the Secretary or the Attorney General from investigating and 

prosecuting, if appropriate, allegations of fraud or abuse arising from such overpayment. 

(f) REPORT.—The Secretary of Health and Human Services shall submit to Congress a report on the project not later than 6 months after the date of its completion. Such reports shall include information on the impact of the project on savings 

to the medicare program and recommendations on the cost-effectiveness of extending or expanding the project.

TITLE IV—RURAL HEALTH CARE 

IMPROVEMENTS 

SEC. 401. ENHANCED DISPROPORTIONATE SHARE HOSPITAL (DSH) TREATMENT FOR RURAL 

HOSPITALS AND URBAN HOSPITALS WITH FEWER THAN 100 BEDS. 

(a) DOUBLING THE CAP.—

(1) IN GENERAL.—Section 1886(d)(5)(F) (42 U.S.C. 1395ww(d)(5)(F)) is amended by adding at the end the following new clause: 

‘‘(xiv)(I) In the case of discharges in a fiscal year beginning on or after October 

1, 2003, subject to subclause (II), there shall be substituted for the disproportionate 

share adjustment percentage otherwise determined under clause (iv) (other than 

subclause (I)) or under clause (viii), (x), (xi), (xii), or (xiii), the disproportionate share 

adjustment percentage determined under clause (vii) (relating to large, urban hospitals). 

‘‘(II) Under subclause (I), the disproportionate share adjustment percentage shall 

not exceed 10 percent for a hospital that is not classified as a rural referral center 

under subparagraph (C).’’. 

(2) CONFORMING AMENDMENTS.—Section 1886(d)(5)(F) (42 U.S.C. 

1395ww(d)(5)(F)) is amended—

(A) in each of subclauses (II), (III), (IV), (V), and (VI) of clause (iv), by 

inserting ‘‘subject to clause (xiv) and’’ before ‘‘for discharges occurring’’; 

(B) in clause (viii), by striking ‘‘The formula’’ and inserting ‘‘Subject to 

clause (xiv), the formula’’; and 

(C) in each of clauses (x), (xi), (xii), and (xiii), by striking ‘‘For purposes’’ 

and inserting ‘‘Subject to clause (xiv), for purposes’’. 

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(b) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to discharges occurring on or after October 1, 2003.

SEC. 402. IMMEDIATE ESTABLISHMENT OF UNIFORM STANDARDIZED AMOUNT IN RURAL AND 

SMALL URBAN AREAS. 

(a) IN GENERAL.—Section 1886(d)(3)(A) (42 U.S.C. 1395ww(d)(3)(A)) is amended—

(1) in clause (iv), by inserting ‘‘and ending on or before September 30, 2003,’’ 

after ‘‘October 1, 1995,’’; and 

(2) by redesignating clauses (v) and (vi) as clauses (vii) and (viii), respectively, 

and inserting after clause (iv) the following new clauses: 

‘‘(v) For discharges occurring in the fiscal year beginning on October 1, 2003, 

the average standardized amount for hospitals located in areas other than a 

large urban area shall be equal to the average standardized amount for hospitals located in a large urban area.’’. 

(b) CONFORMING AMENDMENTS.—

(1) COMPUTING DRG-SPECIFIC RATES.—Section 1886(d)(3)(D) (42 U.S.C. 

1395ww(d)(3)(D)) is amended—

(A) in the heading, by striking ‘‘IN DIFFERENT AREAS’’; 

(B) in the matter preceding clause (i), by striking ‘‘, each of’’; 

(C) in clause (i)—

(i) in the matter preceding subclause (I), by inserting ‘‘for fiscal years 

before fiscal year 2004,’’ before ‘‘for hospitals’’; and 

(ii) in subclause (II), by striking ‘‘and’’ after the semicolon at the end; 

(D) in clause (ii)—

(i) in the matter preceding subclause (I), by inserting ‘‘for fiscal years 

before fiscal year 2004,’’ before ‘‘for hospitals’’; and 

(ii) in subclause (II), by striking the period at the end and inserting 

‘‘; and’’; and 

(E) by adding at the end the following new clause: 

‘‘(iii) for a fiscal year beginning after fiscal year 2003, for hospitals located in all areas, to the product of—

‘‘(I) the applicable standardized amount (computed under subparagraph (A)), reduced under subparagraph (B), and adjusted or reduced 

under subparagraph (C) for the fiscal year; and 

‘‘(II) the weighting factor (determined under paragraph (4)(B)) for 

that diagnosis-related group.’’. 

(2) TECHNICAL CONFORMING SUNSET.—Section 1886(d)(3) (42 U.S.C. 

1395ww(d)(3)) is amended—

(A) in the matter preceding subparagraph (A), by inserting ‘‘, for fiscal 

years before fiscal year 1997,’’ before ‘‘a regional adjusted DRG prospective 

payment rate’’; and 

(B) in subparagraph (D), in the matter preceding clause (i), by inserting 

‘‘, for fiscal years before fiscal year 1997,’’ before ‘‘a regional DRG prospective payment rate for each region,’’.

SEC. 403. ESTABLISHMENT OF ESSENTIAL RURAL HOSPITAL CLASSIFICATION. 

(a) CLASSIFICATION.—Section 1861(mm) (42 U.S.C. 1395x(mm)) is amended—

(1) in the heading by adding ‘‘ESSENTIAL RURAL HOSPITALS’’ at the end; and 

(2) by adding at the end the following new paragraphs: 

‘‘(4)(A) The term ‘essential rural hospital’ means a subsection (d) hospital (as defined in section 1886(d)(1)(B)) that is located in a rural area (as defined for purposes 

of section 1886(d)), has more than 25 licensed acute care inpatient beds, has applied 

to the Secretary for classification as such a hospital, and with respect to which the 

Secretary has determined that the closure of the hospital would significantly diminish the ability of medicare beneficiaries to obtain essential health care services. 

‘‘(B) The determination under subparagraph (A) shall be based on the following 

criteria: 

‘‘(i) HIGH PROPORTION OF MEDICARE BENEFICIARIES RECEIVING CARE FROM HOSPITAL.—(I) A high percentage of such beneficiaries residing in the area of the 

hospital who are hospitalized (during the most recent year for which complete 

data are available) receive basic inpatient medical care at the hospital. 

‘‘(II) For a hospital with more than 200 licensed beds, a high percentage of 

such beneficiaries residing in such area who are hospitalized (during such recent year) receive specialized surgical inpatient care at the hospital. 

‘‘(III) Almost all physicians described in section 1861(r)(1) in such area have 

privileges at the hospital and provide their inpatient services primarily at the 

hospital. 

‘‘(ii) SIGNIFICANT ADVERSE IMPACT IN ABSENCE OF HOSPITAL.—If the hospital 

were to close—

74

‘‘(I) there would be a significant amount of time needed for residents to 

reach emergency treatment, resulting in a potential significant harm to 

beneficiaries with critical illnesses or injuries; 

‘‘(II) there would be an inability in the community to stablize emergency 

cases for transfers to another acute care setting, resulting in a potential for 

significant harm to medicare beneficiaries; and 

‘‘(III) any other nearby hospital lacks the physical and clinical capacity 

to take over the hospital’s typical admissions. 

‘‘(C) In making such determination, the Secretary may also consider the following: 

‘‘(i) Free-standing ambulatory surgery centers, office-based oncology care, and 

imaging center services are insufficient in the hospital’s area to handle the outpatient care of the hospital. 

‘‘(ii) Beneficiaries in nearby areas would be adversely affected if the hospital 

were to close as the hospital provides specialized knowledge and services to a 

network of smaller hospitals and critical access hospitals. 

‘‘(iii) Medicare beneficiaries would have difficulty in accessing care if the hospital were to close as the hospital provides significant subsidies to support ambulatory care in local clinics, including mental health clinics and to support post 

acute care. 

‘‘(iv) The hospital has a committment to provide graduate medical education 

in a rural area. 

‘‘(C) QUALITY CARE.—The hospital inpatient score for quality of care is not 

less than the median hospital score for qualify of care for hospitals in the State, 

as established under standards of the utilization and quality control peer review 

organization under part B of title XI or other quality standards recognized by 

the Secretary. 

A hospital classified as an essential rural hospital may not change such classification and a hospital so classified shall not be treated as a sole community hospital, 

medicare dependent hospital, or rural referral center for purposes of section 1886.’’. 

(b) PAYMENT BASED ON 102 PERCENT OF ALLOWED COSTS.—

(1) INPATIENT HOSPITAL SERVICES.—Section 1886(d) (42 U.S.C. 1395ww(d)) is 

amended by adding at the end the following: 

‘‘(11) In the case of a hospital classified as an essential rural hospital under section 1861(mm)(4) for a cost reporting period, the payment under this subsection for 

inpatient hospital services for discharges occurring during the period shall be based 

on 102 percent of the reasonable costs for such services. Nothing in this paragraph 

shall be construed as affecting the application or amount of deductibles or copayments otherwise applicable to such services under part A or as waiving any requirement for billing for such services.’’. 

(2) HOSPITAL OUTPATIENT SERVICES.—Section 1833(t)(13) (42 U.S.C. 

1395l(t)(13)) is amended by adding at the end the following new subparagraph: 

‘‘(B) SPECIAL RULE FOR ESSENTIAL RURAL HOSPITALS.—In the case of a 

hospital classified as an essential rural hospital under section 1861(mm)(4) 

for a cost reporting period, the payment under this subsection for covered 

OPD services during the period shall be based on 102 percent of the reasonable costs for such services. Nothing in this subparagraph shall be construed as affecting the application or amount of deductibles or copayments 

otherwise applicable to such services under this part or as waiving any requirement for billing for such services.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to cost 

reporting periods beginning on or after October 1, 2004. 

SEC. 404. MORE FREQUENT UPDATE IN WEIGHTS USED IN HOSPITAL MARKET BASKET. 

(a) MORE FREQUENT UPDATES IN WEIGHTS.—After revising the weights used in 

the hospital market basket under section 1886(b)(3)(B)(iii) of the Social Security Act 

(42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the most current data available, the Secretary shall establish a frequency for revising such weights, including the labor 

share, in such market basket to reflect the most current data available more frequently than once every 5 years. 

(b) REPORT.—Not later than October 1, 2004, the Secretary shall submit a report 

to Congress on the frequency established under subsection (a), including an explanation of the reasons for, and options considered, in determining such frequency. 

SEC. 405. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL PROGRAM. 

(a) INCREASE IN PAYMENT AMOUNTS.—

(1) IN GENERAL.—Sections 1814(l), 1834(g)(1), and 1883(a)(3) (42 U.S.C. 

1395f(l); 1395m(g)(1); 42 U.S.C. 1395tt(a)(3)) are each amended by inserting 

‘‘equal to 102 percent of’’ before ‘‘the reasonable costs’’. 

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(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

payments for services furnished during cost reporting periods beginning on or 

after October 1, 2003. 

(b) COVERAGE OF COSTS FOR CERTAIN EMERGENCY ROOM ON-CALL PROVIDERS.—

(1) IN GENERAL.—Section 1834(g)(5) (42 U.S.C. 1395m(g)(5)) is amended—

(A) in the heading—

(i) by inserting ‘‘CERTAIN’’ before ‘‘EMERGENCY’’; and 

(ii) by striking ‘‘PHYSICIANS’’ and inserting ‘‘PROVIDERS’’; 

(B) by striking ‘‘emergency room physicians who are on-call (as defined 

by the Secretary)’’ and inserting ‘‘physicians, physician assistants, nurse 

practitioners, and clinical nurse specialists who are on-call (as defined by 

the Secretary) to provide emergency services’’; and 

(C) by striking ‘‘physicians’ services’’ and inserting ‘‘services covered 

under this title’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply 

with respect to costs incurred for services provided on or after January 1, 2004. 

(c) MODIFICATION OF THE ISOLATION TEST FOR COST-BASED CAH AMBULANCE

SERVICES.—

(1) IN GENERAL.—Section 1834(l)(8) (42 U.S.C. 1395m(l)), as added by section 

205(a) of BIPA (114 Stat. 2763A–482), is amended by adding at the end the following: ‘‘The limitation described in the matter following subparagraph (B) in 

the previous sentence shall not apply if the ambulance services are furnished 

by such a provider or supplier of ambulance services who is a first responder 

to emergencies (as determined by the Secretary).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

ambulances services furnished on or after the first cost reporting period that begins after the date of the enactment of this Act. 

(d) REINSTATEMENT OF PERIODIC INTERIM PAYMENT (PIP).—

(1) IN GENERAL.—Section 1815(e)(2) (42 U.S.C. 1395g(e)(2)) is amended—

(A) in the matter before subparagraph (A), by inserting ‘‘, in the cases described in subparagraphs (A) through (D)’’ after ‘‘1986’’; and 

(B) by striking ‘‘and’’ at the end of subparagraph (C); 

(C) by adding ‘‘and’’ at the end of subparagraph (D); and 

(D) by inserting after subparagraph (D) the following new subparagraph: 

‘‘(E) inpatient critical access hospital services;’’. 

(2) DEVELOPMENT OF ALTERNATIVE METHODS OF PERIODIC INTERIM PAYMENTS.—With respect to periodic interim payments to critical access hospitals 

for inpatient critical access hospital services under section 1815(e)(2)(E) of the 

Social Security Act, as added by paragraph (1), the Secretary shall develop alternative methods for such payments that are based on expenditures of the hospital. 

(3) REINSTATEMENT OF PIP.—The amendments made by paragraph (1) shall 

apply to payments made on or after January 1, 2004. 

(e) CONDITION FOR APPLICATION OF SPECIAL PHYSICIAN PAYMENT ADJUSTMENT.—

(1) IN GENERAL.—Section 1834(g)(2) (42 U.S.C. 1395m(g)(2)) is amended by 

adding after and below subparagraph (B) the following: 

‘‘The Secretary may not require, as a condition for applying subparagraph (B) 

with respect to a critical access hospital, that each physician providing professional services in the hospital must assign billing rights with respect to such 

services, except that such subparagraph shall not apply to those physicians who 

have not assigned such billing rights.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall be effective as if included in the enactment of section 403(d) of the Medicare, Medicaid, 

and SCHIP Balanced Budget Refinement Act of 1999 (113 Stat. 1501A–371). 

(f) FLEXIBILITY IN BED LIMITATION FOR HOSPITALS.—Section 1820 (42 U.S.C. 

1395i–4) is amended—

(1) in subsection (c)(2)(B)(iii), by inserting ‘‘subject to paragraph (3)’’ after 

‘‘(iii) provides’’; 

(2) by adding at the end of subsection (c) the following new paragraph: 

‘‘(3) INCREASE IN MAXIMUM NUMBER OF BEDS FOR HOSPITALS WITH STRONG SEASONAL CENSUS FLUCTUATIONS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (C), in the case of a hospital 

that demonstrates that it meets the standards established under subparagraph (B) and has not made the election described in subsection (f)(2)(A), 

the bed limitations otherwise applicable under paragraph (2)(B)(iii) and 

subsection (f) shall be increased by 5 beds. 

‘‘(B) STANDARDS.—The Secretary shall specify standards for determining 

whether a critical access hospital has sufficiently strong seasonal variations 

76

in patient admissions to justify the increase in bed limitation provided 

under subparagraph (A).’’; and 

(3) in subsection (f)—

(A) by inserting ‘‘(1)’’ after ‘‘(f)’’; and 

(B) by adding at the end the following new paragraph: 

‘‘(2)(A) A hospital may elect to treat the reference in paragraph (1) to ‘15 beds’ 

as a reference to ‘25 beds’, but only if no more than 10 beds in the hospital are at 

any time used for non-acute care services. A hospital that makes such an election 

is not eligible for the increase provided under subsection (c)(3)(A). 

‘‘(B) The limitations in numbers of beds under the first sentence of paragraph (1) 

are subject to adjustment under subsection (c)(3).’’. 

(4) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to designations made before, on, or after January 1, 2004. 

(g) ADDITIONAL 5-YEAR PERIOD OF FUNDING FOR GRANT PROGRAM.—

(1) IN GENERAL.—Section 1820(g) (42 U.S.C. 1395i–4(g)) is amended by adding 

at the end the following new paragraph: 

‘‘(4) FUNDING.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), payment for grants made 

under this subsection during fiscal years 2004 through 2008 shall be made 

from the Federal Hospital Insurance Trust Fund. 

‘‘(B) ANNUAL AGGREGATE LIMITATION.—In no case may the amount of payment provided for under subparagraph (A) for a fiscal year exceed 

$25,000,000.’’. 

(2) CONFORMING AMENDMENT.—Section 1820 (42 U.S.C. 1395i–4) is amended 

by striking subsection (j).

SEC. 406. REDISTRIBUTION OF UNUSED RESIDENT POSITIONS. 

(a) IN GENERAL.—Section 1886(h)(4) (42 U.S.C. 1395ww(h)(4)) is amended—

(1) in subparagraph (F)(i), by inserting ‘‘subject to subparagraph (I),’’ after 

‘‘October 1, 1997,’’; 

(2) in subparagraph (H)(i), by inserting ‘‘subject to subparagraph (I),’’ after 

‘‘subparagraphs (F) and (G),’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(I) REDISTRIBUTION OF UNUSED RESIDENT POSITIONS.—

‘‘(i) REDUCTION IN LIMIT BASED ON UNUSED POSITIONS.—

‘‘(I) IN GENERAL.—If a hospital’s resident level (as defined in 

clause (iii)(I)) is less than the otherwise applicable resident limit 

(as defined in clause (iii)(II)) for each of the reference periods (as 

defined in subclause (II)), effective for cost reporting periods beginning on or after January 1, 2004, the otherwise applicable resident 

limit shall be reduced by 75 percent of the difference between such 

limit and the reference resident level specified in subclause (III) (or 

subclause (IV) if applicable). 

‘‘(II) REFERENCE PERIODS DEFINED.—In this clause, the term ‘reference periods’ means, for a hospital, the 3 most recent consecutive 

cost reporting periods of the hospital for which cost reports have 

been settled (or, if not, submitted) on or before September 30, 2002. 

‘‘(III) REFERENCE RESIDENT LEVEL.—Subject to subclause (IV), 

the reference resident level specified in this subclause for a hospital is the highest resident level for the hospital during any of the 

reference periods. 

‘‘(IV) ADJUSTMENT PROCESS.—Upon the timely request of a hospital, the Secretary may adjust the reference resident level for a 

hospital to be the resident level for the hospital for the cost reporting period that includes July 1, 2003. 

‘‘(V) AFFILIATION.—With respect to hospitals which are members 

of the same affiliated group (as defined by the Secretary under subparagraph (H)(ii)), the provisions of this section shall be applied 

with respect to such an affiliated group by deeming the affiliated 

group to be a single hospital. 

‘‘(ii) REDISTRIBUTION.—

‘‘(I) IN GENERAL.—The Secretary is authorized to increase the 

otherwise applicable resident limits for hospitals by an aggregate 

number estimated by the Secretary that does not exceed the aggregate reduction in such limits attributable to clause (i) (without taking into account any adjustment under subclause (IV) of such 

clause). 

‘‘(II) EFFECTIVE DATE.—No increase under subclause (I) shall be 

permitted or taken into account for a hospital for any portion of a 

77

cost reporting period that occurs before July 1, 2004, or before the 

date of the hospital’s application for an increase under this clause. 

No such increase shall be permitted for a hospital unless the hospital has applied to the Secretary for such increase by December 

31, 2005. 

‘‘(III) CONSIDERATIONS IN REDISTRIBUTION.—In determining for 

which hospitals the increase in the otherwise applicable resident 

limit is provided under subclause (I), the Secretary shall take into 

account the need for such an increase by specialty and location involved, consistent with subclause (IV). 

‘‘(IV) PRIORITY FOR RURAL AND SMALL URBAN AREAS.—In determining for which hospitals and residency training programs an increase in the otherwise applicable resident limit is provided under 

subclause (I), the Secretary shall first distribute the increase to 

programs of hospitals located in rural areas or in urban areas that 

are not large urban areas (as defined for purposes of subsection (d)) 

on a first-come-first-served basis (as determined by the Secretary) 

based on a demonstration that the hospital will fill the positions 

made available under this clause and not to exceed an increase of 

25 full-time equivalent positions with respect to any hospital. 

‘‘(V) APPLICATION OF LOCALITY ADJUSTED NATIONAL AVERAGE PER

RESIDENT AMOUNT.—With respect to additional residency positions 

in a hospital attributable to the increase provided under this 

clause, notwithstanding any other provision of this subsection, the 

approved FTE resident amount is deemed to be equal to the locality adjusted national average per resident amount computed under 

subparagraph (E) for that hospital. 

‘‘(VI) CONSTRUCTION.—Nothing in this clause shall be construed 

as permitting the redistribution of reductions in residency positions 

attributable to voluntary reduction programs under paragraph (6) 

or as affecting the ability of a hospital to establish new medical 

residency training programs under subparagraph (H). 

‘‘(iii) RESIDENT LEVEL AND LIMIT DEFINED.—In this subparagraph: 

‘‘(I) RESIDENT LEVEL.—The term ‘resident level’ means, with respect to a hospital, the total number of full-time equivalent residents, before the application of weighting factors (as determined 

under this paragraph), in the fields of allopathic and osteopathic 

medicine for the hospital. 

‘‘(II) OTHERWISE APPLICABLE RESIDENT LIMIT.—The term ‘otherwise applicable resident limit’ means, with respect to a hospital, 

the limit otherwise applicable under subparagraphs (F)(i) and (H) 

on the resident level for the hospital determined without regard to 

this subparagraph.’’. 

(b) CONFORMING AMENDMENT TO IME.—Section 1886(d)(5)(B)(v) (42 U.S.C. 

1395ww(d)(5)(B)(v)) is amended by adding at the end the following: ‘‘The provisions 

of subparagraph (I) of subsection (h)(4) shall apply with respect to the first sentece 

of this clause in the same manner as it applies with respect to subparagraph (F) 

of such subsection.’’. 

(c) REPORT ON EXTENSION OF APPLICATIONS UNDER REDISTRIBUTION PROGRAM.— Not later than July 1, 2005, the Secretary shall submit to Congress a report containing recommendations regarding whether to extend the deadline for applications 

for an increase in resident limits under section 1886(h)(4)(I)(ii)(II) of the Social Security Act (as added by subsection (a)). 

SEC. 407. TWO-YEAR EXTENSION OF HOLD HARMLESS PROVISIONS FOR SMALL RURAL HOSPITALS AND SOLE COMMUNITY HOSPITALS UNDER PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT DEPARTMENT SERVICES. 

(a) HOLD HARMLESS PROVISIONS.—

(1) IN GENERAL.—Section 1833(t)(7)(D)(i) (42 U.S.C. 1395l(t)(7)(D)(i)) is 

amended—

(A) in the heading, by striking ‘‘SMALL’’ and inserting ‘‘CERTAIN’’; 

(B) by inserting ‘‘or a sole community hospital (as defined in section 

1886(d)(5)(D)(iii)) located in a rural area’’ after ‘‘100 beds’’; and 

(C) by striking ‘‘2004’’ and inserting ‘‘2006’’. 

(2) EFFECTIVE DATE.—The amendment made by subsection (a)(2) shall apply 

with respect to payment for OPD services furnished on and after January 1, 

2004. 

(b) STUDY; ADJUSTMENT.—

(1) STUDY.—The Secretary shall conduct a study to determine if, under the 

prospective payment system for hospital outpatient department services under 

78

section 1833(t) of the Social Security Act (42 U.S.C. 1395l(t)), costs incurred by 

rural providers of services by ambulatory payment classification groups (APCs) 

exceed those costs incurred by urban providers of services. 

(2) ADJUSTMENT.—Insofar as the Secretary determines under paragraph (1) 

that costs incurred by rural providers exceed those costs incurred by urban providers of services, the Secretary shall provide for an appropriate adjustment 

under such section 1833(t) to reflect those higher costs by January 1, 2005. 

SEC. 408. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND FEDERALLY QUALIFIED 

HEALTH CENTER SERVICES FROM THE PROSPECTIVE PAYMENT SYSTEM FOR 

SKILLED NURSING FACILITIES. 

(a) IN GENERAL.—Section 1888(e)(2)(A) (42 U.S.C. 1395yy(e)(2)(A)) is amended—

(1) in clause (i)(II), by striking ‘‘clauses (ii) and (iii)’’ and inserting ‘‘clauses 

(ii), (iii), and (iv)’’; and 

(2) by adding at the end the following new clause: 

‘‘(iv) EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND FEDERALLY

QUALIFIED HEALTH CENTER SERVICES.—Services described in this clause 

are—

‘‘(I) rural health clinic services (as defined in paragraph (1) of 

section 1861(aa)); and 

‘‘(II) Federally qualified health center services (as defined in 

paragraph (3) of such section); 

that would be described in clause (ii) if such services were not furnished by an individual affiliated with a rural health clinic or a Federally qualified health center.’’. 

(b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to 

services furnished on or after January 1, 2004. 

SEC. 409. RECOGNITION OF ATTENDING NURSE PRACTITIONERS AS ATTENDING PHYSICIANS 

TO SERVE HOSPICE PATIENTS. 

(a) IN GENERAL.—Section 1861(dd)(3)(B) (42 U.S.C. 1395x(dd)(3)(B)) is amended 

by inserting ‘‘or nurse practitioner (as defined in subsection (aa)(5))’’ after ‘‘the physician (as defined in subsection (r)(1))’’. 

(b) PROHIBITION ON NURSE PRACTITIONER CERTIFYING NEED FOR HOSPICE.—Section 1814(a)(7)(A)(i)(I) (42 U.S.C. 1395f(a)(7)(A)(i)(I)) is amended by inserting 

‘‘(which for purposes of this subparagraph does not include a nurse practitioner)’’ 

after ‘‘attending physician (as defined in section 1861(dd)(3)(B))’’. 

SEC. 410. IMPROVEMENT IN PAYMENTS TO RETAIN EMERGENCY CAPACITY FOR AMBULANCE 

SERVICES IN RURAL AREAS. 

Section 1834(l) (42 U.S.C. 1395m(l)) is amended—

(1) by redesignating paragraph (8), as added by section 221(a) of BIPA (114 

Stat. 2763A–486), as paragraph (9); and 

(2) by adding at the end the following new paragraph: 

‘‘(10) ASSISTANCE FOR RURAL PROVIDERS FURNISHING SERVICES IN LOW MEDICARE POPULATION DENSITY AREAS.—

‘‘(A) IN GENERAL.—In the case of ground ambulance services furnished on 

or after January 1, 2004, for which the transportation originates in a qualified rural area (as defined in subparagraph (B)), the Secretary shall provide 

for an increase in the base rate of the fee schedule for mileage for a trip 

established under this subsection. In establishing such increase, the Secretary shall, based on the relationship of cost and volume, estimate the average increase in cost per trip for such services as compared with the cost 

per trip for the average ambulance service. 

‘‘(B) QUALIFIED RURAL AREA DEFINED.—For purposes of subparagraph (A), 

the term ‘qualified rural area’ is a rural area (as defined in section 

1886(d)(2)(D)) with a population density of medicare beneficiaries residing 

in the area that is in the lowest quartile of all rural county populations.’’. 

SEC. 411. TWO-YEAR INCREASE FOR HOME HEALTH SERVICES FURNISHED IN A RURAL AREA. 

(a) IN GENERAL.—In the case of home health services furnished in a rural area 

(as defined in section 1886(d)(2)(D) of the Social Security Act (42 U.S.C. 

1395ww(d)(2)(D))) during 2004 and 2005, the Secretary shall increase the payment 

amount otherwise made under section 1895 of such Act (42 U.S.C. 1395fff ) for such 

services by 5 percent. 

(b) WAIVING BUDGET NEUTRALITY.—The Secretary shall not reduce the standard 

prospective payment amount (or amounts) under section 1895 of the Social Security 

Act (42 U.S.C. 1395fff ) applicable to home health services furnished during a period 

to offset the increase in payments resulting from the application of subsection (a). 

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SEC. 412. PROVIDING SAFE HARBOR FOR CERTAIN COLLABORATIVE EFFORTS THAT BENEFIT 

MEDICALLY UNDERSERVED POPULATIONS. 

(a) IN GENERAL.—Section 1128B(b)(3) (42 U.S.C. 1320a–7(b)(3)), as amended by 

section 101(b)(2), is amended—

(1) in subparagraph (F), by striking ‘‘and’’ after the semicolon at the end; 

(2) in subparagraph (G), by striking the period at the end and inserting ‘‘; 

and’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(H) any remuneration between a public or nonprofit private health center entity described under clause (i) or (ii) of section 1905(l)(2)(B) and any 

individual or entity providing goods, items, services, donations or loans, or 

a combination thereof, to such health center entity pursuant to a contract, 

lease, grant, loan, or other agreement, if such agreement contributes to the 

ability of the health center entity to maintain or increase the availability, 

or enhance the quality, of services provided to a medically underserved population served by the health center entity.’’. 

(b) RULEMAKING FOR EXCEPTION FOR HEALTH CENTER ENTITY ARRANGEMENTS.—

(1) ESTABLISHMENT.—

(A) IN GENERAL.—The Secretary of Health and Human Services (in this 

subsection referred to as the ‘‘Secretary’’) shall establish, on an expedited 

basis, standards relating to the exception described in section 

1128B(b)(3)(H) of the Social Security Act, as added by subsection (a), for 

health center entity arrangements to the antikickback penalties. 

(B) FACTORS TO CONSIDER.—The Secretary shall consider the following 

factors, among others, in establishing standards relating to the exception 

for health center entity arrangements under subparagraph (A): 

(i) Whether the arrangement between the health center entity and 

the other party results in savings of Federal grant funds or increased 

revenues to the health center entity. 

(ii) Whether the arrangement between the health center entity and 

the other party restricts or limits a patient’s freedom of choice. 

(iii) Whether the arrangement between the health center entity and 

the other party protects a health care professional’s independent medical judgment regarding medically appropriate treatment. 

The Secretary may also include other standards and criteria that are consistent with the intent of Congress in enacting the exception established 

under this section. 

(2) INTERIM FINAL EFFECT.—No later than 180 days after the date of enactment of this Act, the Secretary shall publish a rule in the Federal Register consistent with the factors under paragraph (1)(B). Such rule shall be effective and 

final immediately on an interim basis, subject to such change and revision, after 

public notice and opportunity (for a period of not more than 60 days) for public 

comment, as is consistent with this subsection. 

SEC. 413. GAO STUDY OF GEOGRAPHIC DIFFERENCES IN PAYMENTS FOR PHYSICIANS’ SERVICES. 

(a) STUDY.—The Comptroller General of the United States shall conduct a study 

of differences in payment amounts under the physician fee schedule under section 

1848 of the Social Security Act (42 U.S.C. 1395w–4) for physicians’ services in different geographic areas. Such study shall include—

(1) an assessment of the validity of the geographic adjustment factors used 

for each component of the fee schedule; 

(2) an evaluation of the measures used for such adjustment, including the frequency of revisions; and 

(3) an evaluation of the methods used to determine professional liability insurance costs used in computing the malpractice component, including a review 

of increases in professional liability insurance premiums and variation in such 

increases by State and physician specialty and methods used to update the geographic cost of practice index and relative weights for the malpractice component. 

(b) REPORT.—Not later than 1 year after the date of the enactment of this Act, 

the Comptroller General shall submit to Congress a report on the study conducted 

under subsection (a). The report shall include recommendations regarding the use 

of more current data in computing geographic cost of practice indices as well as the 

use of data directly representative of physicians’ costs (rather than proxy measures 

of such costs). 

80

SEC. 414. TREATMENT OF MISSING COST REPORTING PERIODS FOR SOLE COMMUNITY HOSPITALS. 

(a) IN GENERAL.—Section 1886(b)(3)(I) (42 U.S.C. 1395ww(b)(3)(I)) is amended by 

adding at the end the following new clause: 

‘‘(iii) In no case shall a hospital be denied treatment as a sole community hospital 

or payment (on the basis of a target rate as such as a hospital) because data are 

unavailable for any cost reporting period due to changes in ownership, changes in 

fiscal intermediaries, or other extraordinary circumstances, so long as data for at 

least one applicable base cost reporting period is available.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to cost 

reporting periods beginning on or after January 1, 2004. 

SEC. 415. EXTENSION OF TELEMEDICINE DEMONSTRATION PROJECT. 

Section 4207 of Balanced Budget Act of 1997 (Public Law 105–33) is amended—

(1) in subsection (a)(4), by striking ‘‘4-year’’ and inserting ‘‘8-year’’; and 

(2) in subsection (d)(3), by striking ‘‘$30,000,000’’ and inserting ‘‘$60,000,000’’. 

SEC. 416. ADJUSTMENT TO THE MEDICARE INPATIENT HOSPITAL PPS WAGE INDEX TO REVISE THE LABOR-RELATED SHARE OF SUCH INDEX. 

(a) IN GENERAL.—Section 1886(d)(3)(E) (42 U.S.C. 1395ww(d)(3)(E)) is amended—

(1) by striking ‘‘WAGE LEVELS.—The Secretary’’ and inserting ‘‘WAGE LEVELS.—

‘‘(i) IN GENERAL.—Except as provided in clause (ii), the Secretary’’; and 

(2) by adding at the end the following new clause: 

‘‘(ii) ALTERNATIVE PROPORTION TO BE ADJUSTED BEGINNING IN FISCAL YEAR

2004.—

‘‘(I) IN GENERAL.—Except as provided in subclause (II), for discharges 

occurring on or after October 1, 2003, the Secretary shall substitute the 

‘62 percent’ for the proportion described in the first sentence of clause 

(i). 

‘‘(II) HOLD HARMLESS FOR CERTAIN HOSPITALS.—If the application of 

subclause (I) would result in lower payments to a hospital than would 

otherwise be made, then this subparagraph shall be applied as if this 

clause had not been enacted.’’. 

(b) WAIVING BUDGET NEUTRALITY.—Section 1886(d)(3)(E) (42 U.S.C. 

1395ww(d)(3)(E)), as amended by subsection (a), is amended by adding at the end 

of clause (i) the following new sentence: ‘‘The Secretary shall apply the previous sentence for any period as if the amendments made by section 402(a) of the Medicare 

Prescription Drug and Modernization Act of 2003 had not been enacted.’’. 

SEC. 417. MEDICARE INCENTIVE PAYMENT PROGRAM IMPROVEMENTS FOR PHYSICIAN SCARCITY. 

(a) ADDITIONAL BONUS PAYMENT FOR CERTAIN PHYSICIAN SCARCITY AREAS.—

(1) IN GENERAL.—Section 1833 (42 U.S.C. 1395l) is amended by adding at the 

end the following new subsection: 

‘‘(u) INCENTIVE PAYMENTS FOR PHYSICIAN SCARCITY AREAS.—

‘‘(1) IN GENERAL.—In the case of physicians’ services furnished in a year—

‘‘(A) by a primary care physician in a primary care scarcity county (identified under paragraph (4)); or 

‘‘(B) by a physician who is not a primary care physician in a specialist 

care scarcity county (as so identified), 

in addition to the amount of payment that would otherwise be made for such 

services under this part, there also shall be paid an amount equal to 5 percent 

of the payment amount for the service under this part. 

‘‘(2) DETERMINATION OF RATIOS OF PHYSICIANS TO MEDICARE BENEFICIARIES IN

AREA.—Based upon available data, the Secretary shall periodically determine, 

for each county or equivalent area in the United States, the following: 

‘‘(A) NUMBER OF PHYSICIANS PRACTICING IN THE AREA.—The number of 

physicians who furnish physicians’ services in the active practice of medicine or osteopathy in that county or area, other than physicians whose practice is exclusively for the Federal Government, physicians who are retired, 

or physicians who only provide administrative services. Of such number, 

the number of such physicians who are—

‘‘(i) primary care physicians; or 

‘‘(ii) physicians who are not primary care physicians. 

‘‘(B) NUMBER OF MEDICARE BENEFICIARIES RESIDING IN THE AREA.—The 

number of individuals who are residing in the county and are entitled to 

benefits under part A or enrolled under this part, or both. 

‘‘(C) DETERMINATION OF RATIOS.—

‘‘(i) PRIMARY CARE RATIO.—The ratio (in this paragraph referred to as 

the ‘primary care ratio’) of the number of primary care physicians (deVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00080 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
81

termined under subparagraph (A)(i)), to number of medicare beneficiaries determined under subparagraph (B). 

‘‘(ii) SPECIALIST CARE RATIO.—The ratio (in this paragraph referred to 

as the ‘specialist care ratio’) of the number of other physicians (determined under subparagraph (A)(ii)), to number of medicare beneficiaries 

determined under subparagraph (B). 

‘‘(3) RANKING OF COUNTIES.—The Secretary shall rank each such county or 

area based separately on its primary care ratio and its specialist care ratio. 

‘‘(4) IDENTIFICATION OF COUNTIES.—The Secretary shall identify—

‘‘(A) those counties and areas (in this paragraph referred to as ‘primary 

care scarcity counties’) with the lowest primary care ratios that represent, 

if each such county or area were weighted by the number of medicare beneficiaries determined under paragraph (2)(B), an aggregate total of 20 percent of the total of the medicare beneficiaries determined under such paragraph; and 

‘‘(B) those counties and areas (in this subsection referred to as ‘specialist 

care scarcity counties’) with the lowest specialist care ratios that represent, 

if each such county or area were weighted by the number of medicare beneficiaries determined under paragraph (2)(B), an aggregate total of 20 percent of the total of the medicare beneficiaries determined under such paragraph. 

There is no administrative or judicial review respecting the identification of a 

county or area or the assignment of a specialty of any physician under this 

paragraph. 

‘‘(5) RURAL CENSUS TRACKS.—To the extent feasible, the Secretary shall treat 

a rural census tract of a metropolitan statistical area (as determined under the 

most recent modification of the Goldsmith Modification, originally published in 

the Federal Register on February 27, 1992 (57 Fed. Reg. 6725) as an equivalent 

area for purposes of qualifying as a primary care scarcity county or specialist 

care scarcity county under this subsection. 

‘‘(6) PHYSICIAN DEFINED.—For purposes of this paragraph, the term ‘physician’ means a physician described in section 1861(r)(1) and the term ‘primary 

care physician’ means a physician who is identified in the available data as a 

general practitioner, family practice practitioner, general internist, or obstetrician or gynecologist. 

‘‘(7) PUBLICATION OF LIST OF COUNTIES.—In carrying out this subsection for 

a year, the Secretary shall include, as part of the proposed and final rule to implement the physician fee schedule under section 1848 for the year, a list of all 

areas which will qualify as a primary care scarcity county or specialist care 

scarcity county under this subsection for the year involved.’’. 

(2) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to 

physicians’ services furnished or after January 1, 2004. 

(b) IMPROVEMENT TO MEDICARE INCENTIVE PAYMENT PROGRAM.—

(1) IN GENERAL.—Section 1833(m) (42 U.S.C. 1395l(m)) is amended—

(A) by inserting ‘‘(1)’’ after ‘‘(m)’’; and 

(B) by adding at the end the following new paragraphs: 

‘‘(2) The Secretary shall establish procedures under which the Secretary, and not 

the physician furnishing the service, is responsible for determining when a payment 

is required to be made under paragraph (1). 

‘‘(3) In carrying out paragraph (1) for a year, the Secretary shall include, as part 

of the proposed and final rule to implement the physician fee schedule under section 

1848 for the year, a list of all areas which will qualify as a health professional shortage area under paragraph (1) for the year involved.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

physicians’ services furnished or after January 1, 2004.

TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

SEC. 501. REVISION OF ACUTE CARE HOSPITAL PAYMENT UPDATES. 

Section 1886(b)(3)(B)(i) (42 U.S.C. 1395ww(b)(3)(B)(i)) is amended—

(1) by striking ‘‘and’’ at the end of subclause (XVIII); 

(2) by striking subclause (XIX); and 

(3) by inserting after subclause (XVIII) the following new subclauses: 

‘‘(XIX) for each of fiscal years 2004 through 2006, the market basket percentage increase minus 0.4 percentage points for hospitals in all areas; and 

82

‘‘(XX) for fiscal year 2007 and each subsequent fiscal year, the market basket 

percentage increase for hospitals in all areas.’’.

SEC. 502. RECOGNITION OF NEW MEDICAL TECHNOLOGIES UNDER INPATIENT HOSPITAL PPS. 

(a) IMPROVING TIMELINESS OF DATA COLLECTION.—Section 1886(d)(5)(K) (42 

U.S.C. 1395ww(d)(5)(K)) is amended by adding at the end the following new clause: 

‘‘(vii) Under the mechanism under this subparagraph, the Secretary shall provide 

for the addition of new diagnosis and procedure codes in April 1 of each year, but 

the addition of such codes shall not require the Secretary to adjust the payment (or 

diagnosis-related group classification) under this subsection until the fiscal year 

that begins after such date.’’. 

(b) ELIGIBILITY STANDARD FOR TECHNOLOGY OUTLIERS.—

(1) MINIMUM PERIOD FOR RECOGNITION OF NEW TECHNOLOGIES.—Section 

1886(d)(5)(K)(vi) (42 U.S.C. 1395ww(d)(5)(K)(vi)) is amended—

(A) by inserting ‘‘(I)’’ after ‘‘(vi)’’; and 

(B) by adding at the end the following new subclause: 

‘‘(II) Under such criteria, a service or technology shall not be denied treatment 

as a new service or technology on the basis of the period of time in which the service 

or technology has been in use if such period ends before the end of the 2-to-3-year 

period that begins on the effective date of implementation of a code under ICD–9–

CM (or a successor coding methodology) that enables the identification of specific 

discharges in which the service or technology has been used.’’. 

(2) ADJUSTMENT OF THRESHOLD.—Section 1886(d)(5)(K)(ii)(I) (42 U.S.C. 

1395ww(d)(5)(K)(ii)(I)) is amended by inserting ‘‘(applying a threshold specified 

by the Secretary that is 75 percent of one standard deviation for the diagnosisrelated group involved)’’ after ‘‘is inadequate’’. 

(3) CRITERION FOR SUBSTANTIAL IMPROVEMENT.—Section 1886(d)(5)(K)(vi) (42 

U.S.C. 1395ww(d)(5)(K)(vi)), as amended by paragraph (1), is further amended 

by adding at the end the following subclause: 

‘‘(III) The Secretary shall by regulation provide for further clarification of the criteria applied to determine whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment 

of beneficiaries. Under such criteria, in determining whether a new service or technology represents an advance in medical technology that substantially improves the 

diagnosis or treatment of beneficiaries, the Secretary shall deem a service or technology as meeting such requirement if the service or technology is a drug or biological that is designated under section 506 of the Federal Food, Drug, and Cosmetic 

Act, approved under section 314.510 or 601.41 of title 21, Code of Federal Regulations, or designated for priority review when the marketing application for such 

drug or biological was filed or is a medical device for which an exemption has been 

granted under section 520(m) of such Act, or for which priority review has been provided under section 515(d)(5) of such Act. Nothing in this subclause shall be construed as effecting the authority of the Secretary to determine whether items and 

services are medically necessary and appropriate under section 1862(a)(1).’’. 

(4) PROCESS FOR PUBLIC INPUT.—Section 1886(d)(5)(K) (42 U.S.C. 

1395ww(d)(5)(K)), as amended by paragraph (1), is amended—

(A) in clause (i), by adding at the end the following: ‘‘Such mechanism 

shall be modified to meet the requirements of clause (viii).’’; and 

(B) by adding at the end the following new clause: 

‘‘(viii) The mechanism established pursuant to clause (i) shall be adjusted to provide, before publication of a proposed rule, for public input regarding whether a new 

service or technology not described in the second sentence of clause (vi)(III) represents an advance in medical technology that substantially improves the diagnosis 

or treatment of beneficiaries as follows: 

‘‘(I) The Secretary shall make public and periodically update a list of all the 

services and technologies for which an application for additional payment under 

this subparagraph is pending. 

‘‘(II) The Secretary shall accept comments, recommendations, and data from 

the public regarding whether the service or technology represents a substantial 

improvement. 

‘‘(III) The Secretary shall provide for a meeting at which organizations representing hospitals, physicians, medicare beneficiaries, manufacturers, and any 

other interested party may present comments, recommendations, and data to 

the clinical staff of the Centers for Medicare & Medicaid Services before publication of a notice of proposed rulemaking regarding whether service or technology represents a substantial improvement.’’. 

(c) PREFERENCE FOR USE OF DRG ADJUSTMENT.—Section 1886(d)(5)(K) (42 U.S.C. 

1395ww(d)(5)(K)) is further amended by adding at the end the following new clause: 

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‘‘(ix) Before establishing any add-on payment under this subparagraph with respect to a new technology, the Secretary shall seek to identify one or more diagnosis-related groups associated with such technology, based on similar clinical or anatomical characteristics and the cost of the technology. Within such groups the Secretary shall assign an eligible new technology into a diagnosis-related group where 

the average costs of care most closely approximate the costs of care of using the new 

technology. In such case, the new technology would no longer meet the threshold 

of exceeding 75 percent of the standard deviation for the diagnosis-related group involved under clause (ii)(I). No add-on payment under this subparagraph shall be 

made with respect to such new technology and this clause shall not affect the application of paragraph (4)(C)(iii).’’. 

(d) IMPROVEMENT IN PAYMENT FOR NEW TECHNOLOGY.—Section 

1886(d)(5)(K)(ii)(III) (42 U.S.C. 1395ww(d)(5)(K)(ii)(III)) is amended by inserting 

after ‘‘the estimated average cost of such service or technology’’ the following: 

‘‘(based on the marginal rate applied to costs under subparagraph (A))’’. 

(e) ESTABLISHMENT OF NEW FUNDING FOR HOSPITAL INPATIENT TECHNOLOGY.— Section 1886(d)(5)(K)(ii)(III) (42 U.S.C. 1395ww(d)(5)(K)(ii)(III)) is amended by striking ‘‘subject to paragraph (4)(C)(iii),’’. 

(f) EFFECTIVE DATE.— (1) IN GENERAL.—The Secretary shall implement the amendments made by 

this section so that they apply to classification for fiscal years beginning with 

fiscal year 2005. 

(2) RECONSIDERATIONS OF APPLICATIONS FOR FISCAL YEAR 2003 THAT ARE DE- NIED.—In the case of an application for a classification of a medical service or 

technology as a new medical service or technology under section 1886(d)(5)(K) 

of the Social Security Act (42 U.S.C. 1395ww(d)(5)(K)) that was filed for fiscal 

year 2004 and that is denied—

(A) the Secretary shall automatically reconsider the application as an application for fiscal year 2005 under the amendments made by this section; 

and 

(B) the maximum time period otherwise permitted for such classification 

of the service or technology shall be extended by 12 months. 

SEC. 503. INCREASE IN FEDERAL RATE FOR HOSPITALS IN PUERTO RICO. 

Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is amended—

(1) in subparagraph (A)—

(A) in clause (i), by striking ‘‘for discharges beginning on or after October 

1, 1997, 50 percent (and for discharges between October 1, 1987, and September 30, 1997, 75 percent)’’ and inserting ‘‘the applicable Puerto Rico percentage (specified in subparagraph (E))’’; and 

(B) in clause (ii), by striking ‘‘for discharges beginning in a fiscal year beginning on or after October 1, 1997, 50 percent (and for discharges between 

October 1, 1987, and September 30, 1997, 25 percent)’’ and inserting ‘‘the 

applicable Federal percentage (specified in subparagraph (E))’’; and 

(2) by adding at the end the following new subparagraph: 

‘‘(E) For purposes of subparagraph (A), for discharges occurring—

‘‘(i) on or after October 1, 1987, and before October 1, 1997, the applicable 

Puerto Rico percentage is 75 percent and the applicable Federal percentage is 

25 percent; 

‘‘(ii) on or after October 1, 1997, and before October 1, 2003, the applicable 

Puerto Rico percentage is 50 percent and the applicable Federal percentage is 

50 percent; 

‘‘(iii) during fiscal year 2004, the applicable Puerto Rico percentage is 41 percent and the applicable Federal percentage is 59 percent; 

‘‘(iv) during fiscal year 2005, the applicable Puerto Rico percentage is 33 percent and the applicable Federal percentage is 67 percent; and 

‘‘(v) on or after October 1, 2005, the applicable Puerto Rico percentage is 25 

percent and the applicable Federal percentage is 75 percent.’’. 

SEC. 504. WAGE INDEX ADJUSTMENT RECLASSIFICATION REFORM . 

(a) IN GENERAL.—Section 1886(d) (42 U.S.C. 1395ww(d)) is amended by adding at 

the end the following: 

‘‘(11)(A) In order to recognize commuting patterns among Metropolitan Statistical 

Areas and between such Areas and rural areas, the Secretary shall establish a process, upon application of a subsection (d) hospital that establishes that it is a qualifying hospital described in subparagraph (B), for an increase of the wage index applied under paragraph (3)(E) for the hospital in the amount computed under subparagraph (D). 

‘‘(B) A qualifying hospital described in this subparagraph is a subsection (d) hospital—

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‘‘(i) the average wages of which exceed the average wages for the area in 

which the hospital is located; and 

‘‘(ii) which has at least 10 percent of its employees who reside in one or more 

higher wage index areas. 

‘‘(C) For purposes of this paragraph, the term ‘higher wage index area’ means, 

with respect to a hospital, an area with a wage index that exceeds that of the area 

in which the hospital is located. 

‘‘(D) The increase in the wage index under subparagraph (A) for a hospital shall 

be equal to the percentage of the employees of the hospital that resides in any higher wage index area multiplied by the sum of the products, for each higher wage 

index area of—

‘‘(i) the difference between (I) the wage index for such area, and (II) the wage 

index of the area in which the hospital is located (before the application of this 

paragraph); and 

‘‘(ii) the number of employees of the hospital that reside in such higher wage 

index area divided by the total number of such employees that reside in all high 

wage index areas. 

‘‘(E) The process under this paragraph shall be based upon the process used by 

the Medicare Geographic Classification Review Board under paragraph (10) with respect to data submitted by hospitals to the Board on the location of residence of hospital employees and wages under the applicable schedule established for geographic 

reclassification. 

‘‘(F) A reclassification under this paragraph shall be effective for a period of 3 fiscal years, except that the Secretary shall establish procedures under which a subsection (d) hospital may elect to terminate such reclassification before the end of 

such period. 

‘‘(G) A hospital that is reclassified under this paragraph for a period is not eligible 

for reclassification under paragraphs (8) or (10) during that period. 

‘‘(H) Any increase in a wage index under this paragraph for a hospital shall not 

be taken into account for purposes of—

‘‘(i) computing the wage index for the area in which the hospital is located 

or any other area; or 

‘‘(ii) applying any budget neutrality adjustment with respect to such index 

under paragraph (8)(D).’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall first apply to 

the wage index for cost reporting period beginning on or after October 1, 2004. 

SEC. 505. MEDPAC REPORT ON SPECIALTY HOSPITALS. 

(a) MEDPAC STUDY.—The Medicare Payment Advisory Commission shall conduct 

a study of specialty hospitals compared with other similar general acute care hospitals under the medicare program. Such study shall examine—

(1) whether there are excessive self-referrals; 

(2) quality of care furnished; 

(3) the impact of specialty hospitals on such general acute care hospitals; and 

(4) differences in the scope of services, medicaid utilization, and uncompensated care furnished. 

(b) REPORT.—Not later than 1 year after the date of the enactment of this Act, 

the Secretary shall submit to Congress a report on the study conducted under subsection (a), and shall include any recommendations for legislation or administrative 

change as the Secretary determines appropriate. 

Subtitle B—Other Provisions 

SEC. 511. PAYMENT FOR COVERED SKILLED NURSING FACILITY SERVICES. 

(a) ADJUSTMENT TO RUGS FOR AIDS RESIDENTS.—Paragraph (12) of section 

1888(e) (42 U.S.C. 1395yy(e)) is amended to read as follows: 

‘‘(12) ADJUSTMENT FOR RESIDENTS WITH AIDS.—

‘‘(A) IN GENERAL.—Subject to subparagraph (B), in the case of a resident 

of a skilled nursing facility who is afflicted with acquired immune deficiency syndrome (AIDS), the per diem amount of payment otherwise applicable shall be increased by 128 percent to reflect increased costs associated 

with such residents. 

‘‘(B) SUNSET.—Subparagraph (A) shall not apply on and after such date 

as the Secretary certifies that there is an appropriate adjustment in the 

case mix under paragraph (4)(G)(i) to compensate for the increased costs associated with residents described in such subparagraph.’’. 

(b) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to services furnished on or after October 1, 2003. 

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SEC. 512. COVERAGE OF HOSPICE CONSULTATION SERVICES. 

(a) COVERAGE OF HOSPICE CONSULTATION SERVICES.—Section 1812(a) (42 U.S.C. 

1395d(a)) is amended—

(1) by striking ‘‘and’’ at the end of paragraph (3); 

(2) by striking the period at the end of paragraph (4) and inserting ‘‘; and’’; 

and 

(3) by inserting after paragraph (4) the following new paragraph: 

‘‘(5) for individuals who are terminally ill, have not made an election under 

subsection (d)(1), and have not previously received services under this paragraph, services that are furnished by a physician who is either the medical director or an employee of a hospice program and that consist of—

‘‘(A) an evaluation of the individual’s need for pain and symptom management; 

‘‘(B) counseling the individual with respect to end-of-life issues and care 

options; and 

‘‘(C) advising the individual regarding advanced care planning.’’. 

(b) PAYMENT.—Section 1814(i) (42 U.S.C. l395f(i)) is amended by adding at the 

end the following new paragraph: 

‘‘(4) The amount paid to a hospice program with respect to the services under section 1812(a)(5) for which payment may be made under this part shall be equal to 

an amount equivalent to the amount established for an office or other outpatient 

visit for evaluation and management associated with presenting problems of moderate severity under the fee schedule established under section 1848(b), other than 

the portion of such amount attributable to the practice expense component.’’. 

(c) CONFORMING AMENDMENT.—Section 1861(dd)(2)(A)(i) (42 U.S.C. 

1395x(dd)(2)(A)(i)) is amended by inserting before the comma at the end the following: ‘‘and services described in section 1812(a)(5)’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to services provided by a hospice program on or after January 1, 2004.

TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services

SEC. 601. REVISION OF UPDATES FOR PHYSICIANS’ SERVICES. 

(a) UPDATE FOR 2004 AND 2005.—

(1) IN GENERAL.—Section 1848(d) (42 U.S.C. 1395w–4(d)) is amended by adding at the end the following new paragraph: 

‘‘(5) UPDATE FOR 2004 AND 2005.—The update to the single conversion factor 

established in paragraph (1)(C) for each of 2004 and 2005 shall be not less than 

1.5 percent.’’. 

(2) CONFORMING AMENDMENT.—Paragraph (4)(B) of such section is amended, 

in the matter before clause (i), by inserting ‘‘and paragraph (5)’’ after ‘‘subparagraph (D)’’. 

(3) NOT TREATED AS CHANGE IN LAW AND REGULATION IN SUSTAINABLE

GROWTH RATE DETERMINATION.—The amendments made by this subsection shall 

not be treated as a change in law for purposes of applying section 1848(f)(2)(D) 

of the Social Security Act (42 U.S.C. 1395w–4(f)(2)(D)). 

(b) USE OF 10-YEAR ROLLING AVERAGE IN COMPUTING GROSS DOMESTIC PRODUCT.—

(1) IN GENERAL.—Section 1848(f)(2)(C) (42 U.S.C. 1395w–4(f)(2)(C)) is amended—

(A) by striking ‘‘projected’’ and inserting ‘‘annual average’’; and 

(B) by striking ‘‘from the previous applicable period to the applicable period involved’’ and inserting ‘‘during the 10-year period ending with the applicable period involved’’.

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

computations of the sustainable growth rate for years beginning with 2003. 

SEC. 602. STUDIES ON ACCESS TO PHYSICIANS’ SERVICES. 

(a) GAO STUDY ON BENEFICIARY ACCESS TO PHYSICIANS’ SERVICES.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study on access of medicare beneficiaries to physicians’ services under the medicare program. The study shall include—

(A) an assessment of the use by beneficiaries of such services through an 

analysis of claims submitted by physicians for such services under part B 

of the medicare program; 

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(B) an examination of changes in the use by beneficiaries of physicians’ 

services over time; 

(C) an examination of the extent to which physicians are not accepting 

new medicare beneficiaries as patients. 

(2) REPORT.—Not later than 18 months after the date of the enactment of this 

Act, the Comptroller General shall submit to Congress a report on the study 

conducted under paragraph (1). The report shall include a determination whether—

(A) data from claims submitted by physicians under part B of the medicare program indicate potential access problems for medicare beneficiaries 

in certain geographic areas; and 

(B) access by medicare beneficiaries to physicians’ services may have improved, remained constant, or deteriorated over time.

(b) STUDY AND REPORT ON SUPPLY OF PHYSICIANS.—

(1) STUDY.—The Secretary shall request the Institute of Medicine of the National Academy of Sciences to conduct a study on the adequacy of the supply 

of physicians (including specialists) in the United States and the factors that 

affect such supply. 

(2) REPORT TO CONGRESS.—Not later than 2 years after the date of enactment 

of this section, the Secretary shall submit to Congress a report on the results 

of the study described in paragraph (1), including any recommendations for legislation. 

(c) GAO STUDY OF MEDICARE PAYMENT FOR INHALATION THERAPY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to examine the adequacy of current reimbursements for inhalation therapy under the medicare program. 

(2) REPORT.—Not later than May 1, 2004, the Comptroller General shall submit to Congress a report on the study conducted under paragraph (1). 

SEC. 603. MEDPAC REPORT ON PAYMENT FOR PHYSICIANS’ SERVICES. 

(a) PRACTICE EXPENSE COMPONENT.—Not later than 1 year after the date of the 

enactment of this Act, the Medicare Payment Advisory Commission shall submit to 

Congress a report on the effect of refinements to the practice expense component 

of payments for physicians’ services, after the transition to a full resource-based 

payment system in 2002, under section 1848 of the Social Security Act (42 U.S.C. 

1395w–4). Such report shall examine the following matters by physician specialty: 

(1) The effect of such refinements on payment for physicians’ services. 

(2) The interaction of the practice expense component with other components 

of and adjustments to payment for physicians’ services under such section. 

(3) The appropriateness of the amount of compensation by reason of such refinements. 

(4) The effect of such refinements on access to care by medicare beneficiaries 

to physicians’ services. 

(5) The effect of such refinements on physician participation under the medicare program. 

(b) VOLUME OF PHYSICIAN SERVICES.—The Medicare Payment Advisory Commission shall submit to Congress a report on the extent to which increases in the volume of physicians’ services under part B of the medicare program are a result of 

care that improves the health and well-being of medicare beneficiaries. The study 

shall include the following: 

(1) An analysis of recent and historic growth in the components that the Secretary includes under the sustainable growth rate (under section 1848(f) of the 

Social Security Act). 

(2) An examination of the relative growth of volume in physician services between medicare beneficiaries and other populations. 

(3) An analysis of the degree to which new technology, including coverage determinations of the Centers for Medicare & Medicaid Services, has affected the 

volume of physicians’ services. 

(4) An examination of the impact on volume of demographic changes. 

(5) An examination of shifts in the site of service of services that influence 

the number and intensity of services furnished in physicians’ offices and the extent to which changes in reimbursement rates to other providers have affected 

these changes. 

(6) An evaluation of the extent to which the Centers for Medicare & Medicaid 

Services takes into account the impact of law and regulations on the sustainable 

growth rate. 

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Subtitle B—Preventive Services

SEC. 611. COVERAGE OF AN INITIAL PREVENTIVE PHYSICAL EXAMINATION. 

(a) COVERAGE.—Section 1861(s)(2) (42 U.S.C. 1395x(s)(2)) is amended—

(1) in subparagraph (U), by striking ‘‘and’’ at the end; 

(2) in subparagraph (V), by inserting ‘‘and’’ at the end; and 

(3) by adding at the end the following new subparagraph: 

‘‘(W) an initial preventive physical examination (as defined in subsection 

(ww));’’. 

(b) SERVICES DESCRIBED.—Section 1861 (42 U.S.C. 1395x) is amended by adding 

at the end the following new subsection: 

‘‘Initial Preventive Physical Examination 

‘‘(ww) The term ‘initial preventive physical examination’ means physicians’ services consisting of a physical examination with the goal of health promotion and disease detection and includes items and services (excluding clinical laboratory tests), 

as determined by the Secretary, consistent with the recommendations of the United 

States Preventive Services Task Force.’’. 

(c) WAIVER OF DEDUCTIBLE AND COINSURANCE.—

(1) DEDUCTIBLE.—The first sentence of section 1833(b) (42 U.S.C. 1395l(b)) is 

amended—

(A) by striking ‘‘and’’ before ‘‘(6)’’, and 

(B) by inserting before the period at the end the following: ‘‘, and (7) such 

deductible shall not apply with respect to an initial preventive physical examination (as defined in section 1861(ww))’’. 

(2) COINSURANCE.—Section 1833(a)(1) (42 U.S.C. 1395l(a)(1)) is amended—

(A) in clause (N), by inserting ‘‘(or 100 percent in the case of an initial 

preventive physical examination, as defined in section 1861(ww))’’ after ‘‘80 

percent’’; and 

(B) in clause (O), by inserting ‘‘(or 100 percent in the case of an initial 

preventive physical examination, as defined in section 1861(ww))’’ after ‘‘80 

percent’’. 

(d) PAYMENT AS PHYSICIANS’ SERVICES.—Section 1848(j)(3) (42 U.S.C. 1395w–

4(j)(3)) is amended by inserting ‘‘(2)(W),’’ after ‘‘(2)(S),’’. 

(e) OTHER CONFORMING AMENDMENTS.—Section 1862(a) (42 U.S.C. 1395y(a)) is 

amended—

(1) in paragraph (1)—

(A) by striking ‘‘and’’ at the end of subparagraph (H); 

(B) by striking the semicolon at the end of subparagraph (I) and inserting 

‘‘, and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(J) in the case of an initial preventive physical examination, which is performed not later than 6 months after the date the individual’s first coverage period begins under part B;’’; and 

(2) in paragraph (7), by striking ‘‘or (H)’’ and inserting ‘‘(H), or (J)’’. 

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to services furnished on or after January 1, 2004, but only for individuals whose coverage 

period begins on or after such date. 

SEC. 612. COVERAGE OF CHOLESTEROL AND BLOOD LIPID SCREENING. 

(a) COVERAGE.—Section 1861(s)(2) (42 U.S.C. 1395x(s)(2)), as amended by section 

611(a), is amended—

(1) in subparagraph (V), by striking ‘‘and’’ at the end; 

(2) in subparagraph (W), by inserting ‘‘and’’ at the end; and 

(3) by adding at the end the following new subparagraph: 

‘‘(X) cholesterol and other blood lipid screening tests (as defined in subsection (XX));’’. 

(b) SERVICES DESCRIBED.—Section 1861 (42 U.S.C. 1395x), as amended by section 

611(b), is amended by adding at the end the following new subsection: 

‘‘Cholesterol and Other Blood Lipid Screening Test 

‘‘(xx)(1) The term ‘cholesterol and other blood lipid screening test’ means diagnostic testing of cholesterol and other lipid levels of the blood for the purpose of 

early detection of abnormal cholesterol and other lipid levels. 

‘‘(2) The Secretary shall establish standards, in consultation with appropriate organizations, regarding the frequency and type of cholesterol and other blood lipid 

88

screening tests, except that such frequency may not be more often than once every 

2 years.’’. 

(c) FREQUENCY.—Section 1862(a)(1) (42 U.S.C. 1395y(a)(1)), as amended by section 

611(e), is amended—

(1) by striking ‘‘and’’ at the end of subparagraph (I); 

(2) by striking the semicolon at the end of subparagraph (J) and inserting ‘‘; 

and’’; and 

(3) by adding at the end the following new subparagraph: 

‘‘(K) in the case of a cholesterol and other blood lipid screening test (as defined in section 1861(xx)(1)), which is performed more frequently than is covered under section 1861(xx)(2).’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to tests 

furnished on or after January 1, 2005. 

SEC. 613. WAIVER OF DEDUCTIBLE FOR COLORECTAL CANCER SCREENING TESTS. 

(a) IN GENERAL.—The first sentence of section 1833(b) (42 U.S.C. 1395l(b)), as 

amended by section 611(c)(1), is amended—

(1) by striking ‘‘and’’ before ‘‘(7)’’; and 

(2) by inserting before the period at the end the following: ‘‘, and (8) such deductible shall not apply with respect to colorectal cancer screening tests (as described in section 1861(pp)(1))’’. 

(b) CONFORMING AMENDMENTS.—Paragraphs (2)(C)(ii) and (3)(C)(ii) of section 

1834(d) (42 U.S.C. 1395m(d)) are each amended—

(1) by striking ‘‘DEDUCTIBLE AND’’ in the heading; and 

(2) in subclause (I), by striking ‘‘deductible or’’ each place it appears. 

(c) EFFECTIVE DATE.—The amendment made by this section shall apply to items 

and services furnished on or after Janaury 1, 2004.

SEC. 614. IMPROVED PAYMENT FOR CERTAIN MAMMOGRAPHY SERVICES. 

(a) EXCLUSION FROM OPD FEE SCHEDULE.—Section 1833(t)(1)(B)(iv) (42 U.S.C. 

1395l(t)(1)(B)(iv)) is amended by inserting before the period at the end the following: 

‘‘and does not include screening mammography (as defined in section 1861(jj)) and 

unilateral and bilateral diagnostic mammography’’. 

(b) ADJUSTMENT TO TECHNICAL COMPONENT.—For diagnostic mammography performed on or after January 1, 2004, for which payment is made under the physician 

fee schedule under section 1848 of the Social Security Act (42 U.S.C. 1395w–4), the 

Secretary, based on the most recent cost data available, shall provide for an appropriate adjustment in the payment amount for the technical component of the diagnostic mammography. 

(c) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to 

mammography performed on or after January 1, 2004.

Subtitle C—Other Services 

SEC. 621. HOSPITAL OUTPATIENT DEPARTMENT (HOPD) PAYMENT REFORM. 

(a) PAYMENT FOR DRUGS.—

(1) MODIFICATION OF AMBULATORY PAYMENT CLASSIFICATION (APC) GROUPS.—

Section 1833(t) (42 U.S.C. 1395l(t)) is amended—

(A) by redesignating paragraph (13) as paragraph (14); and 

(B) by inserting after paragraph (12) the following new paragraph: 

‘‘(13) DRUG APC PAYMENT RATES.—

‘‘(A) IN GENERAL.—With respect to payment for covered OPD services that 

includes a specified covered outpatient drug (defined in subparagraph (B)), 

the amount provided for payment for such drug under the payment system 

under this subsection for services furnished in—

‘‘(i) 2004, 2005, or 2006, shall in no case—

‘‘(I) exceed 95 percent of the average wholesale price for the drug; 

or 

‘‘(II) be less than the transition percentage (under subparagraph 

(C)) of the average wholesale price for the drug; or 

‘‘(ii) a subsequent year, shall be equal to the average price for the 

drug for that area and year established under the competitive acquisition program under section 1847A as calculated and applied by the Secretary for purposes of this paragraph. 

‘‘(B) SPECIFIED COVERED OUTPATIENT DRUG DEFINED.—

‘‘(i) IN GENERAL.—In this paragraph, the term ‘specified covered outpatient drug’ means, subject to clause (ii), a covered outpatient drug (as 

defined in 1927(k)(2), that is—

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‘‘(I) a radiopharmaceutical; or 

‘‘(II) a drug or biological for which payment was made under 

paragraph (6) (relating to pass-through payments) on or before December 31, 2002. 

‘‘(ii) EXCEPTION.—Such term does not include—

‘‘(I) a drug for which payment is first made on or after January 

1, 2003, under paragraph (6); or 

‘‘(II) a drug for a which a temporary HCPCS code has not been 

assigned. 

‘‘(C) TRANSITION TOWARDS HISTORICAL AVERAGE ACQUISITION COST.—The 

transition percentage under this subparagraph for drugs furnished in a 

year is determined in accordance with the following table:

For the year—

The transition percentage for—

Single source 

drugs are—

Innovator multiple source 

drugs are—

Generic drugs are—

2004 ............... 83% 81.5% 46%

2005 ............... 77% 75% 46%

2006 ............... 71% 68% 46%

‘‘(D) PAYMENT FOR NEW DRUGS UNTIL TEMPORARY HCPCS CODE ASSIGNED.—With respect to payment for covered OPD services that includes 

a covered outpatient drug (as defined in 1927(k)) for a which a temporary 

HCPCS code has not been assigned, the amount provided for payment for 

such drug under the payment system under this subsection shall be equal 

to 95 percent of the average wholesale price for the drug. 

‘‘(E) CLASSES OF DRUGS.—For purposes of this paragraph, each of the following shall be treated as a separate class of drugs: 

‘‘(i) SOLE SOURCE DRUGS.—A sole source drug which for purposes of 

this paragraph means a drug or biological that is not a multiple source 

drug (as defined in subclauses (I) and (II) of section 1927(k)(7)(A)(i)) 

and is not a drug approved under an abbreviated new drug application 

under section 355(j) of the Federal Food, Drug, and Cosmetic Act. 

‘‘(ii) INNOVATOR MULTIPLE SOURCE DRUGS.—Innovator multiple source 

drugs (as defined in section 1927(k)(7)(A)(ii)). 

‘‘(iii) NONINNOVATOR MULTIPLE SOURCE DRUGS.—Noninnovator multiple source drugs (as defined in section 1927(k)(7)(A)(iii)). 

‘‘(F) INAPPLICABILITY OF EXPENDITURES IN DETERMINING CONVERSION FACTORS.—Additional expenditures resulting from this paragraph and paragraph (14)(C) in a year shall not be taken into account in establishing the 

conversion factor for that year.’’. 

(2) REDUCTION IN THRESHOLD FOR SEPARATE APCS FOR DRUGS.—Section 

1833(t)(14), as redesignated by paragraph (1)(A), is amended by adding at the 

end the following new subparagraph: 

‘‘(B) THRESHOLD FOR ESTABLISHMENT OF SEPARATE APCS FOR DRUGS.—The 

Secretary shall reduce the threshold for the establishment of separate ambulatory procedure classification groups (APCs) with respect to drugs to $50 

per administration.’’. 

(3) EXCLUSION OF SEPARATE DRUG APCS FROM OUTLIER PAYMENTS.—Section 

1833(t)(5) is amended by adding at the end the following new subparagraph: 

‘‘(E) EXCLUSION OF SEPARATE DRUG APCS FROM OUTLIER PAYMENTS.—No 

additional payment shall be made under subparagraph (A) in the case of 

ambulatory procedure codes established separately for drugs.’’. 

(4) PAYMENT FOR PASS THROUGH DRUGS.—Clause (i) of section 1833(t)(6)(D) 

(42 U.S.C. 1395l(t)(6)(D)) is amended by inserting after ‘‘under section 1842(o)’’ 

the following: ‘‘(or if the drug is covered under a competitive acquisition contract 

under section 1847A for an area, an amount determined by the Secretary equal 

to the average price for the drug for that area and year established under such 

section as calculated and applied by the Secretary for purposes of this paragraph)’’. 

(5) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to services furnished on or after January 1, 2004. 

(b) SPECIAL PAYMENT FOR BRACHYTHERAPY.—

(1) IN GENERAL.—Section 1833(t)(14), as so redesignated and amended by subsection (a)(2), is amended by adding at the end the following new subparagraph: 

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‘‘(C) PAYMENT FOR DEVICES OF BRACHYTHERAPY AT CHARGES ADJUSTED TO

COST.—Notwithstanding the preceding provisions of this subsection, for a 

device of brachytherapy furnished on or after January 1, 2004, and before 

January 1, 2007, the payment basis for the device under this subsection 

shall be equal to the hospital’s charges for each device furnished, adjusted 

to cost.’’. 

(2) SPECIFICATION OF GROUPS FOR BRACHYTHERAPY DEVICES.—Section 

1833(t)(2) (42 U.S.C. 1395l(t)(2) is amended—

(A) in subparagraph (F), by striking ‘‘and’’ at the end; 

(B) in subparagraph (G), by striking the period at the end and inserting 

‘‘; and’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(H) with respect to devices of brachytherapy, the Secretary shall create 

additional groups of covered OPD services that classify such devices separately from the other services (or group of services) paid for under this subsection in a manner reflecting the number, isotope, and radioactive intensity of such devices furnished, including separate groups for palladium-103 

and iodine-125 devices.’’. 

(3) GAO REPORT.—The Comptroller General of the United States shall conduct a study to determine appropriate payment amounts under section 

1833(t)(13)(B) of the Social Security Act, as added by paragraph (1), for devices 

of brachytherapy. Not later than January 1, 2005, the Comptroller General 

shall submit to Congress and the Secretary a report on the study conducted 

under this paragraph, and shall include specific recommendations for appropriate payments for such devices.

(c) APPLICATION OF FUNCTIONAL EQUIVALENCE TEST.—

(1) IN GENERAL.—Section 1833(t)(6) (42 U.S.C. 1395l(t)(6)) is amended by adding at the end the following new subparagraph: 

‘‘(F) LIMITATION ON APPLICATION OF FUNCTIONAL EQUIVALENCE STANDARD.—The Secretary may not apply a ‘functional equivalence’ payment 

standard (including such standard promulgated on November 1, 2002) or 

any other similar standard in order to deem a particular drug or biological 

to be identical to or similar to another drug or biological with respect to 

its mechanism of action or clinical effect to deny pass-through status to new 

drugs or biologics or to remove such status of an existing eligible drug or 

biologic under this paragraph unless—

‘‘(i) the Secretary develops by regulation (after providing notice and 

a period for public comment) criteria for the application of such standard; and 

‘‘(ii) such criteria provide for coordination with the Federal Food and 

Drug Administration and require scientific studies that show the clinical relationship between the drugs or biologicals treated as functionally equivalent.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

the application of a functional equivalence standard to a drug or biological on 

or after the date of the enactment of this Act, unless such application was being 

made to such drug or biological prior to June 13, 2003. 

(d) HOSPITAL ACQUISITION COST STUDY.—

(1) IN GENERAL.—The Secretary shall conduct a study on the costs incurred 

by hospitals in acquiring covered outpatient drugs for which payment is made 

under section 1833(t) of the Social Security Act (42 U.S.C. 1395l(t)). 

(2) DRUGS COVERED.—The study in paragraph (1) shall not include those 

drugs for which the acquisition costs is less than $50 per administration. 

(3) REPRESENTATIVE SAMPLE OF HOSPITALS.—In conducting the study under 

paragraph (1), the Secretary shall collect data from a statistically valid sample 

of hospitals with an urban/rural stratification. 

(4) REPORT.—Not later than January 1, 2006, the Secretary shall submit to 

Congress a report on the study conducted under paragraph (1), and shall include recommendations with respect to the following: 

(A) Whether the study should be repeated, and if so, how frequently. 

(B) Whether the study produced useful data on hospital acquisition cost. 

(C) Whether data produced in the study is appropriate for use in making 

adjustments to payments for drugs and biologicals under section 1847A of 

the Social Security Act. 

(D) Whether separate estimates can made of overhead costs, including 

handing and administering costs for drugs.

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SEC. 622. PAYMENT FOR AMBULANCE SERVICES. 

(a) PHASE-IN PROVIDING FLOOR USING BLEND OF FEE SCHEDULE AND REGIONAL

FEE SCHEDULES.—Section 1834(l) (42 U.S.C. 1395m(l)), as amended by section 

410(a), is amended—

(1) in paragraph (2)(E), by inserting ‘‘consistent with paragraph (11)’’ after ‘‘in 

an efficient and fair manner’’; and 

(2) by adding at the end the following new paragraph: 

‘‘(11) PHASE-IN PROVIDING FLOOR USING BLEND OF FEE SCHEDULE AND REGIONAL FEE SCHEDULES.—In carrying out the phase-in under paragraph (2)(E) 

for each level of service furnished in a year, the portion of the payment amount 

that is based on the fee schedule shall not be less than the following blended 

rate of the fee schedule under paragraph (1) and of a regional fee schedule for 

the region involved: 

‘‘(A) For 2004, the blended rate shall be based 20 percent on the fee 

schedule under paragraph (1) and 80 percent on the regional fee schedule. 

‘‘(B) For 2005, the blended rate shall be based 40 percent on the fee 

schedule under paragraph (1) and 60 percent on the regional fee schedule. 

‘‘(C) For 2006, the blended rate shall be based 60 percent on the fee 

schedule under paragraph (1) and 40 percent on the regional fee schedule. 

‘‘(D) For 2007, 2008, and 2009, the blended rate shall be based 80 percent 

on the fee schedule under paragraph (1) and 20 percent on the regional fee 

schedule. 

‘‘(E) For 2010 and each succeeding year, the blended rate shall be based 

100 percent on the fee schedule under paragraph (1). 

For purposes of this paragraph, the Secretary shall establish a regional fee 

schedule for each of the 9 Census divisions using the methodology (used in establishing the fee schedule under paragraph (1)) to calculate a regional conversion factor and a regional mileage payment rate and using the same payment 

adjustments and the same relative value units as used in the fee schedule 

under such paragraph.’’. 

(b) ADJUSTMENT IN PAYMENT FOR CERTAIN LONG TRIPS.—Section 1834(l), as 

amended by subsection (a), is further amended by adding at the end the following 

new paragraph: 

‘‘(12) ADJUSTMENT IN PAYMENT FOR CERTAIN LONG TRIPS.—In the case of 

ground ambulance services furnished on or after January 1, 2004, and before 

January 1, 2009, regardless of where the transportation originates, the fee 

schedule established under this subsection shall provide that, with respect to 

the payment rate for mileage for a trip above 50 miles the per mile rate otherwise established shall be increased by 1⁄4 of the payment per mile otherwise applicable to such miles.’’. 

(c) GAO REPORT ON COSTS AND ACCESS.—Not later than December 31, 2005, the 

Comptroller General of the United States shall submit to Congress an initial report 

on how costs differ among the types of ambulance providers and on access, supply, 

and quality of ambulance services in those regions and States that have a reduction 

in payment under the medicare ambulance fee schedule (under section 1834(l) of the 

Social Security Act, as amended by this section). Not later than December 31, 2007, 

the Comptroller General shall submit to Congress a final report on such access and 

supply. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to ambulance services furnished on or after January 1, 2004.

SEC. 623. RENAL DIALYSIS SERVICES. 

(a) DEMONSTRATION OF ALTERNATIVE DELIVERY MODELS.—

(1) USE OF ADVISORY BOARD.—In carrying out the demonstration project relating to improving care for people with end-stage renal disease through alternative delivery models (as published in the Federal Register of June 4, 2003), 

the Secretary shall establish an advisory board comprised of representatives described in paragraph (2) to provide advice and recommendations with respect 

to the establishment and operation of such demonstration project. 

(2) REPRESENTATIVES.—Representatives referred to in paragraph (1) include 

representatives of the following: 

(A) Patient organizations. 

(B) Clinicians. 

(C) The medicare payment advisory commission, established under section 1805 of the Social Security Act (42 U.S.C. 1395b–6). 

(D) The National Kidney Foundation. 

(E) The National Institute of Diabetes and Digestive and Kidney Diseases 

of National Institutes of Health. 

(F) End-stage renal disease networks. 

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(G) Medicare contractors to monitor quality of care. 

(I) providers of services and renal dialysis facilities furnishing end-stage 

renal disease services. 

(J) Economists. 

(K) Researchers. 

(b) RESTORING COMPOSITE RATE EXCEPTIONS FOR PEDIATRIC FACILITIES.—

(1) IN GENERAL.—Section 422(a)(2) of BIPA is amended—

(A) in subparagraph (A), by striking ‘‘and (C)’’ and inserting ‘‘, (C), and 

(D)’’; 

(B) in subparagraph (B), by striking ‘‘In the case’’ and inserting ‘‘Subject 

to subparagraph (D), in the case’’; and 

(C) by adding at the end the following new subparagraph: 

‘‘(D) INAPPLICABILITY TO PEDIATRIC FACILITIES.—Subparagraphs (A) and 

(B) shall not apply, as of October 1, 2002, to pediatric facilities that do not 

have an exception rate described in subparagraph (C) in effect on such date. 

For purposes of this subparagraph, the term ‘pediatric facility’ means a 

renal facility at least 50 percent of whose patients are individuals under 18 

years of age.’’. 

(2) CONFORMING AMENDMENT.—The fourth sentence of section 1881(b)(7) (42 

U.S.C. 1395rr(b)(7)), as amended by subsection (b), is further amended by striking ‘‘Until’’ and inserting ‘‘Subject to section 422(a)(2) of the Medicare, Medicaid, 

and SCHIP Benefits Improvement and Protection Act of 2000, and until’’. 

(c) INCREASE IN RENAL DIALYSIS COMPOSITE RATE FOR SERVICES FURNISHED IN

2004.—Notwithstanding any other provision of law, with respect to payment under 

part B of title XVIII of the Social Security Act for renal dialysis services furnished 

in 2004, the composite payment rate otherwise established under section 1881(b)(7) 

of such Act (42 U.S.C. 1395rr(b)(7)) shall be increased by 1.6 percent. 

SEC. 624. ONE-YEAR MORATORIUM ON THERAPY CAPS; PROVISIONS RELATING TO REPORTS. 

(a) 1-YEAR MORATORIUM ON THERAPY CAPS.—Section 1833(g)(4) (42 U.S.C. 

1395l(g)(4)) is amended by striking ‘‘and 2002’’ and inserting ‘‘2002, and 2004’’. 

(b) PROMPT SUBMISSION OF OVERDUE REPORTS ON PAYMENT AND UTILIZATION OF

OUTPATIENT THERAPY SERVICES.—Not later than December 31, 2003, the Secretary 

shall submit to Congress the reports required under section 4541(d)(2) of the Balanced Budget Act of 1997 (relating to alternatives to a single annual dollar cap on 

outpatient therapy) and under section 221(d) of the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 1999 (relating to utilization patterns for outpatient therapy).

(c) IDENTIFICATION OF CONDITIONS AND DISEASES JUSTIFYING WAIVER OF THERAPY

CAP.—

(1) STUDY.—The Secretary shall request the Institute of Medicine of the National Academy of Sciences to identify conditions or diseases that should justify 

conducting an assessment of the need to waive the therapy caps under section 

1833(g)(4) of the Social Security Act (42 U.S.C. 1395l(g)(4)). 

(2) REPORTS TO CONGRESS.—

(A) PRELIMINARY REPORT.—Not later than July 1, 2004, the Secretary 

shall submit to Congress a preliminary report on the conditions and diseases identified under paragraph (1). 

(B) FINAL REPORT.—Not later than September 1, 2004, the Secretary shall 

submit to Congress a final report on such conditions and diseases. 

(C) RECOMMENDATIONS.—Not later than October 1, 2004, the Secretary 

shall submit to Congress a recommendation of criteria, with respect to such 

conditions and disease, under which a waiver of the therapy caps would 

apply. 

(d) GAO STUDY OF PATIENT ACCESS TO PHYSICAL THERAPIST SERVICES.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study on access to physical therapist services in States authorizing such services without a physician referral and in States that require such a physician 

referral. The study shall—

(A) examine the use of and referral patterns for physical therapist services for patients age 50 and older in States that authorize such services 

without a physician referral and in States that require such a physician referral; 

(B) examine the use of and referral patterns for physical therapist services for patients who are medicare beneficiaries; 

(C) examine the potential effect of prohibiting a physician from referring 

patients to physical therapy services owned by the physician and provided 

in the physician’s office; 

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(D) examine the delivery of physical therapists’ services within the facilities of Department of Defense; and 

(E) analyze the potential impact on medicare beneficiaries and on expenditures under the medicare program of eliminating the need for a physician 

referral and physician certification for physical therapist services under the 

medicare program. 

(2) REPORT.—The Comptroller General shall submit to Congress a report on 

the study conducted under paragraph (1) by not later than 1 year after the date 

of the enactment of this Act. 

SEC. 625. ADJUSTMENT TO PAYMENTS FOR SERVICES FURNISHED IN AMBULATORY SURGICAL CENTERS. 

Section 1833(i)(2)(C) (42 U.S.C. 1395l(i)(2)(C)) is amended in the last sentence by 

inserting ‘‘and each of fiscal years 2004 through 2008’’ after ‘‘In each of the fiscal 

years 1998 through 2002’’. 

SEC. 626. PAYMENT FOR CERTAIN SHOES AND INSERTS UNDER THE FEE SCHEDULE FOR 

ORTHOTICS AND PROSTHETICS. 

(a) IN GENERAL.—Section 1833(o) (42 U.S.C. 1395l(o)) is amended—

(1) in paragraph (1), by striking ‘‘no more than the limits established under 

paragraph (2)’’ and inserting ‘‘no more than the amount of payment applicable 

under paragraph (2)’’; and 

(2) in paragraph (2), to read as follows: 

‘‘(2)(A) Except as provided by the Secretary under subparagraphs (B) and (C), the 

amount of payment under this paragraph for custom molded shoes, extra depth 

shoes, and inserts shall be the amount determined for such items by the Secretary 

under section 1834(h). 

‘‘(B) The Secretary or a carrier may establish payment amounts for shoes and inserts that are lower than the amount established under section 1834(h) if the Secretary finds that shoes and inserts of an appropriate quality are readily available 

at or below the amount established under such section. 

‘‘(C) In accordance with procedures established by the Secretary, an individual entitled to benefits with respect to shoes described in section 1861(s)(12) may substitute modification of such shoes instead of obtaining one (or more, as specified by 

the Secretary) pair of inserts (other than the original pair of inserts with respect 

to such shoes). In such case, the Secretary shall substitute, for the payment amount 

established under section 1834(h), a payment amount that the Secretary estimates 

will assure that there is no net increase in expenditures under this subsection as 

a result of this subparagraph.’’. 

(b) CONFORMING AMENDMENTS.—(1) Section 1834(h)(4)(C) (42 U.S.C. 

1395m(h)(4)(C)) is amended by inserting ‘‘(and includes shoes described in section 

1861(s)(12))’’ after ‘‘in section 1861(s)(9)’’. 

(2) Section 1842(s)(2) (42 U.S.C. 1395u(s)(2)) is amended by striking subparagraph 

(C). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to items 

furnished on or after January 1, 2004.

SEC. 627. WAIVER OF PART B LATE ENROLLMENT PENALTY FOR CERTAIN MILITARY RETIREES; SPECIAL ENROLLMENT PERIOD. 

(a) WAIVER OF PENALTY.— (1) IN GENERAL.—Section 1839(b) (42 U.S.C. 1395r(b)) is amended by adding 

at the end the following new sentence: ‘‘No increase in the premium shall be 

effected for a month in the case of an individual who is 65 years of age or older, 

who enrolls under this part during 2001, 2002, 2003, or 2004 and who demonstrates to the Secretary before December 31, 2004, that the individual is a 

covered beneficiary (as defined in section 1072(5) of title 10, United States 

Code). The Secretary of Health and Human Services shall consult with the Secretary of Defense in identifying individuals described in the previous sentence.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

premiums for months beginning with January 2004. The Secretary of Health 

and Human Services shall establish a method for providing rebates of premium 

penalties paid for months on or after January 2004 for which a penalty does 

not apply under such amendment but for which a penalty was previously collected. 

(b) MEDICARE PART B SPECIAL ENROLLMENT PERIOD.—

(1) IN GENERAL.—In the case of any individual who, as of the date of the enactment of this Act, is 65 years of age or older, is eligible to enroll but is not 

enrolled under part B of title XVIII of the Social Security Act, and is a covered 

beneficiary (as defined in section 1072(5) of title 10, United States Code), the 

Secretary of Health and Human Services shall provide for a special enrollment 

period during which the individual may enroll under such part. Such period 

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shall begin as soon as possible after the date of the enactment of this Act and 

shall end on December 31, 2004. 

(2) COVERAGE PERIOD.—In the case of an individual who enrolls during the 

special enrollment period provided under paragraph (1), the coverage period 

under part B of title XVIII of the Social Security Act shall begin on the first 

day of the month following the month in which the individual enrolls. 

SEC. 628. PART B DEDUCTIBLE. 

Section 1833(b) (42 U.S.C. 1395l(b)) is amended—

(1) by striking ‘‘1991 and’’ and inserting ‘‘1991,’’; and 

(2) by striking ‘‘and subsequent years’’ and inserting ‘‘and each subsequent 

year through 2003, and for a subsequent year after 2003 the amount of such 

deductible for the previous year increased by the annual percentage increase in 

the monthly actuarial rate under section 1839(a)(1) ending with such subsequent year (rounded to the nearest $1)’’.

SEC. 629. EXTENSION OF COVERAGE OF INTRAVENOUS IMMUNE GLOBULIN (IVIG) FOR THE 

TREATMENT OF PRIMARY IMMUNE DEFICIENCY DISEASES IN THE HOME. 

(a) IN GENERAL.—Section 1861 (42 U.S.C. 1395x), as amended by sections 611(a) 

and 612(a) is amended—

(1) in subsection (s)(2)—

(A) by striking ‘‘and’’ at the end of subparagraph (W); 

(B) by adding ‘‘and’’ at the end of subparagraph (X); and 

(C) by adding at the end the following new subparagraph: 

‘‘(Y) intravenous immune globulin for the treatment of primary immune 

deficiency diseases in the home (as defined in subsection (yy));’’; and 

(2) by adding at the end the following new subsection: 

‘‘Intravenous Immune Globulin 

‘‘(yy) The term ‘intravenous immune globulin’ means an approved pooled plasma 

derivative for the treatment in the patient’s home of a patient with a diagnosed primary immune deficiency disease, but not including items or services related to the 

administration of the derivative, if a physician determines administration of the derivative in the patient’s home is medically appropriate.’’. 

(b) PAYMENT AS A DRUG OR BIOLOGICAL.—Section 1833(a)(1)(S) (42 U.S.C. 

1395l(a)(1)(S)) is amended by inserting ‘‘(including intravenous immune globulin (as 

defined in section 1861(yy)))’’ after ‘‘with respect to drugs and biologicals’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to items 

furnished administered on or after January 1, 2004.

TITLE VII—PROVISIONS RELATING TO PARTS 

A AND B 

Subtitle A—Home Health Services 

SEC. 701. UPDATE IN HOME HEALTH SERVICES. 

(a) CHANGE TO CALENDER YEAR UPDATE.— (1) IN GENERAL.—Section 1895(b) (42 U.S.C. 1395fff(b)(3)) is amended—

(A) in paragraph (3)(B)(i)—

(i) by striking ‘‘each fiscal year (beginning with fiscal year 2002)’’ and 

inserting ‘‘fiscal year 2002 and for fiscal year 2003 and for each subsequent year (beginning with 2004)’’; and 

(ii) by inserting ‘‘or year’’ after ‘‘the fiscal year’’; 

(B) in paragraph (3)(B)(ii)(II), by striking ‘‘any subsequent fiscal year’’ 

and inserting ‘‘2004 and any subsequent year’’; 

(C) in paragraph (3)(B)(iii), by inserting ‘‘or year’’ after ‘‘fiscal year’’ each 

place it appears; 

(D) in paragraph (3)(B)(iv)—

(i) by inserting ‘‘or year’’ after ‘‘fiscal year’’ each place it appears; and 

(ii) by inserting ‘‘or years’’ after ‘‘fiscal years’’; and 

(E) in paragraph (5), by inserting ‘‘or year’’ after ‘‘fiscal year’’. 

(2) TRANSITION RULE.—The standard prospective payment amount (or 

amounts) under section 1895(b)(3) of the Social Security Act for the calendar 

quarter beginning on October 1, 2003, shall be such amount (or amounts) for 

the previous calendar quarter. 

(b) CHANGES IN UPDATES FOR 2004, 2005, AND 2006.—Section 1895(b)(3)(B)(ii) (42 

U.S.C. 1395fff(b)(3)(B)(ii)), as amended by subsection (a)(1)(B), is amended—

95

(1) by striking ‘‘or’’ at the end of subclause (I); 

(2) by redesignating subclause (II) as subclause (III); 

(3) in subclause (III), as so redesignated, by striking ‘‘2004’’ and inserting 

‘‘2007’’; and 

(4) by inserting after subclause (I) the following new subclause: 

‘‘(II) each of 2004, 2005, and 2006 the home health market basket percentage increase minus 0.4 percentage points; or’’.

SEC. 702. ESTABLISHMENT OF REDUCED COPAYMENT FOR A HOME HEALTH SERVICE EPISODE OF CARE FOR CERTAIN BENEFICIARIES. 

(a) PART A.—

(1) IN GENERAL.—Section 1813(a) (42 U.S.C. 1395e(a)) is amended by adding 

at the end the following new paragraph: 

‘‘(5)(A)(i) Subject to clause (ii), the amount payable for home health services furnished to the individual under this title for each episode of care beginning in a year 

(beginning with 2004) shall be reduced by a copayment equal to the copayment 

amount specified in subparagraph (B)(ii) for such year. 

‘‘(ii) The copayment under clause (i) shall not apply—

‘‘(I) in the case of an individual who has been determined to be entitled to 

medical assistance under section 1902(a)(10)(A) or 1902(a)(10)(C) or to be a 

qualified medicare beneficiary (as defined in section 1905(p)(1)), a specified lowincome medicare beneficiary described in section 1902(a)(10)(E)(iii), or a qualifying individual described in section 1902(a)(10)(E)(iv)(I); and 

‘‘(II) in the case of an episode of care which consists of 4 or fewer visits. 

‘‘(B)(i) The Secretary shall estimate, before the beginning of each year (beginning 

with 2004), the national average payment under this title per episode for home 

health services projected for the year involved. 

‘‘(ii) For each year the copayment amount under this clause is equal to 1.5 percent 

of the national average payment estimated for the year involved under clause (i). 

Any amount determined under the preceding sentence which is not a multiple of $5 

shall be rounded to the nearest multiple of $5. 

‘‘(iii) There shall be no administrative or judicial review under section 1869, 1878, 

or otherwise of the estimation of average payment under clause (i).’’. 

(2) TIMELY IMPLEMENTATION.—Unless the Secretary of Health and Human 

Services otherwise provides on a timely basis, the copayment amount specified 

under section 1813(a)(5)(B)(ii) of the Social Security Act (as added by paragraph 

(1)) for 2004 shall be deemed to be $40. 

(b) CONFORMING PROVISIONS.—

(1) Section 1833(a)(2)(A) (42 U.S.C. 1395l(a)(2)(A)) is amended by inserting 

‘‘less the copayment amount applicable under section 1813(a)(5)’’ after ‘‘1895’’. 

(2) Section 1866(a)(2)(A)(i) (42 U.S.C. 1395cc(a)(2)(A)(i)) is amended—

(A) by striking ‘‘or coinsurance’’ and inserting ‘‘, coinsurance, or copayment’’; and 

(B) by striking ‘‘or (a)(4)’’ and inserting ‘‘(a)(4), or (a)(5)’’. 

SEC. 703. MEDPAC STUDY ON MEDICARE MARGINS OF HOME HEALTH AGENCIES. 

(a) STUDY.—The Medicare Payment Advisory Commission shall conduct a study 

of payment margins of home health agencies under the home health prospective 

payment system under section 1895 of the Social Security Act (42 U.S.C. 1395fff). 

Such study shall examine whether systematic differences in payment margins are 

related to differences in case mix (as measured by home health resource groups 

(HHRGs)) among such agencies. The study shall use the partial or full-year cost reports filed by home health agencies. 

(b) REPORT.—Not later than 2 years after the date of the enactment of this Act, 

the Commission shall submit to Congress a report on the study under subsection 

(a).

Subtitle B—Direct Graduate Medical Education 

SEC. 711. EXTENSION OF UPDATE LIMITATION ON HIGH COST PROGRAMS. 

Section 1886(h)(2)(D)(iv) (42 U.S.C. 1395ww(h)(2)(D)(iv)) is amended—

(1) in subclause (I)—

(A) by inserting ‘‘AND 2004 THROUGH 2013’’ after ‘‘AND 2002’’; and 

(B) by inserting ‘‘or during the period beginning with fiscal year 2004 and 

ending with fiscal year 2013’’ after ‘‘during fiscal year 2001 or fiscal year 

2002’’; and 

(2) in subclause (II)—

(A) by striking ‘‘fiscal year 2004, or fiscal year 2005,’’ and 

96

(B) by striking ‘‘For a’’ and inserting ‘‘For the’’.

Subtitle C—Chronic Care Improvement 

SEC. 721. VOLUNTARY CHRONIC CARE IMPROVEMENT UNDER TRADITIONAL FEE-FOR-SERVICE. 

Title XVIII, as amended by section 105(a), is amended by inserting after section 

1807 the following new section: 

‘‘CHRONIC CARE IMPROVEMENT

‘‘SEC. 1808. (a) IN GENERAL.—

‘‘(1) IN GENERAL.—The Secretary shall establish a process for providing chronic care improvement programs in each CCIA region for medicare beneficiaries 

who are not enrolled under part C or E and who have certain chronic conditions, such as congestive heart failure, diabetes, chronic obstructive pulmonary 

disease (COPD), stroke, or other disease as identified by the Secretary as appropriate for chronic care improvement. Such a process shall begin to be implemented no later than 1 year after the date of the enactment of this section. 

‘‘(2) TERMINOLOGY.—For purposes of this section: 

‘‘(A) CCIA REGION.—The term ‘CCIA region’ means a chronic care improvement administrative region delineated under subsection (b)(2). 

‘‘(B) CHRONIC CARE IMPROVEMENT PROGRAM.—The terms ‘chronic care improvement program’ and ‘program’ means such a program provided by a 

contractor under this section. 

‘‘(C) CONTRACTOR.—The term ‘contractor’ means an entity with a contract 

to provide a chronic care improvement program in a CCIA region under this 

section. 

‘‘(D) INDIVIDUAL PLAN.—The term ‘individual plan’ means a chronic care 

improvement plan established under subsection (c)(5) for an individual. 

‘‘(3) CONSTRUCTION.—Nothing in this section shall be construed as expanding 

the amount, duration, or scope of benefits under this title. 

‘‘(b) COMPETITIVE BIDDING PROCESS.—

‘‘(1) IN GENERAL.—Under this section the Secretary shall award contracts to 

qualified entities for chronic care improvement programs for each CCIA region 

under this section through a competitive bidding process. 

‘‘(2) PROCESS.—Under such process—

‘‘(A) the Secretary shall delineate the United States into multiple chronic 

care improvement administrative regions; and 

‘‘(B) the Secretary shall select at least 2 winning bidders in each CCIA 

region on the basis of the ability of each bidder to carry out a chronic care 

improvement program in accordance with this section, in order to achieve 

improved health and financial outcomes. 

‘‘(3) ELIGIBLE CONTRACTOR.—A contractor may be a disease improvement organization, health insurer, provider organization, a group of physicians, or any 

other legal entity that the Secretary determines appropriate. 

‘‘(c) CHRONIC CARE IMPROVEMENT PROGRAMS.—

‘‘(1) IN GENERAL.—Each contract under this section shall provide for the operation of a chronic care improvement program by a contractor in a CCIA region 

consistent with this subsection. 

‘‘(2) IDENTIFICATION OF PROSPECTIVE PROGRAM PARTICIPANTS.—Each contractor shall have a method for identifying medicare beneficiaries in the region 

to whom it will offer services under its program. The contractor shall identify 

such beneficiaries through claims or other data and other means permitted consistent with applicable disclosure provisions. 

‘‘(3) INITIAL CONTACT BY SECRETARY.—The Secretary shall communicate with 

each beneficiary identified under paragraph (2) as a prospective participant in 

one or more programs concerning participation in a program. Such communication may be made by the Secretary (or on behalf of the Secretary) and shall include information on the following: 

‘‘(A) A description of the advantages to the beneficiary in participating in 

a program. 

‘‘(B) Notification that the contractor offering a program may contact the 

beneficiary directly concerning such participation. 

‘‘(C) Notification that participation in a program is voluntary. 

‘‘(D) A description of the method for the beneficiary to select the single 

program in which the beneficiary wishes to participate and for declining to 

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participate and a method for obtaining additional information concerning 

such participation. 

‘‘(4) PARTICIPATION.—A medicare beneficiary may participate in only one program under this section and may terminate participation at any time in a manner specified by the Secretary. 

‘‘(5) INDIVIDUAL CHRONIC CARE IMPROVEMENT PLANS.— ‘‘(A) IN GENERAL.—For each beneficiary participating in a program of a 

contractor under this section, the contractor shall develop with the beneficiary an individualized, goal-oriented chronic care improvement plan. 

‘‘(B) ELEMENTS OF INDIVIDUAL PLAN.—Each individual plan developed 

under subparagraph (A) shall include a single point of contact to coordinate 

care and the following, as appropriate: 

‘‘(i) Self-improvement education for the beneficiary and support education for health care providers, primary caregivers, and family members. 

‘‘(ii) Coordination of health care services, such as application of a prescription drug regimen and home health services. 

‘‘(iii) Collaboration with physicians and other providers to enhance 

communication of relevant clinical information. 

‘‘(iv) The use of monitoring technologies that enable patient guidance 

through the exchange of pertinent clinical information, such as vital 

signs, symptomatic information, and health self-assessment. 

‘‘(v) The provision of information about hospice care, pain and palliative care, and end-of-life care. 

‘‘(C) CONTRACTOR RESPONSIBILITIES.—In establishing and carrying out individual plans under a program, a contractor shall, directly or through subcontractors—

‘‘(i) guide participants in managing their health, including all their 

co-morbidities, and in performing activities as specified under the elements of the plan; 

‘‘(ii) use decision support tools such as evidence-based practice guidelines or other criteria as determined by the Secretary; and 

‘‘(iii) develop a clinical information database to track and monitor 

each participant across settings and to evaluate outcomes. 

‘‘(6) ADDITIONAL REQUIREMENTS.—The Secretary may establish additional requirements for programs and contractors under this section. 

‘‘(7) ACCREDITATION.—The Secretary may provide that programs that are accredited by qualified organizations may be deemed to meet such requirements 

under this section as the Secretary may specify. 

‘‘(c) CONTRACT TERMS.—

‘‘(1) IN GENERAL.—A contract under this section shall contain such terms and 

conditions as the Secretary may specify consistent with this section. The Secretary may not enter into a contract with an entity under this section unless 

the entity meets such clinical, quality improvement, financial, and other requirements as the Secretary deems to be appropriate for the population to be 

served. 

‘‘(2) USE OF SUBCONTRACTORS PERMITTED.—A contractor may carry out a program directly or through contracts with subcontractors. 

‘‘(3) BUDGET NEUTRAL PAYMENT CONDITION.—In entering into a contract with 

an entity under this subsection, the Secretary shall establish payment rates 

that assure that there will be no net aggregate increase in payments under this 

title over any period of 3 years or longer, as agreed to by the Secretary. Under 

this section, the Secretary shall assure that medicare program outlays plus administrative expenses (that would not have been paid under this title without 

implementation of this section), including contractor fees, shall not exceed the 

expenditures that would have been incurred under this title for a comparable 

population in the absence of the program under this section for the 3-year contract period. 

‘‘(4) AT RISK RELATIONSHIP.—For purposes of section 1128B(b)(3)(F), a contract 

under this section shall be treated as a risk-sharing arrangement referred to 

in such section. 

‘‘(5) PERFORMANCE STANDARDS.—Payment to contractors under this section 

shall be subject to the contractor’s meeting of clinical and financial performance 

standards set by the Secretary. 

‘‘(6) CONTRACTOR OUTCOMES REPORT.—Each contractor offering a program 

shall monitor and report to the Secretary, in a manner specified by the Secretary, the quality of care and efficacy of such program in terms of—

‘‘(A) process measures, such as reductions in errors of treatment and rehospitalization rates; 

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‘‘(B) beneficiary and provider satisfaction; 

‘‘(C) health outcomes; and 

‘‘(D) financial outcomes. 

‘‘(7) PHASED IN IMPLEMENTATION.—Nothing in this section shall be construed 

as preventing the Secretary from phasing in the implementation of programs. 

‘‘(d) BIANNUAL OUTCOMES REPORTS.—The Secretary shall submit to the Congress 

biannual reports on the implementation of this section. Each such report shall include information on—

‘‘(1) the scope of implementation (in terms of both regions and chronic conditions); 

‘‘(2) program design; and 

‘‘(3) improvements in health outcomes and financial efficiencies that result 

from such implementation. 

‘‘(e) CLINICAL TRIALS.—The Secretary shall conduct randomized clinical trials, 

that compare program participants with medicare beneficiaries who are offered, but 

decline, to participate, in order to assess the potential of programs to—

‘‘(1) reduce costs under this title; and 

‘‘(2) improve health outcomes under this title. 

‘‘(f) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated 

to the Secretary, in appropriate part from the Hospital Insurance Trust Fund and 

the Supplementary Medical Insurance Trust Fund, such sums as may be necessary 

to provide for contracts with chronic care improvement programs under this section. 

‘‘(g) LIMITATION ON FUNDING.—In no case shall the funding under this section ex- ceed $100,000,000 over a period of 3 years.’’. 

SEC. 722. CHRONIC CARE IMPROVEMENT UNDER MEDICARE ADVANTAGE AND ENHANCED 

FEE-FOR-SERVICE PROGRAMS. 

(a) UNDER MEDICARE ADVANTAGE PROGRAM.—Section 1852 (42 U.S.C. 1395w–22) 

is amended—

(1) by amending subsection (e) to read as follows: 

‘‘(e) IMPLEMENTATION OF CHRONIC CARE IMPROVEMENT PROGRAMS FOR BENE- FICIARIES WITH MULTIPLE OR SUFFICIENTLY SEVERE CHRONIC CONDITIONS.— ‘‘(1) IN GENERAL.—Each Medicare Advantage organization with respect to 

each Medicare Advantage plan it offers shall have in effect, for enrollees with 

multiple or sufficiently severe chronic conditions, a chronic care improvement 

program that is designed to manage the needs of such enrollees and that meets 

the requirements of this subsection. 

‘‘(2) ENROLLEE WITH MULTIPLE OR SUFFICIENTLY SEVERE CHRONIC CONDI- TIONS.—For purposes of this subsection, the term ‘enrollee with multiple or sufficiently severe chronic conditions’ means, with respect to an enrollee in a Medicare Advantage plan of a Medicare Advantage organization, an enrollee in the 

plan who has one or more chronic conditions, such as congestive heart failure, 

diabetes, COPD, stroke, or other disease as identified by the organization as appropriate for chronic care improvement. 

‘‘(3) GENERAL REQUIREMENTS.— ‘‘(A) IN GENERAL.—Each chronic care improvement program under this 

subsection shall be conducted consistent with this subsection. 

‘‘(B) IDENTIFICATION OF ENROLLEES.—Each such program shall have a 

method for monitoring and identifying enrollees with multiple or sufficiently severe chronic conditions that meet the organization’s criteria for 

participation under the program. 

‘‘(C) DEVELOPMENT OF PLANS.—For an enrollee identified under subparagraph (B) for participation in a program, the program shall develop, with 

the enrollee’s consent, an individualized, goal-oriented chronic care improvement plan for chronic care improvement. 

‘‘(D) ELEMENTS OF PLANS.—Each chronic care improvement plan developed under subparagraph (C) shall include a single point of contact to coordinate care and the following, as appropriate: 

‘‘(i) Self-improvement education for the enrollee and support education for health care providers, primary caregivers, and family members. 

‘‘(ii) Coordination of health care services, such as application of a prescription drug regimen and home health services. 

‘‘(iii) Collaboration with physicians and other providers to enhance 

communication of relevant clinical information. 

‘‘(iv) The use of monitoring technologies that enable patient guidance 

through the exchange of pertinent clinical information, such as vital 

signs, symptomatic information, and health self-assessment. 

‘‘(v) The provision of information about hospice care, pain and palliative care, and end-of-life care. 

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‘‘(E) ORGANIZATION RESPONSIBILITIES.—In establishing and carrying out 

chronic care improvement plans for participants under this paragraph, a 

Medicare Advantage organization shall, directly or through subcontractors—

‘‘(i) guide participants in managing their health, including all their 

co-morbidities, and in performing the activities as specified under the 

elements of the plan; 

‘‘(ii) use decision support tools such as evidence-based practice guidelines or other criteria as determined by the Secretary; and 

‘‘(iii) develop a clinical information database to track and monitor 

each participant across settings and to evaluate outcomes. 

‘‘(3) ADDITIONAL REQUIREMENTS.—The Secretary may establish additional requirements for chronic care improvement programs under this section. 

‘‘(4) ACCREDITATION.—The Secretary may provide that chronic care improvement programs that are accredited by qualified organizations may be deemed 

to meet such requirements under this subsection as the Secretary may specify. 

‘‘(5) OUTCOMES REPORT.—Each Medicare Advantage organization with respect 

to its chronic care improvement program under this subsection shall monitor 

and report to the Secretary information on the quality of care and efficacy of 

such program as the Secretary may require.’’; and 

(2) by amending subparagraph (I) of subsection (c)(1) to read as follows: 

‘‘(I) CHRONIC CARE IMPROVEMENT PROGRAM.—A description of the organization’s chronic care improvement program under subsection (e).’’. 

(b) APPLICATION UNDER ENHANCED FEE-FOR-SERVICE PROGRAM.—Section 1860E–

2(c)(3), as inserted by section 201(a), is amended by inserting ‘‘, including subsection 

(e) (relating to implementation of chronic care improvement programs)’’ after ‘‘The 

provisions of section 1852’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply for contract years beginning on or after 1 year after the date of the enactment of this Act. 

SEC. 723. INSTITUTE OF MEDICINE REPORT. 

(a) STUDY.—

(1) IN GENERAL.—The Secretary of Health and Human Services shall contract 

with the Institute of Medicine of the National Academy of Sciences to conduct 

a study of the barriers to effective integrated care improvement for medicare 

beneficiaries with multiple or severe chronic conditions across settings and over 

time and to submit a report under subsection (b). 

(2) SPECIFIC ITEMS.—The study shall examine the statutory and regulatory 

barriers to coordinating care across settings for medicare beneficiaries in transition from one setting to another (such as between hospital, nursing facility, 

home health, hospice, and home). The study shall specifically identify the following: 

(A) Clinical, financial, or administrative requirements in the medicare 

program that present barriers to effective, seamless transitions across care 

settings. 

(B) Policies that impede the establishment of administrative and clinical 

information systems to track health status, utilization, cost, and quality 

data across settings. 

(C) State-level requirements that may present barriers to better care for 

medicare beneficiaries. 

(3) CONSULTATION.—The study under this subsection shall be conducted in 

consultation with experts in the field of chronic care, consumers, and family 

caregivers, working to integrate care delivery and create more seamless transitions across settings and over time. 

(b) REPORT.—The report under this subsection shall be submitted to the Secretary 

and Congress not later than 18 months after the date of the enactment of this Act. 

SEC. 724. MEDPAC REPORT. 

(a) EVALUATION.—shall conduct an evaluation that includes a description of the 

status of the implementation of chronic care improvement programs under section 

1808 of the Social Security Act, the quality of health care services provided to individuals in such program, the health status of the participants of such program, and 

the cost savings attributed to implementation of such program. 

(b) REPORT.—Not later than 2 years after the date of implementation of such 

chronic care improvement programs, the Commission shall submit a report on such 

evaluation.

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Subtitle D—Other Provisions 

SEC. 731. MODIFICATIONS TO MEDICARE PAYMENT ADVISORY COMMISSION (MEDPAC). 

(a) EXAMINATION OF BUDGET CONSEQUENCES.—Section 1805(b) (42 U.S.C. 1395b–

6(b)) is amended by adding at the end the following new paragraph: 

‘‘(8) EXAMINATION OF BUDGET CONSEQUENCES.—Before making any recommendations, the Commission shall examine the budget consequences of such 

recommendations, directly or through consultation with appropriate expert entities.’’. 

(b) CONSIDERATION OF EFFICIENT PROVISION OF SERVICES.—Section 

1805(b)(2)(B)(i) (42 U.S.C. 1395b–6(b)(2)(B)(i)) is amended by inserting ‘‘the efficient 

provision of’’ after ‘‘expenditures for’’. 

(c) APPLICATION OF DISCLOSURE REQUIREMENTS.—

(1) IN GENERAL.—Section 1805(c)(2)(D) (42 U.S.C. 1395b–6(c)(2)(D)) is amended by adding at the end the following: ‘‘Members of the Commission shall be 

treated as employees of the Congress for purposes of applying title I of the Ethics in Government Act of 1978 (Public Law 95-521).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on January 1, 2004. 

(d) ADDITIONAL REPORTS.—

(1) DATA NEEDS AND SOURCES.—The Medicare Payment Advisory Commission 

shall conduct a study, and submit a report to Congress by not later than June 

1, 2004, on the need for current data, and sources of current data available, to 

determine the solvency and financial circumstances of hospitals and other medicare providers of services. The Commission shall examine data on uncompensated care, as well as the share of uncompensated care accounted for by the expenses for treating illegal aliens. 

(2) USE OF TAX-RELATED RETURNS.—Using return information provided under 

Form 990 of the Internal Revenue Service, the Commission shall submit to Congress, by not later than June 1, 2004, a report on the following: 

(A) Investments, endowments, and fundraising of hospitals participating 

under the medicare program and related foundations. 

(B) Access to capital financing for private and for not-for-profit hospitals. 

SEC. 732. DEMONSTRATION PROJECT FOR MEDICAL ADULT DAY CARE SERVICES. 

(a) ESTABLISHMENT.—Subject to the succeeding provisions of this section, the Secretary of Health and Human Services shall establish a demonstration project (in 

this section referred to as the ‘‘demonstration project’’) under which the Secretary 

shall, as part of a plan of an episode of care for home health services established 

for a medicare beneficiary, permit a home health agency, directly or under arrangements with a medical adult day care facility, to provide medical adult day care services as a substitute for a portion of home health services that would otherwise be 

provided in the beneficiary’s home. 

(b) PAYMENT.—

(1) IN GENERAL.—The amount of payment for an episode of care for home 

health services, a portion of which consists of substitute medical adult day care 

services, under the demonstration project shall be made at a rate equal to 95 

percent of the amount that would otherwise apply for such home health services 

under section 1895 of the Social Security Act (42 u.s.c. 1395fff). In no case may 

a home health agency, or a medical adult day care facility under arrangements 

with a home health agency, separately charge a beneficiary for medical adult 

day care services furnished under the plan of care. 

(2) BUDGET NEUTRALITY FOR DEMONSTRATION PROJECT.—Notwithstanding any 

other provision of law, the Secretary shall provide for an appropriate reduction 

in the aggregate amount of additional payments made under section 1895 of the 

Social Security Act (42 U.S.C. 1395fff) to reflect any increase in amounts expended from the Trust Funds as a result of the demonstration project conducted 

under this section. 

(c) DEMONSTRATION PROJECT SITES.—The project established under this section 

shall be conducted in not more than 5 States selected by the Secretary that license 

or certify providers of services that furnish medical adult day care services. 

(d) DURATION.—The Secretary shall conduct the demonstration project for a period 

of 3 years. 

(e) VOLUNTARY PARTICIPATION.—Participation of medicare beneficiaries in the 

demonstration project shall be voluntary. The total number of such beneficiaries 

that may participate in the project at any given time may not exceed 15,000. 

(f) PREFERENCE IN SELECTING AGENCIES.—In selecting home health agencies to 

participate under the demonstration project, the Secretary shall give preference to 

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those agencies that are currently licensed or certified through common ownership 

and control to furnish medical adult day care services. 

(g) WAIVER AUTHORITY.—The Secretary may waive such requirements of title 

XVIII of the Social Security Act as may be necessary for the purposes of carrying 

out the demonstration project, other than waiving the requirement that an individual be homebound in order to be eligible for benefits for home health services. 

(h) EVALUATION AND REPORT.—The Secretary shall conduct an evaluation of the 

clinical and cost effectiveness of the demonstration project. Not later 30 months 

after the commencement of the project, the Secretary shall submit to Congress a report on the evaluation, and shall include in the report the following: 

(1) An analysis of the patient outcomes and costs of furnishing care to the 

medicare beneficiaries participating in the project as compared to such outcomes and costs to beneficiaries receiving only home health services for the 

same health conditions. 

(2) Such recommendations regarding the extension, expansion, or termination 

of the project as the Secretary determines appropriate. 

(i) DEFINITIONS.—In this section: 

(1) HOME HEALTH AGENCY.—The term ‘‘home health agency’’ has the meaning 

given such term in section 1861(o) of the Social Security Act (42 U.S.C. 

1395x(o)). 

(2) MEDICAL ADULT DAY CARE FACILITY.—The term ‘‘medical adult day care facility’’ means a facility that—

(A) has been licensed or certified by a State to furnish medical adult day 

care services in the State for a continuous 2-year period; 

(B) is engaged in providing skilled nursing services and other therapeutic 

services directly or under arrangement with a home health agency; 

(C) meets such standards established by the Secretary to assure quality 

of care and such other requirements as the Secretary finds necessary in the 

interest of the health and safety of individuals who are furnished services 

in the facility; and 

(D) provides medical adult day care services. 

(3) MEDICAL ADULT DAY CARE SERVICES.—The term ‘‘medical adult day care 

services’’ means—

(A) home health service items and services described in paragraphs (1) 

through (7) of section 1861(m) furnished in a medical adult day care facility; 

(B) a program of supervised activities furnished in a group setting in the 

facility that—

(i) meet such criteria as the Secretary determines appropriate; and 

(ii) is designed to promote physical and mental health of the individuals; and 

(C) such other services as the Secretary may specify. 

(4) MEDICARE BENEFICIARY.—The term ‘‘medicare beneficiary’’ means an individual entitled to benefits under part A of this title, enrolled under part B of 

this title, or both. 

SEC. 733. IMPROVEMENTS IN NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS 

TO RESPOND TO CHANGES IN TECHNOLOGY. 

(a) NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS.—

(1) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended—

(A) in the third sentence of subsection (a) by inserting ‘‘consistent with 

subsection (k)’’ after ‘‘the Secretary shall ensure’’; and 

(B) by adding at the end the following new subsection: 

‘‘(k) NATIONAL AND LOCAL COVERAGE DETERMINATION PROCESS.—

‘‘(1) CRITERIA AND EVIDENCE USED IN MAKING NATIONAL COVERAGE DETERMINATIONS.—The Secretary shall make available to the public the criteria the 

Secretary uses in making national coverage determinations, including how evidence to demonstrate that a procedure or device is reasonable and necessary is 

considered. 

‘‘(2) TIMEFRAME FOR DECISIONS ON REQUESTS FOR NATIONAL COVERAGE DETERMINATIONS.—In the case of a request for a national coverage determination 

that—

‘‘(A) does not require a technology assessment from an outside entity or 

deliberation from the Medicare Coverage Advisory Committee, the decision 

on the request shall be made not later than 6 months after the date of the 

request; or 

‘‘(B) requires such an assessment or deliberation and in which a clinical 

trial is not requested, the decision on the request shall be made not later 

than 12 months after the date of the request. 

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‘‘(3) PROCESS FOR PUBLIC COMMENT IN NATIONAL COVERAGE DETERMINATIONS.—At the end of the 6-month period that begins on the date a request for 

a national coverage determination is made, the Secretary shall—

‘‘(A) make a draft of proposed decision on the request available to the 

public through the Medicare Internet site of the Department of Health and 

Human Services or other appropriate means; 

‘‘(B) provide a 30-day period for public comment on such draft; 

‘‘(C) make a final decision on the request within 60 days of the conclusion 

of the 30-day period referred to under subparagraph (B); 

‘‘(D) include in such final decision summaries of the public comments received and responses thereto; 

‘‘(E) make available to the public the clinical evidence and other data 

used in making such a decision when the decision differs from the recommendations of the Medicare Coverage Advisory Committee; and 

‘‘(F) in the case of a decision to grant the coverage determination, assign 

a temporary or permanent code during the 60-day period referred to in subparagraph (C). 

‘‘(4) CONSULTATION WITH OUTSIDE EXPERTS IN CERTAIN NATIONAL COVERAGE

DETERMINATIONS.—With respect to a request for a national coverage determination for which there is not a review by the Medicare Coverage Advisory Committee, the Secretary shall consult with appropriate outside clinical experts. 

‘‘(5) LOCAL COVERAGE DETERMINATION PROCESS.—With respect to local coverage determinations made on or after January 1, 2004—

‘‘(A) PLAN TO PROMOTE CONSISTENCY OF COVERAGE DETERMINATIONS.—

The Secretary shall develop a plan to evaluate new local coverage determinations to determine which determinations should be adopted nationally 

and to what extent greater consistency can be achieved among local coverage determinations. 

‘‘(B) CONSULTATION.—The Secretary shall require the fiscal intermediaries or carriers providing services within the same area to consult on 

all new local coverage determinations within the area. 

‘‘(C) DISSEMINATION OF INFORMATION.—The Secretary should serve as a 

center to disseminate information on local coverage determinations among 

fiscal intermediaries and carriers to reduce duplication of effort. 

‘‘(6) NATIONAL AND LOCAL COVERAGE DETERMINATION DEFINED.—For purposes 

of this subsection, the terms ‘national coverage determination’ and ‘local coverage determination’ have the meaning given such terms in paragraphs (1)(B) 

and (2)(B), respectively, of section 1869(f).’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

national and local coverage determinations as of January 1, 2004. 

(b) MEDICARE COVERAGE OF ROUTINE COSTS ASSOCIATED WITH CERTAIN CLINICAL

TRIALS.—

(1) IN GENERAL.—With respect to the coverage of routine costs of care for 

beneficiaries participating in a qualifying clinical trial, as set forth on the date 

of the enactment of this Act in National Coverage Determination 30-1 of the 

Medicare Coverage Issues Manual, the Secretary shall deem clinical trials conducted in accordance with an investigational device exemption approved under 

section 520(g) of the Federal Food, Drug, and Cosmetic Act (42 U.S.C. 360j(g)) 

to be automatically qualified for such coverage. 

(2) RULE OF CONSTRUCTION.—Nothing in this subsection shall be construed as 

authorizing or requiring the Secretary to modify the regulations set forth on the 

date of the enactment of this Act at subpart B of part 405 of title 42, Code of 

Federal Regulations, or subpart A of part 411 of such title, relating to coverage 

of, and payment for, a medical device that is the subject of an investigational 

device exemption by the Food and Drug Administration (except as may be necessary to implement paragraph (1)). 

(3) EFFECTIVE DATE.—This subsection shall apply to clinical trials begun before, on, or after the date of the enactment of this Act and to items and services 

furnished on or after such date. 

(c) ISSUANCE OF TEMPORARY NATIONAL CODES.—Not later than January 1, 2004, 

the Secretary shall implement revised procedures for the issuance of temporary national HCPCS codes under part B of title XVIII of the Social Security Act. 

SEC. 734. TREATMENT OF CERTAIN PHYSICIAN PATHOLOGY SERVICES. 

(a) IN GENERAL.—Section 1848(i) (42 U.S.C. 1395w–4(i)) is amended by adding at 

the end the following new paragraph: 

‘‘(4) TREATMENT OF CERTAIN INPATIENT PHYSICIAN PATHOLOGY SERVICES.—

‘‘(A) IN GENERAL.—With respect to services furnished on or after January 

1, 2001, and before January 1, 2006, if an independent laboratory furnishes 

103

the technical component of a physician pathology service to a fee-for-service 

medicare beneficiary who is an inpatient or outpatient of a covered hospital, 

the Secretary shall treat such component as a service for which payment 

shall be made to the laboratory under this section and not as an inpatient 

hospital service for which payment is made to the hospital under section 

1886(d) or as a hospital outpatient service for which payment is made to 

the hospital under section 1833(t). 

‘‘(B) DEFINITIONS.—In this paragraph: 

‘‘(i) COVERED HOSPITAL.— ‘‘(I) IN GENERAL.—The term ‘covered hospital’ means, with respect to an inpatient or outpatient, a hospital that had an arrangement with an independent laboratory that was in effect as of July 

22, 1999, under which a laboratory furnished the technical component of physician pathology services to fee-for-service medicare 

beneficiaries who were hospital inpatients or outpatients, respectively, and submitted claims for payment for such component to a 

carrier with a contract under section 1842 and not to the hospital. 

‘‘(II) CHANGE IN OWNERSHIP DOES NOT AFFECT DETERMINATION.— A change in ownership with respect to a hospital on or after the 

date referred to in subclause (I) shall not affect the determination 

of whether such hospital is a covered hospital for purposes of such 

subclause. 

‘‘(ii) FEE-FOR-SERVICE MEDICARE BENEFICIARY.—The term ‘fee-forservice medicare beneficiary’ means an individual who is entitled to 

benefits under part A, or enrolled under this part, or both, but is not 

enrolled in any of the following: 

‘‘(I) A Medicare+Choice plan under part C. 

‘‘(II) A plan offered by an eligible organization under section 

1876. 

‘‘(III) A program of all-inclusive care for the elderly (PACE) 

under section 1894. 

‘‘(IV) A social health maintenance organization (SHMO) demonstration project established under section 4018(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law 100–203).’’. 

(b) CONFORMING AMENDMENT.—Section 542 of the Medicare, Medicaid, and 

SCHIP Benefits Improvement and Protection Act of 2000 (114 Stat. 2763A–550), as 

enacted into law by section 1(a)(6) of Public Law 106–554, is repealed. 

(c) EFFECTIVE DATES.—The amendments made by this section shall take effect as 

if included in the enactment of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Appendix F, 114 Stat. 2763A–463), as enacted into law by section 1(a)(6) of Public Law 106–554.

TITLE VIII—MEDICARE BENEFITS 

ADMINISTRATION

SEC. 801. ESTABLISHMENT OF MEDICARE BENEFITS ADMINISTRATION. 

(a) IN GENERAL.—Title XVIII (42 U.S.C. 1395 et seq.), as amended by sections 105 

and 721, is amended by inserting after 1808 the following new section: 

‘‘MEDICARE BENEFITS ADMINISTRATION

‘‘SEC. 1809. (a) ESTABLISHMENT.—There is established within the Department of 

Health and Human Services an agency to be known as the Medicare Benefits Administration. 

‘‘(b) ADMINISTRATOR; DEPUTY ADMINISTRATOR; CHIEF ACTUARY.—

‘‘(1) ADMINISTRATOR.—

‘‘(A) IN GENERAL.—The Medicare Benefits Administration shall be headed 

by an administrator to be known as the ‘Medicare Benefits Administrator’ 

(in this section referred to as the ‘Administrator’) who shall be appointed 

by the President, by and with the advice and consent of the Senate. The 

Administrator shall be in direct line of authority to the Secretary. 

‘‘(B) COMPENSATION.—The Administrator shall be paid at the rate of basic 

pay payable for level III of the Executive Schedule under section 5314 of 

title 5, United States Code. 

‘‘(C) TERM OF OFFICE.—The Administrator shall be appointed for a term 

of 4 years. In any case in which a successor does not take office at the end 

of an Administrator’s term of office, that Administrator may continue in office until the entry upon office of such a successor. An Administrator apVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00103 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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pointed to a term of office after the commencement of such term may serve 

under such appointment only for the remainder of such term. 

‘‘(D) GENERAL AUTHORITY.—The Administrator shall be responsible for 

the exercise of all powers and the discharge of all duties of the Administration, and shall have authority and control over all personnel and activities 

thereof. 

‘‘(E) RULEMAKING AUTHORITY.—The Administrator may prescribe such 

rules and regulations as the Administrator determines necessary or appropriate to carry out the functions of the Administration. The regulations prescribed by the Administrator shall be subject to the rulemaking procedures 

established under section 553 of title 5, United States Code. The Administrator shall provide for the issuance of new regulations to carry out parts 

C, D, and E. 

‘‘(F) AUTHORITY TO ESTABLISH ORGANIZATIONAL UNITS.—The Administrator may establish, alter, consolidate, or discontinue such organizational 

units or components within the Administration as the Administrator considers necessary or appropriate, except as specified in this section. 

‘‘(G) AUTHORITY TO DELEGATE.—The Administrator may assign duties, 

and delegate, or authorize successive redelegations of, authority to act and 

to render decisions, to such officers and employees of the Administration as 

the Administrator may find necessary. Within the limitations of such delegations, redelegations, or assignments, all official acts and decisions of such 

officers and employees shall have the same force and effect as though performed or rendered by the Administrator. 

‘‘(2) DEPUTY ADMINISTRATOR.—

‘‘(A) IN GENERAL.—There shall be a Deputy Administrator of the Medicare 

Benefits Administration who shall be appointed by the President, by and 

with the advice and consent of the Senate. 

‘‘(B) COMPENSATION.—The Deputy Administrator shall be paid at the rate 

of basic pay payable for level IV of the Executive Schedule under section 

5315 of title 5, United States Code. 

‘‘(C) TERM OF OFFICE.—The Deputy Administrator shall be appointed for 

a term of 4 years. In any case in which a successor does not take office at 

the end of a Deputy Administrator’s term of office, such Deputy Administrator may continue in office until the entry upon office of such a successor. 

A Deputy Administrator appointed to a term of office after the commencement of such term may serve under such appointment only for the remainder of such term. 

‘‘(D) DUTIES.—The Deputy Administrator shall perform such duties and 

exercise such powers as the Administrator shall from time to time assign 

or delegate. The Deputy Administrator shall be Acting Administrator of the 

Administration during the absence or disability of the Administrator and, 

unless the President designates another officer of the Government as Acting 

Administrator, in the event of a vacancy in the office of the Administrator. 

‘‘(3) CHIEF ACTUARY.—

‘‘(A) IN GENERAL.—There is established in the Administration the position 

of Chief Actuary. The Chief Actuary shall be appointed by, and in direct 

line of authority to, the Administrator of such Administration. The Chief 

Actuary shall be appointed from among individuals who have demonstrated, by their education and experience, superior expertise in the actuarial sciences. The Chief Actuary may be removed only for cause. 

‘‘(B) COMPENSATION.—The Chief Actuary shall be compensated at the 

highest rate of basic pay for the Senior Executive Service under section 

5382(b) of title 5, United States Code. 

‘‘(C) DUTIES.—The Chief Actuary shall exercise such duties as are appropriate for the office of the Chief Actuary and in accordance with professional standards of actuarial independence. 

‘‘(4) SECRETARIAL COORDINATION OF PROGRAM ADMINISTRATION.—The Secretary shall ensure appropriate coordination between the Administrator and the 

Administrator of the Centers for Medicare & Medicaid Services in carrying out 

the programs under this title. 

‘‘(c) DUTIES; ADMINISTRATIVE PROVISIONS.—

‘‘(1) DUTIES.—

‘‘(A) GENERAL DUTIES.—The Administrator shall carry out parts C, D, and 

E, including—

‘‘(i) negotiating, entering into, and enforcing, contracts with plans for 

the offering of Medicare Advantage plans under part C and EFFS plans 

under part E, including the offering of qualified prescription drug coverage under such plans; and 

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‘‘(ii) negotiating, entering into, and enforcing, contracts with PDP 

sponsors for the offering of prescription drug plans under part D. 

‘‘(B) OTHER DUTIES.—The Administrator shall carry out any duty provided for under part C, part D, or part E, including demonstration projects 

carried out in part or in whole under such parts, the programs of all-inclusive care for the elderly (PACE program) under section 1894, the social 

health maintenance organization (SHMO) demonstration projects (referred 

to in section 4104(c) of the Balanced Budget Act of 1997), medicare cost contractors under section 1876(h), and through a Medicare Advantage project 

that demonstrates the application of capitation payment rates for frail elderly medicare beneficiaries through the use of a interdisciplinary team and 

through the provision of primary care services to such beneficiaries by 

means of such a team at the nursing facility involved). 

‘‘(C) PRESCRIPTION DRUG CARD.—The Administrator shall carry out section 1807 (relating to the medicare prescription drug discount card endorsement program). 

‘‘(D) NONINTERFERENCE.—In carrying out its duties with respect to the 

provision of qualified prescription drug coverage to beneficiaries under this 

title, the Administrator may not—

‘‘(i) require a particular formulary or institute a price structure for 

the reimbursement of covered outpatient drugs; 

‘‘(ii) interfere in any way with negotiations between PDP sponsors 

and Medicare Advantage organizations and EFFS organizations and 

drug manufacturers, wholesalers, or other suppliers of covered outpatient drugs; and 

‘‘(iii) otherwise interfere with the competitive nature of providing 

such coverage through such sponsors and organizations. 

‘‘(E) ANNUAL REPORTS.—Not later March 31 of each year, the Administrator shall submit to Congress and the President a report on the administration of parts C, D, and E during the previous fiscal year. 

‘‘(2) STAFF.—

‘‘(A) IN GENERAL.—The Administrator, with the approval of the Secretary, 

may employ, without regard to chapter 31 of title 5, United States Code, 

other than sections 3102 through 3108, 3110 through 3113, 3136m and 

3151, such officers and employees as are necessary to administer the activities to be carried out through the Medicare Benefits Administration. The 

Administrator shall employ staff with appropriate and necessary expertise 

in negotiating contracts in the private sector. 

‘‘(B) FLEXIBILITY WITH RESPECT TO COMPENSATION.—

‘‘(i) IN GENERAL.—The staff of the Medicare Benefits Administration 

shall, subject to clause (ii), be paid without regard to the provisions of 

chapter 51 (other than section 5101) and chapter 53 (other than section 

5301) of such title (relating to classification and schedule pay rates). 

‘‘(ii) MAXIMUM RATE.—In no case may the rate of compensation determined under clause (i) exceed the rate of basic pay payable for level IV 

of the Executive Schedule under section 5315 of title 5, United States 

Code. 

‘‘(C) LIMITATION ON FULL-TIME EQUIVALENT STAFFING FOR CURRENT CMS

FUNCTIONS BEING TRANSFERRED.—The Administrator may not employ under 

this paragraph a number of full-time equivalent employees, to carry out 

functions that were previously conducted by the Centers for Medicare & 

Medicaid Services and that are conducted by the Administrator by reason 

of this section, that exceeds the number of such full-time equivalent employees authorized to be employed by the Centers for Medicare & Medicaid 

Services to conduct such functions as of the date of the enactment of this 

Act. 

‘‘(3) REDELEGATION OF CERTAIN FUNCTIONS OF THE CENTERS FOR MEDICARE &

MEDICAID SERVICES.—

‘‘(A) IN GENERAL.—The Secretary, the Administrator, and the Administrator of the Centers for Medicare & Medicaid Services shall establish an 

appropriate transition of responsibility in order to redelegate the administration of part C from the Secretary and the Administrator of the Centers 

for Medicare & Medicaid Services to the Administrator as is appropriate to 

carry out the purposes of this section. 

‘‘(B) TRANSFER OF DATA AND INFORMATION.—The Secretary shall ensure 

that the Administrator of the Centers for Medicare & Medicaid Services 

transfers to the Administrator of the Medicare Benefits Administration 

such information and data in the possession of the Administrator of the 

Centers for Medicare & Medicaid Services as the Administrator of the 

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Medicare Benefits Administration requires to carry out the duties described 

in paragraph (1). 

‘‘(C) CONSTRUCTION.—Insofar as a responsibility of the Secretary or the 

Administrator of the Centers for Medicare & Medicaid Services is redelegated to the Administrator under this section, any reference to the Secretary or the Administrator of the Centers for Medicare & Medicaid Services in this title or title XI with respect to such responsibility is deemed 

to be a reference to the Administrator.

‘‘(d) OFFICE OF BENEFICIARY ASSISTANCE.—

‘‘(1) ESTABLISHMENT.—The Secretary shall establish within the Medicare Benefits Administration an Office of Beneficiary Assistance to coordinate functions 

relating to outreach and education of medicare beneficiaries under this title, including the functions described in paragraph (2). The Office shall be separate 

operating division within the Administration. 

‘‘(2) DISSEMINATION OF INFORMATION ON BENEFITS AND APPEALS RIGHTS.—

‘‘(A) DISSEMINATION OF BENEFITS INFORMATION.—The Office of Beneficiary 

Assistance shall disseminate, directly or through contract, to medicare 

beneficiaries, by mail, by posting on the Internet site of the Medicare Benefits Administration and through a toll-free telephone number, information 

with respect to the following: 

‘‘(i) Benefits, and limitations on payment (including cost-sharing, 

stop-loss provisions, and formulary restrictions) under parts C, D, and 

E. 

‘‘(ii) Benefits, and limitations on payment under parts A and B, including information on medicare supplemental policies under section 

1882. 

Such information shall be presented in a manner so that medicare beneficiaries may compare benefits under parts A, B, D, and medicare supplemental policies with benefits under Medicare Advantage plans under part 

C and EFFS plans under part E. 

‘‘(B) DISSEMINATION OF APPEALS RIGHTS INFORMATION.—The Office of Beneficiary Assistance shall disseminate to medicare beneficiaries in the manner provided under subparagraph (A) a description of procedural rights (including grievance and appeals procedures) of beneficiaries under the original medicare fee-for-service program under parts A and B, the Medicare 

Advantage program under part C, the Voluntary Prescription Drug Benefit 

Program under part D, and the Enhanced Fee-for-Service program under 

part E. 

‘‘(e) MEDICARE POLICY ADVISORY BOARD.—

‘‘(1) ESTABLISHMENT.—There is established within the Medicare Benefits Administration the Medicare Policy Advisory Board (in this section referred to the 

‘Board’). The Board shall advise, consult with, and make recommendations to 

the Administrator of the Medicare Benefits Administration with respect to the 

administration of parts C, D, and E, including the review of payment policies 

under such parts. 

‘‘(2) REPORTS.—

‘‘(A) IN GENERAL.—With respect to matters of the administration of parts 

C, D, and E the Board shall submit to Congress and to the Administrator 

of the Medicare Benefits Administration such reports as the Board determines appropriate. Each such report may contain such recommendations as 

the Board determines appropriate for legislative or administrative changes 

to improve the administration of such parts, including the topics described 

in subparagraph (B). Each such report shall be published in the Federal 

Register. 

‘‘(B) TOPICS DESCRIBED.—Reports required under subparagraph (A) may 

include the following topics: 

‘‘(i) FOSTERING COMPETITION.—Recommendations or proposals to increase competition under parts C, D, and E for services furnished to 

medicare beneficiaries. 

‘‘(ii) EDUCATION AND ENROLLMENT.—Recommendations for the improvement to efforts to provide medicare beneficiaries information and 

education on the program under this title, and specifically parts C, D, 

and E, and the program for enrollment under the title. 

‘‘(iii) IMPLEMENTATION OF RISK-ADJUSTMENT.—Evaluation of the implementation under section 1853(a)(3)(C) of the risk adjustment methodology to payment rates under that section to Medicare Advantage organizations offering Medicare Advantage plans (and the corresponding 

payment provisions under part E) that accounts for variations in per 

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capita costs based on health status, geography, and other demographic 

factors. 

‘‘(iv) RURAL ACCESS.—Recommendations to improve competition and 

access to plans under parts C, D, and E in rural areas. 

‘‘(C) MAINTAINING INDEPENDENCE OF BOARD.—The Board shall directly 

submit to Congress reports required under subparagraph (A). No officer or 

agency of the United States may require the Board to submit to any officer 

or agency of the United States for approval, comments, or review, prior to 

the submission to Congress of such reports. 

‘‘(3) DUTY OF ADMINISTRATOR OF MEDICARE BENEFITS ADMINISTRATION.—With 

respect to any report submitted by the Board under paragraph (2)(A), not later 

than 90 days after the report is submitted, the Administrator of the Medicare 

Benefits Administration shall submit to Congress and the President an analysis 

of recommendations made by the Board in such report. Each such analysis shall 

be published in the Federal Register. 

‘‘(4) MEMBERSHIP.— ‘‘(A) APPOINTMENT.—Subject to the succeeding provisions of this paragraph, the Board shall consist of seven members to be appointed as follows: 

‘‘(i) Three members shall be appointed by the President. 

‘‘(ii) Two members shall be appointed by the Speaker of the House 

of Representatives, with the advice of the chairmen and the ranking 

minority members of the Committees on Ways and Means and on Energy and Commerce of the House of Representatives. 

‘‘(iii) Two members shall be appointed by the President pro tempore 

of the Senate with the advice of the chairman and the ranking minority 

member of the Senate Committee on Finance. 

‘‘(B) QUALIFICATIONS.—The members shall be chosen on the basis of their 

integrity, impartiality, and good judgment, and shall be individuals who 

are, by reason of their education and experience in health care benefits 

management, exceptionally qualified to perform the duties of members of 

the Board. 

‘‘(C) PROHIBITION ON INCLUSION OF FEDERAL EMPLOYEES.—No officer or 

employee of the United States may serve as a member of the Board. 

‘‘(5) COMPENSATION.—Members of the Board shall receive, for each day (including travel time) they are engaged in the performance of the functions of the 

board, compensation at rates not to exceed the daily equivalent to the annual 

rate in effect for level IV of the Executive Schedule under section 5315 of title 

5, United States Code. 

‘‘(6) TERMS OF OFFICE.—

‘‘(A) IN GENERAL.—The term of office of members of the Board shall be 

3 years. 

‘‘(B) TERMS OF INITIAL APPOINTEES.—As designated by the President at 

the time of appointment, of the members first appointed—

‘‘(i) one shall be appointed for a term of 1 year; 

‘‘(ii) three shall be appointed for terms of 2 years; and 

‘‘(iii) three shall be appointed for terms of 3 years. 

‘‘(C) REAPPOINTMENTS.—Any person appointed as a member of the Board 

may not serve for more than 8 years. 

‘‘(D) VACANCY.—Any member appointed to fill a vacancy occurring before 

the expiration of the term for which the member’s predecessor was appointed shall be appointed only for the remainder of that term. A member 

may serve after the expiration of that member’s term until a successor has 

taken office. A vacancy in the Board shall be filled in the manner in which 

the original appointment was made. 

‘‘(7) CHAIR.—The Chair of the Board shall be elected by the members. The 

term of office of the Chair shall be 3 years. 

‘‘(8) MEETINGS.—The Board shall meet at the call of the Chair, but in no 

event less than three times during each fiscal year. 

‘‘(9) DIRECTOR AND STAFF.—

‘‘(A) APPOINTMENT OF DIRECTOR.—The Board shall have a Director who 

shall be appointed by the Chair. 

‘‘(B) IN GENERAL.—With the approval of the Board, the Director may appoint, without regard to chapter 31 of title 5, United States Code, such additional personnel as the Director considers appropriate. 

‘‘(C) FLEXIBILITY WITH RESPECT TO COMPENSATION.—

‘‘(i) IN GENERAL.—The Director and staff of the Board shall, subject 

to clause (ii), be paid without regard to the provisions of chapter 51 and 

chapter 53 of such title (relating to classification and schedule pay 

rates). 

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‘‘(ii) MAXIMUM RATE.—In no case may the rate of compensation determined under clause (i) exceed the rate of basic pay payable for level IV 

of the Executive Schedule under section 5315 of title 5, United States 

Code. 

‘‘(D) ASSISTANCE FROM THE ADMINISTRATOR OF THE MEDICARE BENEFITS

ADMINISTRATION.—The Administrator of the Medicare Benefits Administration shall make available to the Board such information and other assistance as it may require to carry out its functions. 

‘‘(10) CONTRACT AUTHORITY.—The Board may contract with and compensate 

government and private agencies or persons to carry out its duties under this 

subsection, without regard to section 3709 of the Revised Statutes (41 U.S.C. 

5). 

‘‘(f) FUNDING.—There is authorized to be appropriated, in appropriate part from 

the Federal Hospital Insurance Trust Fund and from the Federal Supplementary 

Medical Insurance Trust Fund (including the Medicare Prescription Drug Account), 

such sums as are necessary to carry out this section.’’. 

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a) shall take effect on 

the date of the enactment of this Act. 

(2) DUTIES WITH RESPECT TO ELIGIBILITY DETERMINATIONS AND ENROLLMENT.—The Administrator of the Medicare Benefits Administration shall carry 

out enrollment under title XVIII of the Social Security Act, make eligibility determinations under such title, and carry out parts C and E of such title for 

years beginning or after January 1, 2006. 

(3) TRANSITION.—Before the date the Administrator of the Medicare Benefits 

Administration is appointed and assumes responsibilities under this section and 

section 1807 of the Social Security Act, the Secretary of Health and Human 

Services shall provide for the conduct of any responsibilities of such Administrator that are otherwise provided under law. 

(c) MISCELLANEOUS ADMINISTRATIVE PROVISIONS.—

(1) ADMINISTRATOR AS MEMBER OF THE BOARD OF TRUSTEES OF THE MEDICARE

TRUST FUNDS.—Section 1817(b) and section 1841(b) (42 U.S.C. 1395i(b), 

1395t(b)) are each amended by striking ‘‘and the Secretary of Health and 

Human Services, all ex officio,’’ and inserting ‘‘the Secretary of Health and 

Human Services, and the Administrator of the Medicare Benefits Administration, all ex officio,’’. 

(2) INCREASE IN GRADE TO EXECUTIVE LEVEL III FOR THE ADMINISTRATOR OF

THE CENTERS FOR MEDICARE & MEDICAID SERVICES; LEVEL FOR MEDICARE BENEFITS ADMINISTRATOR.—

(A) IN GENERAL.—Section 5314 of title 5, United States Code, by adding 

at the end the following: 

‘‘Administrator of the Centers for Medicare & Medicaid Services. 

‘‘Administrator of the Medicare Benefits Administration.’’. 

(B) CONFORMING AMENDMENT.—Section 5315 of such title is amended by 

striking ‘‘Administrator of the Health Care Financing Administration.’’. 

(C) EFFECTIVE DATE.—The amendments made by this paragraph take effect on January 1, 2004.

TITLE IX—REGULATORY REDUCTION AND 

CONTRACTING REFORM 

Subtitle A—Regulatory Reform 

SEC. 901. CONSTRUCTION; DEFINITION OF SUPPLIER. 

(a) CONSTRUCTION.—Nothing in this title shall be construed—

(1) to compromise or affect existing legal remedies for addressing fraud or 

abuse, whether it be criminal prosecution, civil enforcement, or administrative 

remedies, including under sections 3729 through 3733 of title 31, United States 

Code (known as the False Claims Act); or 

(2) to prevent or impede the Department of Health and Human Services in 

any way from its ongoing efforts to eliminate waste, fraud, and abuse in the 

medicare program. 

Furthermore, the consolidation of medicare administrative contracting set forth in 

this Act does not constitute consolidation of the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund or reflect any 

position on that issue. 

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(b) DEFINITION OF SUPPLIER.—Section 1861 (42 U.S.C. 1395x) is amended by inserting after subsection (c) the following new subsection: 

‘‘Supplier 

‘‘(d) The term ‘supplier’ means, unless the context otherwise requires, a physician 

or other practitioner, a facility, or other entity (other than a provider of services) 

that furnishes items or services under this title.’’. 

SEC. 902. ISSUANCE OF REGULATIONS. 

(a) REGULAR TIMELINE FOR PUBLICATION OF FINAL RULES.— (1) IN GENERAL.—Section 1871(a) (42 U.S.C. 1395hh(a)) is amended by adding 

at the end the following new paragraph: 

‘‘(3)(A) The Secretary, in consultation with the Director of the Office of Management and Budget, shall establish and publish a regular timeline for the publication 

of final regulations based on the previous publication of a proposed regulation or 

an interim final regulation. 

‘‘(B) Such timeline may vary among different regulations based on differences in 

the complexity of the regulation, the number and scope of comments received, and 

other relevant factors, but shall not be longer than 3 years except under exceptional 

circumstances. If the Secretary intends to vary such timeline with respect to the 

publication of a final regulation, the Secretary shall cause to have published in the 

Federal Register notice of the different timeline by not later than the timeline previously established with respect to such regulation. Such notice shall include a brief 

explanation of the justification for such variation. 

‘‘(C) In the case of interim final regulations, upon the expiration of the regular 

timeline established under this paragraph for the publication of a final regulation 

after opportunity for public comment, the interim final regulation shall not continue 

in effect unless the Secretary publishes (at the end of the regular timeline and, if 

applicable, at the end of each succeeding 1-year period) a notice of continuation of 

the regulation that includes an explanation of why the regular timeline (and any 

subsequent 1-year extension) was not complied with. If such a notice is published, 

the regular timeline (or such timeline as previously extended under this paragraph) 

for publication of the final regulation shall be treated as having been extended for 

1 additional year. 

‘‘(D) The Secretary shall annually submit to Congress a report that describes the 

instances in which the Secretary failed to publish a final regulation within the applicable regular timeline under this paragraph and that provides an explanation for 

such failures.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. The Secretary shall provide for 

an appropriate transition to take into account the backlog of previously published interim final regulations. 

(b) LIMITATIONS ON NEW MATTER IN FINAL REGULATIONS.—

(1) IN GENERAL.—Section 1871(a) (42 U.S.C. 1395hh(a)), as amended by subsection (a), is amended by adding at the end the following new paragraph: 

‘‘(4) If the Secretary publishes a final regulation that includes a provision that is 

not a logical outgrowth of a previously published notice of proposed rulemaking or 

interim final rule, such provision shall be treated as a proposed regulation and shall 

not take effect until there is the further opportunity for public comment and a publication of the provision again as a final regulation.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

final regulations published on or after the date of the enactment of this Act. 

SEC. 903. COMPLIANCE WITH CHANGES IN REGULATIONS AND POLICIES. 

(a) NO RETROACTIVE APPLICATION OF SUBSTANTIVE CHANGES.—

(1) IN GENERAL.—Section 1871 (42 U.S.C. 1395hh), as amended by section 

902(a), is amended by adding at the end the following new subsection: 

‘‘(e)(1)(A) A substantive change in regulations, manual instructions, interpretative 

rules, statements of policy, or guidelines of general applicability under this title 

shall not be applied (by extrapolation or otherwise) retroactively to items and services furnished before the effective date of the change, unless the Secretary determines that—

‘‘(i) such retroactive application is necessary to comply with statutory requirements; or 

‘‘(ii) failure to apply the change retroactively would be contrary to the public 

interest.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

substantive changes issued on or after the date of the enactment of this Act. 

(b) TIMELINE FOR COMPLIANCE WITH SUBSTANTIVE CHANGES AFTER NOTICE.—

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(1) IN GENERAL.—Section 1871(e)(1), as added by subsection (a), is amended 

by adding at the end the following: 

‘‘(B)(i) Except as provided in clause (ii), a substantive change referred to in subparagraph (A) shall not become effective before the end of the 30-day period that 

begins on the date that the Secretary has issued or published, as the case may be, 

the substantive change. 

‘‘(ii) The Secretary may provide for such a substantive change to take effect on 

a date that precedes the end of the 30-day period under clause (i) if the Secretary 

finds that waiver of such 30-day period is necessary to comply with statutory requirements or that the application of such 30-day period is contrary to the public 

interest. If the Secretary provides for an earlier effective date pursuant to this 

clause, the Secretary shall include in the issuance or publication of the substantive 

change a finding described in the first sentence, and a brief statement of the reasons for such finding. 

‘‘(C) No action shall be taken against a provider of services or supplier with respect to noncompliance with such a substantive change for items and services furnished before the effective date of such a change.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

compliance actions undertaken on or after the date of the enactment of this Act. 

(c) RELIANCE ON GUIDANCE.—

(1) IN GENERAL.—Section 1871(e), as added by subsection (a), is further 

amended by adding at the end the following new paragraph: 

‘‘(2)(A) If—

‘‘(i) a provider of services or supplier follows the written guidance (which may 

be transmitted electronically) provided by the Secretary or by a medicare contractor (as defined in section 1889(g)) acting within the scope of the contractor’s 

contract authority, with respect to the furnishing of items or services and submission of a claim for benefits for such items or services with respect to such 

provider or supplier; 

‘‘(ii) the Secretary determines that the provider of services or supplier has accurately presented the circumstances relating to such items, services, and claim 

to the contractor in writing; and 

‘‘(iii) the guidance was in error; 

the provider of services or supplier shall not be subject to any sanction (including 

any penalty or requirement for repayment of any amount) if the provider of services 

or supplier reasonably relied on such guidance. 

‘‘(B) Subparagraph (A) shall not be construed as preventing the recoupment or repayment (without any additional penalty) relating to an overpayment insofar as the 

overpayment was solely the result of a clerical or technical operational error.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act but shall not apply to any sanction 

for which notice was provided on or before the date of the enactment of this 

Act. 

SEC. 904. REPORTS AND STUDIES RELATING TO REGULATORY REFORM. 

(a) GAO STUDY ON ADVISORY OPINION AUTHORITY.—

(1) STUDY.—The Comptroller General of the United States shall conduct a 

study to determine the feasibility and appropriateness of establishing in the 

Secretary authority to provide legally binding advisory opinions on appropriate 

interpretation and application of regulations to carry out the medicare program 

under title XVIII of the Social Security Act. Such study shall examine the appropriate timeframe for issuing such advisory opinions, as well as the need for 

additional staff and funding to provide such opinions. 

(2) REPORT.—The Comptroller General shall submit to Congress a report on 

the study conducted under paragraph (1) by not later than one year after the 

date of the enactment of this Act. 

(b) REPORT ON LEGAL AND REGULATORY INCONSISTENCIES.—Section 1871 (42 

U.S.C. 1395hh), as amended by section 2(a), is amended by adding at the end the 

following new subsection: 

‘‘(f)(1) Not later than 2 years after the date of the enactment of this subsection, 

and every 2 years thereafter, the Secretary shall submit to Congress a report with 

respect to the administration of this title and areas of inconsistency or conflict 

among the various provisions under law and regulation. 

‘‘(2) In preparing a report under paragraph (1), the Secretary shall collect—

‘‘(A) information from individuals entitled to benefits under part A or enrolled 

under part B, or both, providers of services, and suppliers and from the Medicare Beneficiary Ombudsman and the Medicare Provider Ombudsman with respect to such areas of inconsistency and conflict; and 

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‘‘(B) information from medicare contractors that tracks the nature of written 

and telephone inquiries. 

‘‘(3) A report under paragraph (1) shall include a description of efforts by the Secretary to reduce such inconsistency or conflicts, and recommendations for legislation 

or administrative action that the Secretary determines appropriate to further reduce 

such inconsistency or conflicts.’’. 

Subtitle B—Contracting Reform 

SEC. 911. INCREASED FLEXIBILITY IN MEDICARE ADMINISTRATION. 

(a) CONSOLIDATION AND FLEXIBILITY IN MEDICARE ADMINISTRATION.— (1) IN GENERAL.—Title XVIII is amended by inserting after section 1874 the 

following new section: 

‘‘CONTRACTS WITH MEDICARE ADMINISTRATIVE CONTRACTORS

‘‘SEC. 1874A. (a) AUTHORITY.—

‘‘(1) AUTHORITY TO ENTER INTO CONTRACTS.—The Secretary may enter into 

contracts with any eligible entity to serve as a medicare administrative contractor with respect to the performance of any or all of the functions described 

in paragraph (4) or parts of those functions (or, to the extent provided in a contract, to secure performance thereof by other entities). 

‘‘(2) ELIGIBILITY OF ENTITIES.—An entity is eligible to enter into a contract 

with respect to the performance of a particular function described in paragraph 

(4) only if—

‘‘(A) the entity has demonstrated capability to carry out such function; 

‘‘(B) the entity complies with such conflict of interest standards as are 

generally applicable to Federal acquisition and procurement; 

‘‘(C) the entity has sufficient assets to financially support the performance of such function; and 

‘‘(D) the entity meets such other requirements as the Secretary may impose. 

‘‘(3) MEDICARE ADMINISTRATIVE CONTRACTOR DEFINED.—For purposes of this 

title and title XI—

‘‘(A) IN GENERAL.—The term ‘medicare administrative contractor’ means 

an agency, organization, or other person with a contract under this section. 

‘‘(B) APPROPRIATE MEDICARE ADMINISTRATIVE CONTRACTOR.—With respect 

to the performance of a particular function in relation to an individual entitled to benefits under part A or enrolled under part B, or both, a specific 

provider of services or supplier (or class of such providers of services or suppliers), the ‘appropriate’ medicare administrative contractor is the medicare 

administrative contractor that has a contract under this section with respect to the performance of that function in relation to that individual, provider of services or supplier or class of provider of services or supplier. 

‘‘(4) FUNCTIONS DESCRIBED.—The functions referred to in paragraphs (1) and 

(2) are payment functions, provider services functions, and functions relating to 

services furnished to individuals entitled to benefits under part A or enrolled 

under part B, or both, as follows: 

‘‘(A) DETERMINATION OF PAYMENT AMOUNTS.—Determining (subject to the 

provisions of section 1878 and to such review by the Secretary as may be 

provided for by the contracts) the amount of the payments required pursuant to this title to be made to providers of services, suppliers and individuals. 

‘‘(B) MAKING PAYMENTS.—Making payments described in subparagraph 

(A) (including receipt, disbursement, and accounting for funds in making 

such payments). 

‘‘(C) BENEFICIARY EDUCATION AND ASSISTANCE.—Providing education and 

outreach to individuals entitled to benefits under part A or enrolled under 

part B, or both, and providing assistance to those individuals with specific 

issues, concerns or problems. 

‘‘(D) PROVIDER CONSULTATIVE SERVICES.—Providing consultative services 

to institutions, agencies, and other persons to enable them to establish and 

maintain fiscal records necessary for purposes of this title and otherwise to 

qualify as providers of services or suppliers. 

‘‘(E) COMMUNICATION WITH PROVIDERS.—Communicating to providers of 

services and suppliers any information or instructions furnished to the 

medicare administrative contractor by the Secretary, and facilitating communication between such providers and suppliers and the Secretary. 

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‘‘(F) PROVIDER EDUCATION AND TECHNICAL ASSISTANCE.—Performing the 

functions relating to provider education, training, and technical assistance. 

‘‘(G) ADDITIONAL FUNCTIONS.—Performing such other functions as are 

necessary to carry out the purposes of this title. 

‘‘(5) RELATIONSHIP TO MIP CONTRACTS.—

‘‘(A) NONDUPLICATION OF DUTIES.—In entering into contracts under this 

section, the Secretary shall assure that functions of medicare administrative contractors in carrying out activities under parts A and B do not duplicate activities carried out under the Medicare Integrity Program under section 1893. The previous sentence shall not apply with respect to the activity 

described in section 1893(b)(5) (relating to prior authorization of certain 

items of durable medical equipment under section 1834(a)(15)). 

‘‘(B) CONSTRUCTION.—An entity shall not be treated as a medicare administrative contractor merely by reason of having entered into a contract with 

the Secretary under section 1893. 

‘‘(6) APPLICATION OF FEDERAL ACQUISITION REGULATION.—Except to the extent 

inconsistent with a specific requirement of this title, the Federal Acquisition 

Regulation applies to contracts under this title. 

‘‘(b) CONTRACTING REQUIREMENTS.—

‘‘(1) USE OF COMPETITIVE PROCEDURES.—

‘‘(A) IN GENERAL.—Except as provided in laws with general applicability 

to Federal acquisition and procurement or in subparagraph (B), the Secretary shall use competitive procedures when entering into contracts with 

medicare administrative contractors under this section, taking into account 

performance quality as well as price and other factors. 

‘‘(B) RENEWAL OF CONTRACTS.—The Secretary may renew a contract with 

a medicare administrative contractor under this section from term to term 

without regard to section 5 of title 41, United States Code, or any other provision of law requiring competition, if the medicare administrative contractor has met or exceeded the performance requirements applicable with 

respect to the contract and contractor, except that the Secretary shall provide for the application of competitive procedures under such a contract not 

less frequently than once every five years. 

‘‘(C) TRANSFER OF FUNCTIONS.—The Secretary may transfer functions 

among medicare administrative contractors consistent with the provisions 

of this paragraph. The Secretary shall ensure that performance quality is 

considered in such transfers. The Secretary shall provide public notice 

(whether in the Federal Register or otherwise) of any such transfer (including a description of the functions so transferred, a description of the providers of services and suppliers affected by such transfer, and contact information for the contractors involved). 

‘‘(D) INCENTIVES FOR QUALITY.—The Secretary shall provide incentives for 

medicare administrative contractors to provide quality service and to promote efficiency. 

‘‘(2) COMPLIANCE WITH REQUIREMENTS.—No contract under this section shall 

be entered into with any medicare administrative contractor unless the Secretary finds that such medicare administrative contractor will perform its obligations under the contract efficiently and effectively and will meet such requirements as to financial responsibility, legal authority, quality of services provided, 

and other matters as the Secretary finds pertinent. 

‘‘(3) PERFORMANCE REQUIREMENTS.—

‘‘(A) DEVELOPMENT OF SPECIFIC PERFORMANCE REQUIREMENTS.—In developing contract performance requirements, the Secretary shall develop performance requirements applicable to functions described in subsection 

(a)(4). 

‘‘(B) CONSULTATION.— In developing such requirements, the Secretary 

may consult with providers of services and suppliers, organizations representing individuals entitled to benefits under part A or enrolled under 

part B, or both, and organizations and agencies performing functions necessary to carry out the purposes of this section with respect to such performance requirements. 

‘‘(C) INCLUSION IN CONTRACTS.—All contractor performance requirements 

shall be set forth in the contract between the Secretary and the appropriate 

medicare administrative contractor. Such performance requirements—

‘‘(i) shall reflect the performance requirements developed under subparagraph (A), but may include additional performance requirements; 

‘‘(ii) shall be used for evaluating contractor performance under the 

contract; and 

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‘‘(iii) shall be consistent with the written statement of work provided 

under the contract. 

‘‘(4) INFORMATION REQUIREMENTS.—The Secretary shall not enter into a contract with a medicare administrative contractor under this section unless the 

contractor agrees—

‘‘(A) to furnish to the Secretary such timely information and reports as 

the Secretary may find necessary in performing his functions under this 

title; and 

‘‘(B) to maintain such records and afford such access thereto as the Secretary finds necessary to assure the correctness and verification of the information and reports under subparagraph (A) and otherwise to carry out 

the purposes of this title. 

‘‘(5) SURETY BOND.—A contract with a medicare administrative contractor 

under this section may require the medicare administrative contractor, and any 

of its officers or employees certifying payments or disbursing funds pursuant to 

the contract, or otherwise participating in carrying out the contract, to give surety bond to the United States in such amount as the Secretary may deem appropriate. 

‘‘(c) TERMS AND CONDITIONS.— ‘‘(1) IN GENERAL.—A contract with any medicare administrative contractor 

under this section may contain such terms and conditions as the Secretary finds 

necessary or appropriate and may provide for advances of funds to the medicare 

administrative contractor for the making of payments by it under subsection 

(a)(4)(B). 

‘‘(2) PROHIBITION ON MANDATES FOR CERTAIN DATA COLLECTION.—The Secretary may not require, as a condition of entering into, or renewing, a contract 

under this section, that the medicare administrative contractor match data obtained other than in its activities under this title with data used in the administration of this title for purposes of identifying situations in which the provisions 

of section 1862(b) may apply. 

‘‘(d) LIMITATION ON LIABILITY OF MEDICARE ADMINISTRATIVE CONTRACTORS AND

CERTAIN OFFICERS.—

‘‘(1) CERTIFYING OFFICER.—No individual designated pursuant to a contract 

under this section as a certifying officer shall, in the absence of the reckless disregard of the individual’s obligations or the intent by that individual to defraud 

the United States, be liable with respect to any payments certified by the individual under this section. 

‘‘(2) DISBURSING OFFICER.—No disbursing officer shall, in the absence of the 

reckless disregard of the officer’s obligations or the intent by that officer to defraud the United States, be liable with respect to any payment by such officer 

under this section if it was based upon an authorization (which meets the applicable requirements for such internal controls established by the Comptroller 

General) of a certifying officer designated as provided in paragraph (1) of this 

subsection. 

‘‘(3) LIABILITY OF MEDICARE ADMINISTRATIVE CONTRACTOR.—

‘‘(A) IN GENERAL.—No medicare administrative contractor shall be liable to 

the United States for a payment by a certifying or disbursing officer unless, in 

connection with such payment, the medicare administrative contractor acted 

with reckless disregard of its obligations under its medicare administrative contract or with intent to defraud the United States. 

‘‘(B) RELATIONSHIP TO FALSE CLAIMS ACT.—Nothing in this subsection shall be 

construed to limit liability for conduct that would constitute a violation of sections 3729 through 3731 of title 31, United States Code (commonly known as 

the ‘False Claims Act’). 

‘‘(4) INDEMNIFICATION BY SECRETARY.—

‘‘(A) IN GENERAL.—Subject to subparagraphs (B) and (D), in the case of 

a medicare administrative contractor (or a person who is a director, officer, 

or employee of such a contractor or who is engaged by the contractor to participate directly in the claims administration process) who is made a party 

to any judicial or administrative proceeding arising from or relating directly 

to the claims administration process under this title, the Secretary may, to 

the extent the Secretary determines to be appropriate and as specified in 

the contract with the contractor, indemnify the contractor and such persons. 

‘‘(B) CONDITIONS.—The Secretary may not provide indemnification under 

subparagraph (A) insofar as the liability for such costs arises directly from 

conduct that is determined by the judicial proceeding or by the Secretary 

to be criminal in nature, fraudulent, or grossly negligent. If indemnification 

is provided by the Secretary with respect to a contractor before a deterVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00113 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
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mination that such costs arose directly from such conduct, the contractor 

shall reimburse the Secretary for costs of indemnification. 

‘‘(C) SCOPE OF INDEMNIFICATION.—Indemnification by the Secretary under 

subparagraph (A) may include payment of judgments, settlements (subject 

to subparagraph (D)), awards, and costs (including reasonable legal expenses). 

‘‘(D) WRITTEN APPROVAL FOR SETTLEMENTS.—A contractor or other person 

described in subparagraph (A) may not propose to negotiate a settlement 

or compromise of a proceeding described in such subparagraph without the 

prior written approval of the Secretary to negotiate such settlement or compromise. Any indemnification under subparagraph (A) with respect to 

amounts paid under a settlement or compromise of a proceeding described 

in such subparagraph are conditioned upon prior written approval by the 

Secretary of the final settlement or compromise. 

‘‘(E) CONSTRUCTION.—Nothing in this paragraph shall be construed—

‘‘(i) to change any common law immunity that may be available to 

a medicare administrative contractor or person described in subparagraph (A); or 

‘‘(ii) to permit the payment of costs not otherwise allowable, reasonable, or allocable under the Federal Acquisition Regulations.’’. 

(2) CONSIDERATION OF INCORPORATION OF CURRENT LAW STANDARDS.—In developing contract performance requirements under section 1874A(b) of the Social Security Act, as inserted by paragraph (1), the Secretary shall consider inclusion of the performance standards described in sections 1816(f)(2) of such Act 

(relating to timely processing of reconsiderations and applications for exemptions) and section 1842(b)(2)(B) of such Act (relating to timely review of determinations and fair hearing requests), as such sections were in effect before the 

date of the enactment of this Act. 

(b) CONFORMING AMENDMENTS TO SECTION 1816 (RELATING TO FISCAL INTERMEDIARIES).—Section 1816 (42 U.S.C. 1395h) is amended as follows: 

(1) The heading is amended to read as follows: 

‘‘PROVISIONS RELATING TO THE ADMINISTRATION OF PART A’’. 

(2) Subsection (a) is amended to read as follows: 

‘‘(a) The administration of this part shall be conducted through contracts with 

medicare administrative contractors under section 1874A.’’. 

(3) Subsection (b) is repealed. 

(4) Subsection (c) is amended—

(A) by striking paragraph (1); and 

(B) in each of paragraphs (2)(A) and (3)(A), by striking ‘‘agreement under 

this section’’ and inserting ‘‘contract under section 1874A that provides for 

making payments under this part’’. 

(5) Subsections (d) through (i) are repealed. 

(6) Subsections (j) and (k) are each amended—

(A) by striking ‘‘An agreement with an agency or organization under this 

section’’ and inserting ‘‘A contract with a medicare administrative contractor under section 1874A with respect to the administration of this part’’; 

and 

(B) by striking ‘‘such agency or organization’’ and inserting ‘‘such medicare administrative contractor’’ each place it appears. 

(7) Subsection (l) is repealed. 

(c) CONFORMING AMENDMENTS TO SECTION 1842 (RELATING TO CARRIERS).—Section 1842 (42 U.S.C. 1395u) is amended as follows: 

(1) The heading is amended to read as follows: 

‘‘PROVISIONS RELATING TO THE ADMINISTRATION OF PART B’’. 

(2) Subsection (a) is amended to read as follows: 

‘‘(a) The administration of this part shall be conducted through contracts with 

medicare administrative contractors under section 1874A.’’. 

(3) Subsection (b) is amended—

(A) by striking paragraph (1); 

(B) in paragraph (2)—

(i) by striking subparagraphs (A) and (B); 

(ii) in subparagraph (C), by striking ‘‘carriers’’ and inserting ‘‘medicare administrative contractors’’; and 

(iii) by striking subparagraphs (D) and (E); 

(C) in paragraph (3)—

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(i) in the matter before subparagraph (A), by striking ‘‘Each such contract shall provide that the carrier’’ and inserting ‘‘The Secretary’’; 

(ii) by striking ‘‘will’’ the first place it appears in each of subparagraphs (A), (B), (F), (G), (H), and (L) and inserting ‘‘shall’’; 

(iii) in subparagraph (B), in the matter before clause (i), by striking 

‘‘to the policyholders and subscribers of the carrier’’ and inserting ‘‘to 

the policyholders and subscribers of the medicare administrative contractor’’; 

(iv) by striking subparagraphs (C), (D), and (E); 

(v) in subparagraph (H)—

(I) by striking ‘‘if it makes determinations or payments with respect to physicians’ services,’’ in the matter preceding clause (i); 

and 

(II) by striking ‘‘carrier’’ and inserting ‘‘medicare administrative 

contractor’’ in clause (i); 

(vi) by striking subparagraph (I); 

(vii) in subparagraph (L), by striking the semicolon and inserting a 

period; 

(viii) in the first sentence, after subparagraph (L), by striking ‘‘and 

shall contain’’ and all that follows through the period; and 

(ix) in the seventh sentence, by inserting ‘‘medicare administrative 

contractor,’’ after ‘‘carrier,’’; and 

(D) by striking paragraph (5); 

(E) in paragraph (6)(D)(iv), by striking ‘‘carrier’’ and inserting ‘‘medicare 

administrative contractor’’; and 

(F) in paragraph (7), by striking ‘‘the carrier’’ and inserting ‘‘the Secretary’’ each place it appears. 

(4) Subsection (c) is amended—

(A) by striking paragraph (1); 

(B) in paragraph (2)(A), by striking ‘‘contract under this section which 

provides for the disbursement of funds, as described in subsection (a)(1)(B),’’ 

and inserting ‘‘contract under section 1874A that provides for making payments under this part’’; 

(C) in paragraph (3)(A), by striking ‘‘subsection (a)(1)(B)’’ and inserting 

‘‘section 1874A(a)(3)(B)’’; 

(D) in paragraph (4), in the matter preceding subparagraph (A), by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’; and 

(E) by striking paragraphs (5) and (6). 

(5) Subsections (d), (e), and (f) are repealed. 

(6) Subsection (g) is amended by striking ‘‘carrier or carriers’’ and inserting 

‘‘medicare administrative contractor or contractors’’. 

(7) Subsection (h) is amended—

(A) in paragraph (2)—

(i) by striking ‘‘Each carrier having an agreement with the Secretary 

under subsection (a)’’ and inserting ‘‘The Secretary’’; and 

(ii) by striking ‘‘Each such carrier’’ and inserting ‘‘The Secretary’’; 

(B) in paragraph (3)(A)—

(i) by striking ‘‘a carrier having an agreement with the Secretary 

under subsection (a)’’ and inserting ‘‘medicare administrative contractor 

having a contract under section 1874A that provides for making payments under this part’’; and 

(ii) by striking ‘‘such carrier’’ and inserting ‘‘such contractor’’; 

(C) in paragraph (3)(B)—

(i) by striking ‘‘a carrier’’ and inserting ‘‘a medicare administrative 

contractor’’ each place it appears; and 

(ii) by striking ‘‘the carrier’’ and inserting ‘‘the contractor’’ each place 

it appears; and 

(D) in paragraphs (5)(A) and (5)(B)(iii), by striking ‘‘carriers’’ and inserting ‘‘medicare administrative contractors’’ each place it appears. 

(8) Subsection (l) is amended—

(A) in paragraph (1)(A)(iii), by striking ‘‘carrier’’ and inserting ‘‘medicare 

administrative contractor’’; and 

(B) in paragraph (2), by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’. 

(9) Subsection (p)(3)(A) is amended by striking ‘‘carrier’’ and inserting ‘‘medicare administrative contractor’’. 

(10) Subsection (q)(1)(A) is amended by striking ‘‘carrier’’. 

(d) EFFECTIVE DATE; TRANSITION RULE.—

(1) EFFECTIVE DATE.—

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(A) IN GENERAL.—Except as otherwise provided in this subsection, the 

amendments made by this section shall take effect on October 1, 2005, and 

the Secretary is authorized to take such steps before such date as may be 

necessary to implement such amendments on a timely basis. 

(B) CONSTRUCTION FOR CURRENT CONTRACTS.—Such amendments shall 

not apply to contracts in effect before the date specified under subparagraph (A) that continue to retain the terms and conditions in effect on such 

date (except as otherwise provided under this Act, other than under this 

section) until such date as the contract is let out for competitive bidding 

under such amendments. 

(C) DEADLINE FOR COMPETITIVE BIDDING.—The Secretary shall provide for 

the letting by competitive bidding of all contracts for functions of medicare 

administrative contractors for annual contract periods that begin on or after 

October 1, 2010. 

(D) WAIVER OF PROVIDER NOMINATION PROVISIONS DURING TRANSITION.— During the period beginning on the date of the enactment of this Act and 

before the date specified under subparagraph (A), the Secretary may enter 

into new agreements under section 1816 of the Social Security Act (42 

U.S.C. 1395h) without regard to any of the provider nomination provisions 

of such section. 

(2) GENERAL TRANSITION RULES.—The Secretary shall take such steps, consistent with paragraph (1)(B) and (1)(C), as are necessary to provide for an appropriate transition from contracts under section 1816 and section 1842 of the 

Social Security Act (42 U.S.C. 1395h, 1395u) to contracts under section 1874A, 

as added by subsection (a)(1). 

(3) AUTHORIZING CONTINUATION OF MIP FUNCTIONS UNDER CURRENT CON- TRACTS AND AGREEMENTS AND UNDER ROLLOVER CONTRACTS.—The provisions 

contained in the exception in section 1893(d)(2) of the Social Security Act (42 

U.S.C. 1395ddd(d)(2)) shall continue to apply notwithstanding the amendments 

made by this section, and any reference in such provisions to an agreement or 

contract shall be deemed to include a contract under section 1874A of such Act, 

as inserted by subsection (a)(1), that continues the activities referred to in such 

provisions. 

(e) REFERENCES.—On and after the effective date provided under subsection (d)(1), 

any reference to a fiscal intermediary or carrier under title XI or XVIII of the Social 

Security Act (or any regulation, manual instruction, interpretative rule, statement 

of policy, or guideline issued to carry out such titles) shall be deemed a reference 

to a medicare administrative contractor (as provided under section 1874A of the Social Security Act). 

(f) REPORTS ON IMPLEMENTATION.— (1) PLAN FOR IMPLEMENTATION.—By not later than October 1, 2004, the Secretary shall submit a report to Congress and the Comptroller General of the 

United States that describes the plan for implementation of the amendments 

made by this section. The Comptroller General shall conduct an evaluation of 

such plan and shall submit to Congress, not later than 6 months after the date 

the report is received, a report on such evaluation and shall include in such report such recommendations as the Comptroller General deems appropriate. 

(2) STATUS OF IMPLEMENTATION.—The Secretary shall submit a report to Congress not later than October 1, 2008, that describes the status of implementation of such amendments and that includes a description of the following: 

(A) The number of contracts that have been competitively bid as of such 

date. 

(B) The distribution of functions among contracts and contractors. 

(C) A timeline for complete transition to full competition. 

(D) A detailed description of how the Secretary has modified oversight 

and management of medicare contractors to adapt to full competition. 

SEC. 912. REQUIREMENTS FOR INFORMATION SECURITY FOR MEDICARE ADMINISTRATIVE 

CONTRACTORS. 

(a) IN GENERAL.—Section 1874A, as added by section 911(a)(1), is amended by 

adding at the end the following new subsection: 

‘‘(e) REQUIREMENTS FOR INFORMATION SECURITY.—

‘‘(1) DEVELOPMENT OF INFORMATION SECURITY PROGRAM.—A medicare administrative contractor that performs the functions referred to in subparagraphs (A) 

and (B) of subsection (a)(4) (relating to determining and making payments) 

shall implement a contractor-wide information security program to provide information security for the operation and assets of the contractor with respect 

to such functions under this title. An information security program under this 

paragraph shall meet the requirements for information security programs imposed on Federal agencies under paragraphs (1) through (8) of section 3544(b) 

117

of title 44, United States Code (other than the requirements under paragraphs 

(2)(D)(i), (5)(A), and (5)(B) of such section). 

‘‘(2) INDEPENDENT AUDITS.—

‘‘(A) PERFORMANCE OF ANNUAL EVALUATIONS.—Each year a medicare administrative contractor that performs the functions referred to in subparagraphs (A) and (B) of subsection (a)(4) (relating to determining and making 

payments) shall undergo an evaluation of the information security of the 

contractor with respect to such functions under this title. The evaluation 

shall—

‘‘(i) be performed by an entity that meets such requirements for independence as the Inspector General of the Department of Health and 

Human Services may establish; and 

‘‘(ii) test the effectiveness of information security control techniques 

of an appropriate subset of the contractor’s information systems (as defined in section 3502(8) of title 44, United States Code) relating to such 

functions under this title and an assessment of compliance with the requirements of this subsection and related information security policies, 

procedures, standards and guidelines, including policies and procedures 

as may be prescribed by the Director of the Office of Management and 

Budget and applicable information security standards promulgated 

under section 11331 of title 40, United States Code. 

‘‘(B) DEADLINE FOR INITIAL EVALUATION.—

‘‘(i) NEW CONTRACTORS.—In the case of a medicare administrative 

contractor covered by this subsection that has not previously performed 

the functions referred to in subparagraphs (A) and (B) of subsection 

(a)(4) (relating to determining and making payments) as a fiscal intermediary or carrier under section 1816 or 1842, the first independent 

evaluation conducted pursuant subparagraph (A) shall be completed 

prior to commencing such functions. 

‘‘(ii) OTHER CONTRACTORS.—In the case of a medicare administrative 

contractor covered by this subsection that is not described in clause (i), 

the first independent evaluation conducted pursuant subparagraph (A) 

shall be completed within 1 year after the date the contractor commences functions referred to in clause (i) under this section. 

‘‘(C) REPORTS ON EVALUATIONS.—

‘‘(i) TO THE DEPARTMENT OF HEALTH AND HUMAN SERVICES.—The results of independent evaluations under subparagraph (A) shall be submitted promptly to the Inspector General of the Department of Health 

and Human Services and to the Secretary. 

‘‘(ii) TO CONGRESS.—The Inspector General of Department of Health 

and Human Services shall submit to Congress annual reports on the 

results of such evaluations, including assessments of the scope and sufficiency of such evaluations. 

‘‘(iii) AGENCY REPORTING.—The Secretary shall address the results of 

such evaluations in reports required under section 3544(c) of title 44, 

United States Code.’’. 

(b) APPLICATION OF REQUIREMENTS TO FISCAL INTERMEDIARIES AND CARRIERS.—

(1) IN GENERAL.—The provisions of section 1874A(e)(2) of the Social Security 

Act (other than subparagraph (B)), as added by subsection (a), shall apply to 

each fiscal intermediary under section 1816 of the Social Security Act (42 U.S.C. 

1395h) and each carrier under section 1842 of such Act (42 U.S.C. 1395u) in 

the same manner as they apply to medicare administrative contractors under 

such provisions. 

(2) DEADLINE FOR INITIAL EVALUATION.—In the case of such a fiscal intermediary or carrier with an agreement or contract under such respective section 

in effect as of the date of the enactment of this Act, the first evaluation under 

section 1874A(e)(2)(A) of the Social Security Act (as added by subsection (a)), 

pursuant to paragraph (1), shall be completed (and a report on the evaluation 

submitted to the Secretary) by not later than 1 year after such date. 

Subtitle C—Education and Outreach 

SEC. 921. PROVIDER EDUCATION AND TECHNICAL ASSISTANCE. 

(a) COORDINATION OF EDUCATION FUNDING.—

(1) IN GENERAL.—Title XVIII is amended by inserting after section 1888 the 

following new section: 

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‘‘PROVIDER EDUCATION AND TECHNICAL ASSISTANCE

‘‘SEC. 1889. (a) COORDINATION OF EDUCATION FUNDING.—The Secretary shall coordinate the educational activities provided through medicare contractors (as defined in subsection (g), including under section 1893) in order to maximize the effectiveness of Federal education efforts for providers of services and suppliers.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. 

(3) REPORT.—Not later than October 1, 2004, the Secretary shall submit to 

Congress a report that includes a description and evaluation of the steps taken 

to coordinate the funding of provider education under section 1889(a) of the Social Security Act, as added by paragraph (1). 

(b) INCENTIVES TO IMPROVE CONTRACTOR PERFORMANCE.—

(1) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended by section 912(a), is amended by adding at the end the following new subsection: 

‘‘(f) INCENTIVES TO IMPROVE CONTRACTOR PERFORMANCE IN PROVIDER EDUCATION

AND OUTREACH.—The Secretary shall use specific claims payment error rates or 

similar methodology of medicare administrative contractors in the processing or reviewing of medicare claims in order to give such contractors an incentive to implement effective education and outreach programs for providers of services and suppliers.’’. 

(2) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of 

section 1874A(f) of the Social Security Act, as added by paragraph (1), shall 

apply to each fiscal intermediary under section 1816 of the Social Security Act 

(42 U.S.C. 1395h) and each carrier under section 1842 of such Act (42 U.S.C. 

1395u) in the same manner as they apply to medicare administrative contractors under such provisions. 

(3) GAO REPORT ON ADEQUACY OF METHODOLOGY.—Not later than October 1, 

2004, the Comptroller General of the United States shall submit to Congress 

and to the Secretary a report on the adequacy of the methodology under section 

1874A(f) of the Social Security Act, as added by paragraph (1), and shall include 

in the report such recommendations as the Comptroller General determines appropriate with respect to the methodology. 

(4) REPORT ON USE OF METHODOLOGY IN ASSESSING CONTRACTOR PERFORMANCE.—Not later than October 1, 2004, the Secretary shall submit to Congress 

a report that describes how the Secretary intends to use such methodology in 

assessing medicare contractor performance in implementing effective education 

and outreach programs, including whether to use such methodology as a basis 

for performance bonuses. The report shall include an analysis of the sources of 

identified errors and potential changes in systems of contractors and rules of 

the Secretary that could reduce claims error rates. 

(c) PROVISION OF ACCESS TO AND PROMPT RESPONSES FROM MEDICARE ADMINISTRATIVE CONTRACTORS.—

(1) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended by section 912(a) and subsection (b), is further amended by adding at the 

end the following new subsection: 

‘‘(g) COMMUNICATIONS WITH BENEFICIARIES, PROVIDERS OF SERVICES AND SUPPLIERS.—

‘‘(1) COMMUNICATION STRATEGY.—The Secretary shall develop a strategy for 

communications with individuals entitled to benefits under part A or enrolled 

under part B, or both, and with providers of services and suppliers under this 

title. 

‘‘(2) RESPONSE TO WRITTEN INQUIRIES.—Each medicare administrative contractor shall, for those providers of services and suppliers which submit claims 

to the contractor for claims processing and for those individuals entitled to benefits under part A or enrolled under part B, or both, with respect to whom 

claims are submitted for claims processing, provide general written responses 

(which may be through electronic transmission) in a clear, concise, and accurate 

manner to inquiries of providers of services, suppliers and individuals entitled 

to benefits under part A or enrolled under part B, or both, concerning the programs under this title within 45 business days of the date of receipt of such 

inquiries. 

‘‘(3) RESPONSE TO TOLL-FREE LINES.—The Secretary shall ensure that each 

medicare administrative contractor shall provide, for those providers of services 

and suppliers which submit claims to the contractor for claims processing and 

for those individuals entitled to benefits under part A or enrolled under part 

B, or both, with respect to whom claims are submitted for claims processing, 

a toll-free telephone number at which such individuals, providers of services 

119

and suppliers may obtain information regarding billing, coding, claims, coverage, and other appropriate information under this title. 

‘‘(4) MONITORING OF CONTRACTOR RESPONSES.— ‘‘(A) IN GENERAL.—Each medicare administrative contractor shall, consistent with standards developed by the Secretary under subparagraph 

(B)—

‘‘(i) maintain a system for identifying who provides the information 

referred to in paragraphs (2) and (3); and 

‘‘(ii) monitor the accuracy, consistency, and timeliness of the information so provided. 

‘‘(B) DEVELOPMENT OF STANDARDS.— ‘‘(i) IN GENERAL.—The Secretary shall establish and make public 

standards to monitor the accuracy, consistency, and timeliness of the 

information provided in response to written and telephone inquiries 

under this subsection. Such standards shall be consistent with the performance requirements established under subsection (b)(3). 

‘‘(ii) EVALUATION.—In conducting evaluations of individual medicare 

administrative contractors, the Secretary shall take into account the results of the monitoring conducted under subparagraph (A) taking into 

account as performance requirements the standards established under 

clause (i). The Secretary shall, in consultation with organizations representing providers of services, suppliers, and individuals entitled to 

benefits under part A or enrolled under part B, or both, establish 

standards relating to the accuracy, consistency, and timeliness of the 

information so provided. 

‘‘(C) DIRECT MONITORING.—Nothing in this paragraph shall be construed 

as preventing the Secretary from directly monitoring the accuracy, consistency, and timeliness of the information so provided.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect October 1, 2004. 

(3) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of 

section 1874A(g) of the Social Security Act, as added by paragraph (1), shall 

apply to each fiscal intermediary under section 1816 of the Social Security Act 

(42 U.S.C. 1395h) and each carrier under section 1842 of such Act (42 U.S.C. 

1395u) in the same manner as they apply to medicare administrative contractors under such provisions. 

(d) IMPROVED PROVIDER EDUCATION AND TRAINING.—

(1) IN GENERAL.—Section 1889, as added by subsection (a), is amended by 

adding at the end the following new subsections: 

‘‘(b) ENHANCED EDUCATION AND TRAINING.—

‘‘(1) ADDITIONAL RESOURCES.—There are authorized to be appropriated to the 

Secretary (in appropriate part from the Federal Hospital Insurance Trust Fund 

and the Federal Supplementary Medical Insurance Trust Fund) $25,000,000 for 

each of fiscal years 2005 and 2006 and such sums as may be necessary for succeeding fiscal years. 

‘‘(2) USE.—The funds made available under paragraph (1) shall be used to increase the conduct by medicare contractors of education and training of providers of services and suppliers regarding billing, coding, and other appropriate 

items and may also be used to improve the accuracy, consistency, and timeliness of contractor responses. 

‘‘(c) TAILORING EDUCATION AND TRAINING ACTIVITIES FOR SMALL PROVIDERS OR

SUPPLIERS.—

‘‘(1) IN GENERAL.—Insofar as a medicare contractor conducts education and 

training activities, it shall tailor such activities to meet the special needs of 

small providers of services or suppliers (as defined in paragraph (2)). 

‘‘(2) SMALL PROVIDER OF SERVICES OR SUPPLIER.—In this subsection, the term 

‘small provider of services or supplier’ means—

‘‘(A) a provider of services with fewer than 25 full-time-equivalent employees; or 

‘‘(B) a supplier with fewer than 10 full-time-equivalent employees.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(e) REQUIREMENT TO MAINTAIN INTERNET SITES.—

(1) IN GENERAL.—Section 1889, as added by subsection (a) and as amended 

by subsection (d), is further amended by adding at the end the following new 

subsection: 

‘‘(d) INTERNET SITES; FAQS.—The Secretary, and each medicare contractor insofar 

as it provides services (including claims processing) for providers of services or suppliers, shall maintain an Internet site which—

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‘‘(1) provides answers in an easily accessible format to frequently asked questions, and 

‘‘(2) includes other published materials of the contractor, 

that relate to providers of services and suppliers under the programs under this title 

(and title XI insofar as it relates to such programs).’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(f) ADDITIONAL PROVIDER EDUCATION PROVISIONS.—

(1) IN GENERAL.—Section 1889, as added by subsection (a) and as amended 

by subsections (d) and (e), is further amended by adding at the end the following new subsections: 

‘‘(e) ENCOURAGEMENT OF PARTICIPATION IN EDUCATION PROGRAM ACTIVITIES.—A 

medicare contractor may not use a record of attendance at (or failure to attend) educational activities or other information gathered during an educational program conducted under this section or otherwise by the Secretary to select or track providers 

of services or suppliers for the purpose of conducting any type of audit or prepayment review. 

‘‘(f) CONSTRUCTION.—Nothing in this section or section 1893(g) shall be construed 

as providing for disclosure by a medicare contractor of information that would compromise pending law enforcement activities or reveal findings of law enforcementrelated audits. 

‘‘(g) DEFINITIONS.—For purposes of this section, the term ‘medicare contractor’ includes the following: 

‘‘(1) A medicare administrative contractor with a contract under section 

1874A, including a fiscal intermediary with a contract under section 1816 and 

a carrier with a contract under section 1842. 

‘‘(2) An eligible entity with a contract under section 1893. 

Such term does not include, with respect to activities of a specific provider of services or supplier an entity that has no authority under this title or title IX with respect to such activities and such provider of services or supplier.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act. 

SEC. 922. SMALL PROVIDER TECHNICAL ASSISTANCE DEMONSTRATION PROGRAM. 

(a) ESTABLISHMENT.—

(1) IN GENERAL.—The Secretary shall establish a demonstration program (in 

this section referred to as the ‘‘demonstration program’’) under which technical 

assistance described in paragraph (2) is made available, upon request and on 

a voluntary basis, to small providers of services or suppliers in order to improve 

compliance with the applicable requirements of the programs under medicare 

program under title XVIII of the Social Security Act (including provisions of 

title XI of such Act insofar as they relate to such title and are not administered 

by the Office of the Inspector General of the Department of Health and Human 

Services). 

(2) FORMS OF TECHNICAL ASSISTANCE.—The technical assistance described in 

this paragraph is—

(A) evaluation and recommendations regarding billing and related systems; and 

(B) information and assistance regarding policies and procedures under 

the medicare program, including coding and reimbursement. 

(3) SMALL PROVIDERS OF SERVICES OR SUPPLIERS.—In this section, the term 

‘‘small providers of services or suppliers’’ means—

(A) a provider of services with fewer than 25 full-time-equivalent employees; or 

(B) a supplier with fewer than 10 full-time-equivalent employees. 

(b) QUALIFICATION OF CONTRACTORS.—In conducting the demonstration program, 

the Secretary shall enter into contracts with qualified organizations (such as peer 

review organizations or entities described in section 1889(g)(2) of the Social Security 

Act, as inserted by section 5(f)(1)) with appropriate expertise with billing systems 

of the full range of providers of services and suppliers to provide the technical assistance. In awarding such contracts, the Secretary shall consider any prior investigations of the entity’s work by the Inspector General of Department of Health and 

Human Services or the Comptroller General of the United States. 

(c) DESCRIPTION OF TECHNICAL ASSISTANCE.—The technical assistance provided 

under the demonstration program shall include a direct and in-person examination 

of billing systems and internal controls of small providers of services or suppliers 

to determine program compliance and to suggest more efficient or effective means 

of achieving such compliance. 

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(d) AVOIDANCE OF RECOVERY ACTIONS FOR PROBLEMS IDENTIFIED AS CORRECTED.—The Secretary shall provide that, absent evidence of fraud and notwithstanding any other provision of law, any errors found in a compliance review for 

a small provider of services or supplier that participates in the demonstration program shall not be subject to recovery action if the technical assistance personnel 

under the program determine that—

(1) the problem that is the subject of the compliance review has been corrected to their satisfaction within 30 days of the date of the visit by such personnel to the small provider of services or supplier; and 

(2) such problem remains corrected for such period as is appropriate. 

The previous sentence applies only to claims filed as part of the demonstration program and lasts only for the duration of such program and only as long as the small 

provider of services or supplier is a participant in such program. 

(e) GAO EVALUATION.—Not later than 2 years after the date of the date the demonstration program is first implemented, the Comptroller General, in consultation 

with the Inspector General of the Department of Health and Human Services, shall 

conduct an evaluation of the demonstration program. The evaluation shall include 

a determination of whether claims error rates are reduced for small providers of 

services or suppliers who participated in the program and the extent of improper 

payments made as a result of the demonstration program. The Comptroller General 

shall submit a report to the Secretary and the Congress on such evaluation and 

shall include in such report recommendations regarding the continuation or extension of the demonstration program. 

(f) FINANCIAL PARTICIPATION BY PROVIDERS.—The provision of technical assistance 

to a small provider of services or supplier under the demonstration program is conditioned upon the small provider of services or supplier paying an amount estimated 

(and disclosed in advance of a provider’s or supplier’s participation in the program) 

to be equal to 25 percent of the cost of the technical assistance. 

(g) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated 

to the Secretary (in appropriate part from the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund) to carry out 

the demonstration program— 

(1) for fiscal year 2005, $1,000,000, and 

(2) for fiscal year 2006, $6,000,000. 

SEC. 923. MEDICARE PROVIDER OMBUDSMAN; MEDICARE BENEFICIARY OMBUDSMAN. 

(a) MEDICARE PROVIDER OMBUDSMAN.—Section 1868 (42 U.S.C. 1395ee) is amended—

(1) by adding at the end of the heading the following: ‘‘; MEDICARE PROVIDER

OMBUDSMAN’’; 

(2) by inserting ‘‘PRACTICING PHYSICIANS ADVISORY COUNCIL.—(1)’’ after ‘‘(a)’’; 

(3) in paragraph (1), as so redesignated under paragraph (2), by striking ‘‘in 

this section’’ and inserting ‘‘in this subsection’’; 

(4) by redesignating subsections (b) and (c) as paragraphs (2) and (3), respectively; and 

(5) by adding at the end the following new subsection: 

‘‘(b) MEDICARE PROVIDER OMBUDSMAN.—The Secretary shall appoint within the 

Department of Health and Human Services a Medicare Provider Ombudsman. The 

Ombudsman shall—

‘‘(1) provide assistance, on a confidential basis, to providers of services and 

suppliers with respect to complaints, grievances, and requests for information 

concerning the programs under this title (including provisions of title XI insofar 

as they relate to this title and are not administered by the Office of the Inspector General of the Department of Health and Human Services) and in the resolution of unclear or conflicting guidance given by the Secretary and medicare 

contractors to such providers of services and suppliers regarding such programs 

and provisions and requirements under this title and such provisions; and 

‘‘(2) submit recommendations to the Secretary for improvement in the administration of this title and such provisions, including—

‘‘(A) recommendations to respond to recurring patterns of confusion in 

this title and such provisions (including recommendations regarding suspending imposition of sanctions where there is widespread confusion in program administration), and 

‘‘(B) recommendations to provide for an appropriate and consistent response (including not providing for audits) in cases of self-identified overpayments by providers of services and suppliers. 

The Ombudsman shall not serve as an advocate for any increases in payments or 

new coverage of services, but may identify issues and problems in payment or coverage policies.’’. 

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(b) MEDICARE BENEFICIARY OMBUDSMAN.—Title XVIII, as previously amended, is 

amended by inserting after section 1809 the following new section: 

‘‘MEDICARE BENEFICIARY OMBUDSMAN

‘‘SEC. 1810. (a) IN GENERAL.—The Secretary shall appoint within the Department 

of Health and Human Services a Medicare Beneficiary Ombudsman who shall have 

expertise and experience in the fields of health care and education of (and assistance to) individuals entitled to benefits under this title. 

‘‘(b) DUTIES.—The Medicare Beneficiary Ombudsman shall—

‘‘(1) receive complaints, grievances, and requests for information submitted by 

individuals entitled to benefits under part A or enrolled under part B, or both, 

with respect to any aspect of the medicare program; 

‘‘(2) provide assistance with respect to complaints, grievances, and requests 

referred to in paragraph (1), including—

‘‘(A) assistance in collecting relevant information for such individuals, to 

seek an appeal of a decision or determination made by a fiscal intermediary, carrier, Medicare+Choice organization, or the Secretary; 

‘‘(B) assistance to such individuals with any problems arising from 

disenrollment from a Medicare+Choice plan under part C; and 

‘‘(C) assistance to such individuals in presenting information under section 1860D–2(b)(4)(D)(v); and 

‘‘(3) submit annual reports to Congress and the Secretary that describe the 

activities of the Office and that include such recommendations for improvement 

in the administration of this title as the Ombudsman determines appropriate. 

The Ombudsman shall not serve as an advocate for any increases in payments or 

new coverage of services, but may identify issues and problems in payment or coverage policies. 

‘‘(c) WORKING WITH HEALTH INSURANCE COUNSELING PROGRAMS.—To the extent 

possible, the Ombudsman shall work with health insurance counseling programs 

(receiving funding under section 4360 of Omnibus Budget Reconciliation Act of 

1990) to facilitate the provision of information to individuals entitled to benefits 

under part A or enrolled under part B, or both regarding Medicare+Choice plans 

and changes to those plans. Nothing in this subsection shall preclude further collaboration between the Ombudsman and such programs.’’. 

(c) DEADLINE FOR APPOINTMENT.—The Secretary shall appoint the Medicare Provider Ombudsman and the Medicare Beneficiary Ombudsman, under the amendments made by subsections (a) and (b), respectively, by not later than 1 year after 

the date of the enactment of this Act. 

(d) FUNDING.—There are authorized to be appropriated to the Secretary (in appropriate part from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund) to carry out the provisions of subsection 

(b) of section 1868 of the Social Security Act (relating to the Medicare Provider Ombudsman), as added by subsection (a)(5) and section 1807 of such Act (relating to 

the Medicare Beneficiary Ombudsman), as added by subsection (b), such sums as 

are necessary for fiscal year 2004 and each succeeding fiscal year. 

(e) USE OF CENTRAL, TOLL-FREE NUMBER (1–800–MEDICARE).—

(1) PHONE TRIAGE SYSTEM; LISTING IN MEDICARE HANDBOOK INSTEAD OF OTHER

TOLL-FREE NUMBERS.—Section 1804(b) (42 U.S.C. 1395b–2(b)) is amended by 

adding at the end the following: ‘‘The Secretary shall provide, through the tollfree number 1–800–MEDICARE, for a means by which individuals seeking information about, or assistance with, such programs who phone such toll-free 

number are transferred (without charge) to appropriate entities for the provision of such information or assistance. Such toll-free number shall be the tollfree number listed for general information and assistance in the annual notice 

under subsection (a) instead of the listing of numbers of individual contractors.’’. 

(2) MONITORING ACCURACY.—

(A) STUDY.—The Comptroller General of the United States shall conduct 

a study to monitor the accuracy and consistency of information provided to 

individuals entitled to benefits under part A or enrolled under part B, or 

both, through the toll-free number 1–800–MEDICARE, including an assessment of whether the information provided is sufficient to answer questions 

of such individuals. In conducting the study, the Comptroller General shall 

examine the education and training of the individuals providing information through such number. 

(B) REPORT.—Not later than 1 year after the date of the enactment of this 

Act, the Comptroller General shall submit to Congress a report on the 

study conducted under subparagraph (A). 

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SEC. 924. BENEFICIARY OUTREACH DEMONSTRATION PROGRAM. 

(a) IN GENERAL.—The Secretary shall establish a demonstration program (in this 

section referred to as the ‘‘demonstration program’’) under which medicare specialists employed by the Department of Health and Human Services provide advice and 

assistance to individuals entitled to benefits under part A of title XVIII of the Social 

Security Act, or enrolled under part B of such title, or both, regarding the medicare 

program at the location of existing local offices of the Social Security Administration. 

(b) LOCATIONS.— (1) IN GENERAL.—The demonstration program shall be conducted in at least 

6 offices or areas. Subject to paragraph (2), in selecting such offices and areas, 

the Secretary shall provide preference for offices with a high volume of visits 

by individuals referred to in subsection (a). 

(2) ASSISTANCE FOR RURAL BENEFICIARIES.—The Secretary shall provide for 

the selection of at least 2 rural areas to participate in the demonstration program. In conducting the demonstration program in such rural areas, the Secretary shall provide for medicare specialists to travel among local offices in a 

rural area on a scheduled basis. 

(c) DURATION.—The demonstration program shall be conducted over a 3-year period. 

(d) EVALUATION AND REPORT.— (1) EVALUATION.—The Secretary shall provide for an evaluation of the demonstration program. Such evaluation shall include an analysis of—

(A) utilization of, and satisfaction of those individuals referred to in subsection (a) with, the assistance provided under the program; and 

(B) the cost-effectiveness of providing beneficiary assistance through outstationing medicare specialists at local offices of the Social Security Administration. 

(2) REPORT.—The Secretary shall submit to Congress a report on such evaluation and shall include in such report recommendations regarding the feasibility 

of permanently out-stationing medicare specialists at local offices of the Social 

Security Administration. 

SEC. 925. INCLUSION OF ADDITIONAL INFORMATION IN NOTICES TO BENEFICIARIES ABOUT 

SKILLED NURSING FACILITY BENEFITS. 

(a) IN GENERAL.—The Secretary shall provide that in medicare beneficiary notices 

provided (under section 1806(a) of the Social Security Act, 42 U.S.C. 1395b–7(a)) 

with respect to the provision of post-hospital extended care services under part A 

of title XVIII of the Social Security Act, there shall be included information on the 

number of days of coverage of such services remaining under such part for the medicare beneficiary and spell of illness involved. 

(b) EFFECTIVE DATE.—Subsection (a) shall apply to notices provided during calendar quarters beginning more than 6 months after the date of the enactment of 

this Act. 

SEC. 926. INFORMATION ON MEDICARE-CERTIFIED SKILLED NURSING FACILITIES IN HOSPITAL DISCHARGE PLANS. 

(a) AVAILABILITY OF DATA.—The Secretary shall publicly provide information that 

enables hospital discharge planners, medicare beneficiaries, and the public to identify skilled nursing facilities that are participating in the medicare program. 

(b) INCLUSION OF INFORMATION IN CERTAIN HOSPITAL DISCHARGE PLANS.— (1) IN GENERAL.—Section 1861(ee)(2)(D) (42 U.S.C. 1395x(ee)(2)(D)) is amended—

(A) by striking ‘‘hospice services’’ and inserting ‘‘hospice care and posthospital extended care services’’; and 

(B) by inserting before the period at the end the following: ‘‘and, in the 

case of individuals who are likely to need post-hospital extended care services, the availability of such services through facilities that participate in 

the program under this title and that serve the area in which the patient 

resides’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

discharge plans made on or after such date as the Secretary shall specify, but 

not later than 6 months after the date the Secretary provides for availability 

of information under subsection (a). 

Subtitle D—Appeals and Recovery 

SEC. 931. TRANSFER OF RESPONSIBILITY FOR MEDICARE APPEALS. 

(a) TRANSITION PLAN.—

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(1) IN GENERAL.—Not later than October 1, 2004, the Commissioner of Social 

Security and the Secretary shall develop and transmit to Congress and the 

Comptroller General of the United States a plan under which the functions of 

administrative law judges responsible for hearing cases under title XVIII of the 

Social Security Act (and related provisions in title XI of such Act) are transferred from the responsibility of the Commissioner and the Social Security Administration to the Secretary and the Department of Health and Human Services. 

(2) GAO EVALUATION.—The Comptroller General of the United States shall 

evaluate the plan and, not later than the date that is 6 months after the date 

on which the plan is received by the Comptroller General, shall submit to Congress a report on such evaluation. 

(b) TRANSFER OF ADJUDICATION AUTHORITY.—

(1) IN GENERAL.—Not earlier than July 1, 2005, and not later than October 

1, 2005, the Commissioner of Social Security and the Secretary shall implement 

the transition plan under subsection (a) and transfer the administrative law 

judge functions described in such subsection from the Social Security Administration to the Secretary. 

(2) ASSURING INDEPENDENCE OF JUDGES.—The Secretary shall assure the 

independence of administrative law judges performing the administrative law 

judge functions transferred under paragraph (1) from the Centers for Medicare 

& Medicaid Services and its contractors. In order to assure such independence, 

the Secretary shall place such judges in an administrative office that is organizationally and functionally separate from such Centers. Such judges shall report 

to, and be under the general supervision of, the Secretary, but shall not report 

to, or be subject to supervision by, another other officer of the Department. 

(3) GEOGRAPHIC DISTRIBUTION.—The Secretary shall provide for an appropriate geographic distribution of administrative law judges performing the administrative law judge functions transferred under paragraph (1) throughout 

the United States to ensure timely access to such judges. 

(4) HIRING AUTHORITY.—Subject to the amounts provided in advance in appropriations Act, the Secretary shall have authority to hire administrative law 

judges to hear such cases, giving priority to those judges with prior experience 

in handling medicare appeals and in a manner consistent with paragraph (3), 

and to hire support staff for such judges. 

(5) FINANCING.—Amounts payable under law to the Commissioner for administrative law judges performing the administrative law judge functions transferred under paragraph (1) from the Federal Hospital Insurance Trust Fund 

and the Federal Supplementary Medical Insurance Trust Fund shall become 

payable to the Secretary for the functions so transferred. 

(6) SHARED RESOURCES.—The Secretary shall enter into such arrangements 

with the Commissioner as may be appropriate with respect to transferred functions of administrative law judges to share office space, support staff, and other 

resources, with appropriate reimbursement from the Trust Funds described in 

paragraph (5). 

(c) INCREASED FINANCIAL SUPPORT.—In addition to any amounts otherwise appropriated, to ensure timely action on appeals before administrative law judges and the 

Departmental Appeals Board consistent with section 1869 of the Social Security Act 

(as amended by section 521 of BIPA, 114 Stat. 2763A–534), there are authorized to 

be appropriated (in appropriate part from the Federal Hospital Insurance Trust 

Fund and the Federal Supplementary Medical Insurance Trust Fund) to the Secretary such sums as are necessary for fiscal year 2005 and each subsequent fiscal 

year to—

(1) increase the number of administrative law judges (and their staffs) under 

subsection (b)(4); 

(2) improve education and training opportunities for administrative law 

judges (and their staffs); and 

(3) increase the staff of the Departmental Appeals Board. 

(d) CONFORMING AMENDMENT.—Section 1869(f)(2)(A)(i) (42 U.S.C. 

1395ff(f)(2)(A)(i)), as added by section 522(a) of BIPA (114 Stat. 2763A–543), is 

amended by striking ‘‘of the Social Security Administration’’. 

SEC. 932. PROCESS FOR EXPEDITED ACCESS TO REVIEW. 

(a) EXPEDITED ACCESS TO JUDICIAL REVIEW.—Section 1869(b) (42 U.S.C. 1395ff(b)) 

as amended by BIPA, is amended—

(1) in paragraph (1)(A), by inserting ‘‘, subject to paragraph (2),’’ before ‘‘to 

judicial review of the Secretary’s final decision’’; 

(2) in paragraph (1)(F)—

(A) by striking clause (ii); 

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(B) by striking ‘‘PROCEEDING’’ and all that follows through ‘‘DETERMINA- TION’’ and inserting ‘‘DETERMINATIONS AND RECONSIDERATIONS’’; and 

(C) by redesignating subclauses (I) and (II) as clauses (i) and (ii) and by 

moving the indentation of such subclauses (and the matter that follows) 2 

ems to the left; and 

(3) by adding at the end the following new paragraph: 

‘‘(2) EXPEDITED ACCESS TO JUDICIAL REVIEW.— ‘‘(A) IN GENERAL.—The Secretary shall establish a process under which 

a provider of services or supplier that furnishes an item or service or an 

individual entitled to benefits under part A or enrolled under part B, or 

both, who has filed an appeal under paragraph (1) may obtain access to judicial review when a review panel (described in subparagraph (D)), on its 

own motion or at the request of the appellant, determines that no entity 

in the administrative appeals process has the authority to decide the question of law or regulation relevant to the matters in controversy and that 

there is no material issue of fact in dispute. The appellant may make such 

request only once with respect to a question of law or regulation in a case 

of an appeal. 

‘‘(B) PROMPT DETERMINATIONS.—If, after or coincident with appropriately 

filing a request for an administrative hearing, the appellant requests a determination by the appropriate review panel that no review panel has the 

authority to decide the question of law or regulations relevant to the matters in controversy and that there is no material issue of fact in dispute 

and if such request is accompanied by the documents and materials as the 

appropriate review panel shall require for purposes of making such determination, such review panel shall make a determination on the request in 

writing within 60 days after the date such review panel receives the request and such accompanying documents and materials. Such a determination by such review panel shall be considered a final decision and not subject to review by the Secretary. 

‘‘(C) ACCESS TO JUDICIAL REVIEW.—

‘‘(i) IN GENERAL.—If the appropriate review panel—

‘‘(I) determines that there are no material issues of fact in dispute and that the only issue is one of law or regulation that no review panel has the authority to decide; or 

‘‘(II) fails to make such determination within the period provided 

under subparagraph (B); 

then the appellant may bring a civil action as described in this subparagraph. 

‘‘(ii) DEADLINE FOR FILING.—Such action shall be filed, in the case described in—

‘‘(I) clause (i)(I), within 60 days of date of the determination described in such subparagraph; or 

‘‘(II) clause (i)(II), within 60 days of the end of the period provided under subparagraph (B) for the determination. 

‘‘(iii) VENUE.—Such action shall be brought in the district court of the 

United States for the judicial district in which the appellant is located 

(or, in the case of an action brought jointly by more than one applicant, 

the judicial district in which the greatest number of applicants are located) or in the district court for the District of Columbia. 

‘‘(iv) INTEREST ON AMOUNTS IN CONTROVERSY.—Where a provider of 

services or supplier seeks judicial review pursuant to this paragraph, 

the amount in controversy shall be subject to annual interest beginning 

on the first day of the first month beginning after the 60-day period 

as determined pursuant to clause (ii) and equal to the rate of interest 

on obligations issued for purchase by the Federal Hospital Insurance 

Trust Fund and by the Federal Supplementary Medical Insurance 

Trust Fund for the month in which the civil action authorized under 

this paragraph is commenced, to be awarded by the reviewing court in 

favor of the prevailing party. No interest awarded pursuant to the preceding sentence shall be deemed income or cost for the purposes of determining reimbursement due providers of services or suppliers under 

this Act. 

‘‘(D) REVIEW PANELS.—For purposes of this subsection, a ‘review panel’ is 

a panel consisting of 3 members (who shall be administrative law judges, 

members of the Departmental Appeals Board, or qualified individuals associated with a qualified independent contractor (as defined in subsection 

(c)(2)) or with another independent entity) designated by the Secretary for 

purposes of making determinations under this paragraph.’’. 

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(b) APPLICATION TO PROVIDER AGREEMENT DETERMINATIONS.—Section 1866(h)(1) 

(42 U.S.C. 1395cc(h)(1)) is amended—

(1) by inserting ‘‘(A)’’ after ‘‘(h)(1)’’; and 

(2) by adding at the end the following new subparagraph: 

‘‘(B) An institution or agency described in subparagraph (A) that has filed for a 

hearing under subparagraph (A) shall have expedited access to judicial review under 

this subparagraph in the same manner as providers of services, suppliers, and individuals entitled to benefits under part A or enrolled under part B, or both, may obtain expedited access to judicial review under the process established under section 

1869(b)(2). Nothing in this subparagraph shall be construed to affect the application 

of any remedy imposed under section 1819 during the pendency of an appeal under 

this subparagraph.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to appeals filed on or after October 1, 2004. 

(d) EXPEDITED REVIEW OF CERTAIN PROVIDER AGREEMENT DETERMINATIONS.—

(1) TERMINATION AND CERTAIN OTHER IMMEDIATE REMEDIES.—The Secretary 

shall develop and implement a process to expedite proceedings under sections 

1866(h) of the Social Security Act (42 U.S.C. 1395cc(h)) in which the remedy of 

termination of participation, or a remedy described in clause (i) or (iii) of section 

1819(h)(2)(B) of such Act (42 U.S.C. 1395i–3(h)(2)(B)) which is applied on an immediate basis, has been imposed. Under such process priority shall be provided 

in cases of termination. 

(2) INCREASED FINANCIAL SUPPORT.—In addition to any amounts otherwise appropriated, to reduce by 50 percent the average time for administrative determinations on appeals under section 1866(h) of the Social Security Act (42 U.S.C. 

1395cc(h)), there are authorized to be appropriated (in appropriate part from 

the Federal Hospital Insurance Trust Fund and the Federal Supplementary 

Medical Insurance Trust Fund) to the Secretary such additional sums for fiscal 

year 2005 and each subsequent fiscal year as may be necessary. The purposes 

for which such amounts are available include increasing the number of administrative law judges (and their staffs) and the appellate level staff at the Departmental Appeals Board of the Department of Health and Human Services and 

educating such judges and staffs on long-term care issues. 

SEC. 933. REVISIONS TO MEDICARE APPEALS PROCESS. 

(a) REQUIRING FULL AND EARLY PRESENTATION OF EVIDENCE.—

(1) IN GENERAL.—Section 1869(b) (42 U.S.C. 1395ff(b)), as amended by BIPA 

and as amended by section 932(a), is further amended by adding at the end the 

following new paragraph: 

‘‘(3) REQUIRING FULL AND EARLY PRESENTATION OF EVIDENCE BY PROVIDERS.—

A provider of services or supplier may not introduce evidence in any appeal 

under this section that was not presented at the reconsideration conducted by 

the qualified independent contractor under subsection (c), unless there is good 

cause which precluded the introduction of such evidence at or before that reconsideration.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect on October 1, 2004. 

(b) USE OF PATIENTS’ MEDICAL RECORDS.—Section 1869(c)(3)(B)(i) (42 U.S.C. 

1395ff(c)(3)(B)(i)), as amended by BIPA, is amended by inserting ‘‘(including the 

medical records of the individual involved)’’ after ‘‘clinical experience’’. 

(c) NOTICE REQUIREMENTS FOR MEDICARE APPEALS.— 

(1) INITIAL DETERMINATIONS AND REDETERMINATIONS.—Section 1869(a) (42 

U.S.C. 1395ff(a)), as amended by BIPA, is amended by adding at the end the 

following new paragraphs: 

‘‘(4) REQUIREMENTS OF NOTICE OF DETERMINATIONS.—With respect to an initial determination insofar as it results in a denial of a claim for benefits—

‘‘(A) the written notice on the determination shall include—

‘‘(i) the reasons for the determination, including whether a local medical review policy or a local coverage determination was used; 

‘‘(ii) the procedures for obtaining additional information concerning 

the determination, including the information described in subparagraph 

(B); and 

‘‘(iii) notification of the right to seek a redetermination or otherwise 

appeal the determination and instructions on how to initiate such a redetermination under this section; and 

‘‘(B) the person provided such notice may obtain, upon request, the specific provision of the policy, manual, or regulation used in making the determination. 

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‘‘(5) REQUIREMENTS OF NOTICE OF REDETERMINATIONS.—With respect to a redetermination insofar as it results in a denial of a claim for benefits—

‘‘(A) the written notice on the redetermination shall include—

‘‘(i) the specific reasons for the redetermination; 

‘‘(ii) as appropriate, a summary of the clinical or scientific evidence 

used in making the redetermination; 

‘‘(iii) a description of the procedures for obtaining additional information concerning the redetermination; and 

‘‘(iv) notification of the right to appeal the redetermination and instructions on how to initiate such an appeal under this section; 

‘‘(B) such written notice shall be provided in printed form and written in 

a manner calculated to be understood by the individual entitled to benefits 

under part A or enrolled under part B, or both; and 

‘‘(C) the person provided such notice may obtain, upon request, information on the specific provision of the policy, manual, or regulation used in 

making the redetermination.’’. 

(2) RECONSIDERATIONS.—Section 1869(c)(3)(E) (42 U.S.C. 1395ff(c)(3)(E)), as 

amended by BIPA, is amended—

(A) by inserting ‘‘be written in a manner calculated to be understood by 

the individual entitled to benefits under part A or enrolled under part B, 

or both, and shall include (to the extent appropriate)’’ after ‘‘in writing, ’’; 

and 

(B) by inserting ‘‘and a notification of the right to appeal such determination and instructions on how to initiate such appeal under this section’’ 

after ‘‘such decision,’’. 

(3) APPEALS.—Section 1869(d) (42 U.S.C. 1395ff(d)), as amended by BIPA, is 

amended—

(A) in the heading, by inserting ‘‘; NOTICE’’ after ‘‘SECRETARY’’; and 

(B) by adding at the end the following new paragraph: 

‘‘(4) NOTICE.—Notice of the decision of an administrative law judge shall be 

in writing in a manner calculated to be understood by the individual entitled 

to benefits under part A or enrolled under part B, or both, and shall include—

‘‘(A) the specific reasons for the determination (including, to the extent 

appropriate, a summary of the clinical or scientific evidence used in making 

the determination); 

‘‘(B) the procedures for obtaining additional information concerning the 

decision; and 

‘‘(C) notification of the right to appeal the decision and instructions on 

how to initiate such an appeal under this section.’’. 

(4) SUBMISSION OF RECORD FOR APPEAL.—Section 1869(c)(3)(J)(i) (42 U.S.C. 

1395ff(c)(3)(J)(i)) by striking ‘‘prepare’’ and inserting ‘‘submit’’ and by striking 

‘‘with respect to’’ and all that follows through ‘‘and relevant policies’’. 

(d) QUALIFIED INDEPENDENT CONTRACTORS.—

(1) ELIGIBILITY REQUIREMENTS OF QUALIFIED INDEPENDENT CONTRACTORS.—

Section 1869(c)(3) (42 U.S.C. 1395ff(c)(3)), as amended by BIPA, is amended—

(A) in subparagraph (A), by striking ‘‘sufficient training and expertise in 

medical science and legal matters’’ and inserting ‘‘sufficient medical, legal, 

and other expertise (including knowledge of the program under this title) 

and sufficient staffing’’; and 

(B) by adding at the end the following new subparagraph: 

‘‘(K) INDEPENDENCE REQUIREMENTS.—

‘‘(i) IN GENERAL.—Subject to clause (ii), a qualified independent contractor shall not conduct any activities in a case unless the entity—

‘‘(I) is not a related party (as defined in subsection (g)(5)); 

‘‘(II) does not have a material familial, financial, or professional 

relationship with such a party in relation to such case; and 

‘‘(III) does not otherwise have a conflict of interest with such a 

party. 

‘‘(ii) EXCEPTION FOR REASONABLE COMPENSATION.—Nothing in clause 

(i) shall be construed to prohibit receipt by a qualified independent contractor of compensation from the Secretary for the conduct of activities 

under this section if the compensation is provided consistent with 

clause (iii). 

‘‘(iii) LIMITATIONS ON ENTITY COMPENSATION.—Compensation provided by the Secretary to a qualified independent contractor in connection with reviews under this section shall not be contingent on any decision rendered by the contractor or by any reviewing professional.’’. 

(2) ELIGIBILITY REQUIREMENTS FOR REVIEWERS.—Section 1869 (42 U.S.C. 

1395ff), as amended by BIPA, is amended—

128

(A) by amending subsection (c)(3)(D) to read as follows: 

‘‘(D) QUALIFICATIONS FOR REVIEWERS.—The requirements of subsection (g) 

shall be met (relating to qualifications of reviewing professionals).’’; and 

(B) by adding at the end the following new subsection: 

‘‘(g) QUALIFICATIONS OF REVIEWERS.— ‘‘(1) IN GENERAL.—In reviewing determinations under this section, a qualified 

independent contractor shall assure that—

‘‘(A) each individual conducting a review shall meet the qualifications of 

paragraph (2); 

‘‘(B) compensation provided by the contractor to each such reviewer is 

consistent with paragraph (3); and 

‘‘(C) in the case of a review by a panel described in subsection (c)(3)(B) 

composed of physicians or other health care professionals (each in this subsection referred to as a ‘reviewing professional’), a reviewing professional 

meets the qualifications described in paragraph (4) and, where a claim is 

regarding the furnishing of treatment by a physician (allopathic or osteopathic) or the provision of items or services by a physician (allopathic or 

osteopathic), a reviewing professional shall be a physician (allopathic or osteopathic). 

‘‘(2) INDEPENDENCE.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), each individual conducting a review in a case shall—

‘‘(i) not be a related party (as defined in paragraph (5)); 

‘‘(ii) not have a material familial, financial, or professional relationship with such a party in the case under review; and 

‘‘(iii) not otherwise have a conflict of interest with such a party. 

‘‘(B) EXCEPTION.—Nothing in subparagraph (A) shall be construed to—

‘‘(i) prohibit an individual, solely on the basis of a participation agreement with a fiscal intermediary, carrier, or other contractor, from serving as a reviewing professional if—

‘‘(I) the individual is not involved in the provision of items or 

services in the case under review; 

‘‘(II) the fact of such an agreement is disclosed to the Secretary 

and the individual entitled to benefits under part A or enrolled 

under part B, or both, (or authorized representative) and neither 

party objects; and 

‘‘(III) the individual is not an employee of the intermediary, carrier, or contractor and does not provide services exclusively or primarily to or on behalf of such intermediary, carrier, or contractor; 

‘‘(ii) prohibit an individual who has staff privileges at the institution 

where the treatment involved takes place from serving as a reviewer 

merely on the basis of having such staff privileges if the existence of 

such privileges is disclosed to the Secretary and such individual (or authorized representative), and neither party objects; or 

‘‘(iii) prohibit receipt of compensation by a reviewing professional 

from a contractor if the compensation is provided consistent with paragraph (3). 

For purposes of this paragraph, the term ‘participation agreement’ means 

an agreement relating to the provision of health care services by the individual and does not include the provision of services as a reviewer under 

this subsection. 

‘‘(3) LIMITATIONS ON REVIEWER COMPENSATION.—Compensation provided by a 

qualified independent contractor to a reviewer in connection with a review 

under this section shall not be contingent on the decision rendered by the reviewer. 

‘‘(4) LICENSURE AND EXPERTISE.—Each reviewing professional shall be—

‘‘(A) a physician (allopathic or osteopathic) who is appropriately 

credentialed or licensed in one or more States to deliver health care services 

and has medical expertise in the field of practice that is appropriate for the 

items or services at issue; or 

‘‘(B) a health care professional who is legally authorized in one or more 

States (in accordance with State law or the State regulatory mechanism 

provided by State law) to furnish the health care items or services at issue 

and has medical expertise in the field of practice that is appropriate for 

such items or services. 

‘‘(5) RELATED PARTY DEFINED.—For purposes of this section, the term ‘related 

party’ means, with respect to a case under this title involving a specific individual entitled to benefits under part A or enrolled under part B, or both, any 

of the following: 

129

‘‘(A) The Secretary, the medicare administrative contractor involved, or 

any fiduciary, officer, director, or employee of the Department of Health 

and Human Services, or of such contractor. 

‘‘(B) The individual (or authorized representative). 

‘‘(C) The health care professional that provides the items or services involved in the case. 

‘‘(D) The institution at which the items or services (or treatment) involved 

in the case are provided. 

‘‘(E) The manufacturer of any drug or other item that is included in the 

items or services involved in the case. 

‘‘(F) Any other party determined under any regulations to have a substantial interest in the case involved.’’. 

(3) REDUCING MINIMUM NUMBER OF QUALIFIED INDEPENDENT CONTRACTORS.—

Section 1869(c)(4) (42 U.S.C. 1395ff(c)(4)) is amended by striking ‘‘not fewer 

than 12 qualified independent contractors under this subsection’’ and inserting 

‘‘with a sufficient number of qualified independent contractors (but not fewer 

than 4 such contractors) to conduct reconsiderations consistent with the timeframes applicable under this subsection’’. 

(4) EFFECTIVE DATE.—The amendments made by paragraphs (1) and (2) shall 

be effective as if included in the enactment of the respective provisions of subtitle C of title V of BIPA, (114 Stat. 2763A–534). 

(5) TRANSITION.—In applying section 1869(g) of the Social Security Act (as 

added by paragraph (2)), any reference to a medicare administrative contractor 

shall be deemed to include a reference to a fiscal intermediary under section 

1816 of the Social Security Act (42 U.S.C. 1395h) and a carrier under section 

1842 of such Act (42 U.S.C. 1395u). 

SEC. 934. PREPAYMENT REVIEW. 

(a) IN GENERAL.—Section 1874A, as added by section 911(a)(1) and as amended 

by sections 912(b), 921(b)(1), and 921(c)(1), is further amended by adding at the end 

the following new subsection: 

‘‘(h) CONDUCT OF PREPAYMENT REVIEW.—

‘‘(1) CONDUCT OF RANDOM PREPAYMENT REVIEW.—

‘‘(A) IN GENERAL.—A medicare administrative contractor may conduct 

random prepayment review only to develop a contractor-wide or programwide claims payment error rates or under such additional circumstances as 

may be provided under regulations, developed in consultation with providers of services and suppliers. 

‘‘(B) USE OF STANDARD PROTOCOLS WHEN CONDUCTING PREPAYMENT REVIEWS.—When a medicare administrative contractor conducts a random prepayment review, the contractor may conduct such review only in accordance 

with a standard protocol for random prepayment audits developed by the 

Secretary. 

‘‘(C) CONSTRUCTION.—Nothing in this paragraph shall be construed as 

preventing the denial of payments for claims actually reviewed under a random prepayment review. 

‘‘(D) RANDOM PREPAYMENT REVIEW.—For purposes of this subsection, the 

term ‘random prepayment review’ means a demand for the production of 

records or documentation absent cause with respect to a claim. 

‘‘(2) LIMITATIONS ON NON-RANDOM PREPAYMENT REVIEW.—

‘‘(A) LIMITATIONS ON INITIATION OF NON-RANDOM PREPAYMENT REVIEW.—

A medicare administrative contractor may not initiate non-random prepayment review of a provider of services or supplier based on the initial identification by that provider of services or supplier of an improper billing practice unless there is a likelihood of sustained or high level of payment error 

(as defined in subsection (i)(3)(A)). 

‘‘(B) TERMINATION OF NON-RANDOM PREPAYMENT REVIEW.—The Secretary 

shall issue regulations relating to the termination, including termination 

dates, of non-random prepayment review. Such regulations may vary such 

a termination date based upon the differences in the circumstances triggering prepayment review.’’. 

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendment made 

by subsection (a) shall take effect 1 year after the date of the enactment of this 

Act. 

(2) DEADLINE FOR PROMULGATION OF CERTAIN REGULATIONS.—The Secretary 

shall first issue regulations under section 1874A(h) of the Social Security Act, 

as added by subsection (a), by not later than 1 year after the date of the enactment of this Act. 

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(3) APPLICATION OF STANDARD PROTOCOLS FOR RANDOM PREPAYMENT REVIEW.—Section 1874A(h)(1)(B) of the Social Security Act, as added by subsection 

(a), shall apply to random prepayment reviews conducted on or after such date 

(not later than 1 year after the date of the enactment of this Act) as the Secretary shall specify. 

(c) APPLICATION TO FISCAL INTERMEDIARIES AND CARRIERS.—The provisions of section 1874A(h) of the Social Security Act, as added by subsection (a), shall apply to 

each fiscal intermediary under section 1816 of the Social Security Act (42 U.S.C. 

1395h) and each carrier under section 1842 of such Act (42 U.S.C. 1395u) in the 

same manner as they apply to medicare administrative contractors under such provisions. 

SEC. 935. RECOVERY OF OVERPAYMENTS. 

(a) IN GENERAL.—Section 1893 (42 U.S.C. 1395ddd) is amended by adding at the 

end the following new subsection: 

‘‘(f) RECOVERY OF OVERPAYMENTS.—

‘‘(1) USE OF REPAYMENT PLANS.—

‘‘(A) IN GENERAL.—If the repayment, within 30 days by a provider of services or supplier, of an overpayment under this title would constitute a hardship (as defined in subparagraph (B)), subject to subparagraph (C), upon request of the provider of services or supplier the Secretary shall enter into 

a plan with the provider of services or supplier for the repayment (through 

offset or otherwise) of such overpayment over a period of at least 6 months 

but not longer than 3 years (or not longer than 5 years in the case of extreme hardship, as determined by the Secretary). Interest shall accrue on 

the balance through the period of repayment. Such plan shall meet terms 

and conditions determined to be appropriate by the Secretary. 

‘‘(B) HARDSHIP.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A), the repayment 

of an overpayment (or overpayments) within 30 days is deemed to constitute a hardship if—

‘‘(I) in the case of a provider of services that files cost reports, 

the aggregate amount of the overpayments exceeds 10 percent of 

the amount paid under this title to the provider of services for the 

cost reporting period covered by the most recently submitted cost 

report; or 

‘‘(II) in the case of another provider of services or supplier, the 

aggregate amount of the overpayments exceeds 10 percent of the 

amount paid under this title to the provider of services or supplier 

for the previous calendar year. 

‘‘(ii) RULE OF APPLICATION.—The Secretary shall establish rules for 

the application of this subparagraph in the case of a provider of services or supplier that was not paid under this title during the previous 

year or was paid under this title only during a portion of that year. 

‘‘(iii) TREATMENT OF PREVIOUS OVERPAYMENTS.—If a provider of services or supplier has entered into a repayment plan under subparagraph 

(A) with respect to a specific overpayment amount, such payment 

amount under the repayment plan shall not be taken into account 

under clause (i) with respect to subsequent overpayment amounts. 

‘‘(C) EXCEPTIONS.—Subparagraph (A) shall not apply if—

‘‘(i) the Secretary has reason to suspect that the provider of services 

or supplier may file for bankruptcy or otherwise cease to do business 

or discontinue participation in the program under this title; or 

‘‘(ii) there is an indication of fraud or abuse committed against the 

program. 

‘‘(D) IMMEDIATE COLLECTION IF VIOLATION OF REPAYMENT PLAN.—If a provider of services or supplier fails to make a payment in accordance with a 

repayment plan under this paragraph, the Secretary may immediately seek 

to offset or otherwise recover the total balance outstanding (including applicable interest) under the repayment plan. 

‘‘(E) RELATION TO NO FAULT PROVISION.—Nothing in this paragraph shall 

be construed as affecting the application of section 1870(c) (relating to no 

adjustment in the cases of certain overpayments). 

‘‘(2) LIMITATION ON RECOUPMENT.—

‘‘(A) IN GENERAL.—In the case of a provider of services or supplier that 

is determined to have received an overpayment under this title and that 

seeks a reconsideration by a qualified independent contractor on such determination under section 1869(b)(1), the Secretary may not take any action 

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fined in subparagraph (C)) to recoup the overpayment until the date the decision on the reconsideration has been rendered. If the provisions of section 

1869(b)(1) (providing for such a reconsideration by a qualified independent 

contractor) are not in effect, in applying the previous sentence any reference to such a reconsideration shall be treated as a reference to a redetermination by the fiscal intermediary or carrier involved. 

‘‘(B) COLLECTION WITH INTEREST.—Insofar as the determination on such 

appeal is against the provider of services or supplier, interest on the overpayment shall accrue on and after the date of the original notice of overpayment. Insofar as such determination against the provider of services or supplier is later reversed, the Secretary shall provide for repayment of the 

amount recouped plus interest at the same rate as would apply under the 

previous sentence for the period in which the amount was recouped. 

‘‘(C) MEDICARE CONTRACTOR DEFINED.—For purposes of this subsection, 

the term ‘medicare contractor’ has the meaning given such term in section 

1889(g). 

‘‘(3) LIMITATION ON USE OF EXTRAPOLATION.—A medicare contractor may not 

use extrapolation to determine overpayment amounts to be recovered by 

recoupment, offset, or otherwise unless—

‘‘(A) there is a sustained or high level of payment error (as defined by the 

Secretary by regulation); or 

‘‘(B) documented educational intervention has failed to correct the payment error (as determined by the Secretary). 

‘‘(4) PROVISION OF SUPPORTING DOCUMENTATION.—In the case of a provider of 

services or supplier with respect to which amounts were previously overpaid, a 

medicare contractor may request the periodic production of records or supporting documentation for a limited sample of submitted claims to ensure that 

the previous practice is not continuing. 

‘‘(5) CONSENT SETTLEMENT REFORMS.—

‘‘(A) IN GENERAL.—The Secretary may use a consent settlement (as defined in subparagraph (D)) to settle a projected overpayment. 

‘‘(B) OPPORTUNITY TO SUBMIT ADDITIONAL INFORMATION BEFORE CONSENT

SETTLEMENT OFFER.—Before offering a provider of services or supplier a 

consent settlement, the Secretary shall—

‘‘(i) communicate to the provider of services or supplier—

‘‘(I) that, based on a review of the medical records requested by 

the Secretary, a preliminary evaluation of those records indicates 

that there would be an overpayment; 

‘‘(II) the nature of the problems identified in such evaluation; 

and 

‘‘(III) the steps that the provider of services or supplier should 

take to address the problems; and 

‘‘(ii) provide for a 45-day period during which the provider of services 

or supplier may furnish additional information concerning the medical 

records for the claims that had been reviewed. 

‘‘(C) CONSENT SETTLEMENT OFFER.—The Secretary shall review any additional information furnished by the provider of services or supplier under 

subparagraph (B)(ii). Taking into consideration such information, the Secretary shall determine if there still appears to be an overpayment. If so, the 

Secretary—

‘‘(i) shall provide notice of such determination to the provider of services or supplier, including an explanation of the reason for such determination; and 

‘‘(ii) in order to resolve the overpayment, may offer the provider of 

services or supplier—

‘‘(I) the opportunity for a statistically valid random sample; or 

‘‘(II) a consent settlement. 

The opportunity provided under clause (ii)(I) does not waive any appeal 

rights with respect to the alleged overpayment involved. 

‘‘(D) CONSENT SETTLEMENT DEFINED.—For purposes of this paragraph, the 

term ‘consent settlement’ means an agreement between the Secretary and 

a provider of services or supplier whereby both parties agree to settle a projected overpayment based on less than a statistically valid sample of claims 

and the provider of services or supplier agrees not to appeal the claims involved. 

‘‘(6) NOTICE OF OVER-UTILIZATION OF CODES.—The Secretary shall establish, in 

consultation with organizations representing the classes of providers of services 

and suppliers, a process under which the Secretary provides for notice to classes 

of providers of services and suppliers served by the contractor in cases in which 

132

the contractor has identified that particular billing codes may be overutilized 

by that class of providers of services or suppliers under the programs under this 

title (or provisions of title XI insofar as they relate to such programs). 

‘‘(7) PAYMENT AUDITS.—

‘‘(A) WRITTEN NOTICE FOR POST-PAYMENT AUDITS.—Subject to subparagraph (C), if a medicare contractor decides to conduct a post-payment audit 

of a provider of services or supplier under this title, the contractor shall 

provide the provider of services or supplier with written notice (which may 

be in electronic form) of the intent to conduct such an audit. 

‘‘(B) EXPLANATION OF FINDINGS FOR ALL AUDITS.—Subject to subparagraph (C), if a medicare contractor audits a provider of services or supplier 

under this title, the contractor shall—

‘‘(i) give the provider of services or supplier a full review and explanation of the findings of the audit in a manner that is understandable 

to the provider of services or supplier and permits the development of 

an appropriate corrective action plan; 

‘‘(ii) inform the provider of services or supplier of the appeal rights 

under this title as well as consent settlement options (which are at the 

discretion of the Secretary); 

‘‘(iii) give the provider of services or supplier an opportunity to provide additional information to the contractor; and 

‘‘(iv) take into account information provided, on a timely basis, by the 

provider of services or supplier under clause (iii). 

‘‘(C) EXCEPTION.—Subparagraphs (A) and (B) shall not apply if the provision of notice or findings would compromise pending law enforcement activities, whether civil or criminal, or reveal findings of law enforcement-related 

audits. 

‘‘(8) STANDARD METHODOLOGY FOR PROBE SAMPLING.—The Secretary shall establish a standard methodology for medicare contractors to use in selecting a 

sample of claims for review in the case of an abnormal billing pattern.’’. 

(b) EFFECTIVE DATES AND DEADLINES.—

(1) USE OF REPAYMENT PLANS.—Section 1893(f)(1) of the Social Security Act, 

as added by subsection (a), shall apply to requests for repayment plans made 

after the date of the enactment of this Act. 

(2) LIMITATION ON RECOUPMENT.—Section 1893(f)(2) of the Social Security Act, 

as added by subsection (a), shall apply to actions taken after the date of the 

enactment of this Act. 

(3) USE OF EXTRAPOLATION.—Section 1893(f)(3) of the Social Security Act, as 

added by subsection (a), shall apply to statistically valid random samples initiated after the date that is 1 year after the date of the enactment of this Act. 

(4) PROVISION OF SUPPORTING DOCUMENTATION.—Section 1893(f)(4) of the Social Security Act, as added by subsection (a), shall take effect on the date of 

the enactment of this Act. 

(5) CONSENT SETTLEMENT.—Section 1893(f)(5) of the Social Security Act, as 

added by subsection (a), shall apply to consent settlements entered into after 

the date of the enactment of this Act. 

(6) NOTICE OF OVERUTILIZATION.—Not later than 1 year after the date of the 

enactment of this Act, the Secretary shall first establish the process for notice 

of overutilization of billing codes under section 1893A(f)(6) of the Social Security 

Act, as added by subsection (a). 

(7) PAYMENT AUDITS.—Section 1893A(f)(7) of the Social Security Act, as added 

by subsection (a), shall apply to audits initiated after the date of the enactment 

of this Act. 

(8) STANDARD FOR ABNORMAL BILLING PATTERNS.—Not later than 1 year after 

the date of the enactment of this Act, the Secretary shall first establish a standard methodology for selection of sample claims for abnormal billing patterns 

under section 1893(f)(8) of the Social Security Act, as added by subsection (a). 

SEC. 936. PROVIDER ENROLLMENT PROCESS; RIGHT OF APPEAL. 

(a) IN GENERAL.—Section 1866 (42 U.S.C. 1395cc) is amended—

(1) by adding at the end of the heading the following: ‘‘; ENROLLMENT PROCESSES’’; and 

(2) by adding at the end the following new subsection: 

‘‘(j) ENROLLMENT PROCESS FOR PROVIDERS OF SERVICES AND SUPPLIERS.—

‘‘(1) ENROLLMENT PROCESS.—

‘‘(A) IN GENERAL.—The Secretary shall establish by regulation a process 

for the enrollment of providers of services and suppliers under this title. 

‘‘(B) DEADLINES.—The Secretary shall establish by regulation procedures 

under which there are deadlines for actions on applications for enrollment 

133

(and, if applicable, renewal of enrollment). The Secretary shall monitor the 

performance of medicare administrative contractors in meeting the deadlines established under this subparagraph. 

‘‘(C) CONSULTATION BEFORE CHANGING PROVIDER ENROLLMENT FORMS.— The Secretary shall consult with providers of services and suppliers before 

making changes in the provider enrollment forms required of such providers and suppliers to be eligible to submit claims for which payment may 

be made under this title. 

‘‘(2) HEARING RIGHTS IN CASES OF DENIAL OR NON-RENEWAL.—A provider of 

services or supplier whose application to enroll (or, if applicable, to renew enrollment) under this title is denied may have a hearing and judicial review of 

such denial under the procedures that apply under subsection (h)(1)(A) to a provider of services that is dissatisfied with a determination by the Secretary.’’. 

(b) EFFECTIVE DATES.— (1) ENROLLMENT PROCESS.—The Secretary shall provide for the establishment 

of the enrollment process under section 1866(j)(1) of the Social Security Act, as 

added by subsection (a)(2), within 6 months after the date of the enactment of 

this Act. 

(2) CONSULTATION.—Section 1866(j)(1)(C) of the Social Security Act, as added 

by subsection (a)(2), shall apply with respect to changes in provider enrollment 

forms made on or after January 1, 2004. 

(3) HEARING RIGHTS.—Section 1866(j)(2) of the Social Security Act, as added 

by subsection (a)(2), shall apply to denials occurring on or after such date (not 

later than 1 year after the date of the enactment of this Act) as the Secretary 

specifies. 

SEC. 937. PROCESS FOR CORRECTION OF MINOR ERRORS AND OMISSIONS WITHOUT PURSUING APPEALS PROCESS. 

(a) CLAIMS.—The Secretary shall develop, in consultation with appropriate medicare contractors (as defined in section 1889(g) of the Social Security Act, as inserted 

by section 301(a)(1)) and representatives of providers of services and suppliers, a 

process whereby, in the case of minor errors or omissions (as defined by the Secretary) that are detected in the submission of claims under the programs under title 

XVIII of such Act, a provider of services or supplier is given an opportunity to correct such an error or omission without the need to initiate an appeal. Such process 

shall include the ability to resubmit corrected claims. 

(b) PERMITTING USE OF CORRECTED AND SUPPLEMENTARY DATA.—

(1) IN GENERAL.—Section 1886(d)(10)(D)(vi) (42 U.S.C. 1395ww(d)(10)(D)(vi)) 

is amended by adding after subclause (II) at the end the following: 

‘‘Notwithstanding subclause (I), a hospital may submit, and the Secretary may accept upon verification, data that corrects or supplements the data described in such 

subclause without regard to whether the corrected or supplementary data relate to 

a cost report that has been settled.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

fiscal years beginning with fiscal year 2004. 

(3) SUBMITTAL AND RESUBMITTAL OF APPLICATIONS PERMITTED FOR FISCAL

YEAR 2004.—

(A) IN GENERAL.—Notwithstanding any other provision of law, a hospital 

may submit (or resubmit) an application for a change described in section 

1886(d)(10)(C)(i)(II) of the Social Security Act for fiscal year 2004 if the hospital demonstrates on a timely basis to the satisfaction of the Secretary 

that the use of corrected or supplementary data under the amendment 

made by paragraph (1) would materially affect the approval of such an application. 

(B) APPLICATION OF BUDGET NEUTRALITY.—If one or more hospital’s applications are approved as a result of paragraph (1) and subparagraph (A) for 

fiscal year 2004, the Secretary shall make a proportional adjustment in the 

standardized amounts determined under section 1886(d)(3) of the Social Security Act (42 U.S.C. 1395ww(d)(3)) for fiscal year 2004 to assure that approval of such applications does not result in aggregate payments under 

section 1886(d) of such Act that are greater or less than those that would 

otherwise be made if paragraph (1) and subparagraph (A) did not apply. 

SEC. 938. PRIOR DETERMINATION PROCESS FOR CERTAIN ITEMS AND SERVICES; ADVANCE 

BENEFICIARY NOTICES. 

(a) IN GENERAL.—Section 1869 (42 U.S.C. 1395ff(b)), as amended by sections 521 

and 522 of BIPA and section 933(d)(2)(B), is further amended by adding at the end 

the following new subsection: 

‘‘(h) PRIOR DETERMINATION PROCESS FOR CERTAIN ITEMS AND SERVICES.—

‘‘(1) ESTABLISHMENT OF PROCESS.—

134

‘‘(A) IN GENERAL.—With respect to a medicare administrative contractor 

that has a contract under section 1874A that provides for making payments 

under this title with respect to eligible items and services described in subparagraph (C), the Secretary shall establish a prior determination process 

that meets the requirements of this subsection and that shall be applied by 

such contractor in the case of eligible requesters. 

‘‘(B) ELIGIBLE REQUESTER.—For purposes of this subsection, each of the 

following shall be an eligible requester: 

‘‘(i) A physician, but only with respect to eligible items and services 

for which the physician may be paid directly. 

‘‘(ii) An individual entitled to benefits under this title, but only with 

respect to an item or service for which the individual receives, from the 

physician who may be paid directly for the item or service, an advance 

beneficiary notice under section 1879(a) that payment may not be made 

(or may no longer be made) for the item or service under this title. 

‘‘(C) ELIGIBLE ITEMS AND SERVICES.—For purposes of this subsection and 

subject to paragraph (2), eligible items and services are items and services 

which are physicians’ services (as defined in paragraph (4)(A) of section 

1848(f) for purposes of calculating the sustainable growth rate under such 

section). 

‘‘(2) SECRETARIAL FLEXIBILITY.—The Secretary shall establish by regulation 

reasonable limits on the categories of eligible items and services for which a 

prior determination of coverage may be requested under this subsection. In establishing such limits, the Secretary may consider the dollar amount involved 

with respect to the item or service, administrative costs and burdens, and other 

relevant factors. 

‘‘(3) REQUEST FOR PRIOR DETERMINATION.—

‘‘(A) IN GENERAL.—Subject to paragraph (2), under the process established 

under this subsection an eligible requester may submit to the contractor a 

request for a determination, before the furnishing of an eligible item or 

service involved as to whether the item or service is covered under this title 

consistent with the applicable requirements of section 1862(a)(1)(A) (relating to medical necessity). 

‘‘(B) ACCOMPANYING DOCUMENTATION.—The Secretary may require that 

the request be accompanied by a description of the item or service, supporting documentation relating to the medical necessity for the item or 

service, and any other appropriate documentation. In the case of a request 

submitted by an eligible requester who is described in paragraph (1)(B)(ii), 

the Secretary may require that the request also be accompanied by a copy 

of the advance beneficiary notice involved. 

‘‘(4) RESPONSE TO REQUEST.—

‘‘(A) IN GENERAL.—Under such process, the contractor shall provide the 

eligible requester with written notice of a determination as to whether—

‘‘(i) the item or service is so covered; 

‘‘(ii) the item or service is not so covered; or 

‘‘(iii) the contractor lacks sufficient information to make a coverage 

determination. 

If the contractor makes the determination described in clause (iii), the contractor shall include in the notice a description of the additional information required to make the coverage determination. 

‘‘(B) DEADLINE TO RESPOND.—Such notice shall be provided within the 

same time period as the time period applicable to the contractor providing 

notice of initial determinations on a claim for benefits under subsection 

(a)(2)(A). 

‘‘(C) INFORMING BENEFICIARY IN CASE OF PHYSICIAN REQUEST.—In the case 

of a request in which an eligible requester is not the individual described 

in paragraph (1)(B)(ii), the process shall provide that the individual to 

whom the item or service is proposed to be furnished shall be informed of 

any determination described in clause (ii) (relating to a determination of 

non-coverage) and the right (referred to in paragraph (6)(B)) to obtain the 

item or service and have a claim submitted for the item or service. 

‘‘(5) EFFECT OF DETERMINATIONS.—

‘‘(A) BINDING NATURE OF POSITIVE DETERMINATION.—If the contractor 

makes the determination described in paragraph (4)(A)(i), such determination shall be binding on the contractor in the absence of fraud or evidence 

of misrepresentation of facts presented to the contractor. 

‘‘(B) NOTICE AND RIGHT TO REDETERMINATION IN CASE OF A DENIAL.—

‘‘(i) IN GENERAL.—If the contractor makes the determination described in paragraph (4)(A)(ii)—

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‘‘(I) the eligible requester has the right to a redetermination by 

the contractor on the determination that the item or service is not 

so covered; and 

‘‘(II) the contractor shall include in notice under paragraph (4)(A) 

a brief explanation of the basis for the determination, including on 

what national or local coverage or noncoverage determination (if 

any) the determination is based, and the right to such a redetermination. 

‘‘(ii) DEADLINE FOR REDETERMINATIONS.—The contractor shall complete and provide notice of such redetermination within the same time 

period as the time period applicable to the contractor providing notice 

of redeterminations relating to a claim for benefits under subsection 

(a)(3)(C)(ii). 

‘‘(6) LIMITATION ON FURTHER REVIEW.—

‘‘(A) IN GENERAL.—Contractor determinations described in paragraph 

(4)(A)(ii) or (4)(A)(iii) (and redeterminations made under paragraph (5)(B)), 

relating to pre-service claims are not subject to further administrative appeal or judicial review under this section or otherwise. 

‘‘(B) DECISION NOT TO SEEK PRIOR DETERMINATION OR NEGATIVE DETERMINATION DOES NOT IMPACT RIGHT TO OBTAIN SERVICES, SEEK REIMBURSEMENT, OR APPEAL RIGHTS.—Nothing in this subsection shall be construed as 

affecting the right of an individual who—

‘‘(i) decides not to seek a prior determination under this subsection 

with respect to items or services; or 

‘‘(ii) seeks such a determination and has received a determination described in paragraph (4)(A)(ii), 

from receiving (and submitting a claim for) such items services and from 

obtaining administrative or judicial review respecting such claim under the 

other applicable provisions of this section. Failure to seek a prior determination under this subsection with respect to items and services shall not 

be taken into account in such administrative or judicial review. 

‘‘(C) NO PRIOR DETERMINATION AFTER RECEIPT OF SERVICES.—Once an individual is provided items and services, there shall be no prior determination under this subsection with respect to such items or services.’’. 

(b) EFFECTIVE DATE; TRANSITION.—

(1) EFFECTIVE DATE.—The Secretary shall establish the prior determination 

process under the amendment made by subsection (a) in such a manner as to 

provide for the acceptance of requests for determinations under such process 

filed not later than 18 months after the date of the enactment of this Act. 

(2) TRANSITION.—During the period in which the amendment made by subsection (a) has become effective but contracts are not provided under section 

1874A of the Social Security Act with medicare administrative contractors, any 

reference in section 1869(g) of such Act (as added by such amendment) to such 

a contractor is deemed a reference to a fiscal intermediary or carrier with an 

agreement under section 1816, or contract under section 1842, respectively, of 

such Act. 

(3) LIMITATION ON APPLICATION TO SGR.—For purposes of applying section 

1848(f)(2)(D) of the Social Security Act (42 U.S.C. 1395w–4(f)(2)(D)), the amendment made by subsection (a) shall not be considered to be a change in law or 

regulation. 

(c) PROVISIONS RELATING TO ADVANCE BENEFICIARY NOTICES; REPORT ON PRIOR

DETERMINATION PROCESS.—

(1) DATA COLLECTION.—The Secretary shall establish a process for the collection of information on the instances in which an advance beneficiary notice (as 

defined in paragraph (5)) has been provided and on instances in which a beneficiary indicates on such a notice that the beneficiary does not intend to seek 

to have the item or service that is the subject of the notice furnished. 

(2) OUTREACH AND EDUCATION.—The Secretary shall establish a program of 

outreach and education for beneficiaries and providers of services and other persons on the appropriate use of advance beneficiary notices and coverage policies 

under the medicare program. 

(3) GAO REPORT REPORT ON USE OF ADVANCE BENEFICIARY NOTICES.—Not 

later than 18 months after the date on which section 1869(g) of the Social Security Act (as added by subsection (a)) takes effect, the Comptroller General of the 

United States shall submit to Congress a report on the use of advance beneficiary notices under title XVIII of such Act. Such report shall include information concerning the providers of services and other persons that have provided 

such notices and the response of beneficiaries to such notices. 

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(4) GAO REPORT ON USE OF PRIOR DETERMINATION PROCESS.—Not later than 

18 months after the date on which section 1869(g) of the Social Security Act 

(as added by subsection (a)) takes effect, the Comptroller General of the United 

States shall submit to Congress a report on the use of the prior determination 

process under such section. Such report shall include—

(A) information concerning the types of procedures for which a prior determination has been sought, determinations made under the process, and 

changes in receipt of services resulting from the application of such process; 

and 

(B) an evaluation of whether the process was useful for physicians (and 

other suppliers) and beneficiaries, whether it was timely, and whether the 

amount of information required was burdensome to physicians and beneficiaries. 

(5) ADVANCE BENEFICIARY NOTICE DEFINED.—In this subsection, the term ‘‘advance beneficiary notice’’ means a written notice provided under section 1879(a) 

of the Social Security Act (42 U.S.C. 1395pp(a)) to an individual entitled to benefits under part A or B of title XVIII of such Act before items or services are 

furnished under such part in cases where a provider of services or other person 

that would furnish the item or service believes that payment will not be made 

for some or all of such items or services under such title. 

Subtitle V—Miscellaneous Provisions 

SEC. 941. POLICY DEVELOPMENT REGARDING EVALUATION AND MANAGEMENT (E & M) DOCUMENTATION GUIDELINES. 

(a) IN GENERAL.—The Secretary may not implement any new documentation 

guidelines for, or clinical examples of, evaluation and management physician services under the title XVIII of the Social Security Act on or after the date of the enactment of this Act unless the Secretary—

(1) has developed the guidelines in collaboration with practicing physicians 

(including both generalists and specialists) and provided for an assessment of 

the proposed guidelines by the physician community; 

(2) has established a plan that contains specific goals, including a schedule, 

for improving the use of such guidelines; 

(3) has conducted appropriate and representative pilot projects under subsection (b) to test modifications to the evaluation and management documentation guidelines; 

(4) finds that the objectives described in subsection (c) will be met in the implementation of such guidelines; and 

(5) has established, and is implementing, a program to educate physicians on 

the use of such guidelines and that includes appropriate outreach. 

The Secretary shall make changes to the manner in which existing evaluation and 

management documentation guidelines are implemented to reduce paperwork burdens on physicians. 

(b) PILOT PROJECTS TO TEST EVALUATION AND MANAGEMENT DOCUMENTATION

GUIDELINES.— (1) IN GENERAL.—The Secretary shall conduct under this subsection appropriate and representative pilot projects to test new evaluation and management 

documentation guidelines referred to in subsection (a). 

(2) LENGTH AND CONSULTATION.—Each pilot project under this subsection 

shall—

(A) be voluntary; 

(B) be of sufficient length as determined by the Secretary to allow for preparatory physician and medicare contractor education, analysis, and use 

and assessment of potential evaluation and management guidelines; and 

(C) be conducted, in development and throughout the planning and operational stages of the project, in consultation with practicing physicians (including both generalists and specialists). 

(3) RANGE OF PILOT PROJECTS.—Of the pilot projects conducted under this 

subsection—

(A) at least one shall focus on a peer review method by physicians (not 

employed by a medicare contractor) which evaluates medical record information for claims submitted by physicians identified as statistical outliers 

relative to definitions published in the Current Procedures Terminology 

(CPT) code book of the American Medical Association; 

(B) at least one shall focus on an alternative method to detailed guidelines based on physician documentation of face to face encounter time with 

a patient; 

137

(C) at least one shall be conducted for services furnished in a rural area 

and at least one for services furnished outside such an area; and 

(D) at least one shall be conducted in a setting where physicians bill 

under physicians’ services in teaching settings and at least one shall be conducted in a setting other than a teaching setting. 

(4) BANNING OF TARGETING OF PILOT PROJECT PARTICIPANTS.—Data collected 

under this subsection shall not be used as the basis for overpayment demands 

or post-payment audits. Such limitation applies only to claims filed as part of 

the pilot project and lasts only for the duration of the pilot project and only as 

long as the provider is a participant in the pilot project. 

(5) STUDY OF IMPACT.—Each pilot project shall examine the effect of the new 

evaluation and management documentation guidelines on—

(A) different types of physician practices, including those with fewer than 

10 full-time-equivalent employees (including physicians); and 

(B) the costs of physician compliance, including education, implementation, auditing, and monitoring. 

(6) PERIODIC REPORTS.—The Secretary shall submit to Congress periodic reports on the pilot projects under this subsection. 

(c) OBJECTIVES FOR EVALUATION AND MANAGEMENT GUIDELINES.—The objectives 

for modified evaluation and management documentation guidelines developed by the 

Secretary shall be to—

(1) identify clinically relevant documentation needed to code accurately and 

assess coding levels accurately; 

(2) decrease the level of non-clinically pertinent and burdensome documentation time and content in the physician’s medical record; 

(3) increase accuracy by reviewers; and 

(4) educate both physicians and reviewers. 

(d) STUDY OF SIMPLER, ALTERNATIVE SYSTEMS OF DOCUMENTATION FOR PHYSICIAN

CLAIMS.—

(1) STUDY.—The Secretary shall carry out a study of the matters described 

in paragraph (2). 

(2) MATTERS DESCRIBED.—The matters referred to in paragraph (1) are—

(A) the development of a simpler, alternative system of requirements for 

documentation accompanying claims for evaluation and management physician services for which payment is made under title XVIII of the Social Security Act; and 

(B) consideration of systems other than current coding and documentation requirements for payment for such physician services. 

(3) CONSULTATION WITH PRACTICING PHYSICIANS.—In designing and carrying 

out the study under paragraph (1), the Secretary shall consult with practicing 

physicians, including physicians who are part of group practices and including 

both generalists and specialists. 

(4) APPLICATION OF HIPAA UNIFORM CODING REQUIREMENTS.—In developing an 

alternative system under paragraph (2), the Secretary shall consider requirements of administrative simplification under part C of title XI of the Social Security Act. 

(5) REPORT TO CONGRESS.—(A) Not later than October 1, 2005, the Secretary 

shall submit to Congress a report on the results of the study conducted under 

paragraph (1). 

(B) The Medicare Payment Advisory Commission shall conduct an analysis of 

the results of the study included in the report under subparagraph (A) and shall 

submit a report on such analysis to Congress. 

(e) STUDY ON APPROPRIATE CODING OF CERTAIN EXTENDED OFFICE VISITS.—The 

Secretary shall conduct a study of the appropriateness of coding in cases of extended 

office visits in which there is no diagnosis made. Not later than October 1, 2005, 

the Secretary shall submit a report to Congress on such study and shall include recommendations on how to code appropriately for such visits in a manner that takes 

into account the amount of time the physician spent with the patient. 

(f) DEFINITIONS.—In this section—

(1) the term ‘‘rural area’’ has the meaning given that term in section 

1886(d)(2)(D) of the Social Security Act, 42 U.S.C. 1395ww(d)(2)(D); and 

(2) the term ‘‘teaching settings’’ are those settings described in section 

415.150 of title 42, Code of Federal Regulations. 

SEC. 942. IMPROVEMENT IN OVERSIGHT OF TECHNOLOGY AND COVERAGE. 

(a) COUNCIL FOR TECHNOLOGY AND INNOVATION.—Section 1868 (42 U.S.C. 1395ee), 

as amended by section 921(a), is amended by adding at the end the following new 

subsection: 

‘‘(c) COUNCIL FOR TECHNOLOGY AND INNOVATION.—

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‘‘(1) ESTABLISHMENT.—The Secretary shall establish a Council for Technology 

and Innovation within the Centers for Medicare & Medicaid Services (in this 

section referred to as ‘CMS’). 

‘‘(2) COMPOSITION.—The Council shall be composed of senior CMS staff and 

clinicians and shall be chaired by the Executive Coordinator for Technology and 

Innovation (appointed or designated under paragraph (4)). 

‘‘(3) DUTIES.—The Council shall coordinate the activities of coverage, coding, 

and payment processes under this title with respect to new technologies and 

procedures, including new drug therapies, and shall coordinate the exchange of 

information on new technologies between CMS and other entities that make 

similar decisions. 

‘‘(4) EXECUTIVE COORDINATOR FOR TECHNOLOGY AND INNOVATION.—The Secretary shall appoint (or designate) a noncareer appointee (as defined in section 

3132(a)(7) of title 5, United States Code) who shall serve as the Executive Coordinator for Technology and Innovation. Such executive coordinator shall report 

to the Administrator of CMS, shall chair the Council, shall oversee the execution of its duties, and shall serve as a single point of contact for outside groups 

and entities regarding the coverage, coding, and payment processes under this 

title.’’. 

(b) METHODS FOR DETERMINING PAYMENT BASIS FOR NEW LAB TESTS.—Section 

1833(h) (42 U.S.C. 1395l(h)) is amended by adding at the end the following: 

‘‘(8)(A) The Secretary shall establish by regulation procedures for determining the 

basis for, and amount of, payment under this subsection for any clinical diagnostic 

laboratory test with respect to which a new or substantially revised HCPCS code 

is assigned on or after January 1, 2005 (in this paragraph referred to as ‘new tests’). 

‘‘(B) Determinations under subparagraph (A) shall be made only after the Secretary—

‘‘(i) makes available to the public (through an Internet site and other appropriate mechanisms) a list that includes any such test for which establishment 

of a payment amount under this subsection is being considered for a year; 

‘‘(ii) on the same day such list is made available, causes to have published 

in the Federal Register notice of a meeting to receive comments and recommendations (and data on which recommendations are based) from the public 

on the appropriate basis under this subsection for establishing payment 

amounts for the tests on such list; 

‘‘(iii) not less than 30 days after publication of such notice convenes a meeting, that includes representatives of officials of the Centers for Medicare & Medicaid Services involved in determining payment amounts, to receive such comments and recommendations (and data on which the recommendations are 

based); 

‘‘(iv) taking into account the comments and recommendations (and accompanying data) received at such meeting, develops and makes available to the 

public (through an Internet site and other appropriate mechanisms) a list of 

proposed determinations with respect to the appropriate basis for establishing 

a payment amount under this subsection for each such code, together with an 

explanation of the reasons for each such determination, the data on which the 

determinations are based, and a request for public written comments on the 

proposed determination; and 

‘‘(v) taking into account the comments received during the public comment period, develops and makes available to the public (through an Internet site and 

other appropriate mechanisms) a list of final determinations of the payment 

amounts for such tests under this subsection, together with the rationale for 

each such determination, the data on which the determinations are based, and 

responses to comments and suggestions received from the public. 

‘‘(C) Under the procedures established pursuant to subparagraph (A), the Secretary shall—

‘‘(i) set forth the criteria for making determinations under subparagraph (A); 

and 

‘‘(ii) make available to the public the data (other than proprietary data) considered in making such determinations. 

‘‘(D) The Secretary may convene such further public meetings to receive public 

comments on payment amounts for new tests under this subsection as the Secretary 

deems appropriate. 

‘‘(E) For purposes of this paragraph: 

‘‘(i) The term ‘HCPCS’ refers to the Health Care Procedure Coding System. 

‘‘(ii) A code shall be considered to be ‘substantially revised’ if there is a substantive change to the definition of the test or procedure to which the code applies (such as a new analyte or a new methodology for measuring an existing 

analyte-specific test).’’. 

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(c) GAO STUDY ON IMPROVEMENTS IN EXTERNAL DATA COLLECTION FOR USE IN

THE MEDICARE INPATIENT PAYMENT SYSTEM.— (1) STUDY.—The Comptroller General of the United States shall conduct a 

study that analyzes which external data can be collected in a shorter time 

frame by the Centers for Medicare & Medicaid Services for use in computing 

payments for inpatient hospital services. The study may include an evaluation 

of the feasibility and appropriateness of using of quarterly samples or special 

surveys or any other methods. The study shall include an analysis of whether 

other executive agencies, such as the Bureau of Labor Statistics in the Department of Commerce, are best suited to collect this information. 

(2) REPORT.—By not later than October 1, 2004, the Comptroller General 

shall submit a report to Congress on the study under paragraph (1). 

(d) PROCESS FOR ADOPTION OF ICD CODES AS DATA STANDARD.—Section 1172(f) 

(42 U.S.C. 1320d–1(f)) is amended by inserting after the first sentence the following: 

‘‘Notwithstanding the preceding sentence, if the National Committee on Vital and 

Health Statistics has not made a recommendation to the Secretary before the date 

of the enactment of this sentence, with respect to the adoption of the International 

Classification of Diseases, 10th Revision, Procedure Coding System (‘ICD–10–PCS’) 

and the International Classification of Diseases, 10th Revision, Clinical Modification 

(‘ICD–10–CM’) as a standard under this part for the reporting of diagnoses, the Secretary may adopt ICD–10–PCS and ICD–10–CM as such a standard on or after 1 

year after such date without receiving such a recommendation.’’. 

SEC. 943. TREATMENT OF HOSPITALS FOR CERTAIN SERVICES UNDER MEDICARE SECONDARY PAYOR (MSP) PROVISIONS. 

(a) IN GENERAL.—The Secretary shall not require a hospital (including a critical 

access hospital) to ask questions (or obtain information) relating to the application 

of section 1862(b) of the Social Security Act (relating to medicare secondary payor 

provisions) in the case of reference laboratory services described in subsection (b), 

if the Secretary does not impose such requirement in the case of such services furnished by an independent laboratory. 

(b) REFERENCE LABORATORY SERVICES DESCRIBED.—Reference laboratory services 

described in this subsection are clinical laboratory diagnostic tests (or the interpretation of such tests, or both) furnished without a face-to-face encounter between the 

individual entitled to benefits under part A or enrolled under part B, or both, and 

the hospital involved and in which the hospital submits a claim only for such test 

or interpretation. 

SEC. 944. EMTALA IMPROVEMENTS. 

(a) PAYMENT FOR EMTALA-MANDATED SCREENING AND STABILIZATION SERVICES.—

(1) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended by inserting 

after subsection (c) the following new subsection: 

‘‘(d) For purposes of subsection (a)(1)(A), in the case of any item or service that 

is required to be provided pursuant to section 1867 to an individual who is entitled 

to benefits under this title, determinations as to whether the item or service is reasonable and necessary shall be made on the basis of the information available to 

the treating physician or practitioner (including the patient’s presenting symptoms 

or complaint) at the time the item or service was ordered or furnished by the physician or practitioner (and not on the patient’s principal diagnosis). When making 

such determinations with respect to such an item or service, the Secretary shall not 

consider the frequency with which the item or service was provided to the patient 

before or after the time of the admission or visit.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

items and services furnished on or after January 1, 2004. 

(b) NOTIFICATION OF PROVIDERS WHEN EMTALA INVESTIGATION CLOSED.—Section 

1867(d) (42 U.S.C. 42 U.S.C. 1395dd(d)) is amended by adding at the end the following new paragraph: 

‘‘(4) NOTICE UPON CLOSING AN INVESTIGATION.—The Secretary shall establish 

a procedure to notify hospitals and physicians when an investigation under this 

section is closed.’’. 

(c) PRIOR REVIEW BY PEER REVIEW ORGANIZATIONS IN EMTALA CASES INVOLVING

TERMINATION OF PARTICIPATION.—

(1) IN GENERAL.—Section 1867(d)(3) (42 U.S.C. 1395dd(d)(3)) is amended—

(A) in the first sentence, by inserting ‘‘or in terminating a hospital’s participation under this title’’ after ‘‘in imposing sanctions under paragraph 

(1)’’; and 

(B) by adding at the end the following new sentences: ‘‘Except in the case 

in which a delay would jeopardize the health or safety of individuals, the 

Secretary shall also request such a review before making a compliance deVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00139 Fmt 6659 Sfmt 6621 E:\HR\OC\HR178P2.XXX HR178P2
140

termination as part of the process of terminating a hospital’s participation 

under this title for violations related to the appropriateness of a medical 

screening examination, stabilizing treatment, or an appropriate transfer as 

required by this section, and shall provide a period of 5 days for such review. The Secretary shall provide a copy of the organization’s report to the 

hospital or physician consistent with confidentiality requirements imposed 

on the organization under such part B.’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

terminations of participation initiated on or after the date of the enactment of 

this Act.

(d) MODIFICATION OF REQUIRMENT FOR MEDICAL SCREENING EXAMINATIONS FOR

PATIENTS NOT REQUESTING EMERGENCY DEPARTMENT SERVICES.— (1) IN GENERAL.—Section 1867(a) (42 U.S.C. 1395dd(a)) is amended—

(A) by designating all that follows ‘‘(a) MEDICAL SCREENING REQUIRE- MENT.—’’ as paragraph (1) with the heading ‘‘IN GENERAL.—’’; 

(B) by aligning such paragraph with the paragraph added by paragraph 

(3); and 

(C) by adding at the end the following new paragraph: 

‘‘(2) EXCEPTION FOR CERTAIN CASES.—The requirement for an appropriate 

medical screening examination under paragraph (1) shall not apply in the case 

of an individual who comes to the emergency department and does not request 

examination or treatment for an emergency medical condition (such as a request solely for prescription refills, blood pressure screening, and non-emergency laboratory and diagnostic tests).’’. 

(2) EFFECTIVE DATE.—The amendments made by paragraph (1) shall apply to 

terminations of participation initiated on or after the date of the enactment of 

this Act. 

SEC. 945. EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT (EMTALA) TECHNICAL 

ADVISORY GROUP. 

(a) ESTABLISHMENT.—The Secretary shall establish a Technical Advisory Group 

(in this section referred to as the ‘‘Advisory Group’’) to review issues related to the 

Emergency Medical Treatment and Labor Act (EMTALA) and its implementation. 

In this section, the term ‘‘EMTALA’’ refers to the provisions of section 1867 of the 

Social Security Act (42 U.S.C. 1395dd). 

(b) MEMBERSHIP.—The Advisory Group shall be composed of 19 members, including the Administrator of the Centers for Medicare & Medicaid Services and the Inspector General of the Department of Health and Human Services and of which—

(1) 4 shall be representatives of hospitals, including at least one public hospital, that have experience with the application of EMTALA and at least 2 of 

which have not been cited for EMTALA violations; 

(2) 7 shall be practicing physicians drawn from the fields of emergency medicine, cardiology or cardiothoracic surgery, orthopedic surgery, neurosurgery, pediatrics or a pediatric subspecialty, obstetrics-gynecology, and psychiatry, with 

not more than one physician from any particular field; 

(3) 2 shall represent patients; 

(4) 2 shall be staff involved in EMTALA investigations from different regional 

offices of the Centers for Medicare & Medicaid Services; and 

(5) 1 shall be from a State survey office involved in EMTALA investigations 

and 1 shall be from a peer review organization, both of whom shall be from 

areas other than the regions represented under paragraph (4). 

In selecting members described in paragraphs (1) through (3), the Secretary shall 

consider qualified individuals nominated by organizations representing providers 

and patients. 

(c) GENERAL RESPONSIBILITIES.—The Advisory Group—

(1) shall review EMTALA regulations; 

(2) may provide advice and recommendations to the Secretary with respect to 

those regulations and their application to hospitals and physicians; 

(3) shall solicit comments and recommendations from hospitals, physicians, 

and the public regarding the implementation of such regulations; and 

(4) may disseminate information on the application of such regulations to hospitals, physicians, and the public. 

(d) ADMINISTRATIVE MATTERS.—

(1) CHAIRPERSON.—The members of the Advisory Group shall elect a member 

to serve as chairperson of the Advisory Group for the life of the Advisory Group. 

(2) MEETINGS.—The Advisory Group shall first meet at the direction of the 

Secretary. The Advisory Group shall then meet twice per year and at such other 

times as the Advisory Group may provide. 

(e) TERMINATION.—The Advisory Group shall terminate 30 months after the date 

of its first meeting. 

141

(f) WAIVER OF ADMINISTRATIVE LIMITATION.—The Secretary shall establish the Advisory Group notwithstanding any limitation that may apply to the number of advisory committees that may be established (within the Department of Health and 

Human Services or otherwise). 

SEC. 946. AUTHORIZING USE OF ARRANGEMENTS TO PROVIDE CORE HOSPICE SERVICES IN 

CERTAIN CIRCUMSTANCES. 

(a) IN GENERAL.—Section 1861(dd)(5) (42 U.S.C. 1395x(dd)(5)) is amended by adding at the end the following: 

‘‘(D) In extraordinary, exigent, or other non-routine circumstances, such as unanticipated periods of high patient loads, staffing shortages due to illness or other 

events, or temporary travel of a patient outside a hospice program’s service area, 

a hospice program may enter into arrangements with another hospice program for 

the provision by that other program of services described in paragraph (2)(A)(ii)(I). 

The provisions of paragraph (2)(A)(ii)(II) shall apply with respect to the services provided under such arrangements. 

‘‘(E) A hospice program may provide services described in paragraph (1)(A) other 

than directly by the program if the services are highly specialized services of a registered professional nurse and are provided non-routinely and so infrequently so 

that the provision of such services directly would be impracticable and prohibitively 

expensive.’’. 

(b) CONFORMING PAYMENT PROVISION.—Section 1814(i) (42 U.S.C. 1395f(i)) is 

amended by adding at the end the following new paragraph: 

‘‘(4) In the case of hospice care provided by a hospice program under arrangements under section 1861(dd)(5)(D) made by another hospice program, the hospice 

program that made the arrangements shall bill and be paid for the hospice care.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to hospice care provided on or after the date of the enactment of this Act. 

SEC. 947. APPLICATION OF OSHA BLOODBORNE PATHOGENS STANDARD TO CERTAIN HOSPITALS. 

(a) IN GENERAL.—Section 1866 (42 U.S.C. 1395cc) is amended—

(1) in subsection (a)(1)—

(A) in subparagraph (R), by striking ‘‘and’’ at the end; 

(B) in subparagraph (S), by striking the period at the end and inserting 

‘‘, and’’; and 

(C) by inserting after subparagraph (S) the following new subparagraph: 

‘‘(T) in the case of hospitals that are not otherwise subject to the Occupational 

Safety and Health Act of 1970, to comply with the Bloodborne Pathogens standard under section 1910.1030 of title 29 of the Code of Federal Regulations (or 

as subsequently redesignated).’’; and 

(2) by adding at the end of subsection (b) the following new paragraph: 

‘‘(4)(A) A hospital that fails to comply with the requirement of subsection (a)(1)(T) 

(relating to the Bloodborne Pathogens standard) is subject to a civil money penalty 

in an amount described in subparagraph (B), but is not subject to termination of 

an agreement under this section. 

‘‘(B) The amount referred to in subparagraph (A) is an amount that is similar to 

the amount of civil penalties that may be imposed under section 17 of the Occupational Safety and Health Act of 1970 for a violation of the Bloodborne Pathogens 

standard referred to in subsection (a)(1)(T) by a hospital that is subject to the provisions of such Act. 

‘‘(C) A civil money penalty under this paragraph shall be imposed and collected 

in the same manner as civil money penalties under subsection (a) of section 1128A 

are imposed and collected under that section.’’. 

(b) EFFECTIVE DATE.—The amendments made by this subsection (a) shall apply 

to hospitals as of July 1, 2004. 

SEC. 948. BIPA-RELATED TECHNICAL AMENDMENTS AND CORRECTIONS. 

(a) TECHNICAL AMENDMENTS RELATING TO ADVISORY COMMITTEE UNDER BIPA 

SECTION 522.—(1) Subsection (i) of section 1114 (42 U.S.C. 1314)—

(A) is transferred to section 1862 and added at the end of such section; and 

(B) is redesignated as subsection (j). 

(2) Section 1862 (42 U.S.C. 1395y) is amended—

(A) in the last sentence of subsection (a), by striking ‘‘established under section 1114(f)’’; and 

(B) in subsection (j), as so transferred and redesignated—

(i) by striking ‘‘under subsection (f)’’; and 

(ii) by striking ‘‘section 1862(a)(1)’’ and inserting ‘‘subsection (a)(1)’’. 

(b) TERMINOLOGY CORRECTIONS.—(1) Section 1869(c)(3)(I)(ii) (42 U.S.C. 

1395ff(c)(3)(I)(ii)), as amended by section 521 of BIPA, is amended—

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(A) in subclause (III), by striking ‘‘policy’’ and inserting ‘‘determination’’; and 

(B) in subclause (IV), by striking ‘‘medical review policies’’ and inserting ‘‘coverage determinations’’. 

(2) Section 1852(a)(2)(C) (42 U.S.C. 1395w–22(a)(2)(C)) is amended by striking 

‘‘policy’’ and ‘‘POLICY’’ and inserting ‘‘determination’’ each place it appears and ‘‘DE- TERMINATION’’, respectively. 

(c) REFERENCE CORRECTIONS.—Section 1869(f)(4) (42 U.S.C. 1395ff(f)(4)), as added 

by section 522 of BIPA, is amended—

(1) in subparagraph (A)(iv), by striking ‘‘subclause (I), (II), or (III)’’ and inserting ‘‘clause (i), (ii), or (iii)’’; 

(2) in subparagraph (B), by striking ‘‘clause (i)(IV)’’ and ‘‘clause (i)(III)’’ and 

inserting ‘‘subparagraph (A)(iv)’’ and ‘‘subparagraph (A)(iii)’’, respectively; and 

(3) in subparagraph (C), by striking ‘‘clause (i)’’, ‘‘subclause (IV)’’ and ‘‘subparagraph (A)’’ and inserting ‘‘subparagraph (A)’’, ‘‘clause (iv)’’ and ‘‘paragraph 

(1)(A)’’, respectively each place it appears. 

(d) OTHER CORRECTIONS.—Effective as if included in the enactment of section 

521(c) of BIPA, section 1154(e) (42 U.S.C. 1320c–3(e)) is amended by striking paragraph (5). 

(e) EFFECTIVE DATE.—Except as otherwise provided, the amendments made by 

this section shall be effective as if included in the enactment of BIPA. 

SEC. 949. CONFORMING AUTHORITY TO WAIVE A PROGRAM EXCLUSION. 

The first sentence of section 1128(c)(3)(B) (42 U.S.C. 1320a–7(c)(3)(B)) is amended 

to read as follows: ‘‘Subject to subparagraph (G), in the case of an exclusion under 

subsection (a), the minimum period of exclusion shall be not less than five years, 

except that, upon the request of the administrator of a Federal health care program 

(as defined in section 1128B(f)) who determines that the exclusion would impose a 

hardship on individuals entitled to benefits under part A of title XVIII or enrolled 

under part B of such title, or both, the Secretary may waive the exclusion under 

subsection (a)(1), (a)(3), or (a)(4) with respect to that program in the case of an individual or entity that is the sole community physician or sole source of essential specialized services in a community.’’. 

SEC. 950. TREATMENT OF CERTAIN DENTAL CLAIMS. 

(a) IN GENERAL.—Section 1862 (42 U.S.C. 1395y) is amended by adding after subsection (g) the following new subsection: 

‘‘(h)(1) Subject to paragraph (2), a group health plan (as defined in subsection 

(a)(1)(A)(v)) providing supplemental or secondary coverage to individuals also entitled to services under this title shall not require a medicare claims determination 

under this title for dental benefits specifically excluded under subsection (a)(12) as 

a condition of making a claims determination for such benefits under the group 

health plan. 

‘‘(2) A group health plan may require a claims determination under this title in 

cases involving or appearing to involve inpatient dental hospital services or dental 

services expressly covered under this title pursuant to actions taken by the Secretary.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect on 

the date that is 60 days after the date of the enactment of this Act. 

SEC. 951. FURNISHING HOSPITALS WITH INFORMATION TO COMPUTE DSH FORMULA. 

Beginning not later than 1 year after the date of the enactment of this Act, the 

Secretary shall furnish to subsection (d) hospitals (as defined in section 

1886(d)(1)(B) of the Social Security Act, 42 U.S.C. 1395ww(d)(1)(B)) the data necessary for such hospitals to compute the number of patient days described in subclause (II) of section 1886(d)(5)(F)(vi) of the Social Security Act (42 U.S.C. 

1395ww(d)(5)(F)(vi)) used in computing the disproportionate patient percentage 

under such section for that hospital. Such data shall also be furnished to other hospitals which would qualify for additional payments under part A of title XVIII of 

the Social Security Act on the basis of such data. 

SEC. 952. REVISIONS TO REASSIGNMENT PROVISIONS. 

(a) IN GENERAL.—Section 1842(b)(6)(A) (42 U.S.C. 1395u(b)(6)(A)) is amended by 

striking ‘‘or (ii) (where the service was provided in a hospital, critical access hospital, clinic, or other facility) to the facility in which the service was provided if 

there is a contractual arrangement between such physician or other person and 

such facility under which such facility submits the bill for such service,’’ and inserting ‘‘or (ii) where the service was provided under a contractual arrangement between such physician or other person and an entity (as defined by the Secretary), 

to the entity if, under the contractual arrangement, the entity submits the bill for 

the service and the contractual arrangement meets such other program integrity 

and other safeguards as the Secretary may determine to be appropriate,’’. 

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(b) CONFORMING AMENDMENT.—The second sentence of section 1842(b)(6) (42 

U.S.C. 1395u(b)(6)) is amended by striking ‘‘except to an employer or facility’’ and 

inserting ‘‘except to an employer, entity, or other person’’. 

(c) EFFECTIVE DATE.—The amendments made by section shall apply to payments 

made on or after the date that is one year after the date of the enactment of this 

Act. 

SEC. 953. OTHER PROVISIONS. 

(a) GAO REPORTS ON THE PHYSICIAN COMPENSATION.—

(1) SUSTAINABLE GROWTH RATE AND UPDATES.—Not later than 6 months after 

the date of the enactment of this Act, the Comptroller General of the United 

States shall submit to Congress a report on the appropriateness of the updates 

in the conversion factor under subsection (d)(3) of section 1848 of the Social Security Act (42 U.S.C. 1395w–4), including the appropriateness of the sustainable 

growth rate formula under subsection (f) of such section for 2002 and succeeding years. Such report shall examine the stability and predictability of such 

updates and rate and alternatives for the use of such rate in the updates. 

(2) PHYSICIAN COMPENSATION GENERALLY.—Not later than 12 months after 

the date of the enactment of this Act, the Comptroller General shall submit to 

Congress a report on all aspects of physician compensation for services furnished under title XVIII of the Social Security Act, and how those aspects interact and the effect on appropriate compensation for physician services. Such report shall review alternatives for the physician fee schedule under section 1848 

of such title (42 U.S.C. 1395w–4). 

(b) ANNUAL PUBLICATION OF LIST OF NATIONAL COVERAGE DETERMINATIONS.—The 

Secretary shall provide, in an appropriate annual publication available to the public, 

a list of national coverage determinations made under title XVIII of the Social Security Act in the previous year and information on how to get more information with 

respect to such determinations. 

(c) GAO REPORT ON FLEXIBILITY IN APPLYING HOME HEALTH CONDITIONS OF PARTICIPATION TO PATIENTS WHO ARE NOT MEDICARE BENEFICIARIES.—Not later than 

6 months after the date of the enactment of this Act, the Comptroller General of 

the United States shall submit to Congress a report on the implications if there 

were flexibility in the application of the medicare conditions of participation for 

home health agencies with respect to groups or types of patients who are not medicare beneficiaries. The report shall include an analysis of the potential impact of 

such flexible application on clinical operations and the recipients of such services 

and an analysis of methods for monitoring the quality of care provided to such recipients. 

(d) OIG REPORT ON NOTICES RELATING TO USE OF HOSPITAL LIFETIME RESERVE

DAYS.—Not later than 1 year after the date of the enactment of this Act, the Inspector General of the Department of Health and Human Services shall submit a report 

to Congress on—

(1) the extent to which hospitals provide notice to medicare beneficiaries in 

accordance with applicable requirements before they use the 60 lifetime reserve 

days described in section 1812(a)(1) of the Social Security Act (42 U.S.C. 

1395d(a)(1)); and 

(2) the appropriateness and feasibility of hospitals providing a notice to such 

beneficiaries before they completely exhaust such lifetime reserve days. 

SEC. 954. TEMPORARY SUSPENSION OF OASIS REQUIREMENT FOR COLLECTION OF DATA ON 

NON-MEDICARE AND NON-MEDICAID PATIENTS. 

(a) IN GENERAL.—During the period described in subsection (b), the Secretary may 

not require, under section 4602(e) of the Balanced Budget Act of 1997 or otherwise 

under OASIS, a home health agency to gather or submit information that relates 

to an individual who is not eligible for benefits under either title XVIII or title XIX 

of the Social Security Act (such information in this section referred to as ‘‘non-medicare/medicaid OASIS information’’). 

(b) PERIOD OF SUSPENSION.—The period described in this subsection—

(1) begins on the date of the enactment of this Act; and 

(2) ends on the last day of the 2nd month beginning after the date as of which 

the Secretary has published final regulations regarding the collection and use 

by the Centers for Medicare & Medicaid Services of non-medicare/medicaid 

OASIS information following the submission of the report required under subsection (c). 

(c) REPORT.—

(1) STUDY.—The Secretary shall conduct a study on how non-medicare/medicaid OASIS information is and can be used by large home health agencies. 

Such study shall examine—

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(A) whether there are unique benefits from the analysis of such information that cannot be derived from other information available to, or collected 

by, such agencies; and 

(B) the value of collecting such information by small home health agencies compared to the administrative burden related to such collection. 

In conducting the study the Secretary shall obtain recommendations from quality assessment experts in the use of such information and the necessity of 

small, as well as large, home health agencies collecting such information. 

(2) REPORT.—The Secretary shall submit to Congress a report on the study 

conducted under paragraph (1) by not later than 18 months after the date of 

the enactment of this Act. 

(d) CONSTRUCTION.—Nothing in this section shall be construed as preventing 

home health agencies from collecting non-medicare/medicaid OASIS information for 

their own use.

I. INTRODUCTION 

A. PURPOSE AND SUMMARY, AND

B. BACKGROUND AND NEED FOR LEGISLATION

Nearly four decades ago, Congress enacted the Medicare program 

to help provide health care to our nation’s seniors. Medicare has 

improved and lengthened the lives of millions of people. In recent 

years, Congress has both successfully slowed Medicare’s growth 

rate and added new preventive benefits to keep seniors healthier. 

Yet Medicare has still not met its true promise because it remains 

mired in a rigid administrative structure that can only change 

when Congress enacts a law. 

When Medicare was enacted, there were few prescription drugs, 

and most care was delivered in hospitals and physician offices. 

Consequently, Medicare did not cover prescription drugs. While 

about two-thirds of seniors have some prescription drug coverage 

through various sources, access to such coverage has been declining 

and oftentimes remains inadequate. Many other seniors lack prescription drug coverage, and therefore, they lack the bargaining 

power to reduce their drug costs. 

Prescription drugs are an integral part of health care today. They 

prevent and manage diseases and most often are less invasive and 

costly than alternative health care options (e.g. surgery, hospitalization, nursing home admission, etc.). Most private health 

plans have voluntarily integrated prescription drugs into their benefits. Nobody today with a blank sheet of paper would design a 

health care program for seniors that excluded prescription drugs. 

Yet, the absence of a prescription drug benefit epitomizes how 

Medicare has not kept pace with modern medicine. While a Medicare prescription drug benefit is long overdue, it is not the only 

problem afflicting a program so many cherish and want to 

strengthen. 

Irrational and unpredictable payments to physicians are just one 

example of what is wrong with Medicare’s reimbursement policy. 

While health costs are escalating under the current Sustainable 

Growth Rate formula, payments to physicians under current law 

would be substantially reduced. Patients’ access to physicians will 

suffer and the doctors beneficiaries rely on will only become more 

demoralized. Similarly, rural hospitals continue to struggle and are 

not paid equitably compared to large urban hospitals. In addition, 

numerous Medicare+Choice plans are withdrawing from the program and are substantially cutting benefits because government 

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payments are not related to the actual cost of providing health 

care. 

At the same time, Medicare is overpaying on other counts, such 

as for durable medical equipment. The Office of Inspector General 

has documented that taxpayers and Medicare beneficiaries are paying millions more for durable medical equipment than other programs, such as the Federal Employees Health Benefit Program 

(FEHBP). Similarly, numerous studies by the General Accounting 

Office, Office of Inspector General and others have documented tremendous overpayments to oncologists and other physicians for currently covered prescription drugs. In some cases, the beneficiary 

copay exceeds the actual acquisition cost of the drug. 

In addition, the health care professionals serving Medicare beneficiaries are being crushed by more than 130,000 pages of overly 

burdensome regulations—four times more than those governing the 

Internal Revenue Code. This over-regulation hampers efforts to 

provide quality care to seniors, and it must be changed. 

Finally, and most importantly, Medicare’s long-term viability is 

not on stable ground. When Medicare was enacted, there were 

more than six workers per beneficiary. Today, there are about four 

workers per beneficiary. After the baby-boom generation retires 

(which starts at the end of this decade), there will be about two 

workers per beneficiary. Absent any change in law, Medicare costs 

will nearly double over the next 10 years. Medicare needs to become more efficient. 

This bill addresses all of these issues and more. 

First and foremost, the bill provides a voluntary, affordable prescription drug benefit as an entitlement to all beneficiaries. The 

proposal is within the $400 billion over 10 years allocated under 

the budget resolution. Under the bill, Medicare beneficiaries would 

pay a $250 deductible and then receive 80 percent coverage of their 

annual drug costs up to $2,000. This 80–20 benefit looks like standard coverage offered by employer plans, and today nearly twothirds of beneficiaries spend less than $2,000 on drugs annually. In 

addition, the bill provides catastrophic protection after an individual has incurred $3,500 in out-of-pocket costs. At that threshold, 

100 percent of costs will be covered. The Congressional Budget Office (CBO) estimates the average monthly beneficiary premium to 

be about $35. 

Additionally, the bill targets resources to those who need them 

most. For low-income seniors up to 135 percent of poverty, premiums would be fully subsidized and all cost-sharing, except for 

nominal copays, would be covered. Those with incomes between 135 

and 150 percent would also receive assistance for their premiums. 

Seniors with incomes above $60,000 or couples with incomes above 

$120,000 would have a higher catastrophic threshold, but would receive the same front-end benefit. This higher threshold would affect 

only about five percent of individuals. 

The prescription drug benefit would be delivered through competing integrated health plans and private sector entities that already deliver pharmaceutical benefits for millions of people, including every Member of Congress. The bill permits and encourages 

these plans to utilize private sector tools to aggressively negotiate 

lower drug prices and provide better service for beneficiaries. By 

exempting prices negotiated for Medicare beneficiaries from the 

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Medicaid ‘‘best price’’ provision, the bill encourages steep discounting by pharmaceutical manufacturers that would save taxpayers and beneficiaries billions of dollars. The private sector delivery of benefits is backed up by a government guarantee that all 

seniors in every area of the country must be covered. Indeed, the 

Congressional Budget Office and the Centers for Medicare and 

Medicaid Services (CMS) Office of the Actuary predicts that more 

than 95 percent of the seniors that lack coverage would voluntarily 

sign up for this benefit. 

The bill would provide seniors with more and better choices for 

the delivery of their health care. The Medicare+Choice program 

would be fundamentally reformed by re-linking payments to fee-forservice costs and permitting plans to bid their actual costs, beginning in 2006. Plans would be paid what they bid and savings would 

be split 75 percent–25 percent between the beneficiary and government for plans that bid below the benchmark. The bill would also 

implement the President’s ‘‘enhanced fee-for-service’’ program, 

which provides for regional, open-network plans offering better integrated care. 

In 2010, the bill would put Medicare on a more stable funding 

path by moving to a FEHBP-style of competition between plans. 

Nothing would change Medicare’s entitlement to a defined set of 

benefits, but costs between fee-for-service and private plans would 

be directly compared. Beneficiaries would be rewarded for enrolling 

in more efficient plans, regardless of whether the plans are private 

or traditional fee-for-service. This program would only apply in 

areas with significant private plan penetration (at least equal to 

the national average market share), and the fee-for-service plan 

would have disproportionate influence in establishing the benchmark. This transition would be phased in over five years. This provision provides Medicare the best chance to bend its growth rate 

in the out-years by enabling beneficiaries to make efficient and rational choices, and by permitting the government to share in the 

savings when beneficiaries select cost-effective plans. 

More than 179 different patient groups, provider groups, and employers have endorsed this legislation because it provides a meaningful benefit, modernizes irrational reimbursements, and reduces 

burdensome regulatory structures that undermine the quality and 

accessibility of care. The bill reforms physician payments, addresses payment inequities for rural hospitals and home health providers, and makes responsible decisions on provider reimbursements based on the Medicare Payment Advisory Commission’s recommendations. More importantly, the legislation sets Medicare on 

a path of more rational pricing—determined by the marketplace, 

rather than government edict—through moving durable medical 

equipment, currently covered drugs, and Medicare’s contractors 

into a competitive system. In addition to creating a more rational 

system that saves money over time, these changes get Congress out 

of the business of micro-managing payments to providers across 

communities in America based on political decisions in Washington. 

The bill provides clear improvements for preventive benefits for 

beneficiaries. For the first time, in order to diagnose problems early 

and keep seniors healthy, Medicare would cover initial physicals 

and provide coverage for cholesterol screening. The bill would also 

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provide better-coordinated care for the numerous Medicare beneficiaries who suffer from multiple chronic illnesses. 

The bill also includes regulatory and contracting reforms—reforms that passed the House twice in the 107th Congress—to reduce unnecessary regulation and modernize how Medicare selects 

its contractors. 

Finally, the bill also establishes a new Medicare Benefits Administration (MBA) to manage and oversee the Medicare Advantage 

and Enhanced Fee-for-Service Programs as well as the prescription 

drug benefit. Creating of the MBA eliminates the inherent conflictof-interest in requiring a government-run fee-for-service plan to 

regulate competing private plans. 

C. LEGISLATIVE HISTORY

Legislative Hearings 

During the 107th and 108th Congresses, the Committee on Ways 

and Means, and its Subcommittee on Health, held 24 hearings exploring how Medicare should be strengthened and modernized. 

These hearings, which examined all aspects of the Medicare program, included expert testimony from academic, beneficiary and 

provider representatives. The following lists the hearings in the 

107th and 108th Congresses in reverse chronological order: 

108TH CONGRESS

May 1, 2003: Medicare Cost-Sharing and Medigap Reform (Subcommittee on Health) 

Witnesses 

Glenn M. Hackbarth, Chairman, Medicare Payment Advisory 

Commission. 

Stephen W. Still, Esq., Maynard, Cooper & Gale, P.C., Birmingham, Alabama, on behalf of Torchmark Corporation, Birmingham, Alabama, and United American Insurance Company, 

McKinney, Texas. 

Richard White, Vice President, Individual Project Management, 

Southeast Region, Anthem Blue Cross and Blue Shield, Roanoke, 

Virginia. 

Patricia Neuman, Sc. D., Vice President and Director, Medicare 

Policy Project, Kaiser Medicare Policy Project, Henry J. Kaiser 

Family Foundation. 

April 9, 2003: Hearing on Expanding Coverage of Prescription 

Drugs in Medicare (Full Committee) 

Witnesses 

Douglas Holtz-Eakin, Ph.D., Director, Congressional Budget Office. 

The Honorable David M. Walker, Comptroller General, U.S. General Accounting Office. 

Bruce Stewart, Ph.D., Director, Peter Lamy Center on Drug 

Therapy and Aging, University of Maryland, Baltimore, Maryland. 

Mark V. Pauly, Ph.D., Chairperson, Health Care Systems Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania.

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Uwe Reinhardt, Ph.D., Professor, Economics and Public Affairs, 

Department of Economics, and Woodrow Wilson School of Public 

and International Affairs, Princeton University, Princeton, New 

Jersey 

March 6, 2003: Hearing on the MedPAC Report on Medicare Payment Policies (Subcommittee on Health) 

Witnesses 

Glenn M. Hackbarth, Chairman, MedPAC. 

James Jaruzewicz, President and Chief Executive Officer, Visiting Nurses Association of Erie County, Erie, Pennsylvania, on behalf of the Visiting Nurses Association of America. 

Larry C. Buckelew, President and Chief Executive Officer, 

Gambro Healthcare U.S., and Chairman, Renal Leadership Council. 

William G. Plested, III, M.D., Chair-Elect, American Medical Association. 

Mary K. Ousley, Chairman, American Health Care Association. 

Dennis Barry, President and Chief Executive Officer, Moses Cone 

Health System, Greensboro, North Carolina, and Chairman, Board 

of Trustees, American Hospital Association. 

Betty Severyn, Member, Board of Directors, AARP. 

February 25, 2003: Hearing on Eliminating Barriers to Chronic 

Care Management in Medicare (Subcommittee on Health) 

Witnesses 

Stuart Guterman, Director, Office of Research, Development and 

Information, Centers for Medicare and Medicaid Services. 

Jeff Lemieux, Senior Economist, Progressive Policy Institute. 

Ed Wagner, M.D., Director, MacColl Institute for Healthcare Innovation, Center for Health Studies, Group Health Cooperative, Seattle, Washington. 

George A. Taler, M.D., Director, Long Term Care, Department of 

Medicine, Washington Hospital Center, on behalf of the American 

Geriatric Society. 

Jan Berger, M.D., Senior Vice President, Clinical Quality and 

Support, Caremark Rx Incorporated, Northbrook, Illinois. 

February 13, 2003: Hearing on Medicare Regulatory and Contracting Reform (Subcommittee on Health) 

Witnesses 

The Honorable Thomas A. Scully, Administrator, Centers for 

Medicare and Medicaid Services. 

Douglas L. Wood, M.D., Vice Chair, Department of Medicine, 

Mayo Clinic and Foundation, Rochester, Minnesota. 

Michael Luebke, President, Verizon Information Technologies 

Inc., Tampa, Florida. 

Tony Fay, Vice President, Government Affairs, Province 

Healthcare Company, Brentwood, Tennessee, on behalf of the 

American Hospital Association. 

J. Edward Hill, M.D., Chairman, Board of Trustees, American 

Medical Association. 

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Janet B. Wolf, President, Munson Home Health, Traverse City, 

Michigan, and Past President, Board of Directors, Michigan Home 

Health Association, Okemos, Michigan, on behalf of the National 

Association for Home Care and Hospice. 

Judith A. Ryan, Ph.D., President and Chief Executive Officer, 

Evangelical Lutheran Good Samaritan Society, Sioux Falls, South 

Dakota, on behalf of the American Health Care Association. 

Michael Carius, M.D., Immediate Past President, American College of Emergency Physicians, Norwalk, Connecticut, and Founding 

Member, Alliance of Specialty Medicine. 

Vicki Gottlich, Attorney, Healthcare Rights Project, Center for 

Medicare Advocacy, Inc. 

February 6, 2003: Hearing on the President’s Fiscal Year 2004 

Budget with U.S. Department of Health and Human Services 

(Full Committee) 

Witness 

The Honorable Tommy G. Thompson, Secretary, U.S. Department of Health and Human Services. 

107TH CONGRESS

October 3, 2003: Medicare Payments for Currently Covered Prescription Drugs (Subcommittee on Health) 

July 23, 2002: Medicare’s Geographic Cost Adjusters (Subcommittee on Health)

April 17, 2002: Integrating Prescription Drugs into Medicare (Full 

Committee) 

April 16, 2002: Promoting Disease Management in Medicare (Subcommittee on Health) 

March 14, 2002: Medicare Supplemental Insurance (Subcommittee 

on Health) 

March 7, 2002: Health Quality and Medical Errors (Subcommittee 

on Health) 

February 28, 2002: Reforming Physician Payments (Subcommittee 

on Health) 

December 4, 2001: Status of the Medicare+Choice Program (Subcommittee on Health) 

September 25, 2001: H.R. 2768, Medicare Regulatory and Contracting Reform Act (Subcommittee on Health) 

July 19, 2001: Administration’s Principles to Strengthen and Modernize Medicare (Full Committee) 

June 12, 2001: Rural Health Care in Medicare (Subcommittee on 

Health) 

May 9, 2001: Strengthening Medicare: Modernizing Beneficiary 

Cost-Sharing (Subcommittee on Health) 

May 1, 2001: Medicare+Choice: Lessons for Reform (Subcommittee 

on Health) 

March 27, 2001: Laying the Groundwork for a Prescription Drug 

Benefit (Subcommittee on Health) 

March 20, 2001: Medicare Solvency (Full Committee) 

March 15, 2001: Bringing Regulatory Relief to Beneficiaries and 

Providers (Subcommittee on Health) 

March 14, 2001: Administration’s Health and Welfare Priorities 

(Full Committee) 

150

February 28, 2001: Perspectives on Medicare Reform (Subcommittee on Health)

On April 11, 2003, Congress agreed to the conference report for 

H. Con. Res. 95, ‘‘Establishing the congressional budget for the 

United States Government for fiscal year 2004 and setting forth 

appropriate budgetary levels for fiscal years 2003 and 2005 

through 2013,’’ which provided $400 billion over 10 years for Medicare modernization and prescription drugs. 

On June 16, 2003, Committee on Ways and Means Chairman Bill 

Thomas and Committee on Energy and Commerce Chairman Billy 

Tauzin introduced H.R. 2473, the ‘‘Medicare Prescription Drug and 

Modernization Act of 2003’’. (Identical language in the form of a report was released publicly June 13, 2003.) On June 17, 2003, H.R. 

2473 was marked up by the full Committee on Ways and Means 

and ordered favorably reported by a vote of 25–15, after adopted 

amendments—including the Thomas amendment in the nature of 

a substitute—were accepted into the bill. The amendments that 

were accepted to the Thomas amendment in the nature of a substitute were: (1) an amendment offered by Mrs. Johnson to instruct 

the Secretary of the U.S. Department of Health and Human Services to promptly evaluate existing codes for physician services associated with the administration of covered outpatient drugs; and to 

use existing processes to establish relative values for such services; 

(2) an en bloc amendment offered by Mr. Collins to exempt MA private FFS plans from compliance with the drug utilization management program, negotiation of discounts from manufacturers, disclosure of fact that generic drug is available at a lower cost, and 

TRICARE standards for participation; and (3) an amendment offered by Mr. Nussle and Mr. Pomeroy to adjust the Medicare inpatient hospital prospective payments system wage index to revise 

the labor-related share of such index, and to provide a five percent 

bonus payment to physicians operating in physician scarcity areas.

II. EXPLANATION OF PROVISIONS 

A. TITLE I—MEDICARE PRESCRIPTION DRUG BENEFIT

Section 101. Establishment of a Medicare Prescription Drug Benefit 

CURRENT LAW

Medicare does not cover most outpatient prescription drugs. 

Beneficiaries in hospitals or skilled nursing facilities may receive 

drugs as part of their treatment. Medicare payments made to the 

facilities cover these costs. Medicare also makes payments to physicians for drugs or biologicals that are not usually self-administered. 

This means that coverage is generally limited to drugs or 

biologicals administered by injection. However, if the injection is 

generally self-administered (e.g., insulin), it is not covered. 

Despite the general limitation on coverage for outpatient drugs, 

Medicare statute specifically authorizes coverage for the following: 

(1) drugs used in immunosuppressive therapy (such as cyclosporin) 

following discharge from a hospital for a Medicare-covered organ 

transplant, (2) erythropoietin (EPO) for the treatment of anemia 

for persons with chronic renal failure who are on dialysis, (3) drugs 

taken orally during cancer chemotherapy provided they have the 

151

same active ingredients and are used for the same indications as 

chemotherapy drugs which would be covered if they were not selfadministered and were administered as incident to a physician’s 

professional service, and (4) hemophilia clotting factors for hemophilia patients competent to use such factors to control bleeding 

without medical supervision, and items related to the administration of such factors. The program also pays for supplies (including 

drugs) that are necessary for the effective use of covered durable 

medical equipment, including those that must be put directly into 

equipment (e.g., tumor chemotherapy agents used with an infusion 

pump). Medicare also covers pneumococcal pneumonia vaccines, 

hepatitis B vaccines, and influenza virus vaccines. 

EXPLANATION OF PROVISION

The provision would establish a new voluntary prescription drug 

benefit program under a new Medicare Part D of Title XVIII of the 

Social Security Act. Effective January 1, 2006, a new voluntary 

benefit would be established. Beneficiaries could purchase either 

‘‘standard coverage’’ or actuarially equivalent coverage approved by 

the Secretary of Health and Human Services. In 2006, ‘‘standard 

coverage’’ would have a $250 deductible, 80 percent coverage for 

costs between $251 and $2,000, and all costs after the individual 

has borne $3,500 in out-of-pocket spending (a.k.a. the catastrophic 

threshold). The catastrophic threshold would be raised for individuals with income above $60,000 and couples with income above 

$120,000. Subsidies would be provided for persons with income 

below 150 percent of poverty. Coverage would be provided through 

PDPs, Medicare Advantage (MA) plans (formerly known as 

Medicare+Choice plans), or Enhanced Fee-For-Service plans 

(EFFS). The program would rely on private plans to provide coverage and to bear some of the financial risk for drug costs. Federal 

subsidies would be provided to encourage participation. Plans 

would be expected to negotiate prices for drugs. A new Medicare 

Benefits Administration (MBA), within the Department of Health 

and Human Services (HHS), would contract with plans. 

New Section 1860D–1. Benefits; Eligibility; Enrollment; and 

Coverage Period 

The new Section 1860A would specify that each individual entitled to Medicare Part A or enrolled in Medicare Part B would be 

entitled to obtain qualified prescription drug coverage under Medicare. MA plans and EFFS plans (MA–EFFS plans) would be required to offer qualified prescription drug coverage. An individual 

enrolled in a MA–EFFS plan would obtain their drug coverage 

through the plan. An individual not enrolled in either a Medicare 

Advantage or EFFS plan could enroll in a new PDP. The provision 

would specify that an individual eligible to make an election to enroll in a PDP, or with a MA–EFFS plan, would do so in accordance 

with regulations issued by the Administrator of the new MBA. Enrollments and changes in enrollment could occur only during a 

specified election period. The election periods would generally be 

the same as those established for MA–EFFS programs including 

annual coordinated election periods and special election periods. An 

individual discontinuing a MA election during the first year of eligibility would be permitted to enroll in a PDP at the same time as 

152

the election of coverage under the original fee-for-service plan 

(FFS). 

An initial six month election period, beginning on October 1, 

2005, would be established for persons entitled to Part A or enrolled under Part B on that date. For persons first entitled to Part 

A or enrolled in Part B after that date, an initial election period 

that would be the same as that for initial Part B enrollment, would 

be established. The MBA Administrator would be required to establish special election periods for persons in specific circumstances, 

such as having and then involuntarily losing prescription drug coverage; enrollment delays or non-enrollment attributable to government action; becoming eligible for Medicaid drug coverage; or any 

such exceptional circumstance specified by the MBA Administrator 

(including circumstances pertaining to MA enrollment). 

Guaranteed issue and community-rating protections would be established for beneficiaries. Individuals electing qualified prescription drug coverage under a PDP plan or MA–EFFS plan could not 

be denied enrollment based on health status or other factor. MA 

provisions relating to priority enrollment (where capacity limits 

have been reached) and limitations on terminations of elections 

would apply to PDP sponsors. 

The provision would specify that PDP sponsors and MA–EFFS 

organizations providing qualified prescription drug coverage could 

not deny, limit, or condition the coverage or provision of benefits 

or increase the premium based on any health-related status factor 

in the case of persons who maintained continuous prescription drug 

coverage since the date they first qualified to elect drug coverage 

under Part D. Individuals who did not maintain continuous coverage could be subject to an adjusted premium in a manner reflecting the additional actuarial risk involved. Such risk would be established through an appropriate actuarial opinion. 

An individual would be considered to have had continuous prescription drug coverage if the individual could establish that he or 

she had coverage under one of the following (and coverage in one 

plan occurred no more than 63 days after termination of coverage 

in another plan): (1) a qualified PDP or MA–EFFS plan, (2) Medicaid, (3) a group health plan, but only if benefits were at least 

equivalent to benefits under a qualified PDP, (4) a Medigap plan, 

but only if the policy was in effect on January 1, 2006, and only 

if the benefits were at least equivalent to benefits under a qualified 

PDP, (5) a state pharmaceutical assistance program, but only if 

benefits were at least equivalent to benefits under a qualified PDP, 

or (6) a veteran’s plan, but only if benefits were at least equivalent 

to benefits under a qualified PDP. Individuals could apply to the 

MBA Administrator to waive the requirement that such coverage 

be at least equivalent to benefits under a qualified PDP if they 

could establish that they were not adequately informed that the 

coverage did not provide such level of coverage. 

PDP sponsors would make drug coverage available to all eligible 

individuals residing in the area—without regard to their health, 

economic status, or place of residence. 

Elections would take effect at the same time that they do for MA 

plans; however, no election could take effect before January 1, 

2006. The MBA Administrator would provide for the termination of 

an election in the case of termination of Part A and Part B covVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00152 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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erage or termination of an election for cause (including failure to 

pay the required premium). 

New Section 1860D–2. Requirements for Qualified Prescription Drug Coverage 

The new Section 1860D–2 would specify the requirements for 

qualified prescription drug coverage. Qualified coverage would be 

defined as either ‘‘standard coverage’’ or actuarially equivalent coverage. 

For 2006, ‘‘standard coverage’’ would have a $250 deductible, 80 

percent coverage for costs between $251 and $2,000, and full coverage for all costs after the individual has borne $3,500 in out-ofpocket spending (a.k.a. the catastrophic threshold). Beneficiaries 

would have access to negotiated discounts even where there would 

be no insurance benefit (between $2,000 in spending and $3,500 in 

out-of-pocket spending). Beginning in 2007, standard coverage 

thresholds would be increased by the annual percent increase in 

average per capita expenditures for covered outpatient drugs for 

beneficiaries (for the 12-month period ending in July of the previous year). 

Plans would be permitted to substitute cost-sharing schedules for 

costs up to the initial coverage limit ($2,000) that are actuarially 

consistent with the average expected 20 percent cost-sharing up to 

the initial coverage limit. They could also apply tiered coinsurance, 

provided such coinsurance was actuarially consistent with the average 20 percent cost-sharing requirements. 

Costs that would count toward meeting the catastrophic limit 

would only be considered incurred if they were paid for the deductible, cost-sharing, or benefits not paid because of application to the 

initial coverage limit. Costs would be treated as incurred costs only 

if they are paid by the individual (or by another family member on 

behalf of the individual), paid on behalf of a low-income individual 

under the subsidy provisions, under the Medicaid program, or by 

a state pharmaceutical assistance program. Substantial new assistance would be provided to those states with pharmaceutical assistance programs through the catastrophic benefit by requiring Medicare to pay 80 percent of the costs above the catastrophic limit. 

Any costs for which the individual was reimbursed by insurance or 

otherwise would not count toward incurred costs. 

The provision would increase the annual out-of-pocket threshold 

for each enrollee whose adjusted gross income exceeds a specified 

income threshold. The portion of income exceeding this income 

threshold ($60,000 for individuals and $120,000 for couples in 

2006), but below an income threshold limit ($200,000 in 2006), 

would be considered in making this calculation. The increase would 

be calculated as follows: first, the ratio of the annual out-of-pocket 

limit to the income limit would be calculated and expressed as a 

percent; for 2006, this would be $3,500 divided by $60,000, equaling about 5.8 percent. This percentage would be multiplied by income over the income threshold, not exceeding $140,000. Thus, the 

catastrophic out-of-pocket limit would be $5,820 for an enrollee 

with an income of $100,000 and $11,620 for persons with incomes 

at $200,000 or above. Beginning in 2007, the income threshold and 

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crease in the consumer product index (CPI) for all urban consumers, rounding to the nearest $100. 

The amount used for making the income determination would be 

adjusted gross income Individuals filing joint returns would be 

treated separately with each person considered to have an adjusted 

gross income equal to one-half of the total. The determination 

would be the most recent return information disclosed by the Secretary of the Treasury to the Secretary of HHS before the beginning of the year. The Secretary, in coordination with the Secretary 

of the Treasury, would provide a procedure under which an enrollee could elect to use more recent information, including information for a taxable year ending in the current calendar year. 

Through the 1–800 toll free Medicare beneficiary line, individuals 

would have assistance in appealing a determination from the Medicare Ombudsman. The process would require: (1) the enrollee to 

provide the Secretary with the relevant portion of the more recent 

return, (2) verification by the Secretary of the Treasury, and (3) 

payment by the Secretary to the enrollee equal to the benefit payments that would have been payable under the plan if more recent 

information had been used. If such payments were made, the PDP 

sponsor would pay the Secretary the requisite amount, less the applicable reinsurance that would have applied. 

The Secretary would be required to provide, through the annual 

Medicare handbook, general information on the calculation of catastrophic out-of-pocket thresholds. The Secretary would periodically 

transmit to the Secretary of the Treasury the names and Social Security Numbers (SSNs) of enrollees in PDPs or MA–EFFS plans 

and request that the Secretary of the Treasury disclose income information. The Secretary would disclose to entities offering the 

plan the amount of the out-of-pocket threshold that would apply to 

a specified taxpayer. New confidentiality protections and severe 

criminal and civil penalties would apply to any unauthorized disclosure of information. 

The provision would permit a PDP or MA–EFFS sponsor to offer, 

subject to approval by the MBA Administrator, alternative coverage providing certain requirements were met. The actuarial 

value of total coverage would have to be at least equal to the actuarial value of standard coverage. The unsubsidized value of the 

coverage (i.e. the value of the coverage exceeding subsidy payments) would have to be equal to the unsubsidized value of standard coverage. The coverage would be designed (based on actuarially 

representative patterns of utilization) to provide for payment of incurred costs up to the initial coverage limit of at least the same 

percentage of costs provided under standard coverage. Further, catastrophic protection would have to be the same as that under 

standard coverage. It could not vary. 

Both standard coverage and actuarially equivalent coverage 

would offer access to negotiated prices, including applicable discounts. Access would be provided even when no benefits were payable because of the application of cost-sharing or initial coverage 

limits. Insofar as a State elected to use these negotiated prices for 

its Medicaid program, the Medicaid drug payment provisions would 

not apply. Further, the negotiated prices would not be taken into 

account in making ‘‘best price’’ determinations under Medicaid. 

Under the current Medicaid best price policy, the largest discount 

155

a pharmaceutical manufacturer negotiates in the private market 

must be passed along to the Medicaid program as well. Since manufacturers can only influence market share and volume in the private sector, not Medicaid, the ‘‘best price’’ policy has led to less discounting by manufacturers. As a result, arbitrary price floors are 

created and consumers pay the price as competing manufacturers 

have had less incentive to steeply discount their prices. This provision saves Medicare billions of dollars by encouraging pharmaceutical manufacturers to offer the same discounts that private 

plans currently receive. For transparency reasons, the PDP or MA–

EFFS sponsor would be required to disclose to the MBA Administrator the extent to which manufacturer discounts or rebates or 

other remunerations or price concessions are made available to the 

sponsor or organization and passed through to enrollees through 

pharmacies. Manufacturers would be required to disclose pricing 

information to the MBA Administrator under the same conditions 

currently required for Medicaid. Transparency in pricing and rebate arrangements is a key factor in ensuring beneficiaries and 

taxpayers are receiving the best value for their resources. 

Qualified prescription drug coverage could include coverage exceeding that specified for standard coverage or actuarially equivalent coverage. However, any additional coverage would be limited 

to covered outpatient drugs. The MBA Administrator could terminate a contract with a PDP or MA–EFFS sponsor if a determination was made that the sponsor or organizations engaged in activities intended to discourage enrollment of classes of eligible Medicare beneficiaries obtaining coverage through the plan on the basis 

of their higher likelihood of utilizing prescription drug coverage. 

Covered outpatient drugs would be defined to include: (1) a drug 

which may only be dispensed subject to a prescription and which 

is described in subparagraph (A)(i) or (A)(ii) of Section 1927(k)(2) 

of the Social Security Act (relating to drugs covered under Medicaid), (2) a biological product described in paragraph B of such 

subsection, (3) insulin described in subparagraph C of such section, 

and (4) vaccines licensed under Section 351 of the Public Health 

Service Act. Drugs excluded from Medicaid coverage would be excluded from the definition except for smoking cessation drugs. The 

definition includes any use of a covered outpatient drug for a medically accepted indication. Drugs paid for under Medicare Part B 

would not be covered under Part D. A plan could elect to exclude 

a drug that would otherwise be covered, if the drug was excluded 

under the formulary and the exclusion was not successfully appealed under the new Section 1860D–3. In addition, a PDP or MA–

EFFS sponsor could exclude from coverage, subject to reconsideration and appeals provisions, any drug that either does not meet 

Medicare’s definition of medical necessity or is not prescribed in accordance with the plan or Part D. Beneficiaries could appeal the 

placement of a drug in a higher coinsurance tier to an external, 

independent entity. 

New Section 1860D–3. Beneficiary Protections for Qualified 

Prescription Drug Coverage 

The new Section 1860D–3 would specify required beneficiary protections. Plans would have to comply with guaranteed issue and 

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156

tion 1860D–1, access to negotiated prices as specified in the new 

Section 1860D–2, and the non-discrimination provisions specified in 

the new Section 1860D–6. 

The PDP sponsors would be required to disclose to each enrolling 

beneficiary information about the plan’s benefit structure, including information on: (1) access to covered drugs, including access 

through pharmacy networks, (2) how any formulary used by the 

sponsor functioned, (3) copayment and deductible requirements (including any applicable tiered copayment requirements), and (4) 

grievance and appeals procedures. In addition, beneficiaries would 

have the right to obtain more detailed plan information. The sponsor would be required to make available, through an Internet site 

and, on request, in writing, information regarding the basis for exclusion of any drug from the formulary. Plans must notify enrollees 

when a change has been made in the preferred status of a drug or 

biological, or if there has been a change in a beneficiary’s coinsurance. Plans would be required to furnish to enrollees a detailed explanation of benefits, including information on benefits compared to 

the initial coverage limit and the applicable out-of-pocket threshold. 

PDP and MA–EFFs sponsors would be required to permit the 

participation of any pharmacy that met the plan’s terms and conditions. Beneficiaries would be ensured access to any convenient local 

pharmacy that chose to participate in the plan. PDP and MA–

EFFS sponsors could reduce coinsurance for their enrolled beneficiaries below the otherwise applicable level for drugs dispensed 

through in-network pharmacies; in no case could the reduction result in an increase in subsidy payments made by the MBA Administrator to the plan. Sponsors would be required to secure participation in its network of a sufficient number of pharmacies that dispense drugs directly to patients to assure convenient access. Mail 

order only pharmacy would be prohibited so that beneficiaries have 

access to a convenient bricks and mortar pharmacy. The MBA Administrator would establish convenient access rules that were no 

less favorable to enrollees than rules for convenient access established by the Secretary of Defense on June 1, 2003, for the 

TRICARE Retail Pharmacy program. The TRICARE standard 

specifies that, in an urban area, 90 percent of beneficiaries must 

be within two miles of a participating pharmacy; in a suburban 

area, 90 percent of beneficiaries must be within five miles of a participating pharmacy; and in rural areas, 70 percent of beneficiaries 

must be within fifteen miles of a participating pharmacy. According 

to the Department of Defense, the TRICARE Retail Pharmacy program receives minimal access complaints each year, and problems 

and disputes related to access are resolved quickly. The rules 

would include adequate emergency access for enrolled beneficiaries. 

Sponsors would permit enrollees to receive benefits through a community pharmacy, rather than through mail-order, with any differential in cost paid by enrollees. Pharmacies could not be required to accept insurance risk as a condition of participation. It 

is important that pharmacies are not put at risk for events they 

cannot control, such as volume and frequency of prescriptions.

PDP and MA–EFFS sponsors would be required to issue (and reissue as appropriate) a card or other technology that could be used 

by an enrolled beneficiary to assure access to negotiated prices for 

157

drugs when coverage is not otherwise provided under the plan. The 

MBA Administrator would provide for the development of uniform 

standards relating to a standardized format for the card or other 

technology. These standards would be compatible with the administrative simplification requirements of Title XI of the Social Security 

Act. 

There is no requirement to use a formulary, however, if a PDP 

or MA–EFFS sponsor uses a formulary, it would have to meet certain requirements. It would be required to establish an independent pharmaceutical and therapeutic committee free of conflict 

with the plan to develop and review the formulary. The committee 

would include at least one physician and one pharmacist with expertise in the care of elderly or disabled persons, and the majority 

of members would be physicians or pharmacists. The committee 

would be required, when developing and reviewing the formulary, 

to base clinical decisions on the strength of scientific evidence and 

standards of practice, including assessing peer-reviewed medical 

literature, such as randomized clinical trials, pharmacoeconomic 

studies, outcomes research data, and such other information the 

committee determined appropriate. Arbitrary determinations to exclude products from the formulary would not be permitted. 

The P&T committee would also take into account whether including a particular covered drug had therapeutic advantages in terms 

of safety and efficacy. In addition, the formulary would have to include at least two drugs within each therapeutic category and class 

of covered outpatient drugs, although not necessarily all drugs 

within such categories or classes. When establishing such classes, 

the committee would take into account the standards published in 

the United States Pharmacopoeia Drug Information. It would be 

required to make available to plan enrollees, through the Internet 

or otherwise, the clinical basis for the coverage of any drug on the 

formulary. The committee would be required to establish policies 

and procedures to educate and inform health care providers concerning the formulary. Any removal of a drug from the formulary 

could not occur until appropriate notice had been provided to beneficiaries and physicians. The plan would provide for periodic evaluation and analysis of treatment protocols and procedures. Further, the PDP or MA–EFFS sponsor would be required to provide 

for, as part of its overall appeals process, appeals of coverage denials regarding application of the formulary. 

Each PDP or MA–EFFS sponsor would ensure that each pharmacy or other dispenser informed enrolled beneficiaries at the time 

of purchase, of any price differential between their prescribed drug 

and the price of the lowest cost generic drug covered under the 

plan that was therapeutically equivalent and bioequivalent. 

The PDP or MA–EFFS sponsor would be required to have (directly, or indirectly through arrangements): (1) an effective cost 

and drug utilization management program, (2) quality assurance 

measures including a medication therapy management program, 

(3) for years beginning with 2007, an electronic prescription drug 

program, and (4) a program to control waste, fraud, and abuse. Utilization management programs would be required to include medically appropriate incentives to use generic drugs and therapeutic 

interchange where appropriate. Medication therapy management 

programs would be designed to assure, for beneficiaries at risk for 

158

potential medication problems such as beneficiaries with complex 

or chronic diseases (such as diabetes, asthma, hypertension, and 

congestive heart failure) or multiple prescriptions, that drugs 

under the plan were appropriately used to optimize therapeutic 

outcomes through improved medication use and to reduce the risk 

of adverse events, including adverse drug interactions. The program would be developed in cooperation with licensed pharmacists 

and physicians. The PDP sponsor would be required, when establishing fees for pharmacists and other providers, to take into account the resources and time associated with the medication therapy management program. MA private fee-for-service plans would 

not be required to comply with the drug utilization management 

program, negotiate discounts from manufacturers, meet the 

TRICARE standards for participation, or disclose the fact that a 

lower priced generic drug is available at the time of purchase. 

The electronic prescription drug program would have to be consistent with national standards developed by the MBA Administrator. The program would be required to provide for electronic 

transmittal of prescriptions (except in emergencies and exceptional 

cases) and for provision of information to the prescribing health 

professional. To the extent feasible, the program would permit the 

prescribing health professional to provide, and be provided, information on an interactive real-time basis. The electronic prescribing 

program would permit health professionals to access information 

on the different medications a senior may be taking—making it 

easier to prevent adverse drug interactions and side effects. In addition, electronic prescribing would cut down on both the costs and 

hassle that pharmacists incur trying to decipher a handwritten 

script. These systems will increase drug compliance and properly 

monitor drug utilization. 

The MBA Administrator would be required to provide for the development of national standards relating to the electronic prescription drug program. The standards would be compatible with those 

established for the administrative simplification program established under title XI of the Social Security Act. The MBA Administrator would establish an advisory task force that included representatives of physicians, hospitals, pharmacies, beneficiaries, 

pharmacy benefit managers, technology experts, and pharmacy 

benefit experts of the Department of Veterans Affairs, Defense and 

other appropriate Federal agencies. The task force would provide 

recommendations to the MBA Administrator on standards including recommendations relating to: (1) range of available computerized prescribing software and hardware and their costs to develop 

and implement, (2) extent to which such standards and systems reduce medication errors and can be readily implemented by physicians, pharmacies, and hospitals, (3) efforts to develop uniform 

standards and a common software platform for the secure electronic transmission of medication history, eligibility, benefit and 

prescription information, (4) efforts to develop and promote universal connectivity and interoperability for the secure exchange of 

information, (5) cost of implementing such systems in hospital and 

physician office settings and pharmacies, and (6) implementation 

issues as they relate to administrative simplification requirements 

and current Federal and State prescribing laws and regulations 

and their impact on implementation of computerized prescribing. 

159

The MBA Administrator would be required to establish the task 

force by April 1, 2004. The task force would be required to submit 

recommendations to the MBA Administrator by January 1, 2005. 

The MBA Administrator would be required to promulgate national 

standards by January 1, 2006. Given current available technology, 

the committee supports the timely development of standards to facilitate a secure electronic prescription information program between prescribing health care professionals, pharmacists, and pharmacy benefit managers (PBMs) to reduce dangerous drug interactions as well as errors due to poor handwriting and transcribing 

errors. To this end, the committee believes that it would be to the 

benefit of the patient for prescribing professionals to have realtime, ‘‘up-front’’ access to the patient’s medication history, eligibility for benefits, drug formulary (if applicable), and coverage, 

when making prescribing decisions. 

Each PDP sponsor would be required to have meaningful procedures for the hearing and resolving of any grievances between the 

organization (including any entity or individual through which the 

organization provides covered benefits) and enrollees. Enrollees 

would be afforded access to expedited determinations and reconsiderations, in the same manner afforded under MA. A beneficiary in 

a plan that provided for tiered cost-sharing could request coverage 

of a non-preferred drug on the same conditions applicable to preferred drugs if the prescribing physician determines that the preferred drug for the treatment of the same condition was not as effective for the enrollee or could have adverse effects for the enrollee. Such decisions could also be appealed under the MA appeals 

structure. 

In general, PDP sponsors would be required to meet for independent review standards for coverage denials and appeals in the 

same manner that such standards apply to MA organizations. An 

individual enrolled in a PDP could appeal to obtain coverage for a 

drug not on the formulary or in a different cost sharing tier if the 

prescribing physician determined that the formulary drug for treatment of the same condition was not as effective for the individual 

or had adverse effects for the individual. The PDP sponsor would 

be required to meet requirements related to confidentiality and accuracy of enrollee records in the same manner that such requirements apply to MA organizations. 

New Section 1860D–4. Requirements for and Contracts With 

Prescription Drug Plan (PDP) Sponsors 

New Section 1860D–4 would specify organizational plan requirements for entities seeking to become PDP sponsors. In general, the 

section would require a PDP sponsor to be licensed under state law 

as a risk-bearing entity eligible to offer health insurance or health 

benefits coverage in each state in which it offers a prescription 

drug plan. Alternatively it could meet solvency standards established by the MBA Administrator for entities not licensed by the 

state. Plans would be required to assume full financial risk on a 

prospective basis for covered benefits except: (1) as covered by federal subsidy payments and reinsurance payments for high-cost enrollees, or (2) as covered by federal incentive payments to encourage plans to expand service areas for existing plans or establish 

160

new plans. The entity could obtain insurance or make other arrangements for the cost of coverage provided to enrollees. 

PDP sponsors would be required to enter into a contract with the 

MBA Administrator under which the sponsor agrees to comply both 

with the applicable requirements and standards and the terms and 

conditions of payment. The contract could cover more than one 

plan. The MBA Administrator would have the same authority to 

negotiate the terms and conditions of the plans as the Director of 

the Office of Personnel Management has with respect to FEHB 

plans. The MBA Administrator would be required to take into account subsidy payments for covered benefits in negotiating the 

terms and conditions regarding premiums. The MBA Administrator 

would designate at least 10 service areas consistent with the areas 

established for EFFS plans. 

The new section would incorporate, by reference, many of the 

contract requirements applicable to MA plans, including minimum 

enrollment, contract periods, allowable audits to protect against 

fraud and abuse, intermediate sanctions, and contract terminations. Pro rated user fees could be established to help finance enrollment activities; in no case could the amount of the fee exceed 

20 percent of the maximum fee permitted for a MA plan. 

The new Section would permit the MBA Administrator to waive 

the state licensure requirement under circumstances similar to 

those permitted under Part C for provider-sponsored organizations. 

In such cases, plans would be required to meet financial solvency 

and capital adequacy standards established by the MBA Administrator. The MBA Administrator would establish such standards by 

regulation by October 1, 2004. 

The standards established under Part D would supersede any 

state law or regulation (other than state licensing laws or laws relating to plan solvency). In addition, states would be prohibited 

from imposing premium taxes or similar taxes with respect to premiums paid to PDP sponsors or payments made to such sponsors 

by the MBA Administrator. 

New Section 1860D–5. Process for Beneficiaries To Select 

Qualified Prescription Drug Coverage 

The new Section 1860D–5 would require the MBA Administrator 

to establish a process for the selection of a PDP or MA–EFFS sponsor that provided qualified prescription drug coverage. The process 

would include the conduct of annual coordinated election periods 

under which individuals could change the qualifying plans through 

which they obtained coverage. The process would also include the 

active dissemination of information to promote an informed selection among qualifying plans (based on price, quality, and other features) in a manner consistent with and in coordination with the 

dissemination of information under MA. Further, the process would 

provide for the coordination of elections through filing with a PDP 

or MA–EFFS sponsor in a manner consistent with that provided 

under MA. The plan would have to inform each enrollee at the beginning of the year of the enrollee’s annual out-of-pocket threshold. 

The section would specify that an EFFS enrollee could only elect 

to receive drug coverage through the plan. 

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161

ment in at least two qualifying plan options, at least one of which 

is a PDP, in their area of residence. The requirement would not be 

satisfied if only one PDP or MA–EFFS sponsor offers all the qualifying plans in the area. If necessary to ensure such access, the 

MBA Administrator would be authorized to provide partial underwriting of risk for a PDP sponsor to expand its service area under 

an existing prescription drug plan to adjoining or additional areas, 

or to establish such a plan, including offering such plan on a regional or nationwide basis. The assistance would be available only 

so long as, and to the extent necessary, to assure the guaranteed 

access. However, the MBA Administrator could never provide for 

the full underwriting of financial risk for any PDP sponsor. Additionally, the MBA Administrator would be directed to seek to maximize the assumption of financial risk by PDP sponsors and entities 

offering MA–EFFS plans. The MBA Administrator would be required to report to Congress annually on the exercise of this authority and recommendations to minimize the exercise of such authority. 

New Section 1860D–6. Submission of Bids 

The new Section 1860D–6 would require each PDP sponsor to 

submit to the MBA Administrator specified information in the 

same manner MA organizations submit information. The submitted 

information would be the qualified drug coverage to be provided, 

the actuarial value of the coverage, and details of the bid and coverage premium. The PDP sponsor would include: (1) actuarial certification of the bid and premium, (2) the portion of the bid and 

premium attributable to benefits in excess of the standard coverage, (3) the reduction in the premium resulting from reinsurance 

subsidies, (4) the reduction in the bid resulting from direct and reinsurance subsidy payments, and (5) such other information required by the MBA Administrator. 

The MBA Administrator would review the submitted information 

for purposes of conducting negotiations with the plan. The MBA 

Administrator would approve the premium only if it accurately reflected the actuarial value of the benefits and the 73 percent average subsidy provided for under the new Section 1860D–8. The MBA 

Administrator would apply actuarial principles to approval of a 

premium in a manner similar to that used for establishing the 

monthly Part B premium. These requirements would not apply to 

MA plans. 

The bid and premium for a PDP could not vary among individuals enrolled in the plan in the same service area, provided they 

were not subject to late enrollment penalties. A PDP sponsor would 

permit each enrollee to have their premiums withheld from their 

Social Security checks in the same manner as is currently done for 

Part B premiums and transferred to the plan in which they are enrolled. Beneficiaries could also make payment of the premium 

through an electronic funds transfer mechanism. The amount 

would be credited to the Medicare Prescription Drug Trust Fund. 

Reductions in Part B premiums attributable to enrollment in MA 

plans could be used to reduce the premium otherwise applicable. 

Under certain conditions, PDP or MA–EFFS sponsors in an area 

would be required to accept, for an individual eligible for a low-income premium subsidy, the reference premium amount (premium 

162

for standard coverage) as payment in full for the premium for 

qualified prescription coverage. This requirement would apply if 

there was no standard coverage available in the area. 

New Section 1860D–7. Premium and Cost-Sharing Subsidies 

for Low-Income Individuals 

The new Section 1860D–7 would provide subsidies for low-income 

individuals. Low-income persons would receive a premium subsidy 

(based on the value of standard coverage). Individuals with incomes 

below 135 percent of poverty (and assets below $4,000) would have 

a subsidy equal to 100 percent of the value of standard drug coverage provided under the plan. For individuals between 135 percent and 150 percent of poverty, there would be a sliding scale premium subsidy ranging from 100 percent of such value at 135 percent of poverty to zero percent of such value at 150 percent of poverty. The asset test for this part is twice the asset test used for determining Supplemental Security Income (SSI) eligibility, indexed 

to inflation. (Note: the asset test has not previously been indexed.) 

Not all resources are counted. Excluded resources include: a home 

(with no limit on its value) if the individual lives in it; household 

goods and personal effects up to $2,000; one car used to provide 

necessary transportation regardless of value or if not used to provide transportation, excluded up to $4,500 in value; the value of a 

burial space; other property essential for self support of the individual; life insurance up to $1,500; the value of a trust, but trusts 

must meet very specific criteria; and other exclusions. Sponsors 

and entities could not charge individuals receiving cost-sharing 

subsidies more than five dollars per prescription. Sponsors and entities could reduce the cost-sharing to zero, which would otherwise 

be applicable for generic drugs. 

State Medicaid programs or the Social Security Administration 

(SSA) would determine whether an individual would be eligible for 

a low-income subsidy, as well as the amount of the subsidy. SSA 

would be appropriated the necessary funds. The Congressional 

Budget Office (CBO) estimates that 152,000 seniors who would otherwise not enroll in the low-income subsidy program would participate since the enrollment process through SSA avoids the stigma 

of signing up at a welfare office. Individuals not in the 50 States 

or the District of Columbia could not be subsidy eligible individuals 

but could be eligible for financial assistance with drug costs under 

new Section 1935(e) added by Section 103. 

Whether offered by a PDP or MA–EFFS sponsor, the premium 

subsidy amount would be defined as the benchmark premium 

amount for the qualified prescription drug coverage chosen by the 

beneficiary. The benchmark premium amount for a plan means the 

premium amount for enrollment under the plan (without regard to 

any subsidies or late enrollment penalties) for standard coverage 

(or alternative coverage if the actuarial value is equivalent). If a 

plan provides alternative coverage with a higher actuarial value 

than that for standard coverage, the benchmark amount would 

bear the same ratio to the total premium as the actuarial value of 

standard coverage was to the actuarial value of alternative coverage. 

The MBA Administrator would provide a process whereby the 

PDP or MA–EFFS sponsor would notify an individual that he or 

163

she is eligible for a subsidy as well as the amount of the subsidy. 

The sponsor would reduce the individual’s premium or cost-sharing 

otherwise imposed by the amount of the subsidy. The MBA Administrator would periodically, and on a timely basis, reimburse the 

sponsor or entity for the amount of such reductions. 

Part D benefits would be primary to any coverage available 

under Medicaid. The MBA Administrator would be required to develop and implement a plan for the coordination of Part D benefits 

and Medicaid benefits. Particular attention would be given to coordination of payments and preventing fraud and abuse. The MBA 

Administrator would be required to involve the Secretary, the 

States, the data processing industry, pharmacists, pharmaceutical 

manufacturers, and other experts in the development and administration of the plan.

New Section 1860D–8. Subsidies for All Medicare Beneficiaries for Qualified Prescription Drug Coverage 

New Section 1860D–8 would provide for subsidy payments to 

qualifying entities. The payments would reduce premiums for all 

enrolled beneficiaries consistent with an overall subsidy level of 73 

percent, reduce adverse selection among plans, and promote the 

participation of PDP sponsors. Such payments would be made as 

direct subsidies and through reinsurance. The section would constitute budget authority in advance of appropriations and represent 

the obligation of the MBA Administrator to provide for subsidy 

payments specified under the section. 

Direct subsidies would be made for individuals enrolled in a PDP 

or MA–EFFS plan, equal to 43 percent of the national weighted average monthly bid amount. Each year, the MBA Administrator 

would compute a national average monthly bid amount equal to the 

average of the benchmark bid amounts for each drug plan (not including those offered by private plans) adjusted to add back in the 

value of reinsurance subsidies. The benchmark bid amount would 

be defined as the portion of the bid attributable to standard coverage or actuarial equivalent coverage. The bid amount would be 

a weighted average with the weight for each plan equal to the average number of beneficiaries enrolled in the plan for the previous 

year. (The MBA Administrator would establish a procedure for determining the weighted average for 2005). 

Reinsurance payments would be made for specified costs incurred 

in providing prescription drug coverage for individuals enrolled in 

either a PDP or MA–EFFS plan. The MBA Administrator would 

provide for reinsurance payments to PDP sponsors, and entities offering MA or EFFS plans. Reinsurance payments would be provided for 30 percent of an individual’s allowable drug costs over the 

initial reinsurance threshold ($1,000 in 2006) but not over the initial coverage limit ($2,000 in 2006). Reinsurance of 80 percent 

would also be provided for allowable costs over the out-of-pocket 

threshold ($3,500 in 2006). These reinsurance payments would provide additional assistance to those plans that enroll beneficiaries 

who have multiple or very expensive prescription drug regimens. In 

the aggregate, reinsurance payments would equal 30 percent of 

total payments made by qualifying entities for standard coverage. 

For purposes of calculating reinsurance payments, allowable 

costs would be defined as the portion of gross covered prescription 

164

drug costs that were actually paid by the plan, but in no case more 

than the part of such costs that would have been paid by the plan 

if the drug coverage under the plan were standard coverage. Gross 

covered drug costs would be defined as costs (including administrative costs) incurred under the plan for covered prescription drugs 

dispensed during the year, including costs related to the deductible, 

whether paid by the enrollee or the plan, regardless of whether 

coverage under the plan exceeded standard coverage and regardless of when the payment for the drugs was made. 

The MBA Administrator would be required to estimate the total 

reinsurance subsidy payments that would be made during the year 

(including those made to qualified retiree plans) and total benefit 

payments to be made by qualifying entities for standard coverage 

during the year. The MBA Administrator would proportionately adjust payments such that total subsidy payments during the year 

were equal to 30 percent of total payments made by qualifying 

plans for standard coverage during the year. The MBA Administrator could adjust direct subsidy payments in order to avoid risk 

selection. The MBA Administrator would determine the payment 

method and could use an interim payment system based on estimates. Payments would be made from the Medicare Prescription 

Drug Trust Fund. 

Special subsidy payments would be made to a qualified retiree 

prescription drug plan. A qualified plan would be defined as employment-based retiree health coverage (including coverage offered 

pursuant to one or more collective bargaining agreements) meeting 

certain requirements. The MBA Administrator would approve coverage with at least the same actuarial value as standard coverage. 

The sponsor (and the plan) would be required to maintain and provide access to records needed to ensure the adequacy of coverage 

and the accuracy of payments made. Further, the sponsor would be 

required to provide certifications of coverage. Payment could not be 

made for an individual unless the individual was covered under the 

retiree plan and entitled to enroll under a PDP or MA–EFFS plan 

but elected not to. Subsidy payments would equal 28 percent of allowable costs between $250 and $5,000. (The dollar amounts would 

be adjusted annually by the percentage increase in Medicare per 

capita prescription drug costs.) 

About one-third of Medicare beneficiaries receive retiree coverage 

from their former employers. While most of these people are satisfied with their coverage, employers are under increasing pressure 

to drop or reduce prescription drug coverage. This subsidy provides 

employers and union plans with maximum flexibility, encouraging 

them to maintain or expand their retiree plans. Thus, Medicare 

would reap significant savings from subsidizing employer plans at 

two-thirds of the cost of other Medicare prescription drug plans. 

New Section 1860D–9. Medicare Prescription Drug Trust 

Fund 

New Section 1860D–9 would create a Medicare Prescription Drug 

Trust Fund. Requirements applicable to the Part B trust fund 

would apply in the same manner to the Drug Trust Fund as they 

apply to the Part B Trust Fund. The Managing Trustee would pay 

from the account, from time to time, low-income subsidy payments, 

subsidy payments, and payments for administrative expenses. The 

165

Managing Trustee would transfer, from time to time, to the Medicaid account amounts attributable to allowable increases in administrative costs associated with identifying and qualifying beneficiaries eligible for low-income subsidies. Amounts deposited into 

the Trust Fund would include the federal amount which would otherwise be payable by Medicaid except for the fact that Medicaid becomes the secondary payer of drug benefits for the dual-eligibles. 

The provision would authorize appropriations to the Trust Fund an 

amount equal to the amount of payments from the Trust Fund reduced by the amount transferred to the Trust Fund. 

The provision would specify that any provision of law relating to 

the solvency of the Trust Fund would take into account the 

amounts received by, or payable from, the Trust Fund. 

EFFECTIVE DATE

Upon enactment.

New Section 1860D–10. Definitions; Treatment of References 

to Provisions in Part C 

New section 1860D–10 would include definitions of terms and 

specify how cross-references to Part C would be applied. It would 

further provide that any reduction or waiver of cost-sharing would 

not be in violation of kickback and similar prohibitions. The section 

would further require the Secretary to submit a report to Congress 

within 6 months of enactment that makes recommendations regarding providing benefits under Part D. 

Also within six months of enactment, the Secretary would be required to review the current standards of practice for pharmacy 

services provided to patients in nursing facilities. Specifically, the 

Secretary would assess: (1) the current standards of practice, clinical services, and other service requirements generally utilized for 

such pharmacy services, (2) evaluate the impact of those standards 

with respect to patient safety, reduction of medication errors, and 

quality of care, and (3) recommend necessary actions. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Prescription drugs are just as important to modern health care 

as hospitals and physician services were when Medicare was enacted in nearly 40 years ago. Prescription drugs are more often 

than not, the health care solution of choice. Most often, they prevent, treat or manage diseases more effectively and less invasively 

than hospitals and nursing homes. The typical senior now takes 

more than 20 prescriptions a year to improve their health or manage their diseases. While seniors are taking more drugs than any 

other demographic group, they are often paying the highest prices 

because more than one-third of seniors have no prescription drug 

coverage. Similarly, low-income beneficiaries must often make unacceptable choices between life-savings medicines and other essentials. 

The addition of a prescription drug benefit to Medicare, while 

providing seniors additional choices in how they receive their 

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health services, is a critical modernization of the program. In designing how these benefits are delivered, the Committee believes 

competition among plans will lead to the most efficient allocation 

of resources and will create opportunities to increase the availability of certain drugs, to reduce the cost of drugs, and the cost 

of the program to taxpayers. 

Importantly, guaranteeing issuance of policies, providing uniform 

plan premiums, ensuring two plans in each area and providing a 

worst case fall back ensure beneficiaries have the coverage to 

which they are entitled. Important new beneficiary protections, 

such as allowing any willing pharmacy to participate, ensuring convenient access to bricks and mortar pharmacies, creating a level 

playing field for mail order and retail pharmacy, and prohibiting 

plans from pushing insurance risk onto pharmacists ensure seniors 

can get the drugs at the pharmacy of their choice. Establishing new 

appeal rights for coverage denials or tiered cost sharing problems 

helps beneficiaries access the drugs most appropriate to their medical condition. 

In addition, by providing new tools to improve health, such as 

electronic prescribing, medication therapy management, and utilization review, the provision would greatly improve the quality of 

services provided to beneficiaries. 

In combination, these provisions will provide important new benefits where Medicare is lacking, create new choices for seniors, and 

create new protections to achieve the goals of reduced costs and improved health. 

Section 102. Offering of Qualified Prescription Drug Coverage 

Under the Medicare Advantage and Enhanced Fee-For-Service 

Program 

CURRENT LAW

Under current law, Medicare+Choice plans may elect to offer prescription drug coverage under Part C. The extent of these benefits 

varies and is not subject to any explicit standardization requirements. However, as with all Medicare+Choice benefit specifics, the 

financing and design of such benefits must meet the approval of 

the Secretary under the adjusted community rate (ACR) approval 

process. Generally, plans offering drugs must either finance such 

benefits from the differences between the applicable county payment rate and their costs in providing Medicare’s basic benefits, or 

by assessing beneficiaries who enroll in the plan supplemental premiums. 

EXPLANATION OF PROVISION

The provision would specify that, beginning January 1, 2006, a 

MA organization could not offer a coordinated care MA plan unless 

either that plan or another plan offered by the organization in the 

area included qualified drug coverage. It could not offer drug coverage (other than that already required under Medicare) unless the 

coverage was at least qualified prescription drug coverage. An individual not electing qualified prescription drug coverage under Part 

D would be treated as ineligible to enroll in a MA plan offering 

such coverage. 

167

The organization would be required to meet beneficiary protections outlined in the new Section 1860D–3, including requirements 

relating to information dissemination and grievance and appeals. 

The organization would also be required to submit the same information required of PDP sponsors when submitting a bid. The MBA 

Administrator could waive such requirements to the extent the 

MBA Administrator determined they were duplicative of requirements otherwise applicable to the organization or plan. MA organizations providing qualified drug coverage would receive low-income 

subsidy payments, and direct and reinsurance subsidies. A single 

premium would be established for drug and non-drug coverage. 

The same requirements would be applicable to an EFFS organization.

EFFECTIVE DATE

Applies to coverage provided on or after January 1, 2006 

REASON FOR CHANGE

Ensures MA–EFFS plans offer qualified prescription drug coverage if they offer coverage, consistent with Section 101. 

Section 103. Medicaid Amendments 

CURRENT LAW

Some low-income aged and disabled Medicare beneficiaries are 

also eligible for full or partial coverage under Medicaid. Within 

broad federal guidelines, each state sets its own eligibility criteria, 

including income eligibility standards. Persons meeting the state 

standards are entitled to full coverage under Medicaid. Persons entitled to full Medicaid protection generally have all of their health 

care expenses met by a combination of Medicare and Medicaid. For 

these ‘‘dual-eligibles’’ Medicare pays first for services both programs cover. Medicaid picks up Medicare cost-sharing charges and 

provides protection against the costs of services generally not covered by Medicare, including prescription drugs. State Medicaid programs have the option to include prescription drugs in their Medicaid benefit packages. All states include drugs for at least some of 

their Medicaid beneficiaries and many offer it to all program recipients entitled to full Medicaid benefits. 

Federal law specifies several population groups that are entitled 

to more limited Medicaid protection. These are qualified Medicare 

beneficiaries (QMBs), specified low-income Medicare beneficiaries 

(SLMBs), and certain qualifying individuals. QMBs are aged or disabled persons with incomes at or below the federal poverty level 

and assets below $4,000 for an individual and $6,000 for a couple. 

QMBs are entitled to have their Medicare cost-sharing charges, including the Part B premium, paid by the federal-state Medicaid 

program. SLMBs are persons who meet the QMB criteria, except 

that their income is over the QMB limit; the SLMB limit is 120 

percent of the federal poverty level. Medicaid protection for SLMBs 

is limited to payment of the Medicare Part B premium. QMBs and 

SLMBs are not entitled to Medicaid’s prescription drug benefit unless they are also entitled to full Medicaid coverage under their 

state’s Medicaid program. 

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Qualifying individuals (QIs) are never entitled to Medicaid drug 

coverage (because, by definition, they are not eligible for full Medicaid benefits). QI–1s are persons who meet the QMB criteria, except that their income is between 120 percent and 135 percent of 

poverty. Medicaid protection for QI–1s is limited to payment of the 

monthly Medicare Part B premium. QI–2s are persons who meet 

the QMB criteria, except that their income is between 135 percent 

and 175 percent of poverty. Medicaid protection for QI–2s is limited 

to payment of that portion of the Part B premium attributable to 

the gradual transfer of some home health visits from Medicare Part 

A to Medicare Part B. Expenditures under the QI–1 and QI–2 programs are paid for 100 percent by the Federal government (from 

the Part B Trust Fund) up to the state’s allocation level. A state 

is only required to cover the number of persons which would bring 

its spending on these population groups in a year up to its allocation level. Any expenditure beyond that level would be paid by the 

state. Assistance under the QI–1 and QI–2 programs is available 

for the period January 1, 1998 to December 31, 2002. 

EXPLANATION OF PROVISION

Section 103 would add a new Section 1935 to the Social Security 

Act entitled ‘‘Special Provisions Relating to Medicare Prescription 

Drug Benefit.’’ The provision requires states, as a condition of receiving Federal Medicaid assistance, to make eligibility determinations for low-income premium and cost-sharing subsidies, inform 

the MBA Administrator of cases where eligibility has been established, and otherwise provide the MBA Administrator with information that may be needed to carry out Part D. In 2005, the federal matching rate would be increased to 100 percent over 15 

years. Beginning in 2020 the, the federal matching rate would be 

100 percent. The states would be required to provide the MBA Administrator with the appropriate information needed to properly allocate administrative expenditures that could be made for similar 

eligibility determinations. 

The provision would provide for the Federal phase-in of the costs 

of premiums and cost-sharing subsidies for dual-eligibles (i.e. persons eligible for Medicare and full Medicaid benefits, including 

drugs). Over the 2006–2020 period, the Federal matching rate for 

these costs would be increased to cover 100 percent of what would 

otherwise be state costs. States would be required to maintain 

Medicaid benefits as a wrap-around to Medicare benefits for dualeligibles; states could require that these persons elect Part D drug 

coverage. 

Residents of territories would not be eligible for regular low-income subsidies. However, territories would be able to get additional 

Medicaid funds, beginning at $25 million in 2006 and increasing in 

subsequent years by the annual percentage increase in prescription 

drug costs for Medicare beneficiaries. In order to obtain these 

funds, territories would be required to formulate a plan on how 

they would dedicate the funds to assist low-income Medicare beneficiaries in obtaining covered outpatient prescription drugs. The 

MBA Administrator would be required to report to Congress on the 

application of the law in the territories. 

169

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Seniors should be treated as seniors first and low-income second. 

The patchwork of state Medicaid programs that can vary from 

state to state is confusing and demoralizing for many seniors. By 

federalizing the drug costs of the dual eligibles, we ensure beneficiaries have access to a uniform, Medicare benefit.

Section 104. Medigap Transition 

CURRENT LAW

Most beneficiaries have some health insurance coverage in addition to basic Medicare benefits. Some individuals obtain private 

supplemental coverage through an individually purchased policy, 

commonly referred to as a ‘‘Medigap’’ policy. Beneficiaries with 

Medigap insurance typically have coverage for Medicare’s 

deductibles and coinsurance; they may also have coverage for some 

items and services not covered by Medicare. Individuals generally 

select from one of ten standardized plans, though not all ten plans 

are offered in all states. The plans are known as Plans A through 

plan J. Plan A covers a basic package of benefits. Each of the other 

nine plans includes the basic benefits plus a different combination 

of additional benefits. Plan J is the most comprehensive. Plans H, 

I, and J offer some drug coverage. 

The law provided for the development by the National Association of Insurance Commissioners (NAIC) of standardized benefit 

packages. It also provides for modifications of such packages when 

Medicare benefit changes are enacted. 

All insurers offering Medigap policies are required to offer open 

enrollment for 6 months from the date a person first enrolls in 

Medicare Part B (generally when the enrollee turns 65). The law 

also guarantees issuance of specified Medigap policies for certain 

persons whose previous supplemental coverage was terminated. 

Guaranteed issue also applies to certain persons who elect to try 

out a managed care option under the Medicare+Choice plan program. 

EXPLANATION OF PROVISION

The provision would prohibit, effective January 1, 2006, the 

issuance of new Medigap policies with prescription drug coverage. 

The prohibition would not apply to policies replacing another policy 

with drug coverage. Further, it would not apply to policies meeting 

new standards, or pre-standards, as outlined below. Beneficiaries 

could keep their existing H, I, and J plans. 

The provision would guarantee issuance of a substitute Medigap 

policy for persons, enrolling in Part D, who at the time of such enrollment were enrolled in and terminated enrollment in a Medigap 

H, I, or J plan. The guaranteed enrollment would be for any of the 

Plans A through Plan G. The guarantee would apply for enrollments occurring in the new Medigap plan within 63 days of termination of enrollment in a Medigap H, I, or J plan. The insurer 

could not impose an exclusion based on a pre-existing condition for 

170

such individuals. Further, the insurer would be prohibited from 

discriminating in the pricing of such policy on the basis of the individual’s health status, claims experience, receipt of health care or 

medical condition. 

The provision would provide for the development by the NAIC of 

two new standardized Medigap plans and would outline the standards for these policies. The first new policy would have the following benefits (notwithstanding other provisions of law relating to 

core benefits): (1) coverage of 50 percent of the cost-sharing otherwise applicable (except coverage of 100 percent cost-sharing applicable for preventive benefits), (2) no coverage of the Part B deductible, (3) coverage of all hospital coinsurance for long stays (as in 

current core package), and (4) a limitation on annual out-of-pocket 

costs for Part A and Part B beneficiaries of $4,000 in 2005 (increased in future years by an appropriate inflation adjustment as 

specified by the Secretary). The second new policy would have the 

same benefit structure as the first new policy, except that: (1) coverage would be provided for 75 percent, rather than 50 percent, of 

cost-sharing otherwise applicable, and (2) the limitation on out-ofpocket costs would be $2,000, rather than $4,000. Both policies 

could provide for coverage of Part D cost-sharing; however, neither 

policy could cover the Part D deductible. 

The NAIC would make recommendations to Congress on modernizing the Medigap market. 

It is the Committee’s intent that the offering of these new 

Medigap policies would be voluntary on the part of insurers, as is 

the case for all other Medigap standardized policies beyond plan 

type A, basic Medigap coverage. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The two new Medigap policies would provide additional cost 

sharing for beneficiaries without first dollar coverage. This ensures 

beneficiaries have additional access to cover cost sharing for the 

new prescription drug benefit if they so choose. 

Section 105. Medicare Prescription Drug Discount Card Endorsement Program 

CURRENT LAW

On July 12, 2001, the President announced a new national drug 

discount card program for Medicare beneficiaries. Under this program, CMS would endorse drug card programs that meet certain 

requirements. This program was intended to be an interim step 

until a legislative reform package, including both a drug benefit 

and other Medicare reforms, is enacted. Implementation of the 

drug discount card program was suspended by court action. 

EXPLANATION OF PROVISION

The provision would require the Secretary or Administrator to 

establish a program to: (1) endorse prescription drug discount card 

programs that meet certain requirements, and (2) make available 

171

information on such programs to beneficiaries. The Secretary would 

begin operating the program within 90 days of enactment. The Secretary would provide for an appropriate transition and discontinuation at the time a drug benefit first becomes available under Part 

D.

Programs endorsed by the Secretary must meet certain requirements. Programs shall pass negotiated discounts on drugs to enrollees. Programs could not be limited to mail order drugs and must 

provide support services to educate patients and prevent adverse 

events. Programs must also provide, through the Internet or otherwise, information to enrollees that the Secretary deems necessary 

for beneficiaries to make informed choices among all endorsed programs. This information would include information on enrollment 

fees, prices charged to beneficiaries, and services offered under the 

program. Program sponsors would be required to demonstrate experience and expertise in operating such a program. The sponsor 

would also be required to have in place adequate procedures for 

quality assurance. The annual enrollment fee could not exceed $30 

(which could be paid in whole or in part by states). Further, the 

program would be required to meet additional requirements identified by the Secretary to protect and promote the interest of Medicare beneficiaries, including requirements that assure that beneficiaries were not charged more than the lower of the negotiated retail price or the usual and customary price. 

The Secretary would provide for the dissemination of information 

that compared the costs and benefits of available programs. This 

activity would be coordinated with the dissemination of educational 

information on MA plans. The Secretary would also oversee the endorsed programs’ compliance with the requirements of this section, 

including verification of discounts, and services provided, the 

amount of dispensing fees, and audits. The Secretary would be required to provide, through the use of the Medicare toll-free number, for the receipt and response to inquiries and complaints. The 

Secretary would be required to revoke the endorsement of any program that no longer meets requirements or engages in false or misleading marketing practices. The provision would specify that a 

beneficiary could only be enrolled in one endorsed program at a 

time. A beneficiary could change enrollment after he or she has 

been enrolled in a plan for a minimum period specified by the Secretary. 

The provision creates a two-year, temporary, transitional low-income assistance program. Medicare beneficiaries with incomes 

below 150 percent of poverty would be eligible for assistance in 

2004 and 2005. The program provides additional funds in conjunction with the discount card to help low-income seniors purchase 

prescription drugs prior to the implementation of the drug benefit 

in 2006. The bill provides for $2 billion in 2004 and $3 billion in 

2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Immediate help for those without prescription drug coverage will 

provide a transition into the new Part D drug benefit while ensurVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00171 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
172

ing those who cannot afford prescription drugs receive assistance. 

In addition, drug discount cards can be up and running within 90 

days, which will provide savings to seniors at retail between 10 and 

20 percent, according to HHS. Discounts must be provided by both 

manufacturers and pharmacies and must be passed on to beneficiaries. 

Section 106. Disclosure of Return Information for Purpose of Carrying Out Medicare Catastrophic Prescription Drug Program 

8URRENT LAW

Current law authorizes, under specified circumstances, the Secretary of the Treasury to disclose returns and return information 

for purposes other than tax administration. 

EXPLANATION OF PROVISION

The provision would permit the Secretary of the Treasury, upon 

written request from the Secretary of the Department of Health 

and Human Services (HHS), to disclose to officers and employees 

of HHS specific information with respect to a specified taxpayer for 

a specific tax year. Information that could be disclosed would be 

taxpayer identification information and adjusted gross income, or, 

simply the income threshold limit specified under the new Part D 

($200,000 in 2006). A specified taxpayer would be either: (1) an individual who had adjusted gross income for the year in question in 

excess of the income threshold specified in the new Part D ($60,000 

per individual), or (2) an individual who elected to use more recent 

income information as permitted under Part D. Individuals filing 

joint returns would be treated separately, each considered to have 

an adjusted gross income equal to one-half of the total. 

Officers and employees of HHS would be authorized to use tax 

return information only for administering the prescription drug 

benefit. HHS could disclose a beneficiary’s determined annual outof-pocket threshold to a beneficiary’s PDP sponsor. The sponsor 

could use such information only for the purposes of administering 

the benefit. 

EFFECTIVE DATE

Upon enactment. 

Section 107. State Pharmaceutical Assistance Transition Commission 

CURRENT LAW

A number of states currently have programs to provide low-income persons, not qualifying for Medicaid, with financial assistance 

in meeting their drug costs. The state programs differ substantially 

in both design and coverage. 

EXPLANATION OF PROVISION

The provision would establish a State Pharmaceutical Assistance 

Transition Commission to develop a proposal for dealing with the 

transitional issues facing state programs and participants due to 

implementation of the new Part D prescription drug program. The 

Commission, to be established on the first day of the third month 

173

following enactment, would include: (1) a representative of each 

governor from each state with a program that the Secretary identifies as having a benefit package comparable to or more generous 

than the new Part D, (2) representatives from other states that 

have pharmaceutical assistance programs, as appointed by the Secretary, (3) representatives (not exceeding the total under (1) or (2) 

above) of organizations that represent interests of participants, appointed by the Secretary, (4) representatives of Medicare Advantage organizations; and (5) the Secretary or the Secretary’s designee and other members specified by the Secretary. The Commission would develop the proposal in accordance with specified principles, namely: (1) protection of the interests of program participants in the least disruptive manner, (2) protection of the financial 

and flexibility interests of states so they are not financially worse 

off, and (3) principles of Medicare modernization outlined in Title 

II of the Act. It is the intent of the Committee that Medicare beneficiaries use one prescription drug card for their benefit. The Committee believes presenting beneficiaries with more than one card 

would be confusing and administratively inefficient. 

The Commission would report to the President and Congress by 

January 1, 2005. The report would contain specific proposals including specific legislative or administrative recommendations, if 

any. The Commission would terminate 30 days later. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

States, especially those with comprehensive pharmaceutical assistance programs, would benefit significantly. States would receive 

billions of dollars in assistance under the proposal, with the most 

help going to those states that have already provided pharmaceutical drug assistance to seniors. Since some states have initiated 

pharmaceutical assistance for low-income seniors, these states 

would reap the most savings, as Medicare would become the primary insurer for these beneficiaries. States have several options in 

relation to the new benefit. First, they could design their pharmacy 

programs to ‘‘wrap around’’ the Medicare drug benefit. Second, 

their pharmacy program could subsidize low-income individuals 

with costs between $2,000 and the $3,500 catastrophic benefit. This 

spending would count toward the catastrophic cap. Further, state 

pharmacy assistance programs could use money saved from the 

Medicare drug benefit to extend their assistance to persons with incomes above 150 percent of poverty. Finally, state pharmacy programs could work to encourage low-income individuals to enroll in 

a PDP, thereby creating a seamless transition from the perspective 

of the individual. Their cost-sharing still could not exceed $5 per 

prescription, and they could get the prescription drugs they need 

at a convenient pharmacy. From the beneficiary’s perspective nothing will have changed. 

It is difficult to foresee every issue that may impact states that 

have already provided substantial assistance to seniors. A State 

Pharmaceutical Assistance Transition Commission would be established under the bill. This commission would develop a proposal to 

address the unique transition issues facing these states. 

174

B. TITLE II—MEDICARE ENHANCED FEE-FOR-SERVICE AND

MEDICARE ADVANTAGE PROGRAMS; MEDICARE COMPETITION

Section 200. Medicare Modernization and Revitalization 

CURRENT LAW

Health Maintenance Organizations (HMOs) and other types of 

managed care plans have been allowed to participate in the Medicare program, beginning with private health plan contracts in the 

1970s and the Medicare risk contract program in the 1980s. BBA 

97 replaced the risk contract program with the Medicare+Choice 

(M+C) program. 

EXPLANATION OF PROVISION

This title would establish the Medicare Enhanced Fee-for-Service 

(EFFS) program, under which Medicare beneficiaries would be provided access to a range of EFFS plans that may include preferred 

provider networks. It would establish a Medicare Advantage (MA) 

program to offer improved managed care plans with coordinated 

care. It would also use competitive bidding, in the same style as 

FEHBP for certain areas, beginning in 2010, to promote greater efficiency and responsiveness to Medicare beneficiaries. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This title modernizes and revitalizes private plans under Medicare. BBA 97 altered payments for private plans and expanded the 

types of plans that could be offered under Medicare. Since payment 

rate changes were implemented, enrollment in private plans has 

fallen from 6.2 million beneficiaries in 1998 to 4.6 million beneficiaries in May 2003, and the number of plans has decreased from 

346 risk plans in 1998 to 153 (149 coordinated care plans and 4 

private FFS plans) in May 2003. This disruption has been due, in 

part, to unpredictable and insufficient payments. BBA 97 fundamentally de-linked payments to plans from FFS payment 

growth. 

To increase beneficiary choice, Title II reforms the payment system in 2004. All plans would be paid at a rate at least as high as 

the rate for traditional FFS Medicare, as recommended by the 

Medicare Payment Advisory Commission (MedPAC). After 2004, 

private plans’ capitation rates would grow at the same rate as FFS 

Medicare. To increase beneficiary choice in more rural areas, Title 

II would establish the Enhanced Fee-for-Service (EFFS) program, 

which would encourage private plans to serve Medicare beneficiaries in larger regions, beginning in 2006. Private plans in both 

Medicare Advantage (MA) and EFFS plans would bid competitively 

against a benchmark beginning in 2006.

Once private plans became established, and enrollment in private plans increased, plans in certain areas would enter a FEHBPstyle competitive bidding program, beginning in 2010. Plan bids 

from private plans and rates for traditional FFS Medicare would be 

averaged to create a benchmark for competitive bidding. The competitive program would encourage beneficiaries to enroll in the 

175

most efficient plan, producing savings for both beneficiaries, 

through reduced premiums, and for taxpayers, through relatively 

lower Medicare costs. 

Subtitle A—Medicare Enhanced Fee-for-Service Program 

Section 201. Establishment of Enhanced Fee-for-Service (EFFS) 

Program under Medicare 

CURRENT LAW

Payment. Under current law, Medicare+Choice (M+C) plans are 

paid an administered monthly payment, called the M+C payment 

rate, for each enrollee. The per capita rate for a payment area is 

set at the highest one of three amounts, calculated according to formulas established in statute and updated by law. The three 

amounts are: 

• A minimum payment (or floor) rate, 

• A rate calculated as a blend of an area-specific (local) rate 

and a national rate, or 

• A rate reflecting a minimum increase from the previous 

year’s rate. 

After preliminary M+C payment rates are determined for each 

payment area (typically a county), a budget neutrality adjustment 

is required by law to determine final payment rates. This adjustment is made so that estimated total M+C payments in a given 

year would be equal to the total payments that would be made if 

payments were based solely on area-specific rates. The budget neutrality adjustment may only be applied to the blended rates because rates cannot be reduced below the floor or minimum increase 

amounts. The blend payment is also adjusted to remove the costs 

of direct and indirect graduate medical education. The blend payment amount is based on a weighted average of local and national 

rates for all Medicare beneficiaries. Blend payments have been 

made only once since 1998 (in the year 2000) because of the budget 

neutrality provision. 

Each year, the three payment amounts are updated by formulas 

set in statute. Both the floor and the blend are updated each year 

by a measure of growth in program spending per capita, the national growth percentage. The minimum increase provides an additional two percent over the previous year’s amount. 

Eligibility: Medicare beneficiaries who are entitled to Medicare 

Part A and are enrolled in Part B may receive benefits through traditional FFS or they may enroll in a M+C plan. 

EXPLANATION OF PROVISION

Beginning January 1, 2006 the MBA Administrator would establish an EFFS program to offer EFFS plans to EFFS-eligible individuals in one of not less than 10 regions established by the MBA 

Administrator. Before establishing regions, the MBA Administrator 

must conduct a market survey and analysis to determine how regions should be established. 

The EFFS plans would be required to provide open network 

plans—either Fee-for-Service (FFS) or preferred provider coverage. 

Under FFS coverage, plans would: (1) reimburse hospitals, physicians and other providers at a rate determined by the plan on a 

176

FFS basis, without placing providers at financial risk, (2) not vary 

rates based on utilization related to the provider, and (3) not restrict the selection of providers from among those who are lawfully 

authorized to provide covered services and agree to accept the 

plan’s terms and conditions. Preferred Provider Organization (PPO) 

coverage plans would: (1) require a network of providers who 

agreed to a contractually specified reimbursement for covered benefits with the organization, and (2) provide for reimbursement for all 

covered benefits regardless of whether they were provided within 

the network. 

The EFFS-eligible individuals would be those individuals who 

were entitled to Medicare Part A and enrolled in Part B. EFFS 

plans could only be offered in a region, if the plan was: (1) available to all EFFS beneficiaries in an entire region, (2) complied with 

statutory access requirements, (3) uniformly provided all required 

Parts A and B benefits, and other benefits as may be required, (4) 

included a single deductible for benefits under Parts A and B, and 

a catastrophic limit on out-of-pocket expenses, and (5) provided prescription drug coverage for each enrollee electing Part D drug coverage. The MBA Administrator would not approve an EFFS plan 

if benefits were designed to substantially discourage enrollment by 

certain eligible individuals. 

Each year, beginning in 2006, an EFFS organization would submit a monthly bid amount for each plan in each region, referred 

to as the ‘‘EFFS monthly bid amount’’. The bid could not vary 

among EFFS eligible individuals in the EFFS region involved. The 

EFFS organization would be required to provide the following information: (1) the bid amount for the provision of all required items 

and services, based on average costs for a typical enrollee residing 

in the region and the actuarial basis for determining such amount, 

(2) the proportion of the bid attributed to the provision of statutory 

non-drug benefits (the ‘‘unadjusted EFFS statutory non-drug 

monthly bid amount’’), statutory prescription drug benefits, and 

non-statutory benefits, (3) the actuarial basis for determining these 

proportions, and (4) additional information as the MBA Administrator may require. The MBA Administrator would have the negotiation authority that the Director of the Office of Personnel Management has with regard to FEHBP to negotiate the bid amount 

and could also reject a bid amount or proportion, if it was not supported by the actuarial basis. The MBA Administrator could enter 

into contract for up to three EFFS plans in any region. 

Certain plans, based in part on their monthly bid amount, may 

be able to provide beneficiary savings. The EFFS plan would provide the enrollee a monthly rebate equal to 75 percent of the average per capita savings, if any. (Calculation of average per capita 

savings is discussed below.) The rebate could be in the form of a 

credit towards the EFFS monthly prescription drug premium or the 

EFFS monthly supplemental beneficiary premium, a direct monthly payment, or other means approved by the MBA Administrator. 

The MBA Administrator would determine, at the same time payment rates were announced (beginning in 2006), the average of the 

risk adjustment factors, by region. For plans offered in the previous 

year, the MBA Administrator could compute the average based on 

a previous year’s risk adjustment factors. For plans entering a region, in which no plan was offered in the previous year, the MBA 

177

Administrator would estimate the average, and could use factors 

applied in comparable regions or on a national basis. 

For each EFFS plan, the MBA Administrator would adjust the 

EFFS region-specific non-drug monthly benchmark amount and the 

unadjusted EFFS statutory non-drug monthly bid amount by the 

applicable average risk adjustment factor. The average per capita 

monthly savings would equal the amount by which the risk-adjusted benchmark exceeds the risk-adjusted bid. The EFFS regionspecific non-drug monthly benchmark amount would be an amount 

equal to 1/12 of the average (weighted by the number of EFFS-eligible individuals in each payment area) of the annual capitation 

rate calculated for that area. 

The MBA Administrator would pay plans as follows. For plans 

with bids below the benchmark (for which there were average per 

capita monthly savings), the payment would equal the unadjusted 

EFFS statutory non-drug monthly bid amount, with three adjustments. Payment would be adjusted for demographics factors including age, disability, gender, institutional status, health status, and 

other factors; intra-regional geographic variations; and the amount 

of the monthly rebate for the plan and year. For plans with bids 

at or above the benchmark (for which there were no average per 

capita monthly savings), the payment amount would equal the 

EFFS region-specific non-drug monthly benchmark amount, with 

the demographic, health status and geographic adjustments. Additionally, for an EFFS enrollee who enrolls in Part D and elects 

qualified prescription drug coverage through the plan, the plan 

would receive reimbursement for prescription drugs. This reimbursement would include a direct subsidy payment, a reinsurance 

subsidy payment and reimbursement for premiums and cost-sharing reductions for certain low-income individuals. 

Beneficiary EFFS premiums are defined as follows. In the case 

where a plan provides a rebate, the EFFS monthly basic beneficiary premium would be zero. In the case where a plan does not 

provide a rebate (the plan’s unadjusted EFFS statutory non-drug 

bid is above the EFFS region specific non-drug benchmark), the 

EFFS monthly basic beneficiary premium would be the difference 

between the bid and the benchmark amount. The EFFS monthly 

prescription drug beneficiary premium would be the portion of the 

plan’s total monthly bid that the statutory drug benefit represents. 

The EFFS monthly supplemental beneficiary premium would be 

the portion of the plan’s total monthly bid that is attributable to 

the supplemental non-statutory benefits. 

Most of the statutory requirements concerning payment rules 

(other than the requirements for rates, service areas and MSA payments), organization and financial requirements, the establishment 

of standards, and contracts, would apply to EFFS plans. However, 

unlike current law, EFFS plans would not be permitted to segment 

a region. No Medicare supplemental policy could provide coverage 

of the single deductible or more than 50 percent of the other costsharing imposed under an EFFS plan under Part E. 

EFFECTIVE DATE

On or after January 1, 2006. 

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REASON FOR CHANGE

The EFFS program would encourage the development of regional 

plans, by requiring EFFS plans to serve all beneficiaries throughout the region. Because enrollees in an EFFS plan must have the 

same benefits, cost-sharing obligations, and premiums, EFFS 

would decrease the variation in private plan offerings in the M+C 

program today. EFFS plans would also encourage plans to enter 

rural areas, where few M+C plans currently exist. 

In carrying out these programs, the Committee believes the existing experience of the Medicare Quality Improvement Organizations (QIOs) would be employed to offer assistance to beneficiaries, 

providers and plans operating in Parts C, D and E, particularly as 

it relates to quality improvement. QIOs are currently required to 

offer assistance with clinical improvement under Parts A and B in 

hospitals, physicians’ offices, nursing homes and home health agencies and to all MA organizations under part C. Expanding the 

QIOs’ work to include the new entities and benefits created in this 

legislation will help improve the quality of care for Medicare beneficiaries. 

Subtitle B—Medicare Advantage Program 

CHAPTER 1—IMPLEMENTATION OF PROGRAM 

Section 211. Implementation of Medicare Advantage Program 

CURRENT LAW

Health Maintenance Organizations (HMOs) and other types of 

managed care plans have been allowed to participate in the Medicare program, beginning with private health plan contracts in the 

1970s and the Medicare risk contract program in the 1980s. BBA 

97 replaced the risk contract program with the Medicare+Choice 

(M+C) program. 

EXPLANATION OF PROVISION

This provision would establish the Medicare Advantage (MA) 

program under Part C of Medicare, replacing the Medicare+Choice 

provision. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Medicare Advantage would reform Medicare+Choice to increase 

beneficiary choice. 

Section 212. Medicare Advantage Improvements 

CURRENT LAW

Payment. Under current law, Medicare+Choice (M+C) plans are 

paid an administered monthly payment, called the M+C payment 

rate, for each enrollee. The per capita rate for a payment area is 

set at the highest one of three amounts, calculated according to formulas established in statute and updated by law. The three 

amounts are: 

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• A minimum payment (or floor) rate, • A rate calculated as a blend of an area-specific (local) rate 

and a national rate, or • A rate reflecting a minimum increase from the previous 

year’s rate. 

After preliminary M+C payment rates are determined for each 

payment area (typically a county), a budget neutrality adjustment 

is required by law to determine final payment rates. This adjustment is made so that estimated total M+C payments in a given 

year would be equal to the total payments that would be made if 

payments were based solely on area-specific rates. The budget neutrality adjustment may only be applied to the blended rates because rates cannot be reduced below the floor or minimum increase 

amounts. The blend payment is also adjusted to remove the costs 

of direct and indirect graduate medical education. The blend payment amount is based on a weighted average of local and national 

rates for all Medicare beneficiaries. Blend payments have been 

made only once since 1998 (in the year 2000) because of the budget 

neutrality provision. 

Each year, the three payment amounts are updated by formulas 

set in statute. Both the floor and the blend are updated each year 

by a measure of growth in program spending per capita, the national growth percentage. The minimum increase provides an additional two percent over the previous year’s amount. 

Eligibility. Medicare beneficiaries who are entitled to Medicare 

Part A and are enrolled in Part B may receive benefits through the 

traditional FFS program or they may enroll in a M+C plan. 

EXPLANATION OF PROVISION

This provision would change payments for MA plans. A fourth 

payment option would be added: 100 percent of the adjusted FFS 

rate for the area (the Adjusted Average Per Capita Cost (AAPCC) 

for the year, for the MA payment area for services covered under 

Parts A and B for individuals entitled to benefits under Part A, enrolled under Part B, and who are not enrolled in a MA plan). The 

AAPCC would be adjusted to include the additional payments that 

would have been made if Medicare beneficiaries had not received 

services from facilities of the Department of Veterans Affairs (VA) 

and the Department of Defense (DoD), and would include payments 

for indirect medical education costs. The minimum payment (floor) 

would be increased as under current law. The minimum percentage 

increase amount would also be changed. For 2004 and beyond, the 

minimum percent increase would be the greater of: (1) a two percent increase over the previous year, as under current law, or (2) 

the annual MA capitation rate for the area for the previous year, 

increased by the national per capita growth percentage increase. 

There would be no adjustment to the national growth percentage 

for prior years’ errors before 2004, for purposes of calculating the 

minimum percentage increase in 2004. For 2005, the annual rate 

would equal the previous year’s rate increased by the greater of 

two percent or the national per capita growth percentage. 

No later than 18 months after enactment of this legislation, the 

Medicare Payment Advisory Commission would report to Congress 

providing an assessment of the method used for determining the 

adjusted average per capita cost (AAPCC). The report would examVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00179 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ine: (1) the variation in costs between different areas, including differences in input prices, utilization and practice patterns, (2) the 

appropriate geographic area for payment, and (3) the accuracy of 

the risk adjustment methods in reflecting differences in the cost of 

providing care. 

No later than July 1, 2006, the MBA Administrator would submit a report to Congress that describes the impact of additional financing provided under this Act and other Acts, including the Balanced Budget Refinement Act of 1999 (BBRA) and the Medicare, 

Medicaid, and SCHIP Benefits Improvement and Protection Act of 

2000 (BIPA) on the availability of MA plans in different areas and 

its impact on lowering premiums and increasing benefits under 

such plans. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In some M+C payment areas, the M+C payment rate is lower 

than the costs of providing FFS care to enrollees in traditional 

Medicare. Many private plans have seen their Medicare payment 

rates rise much less rapidly than the costs of FFS Medicare, as 

they have been held to increases of two percent annually every 

year since 1998, except for 2001 when a three percent increase was 

paid due to the BIPA. Health costs in general are running much 

higher than the two percent payment increases that most plans are 

receiving in the areas where most of the beneficiaries are enrolled 

in Medicare+Choice. Plans find it difficult—if not impossible—to 

contract with providers if FFS Medicare can reimburse providers at 

higher rates than private plans may offer, given their Medicare 

payments. If paid less than FFS Medicare, private plans may be 

forced to increase enrollee premiums or cost-sharing, or decrease 

supplemental benefits, such as prescription drug coverage. Since 

1998, the number of plans participating in M+C has declined from 

346 to 153. To level the playing field between traditional Medicare 

and private plans, under this provision all private plans would be 

paid at a minimum of the FFS rate. In addition, private plan rates 

would increase at the same rate as growth in FFS Medicare. The 

goal is to increase beneficiary choice, by increasing private plan 

participation in Medicare.

CHAPTER 2—IMPLEMENTATION OF COMPETITION 

PROGRAM 

Section 221. Competition Program Beginning in 2006

CURRENT LAW

See Section 200. Medicare Modernization and Revitalization and 

Section 201. Establishment of Enhanced Fee-For-Service (EFFS) 

Program under Medicare. 

EXPLANATION OF PROVISION

Each year, beginning in 2006, an MA organization would be required to provide the following information: (1) the bid amount for 

the provision of all required items and services, based on average 

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costs for a typical enrollee residing in the area and the actuarial 

basis for determining such amount, (2) the proportion of the bid attributed to the provision of statutory non-drug benefits (the 

‘‘unadjusted MA statutory non-drug monthly bid amount’’), statutory prescription drug benefits, and non-statutory benefits, (3) the 

actuarial basis for determining these proportions, and (4) additional information as the MBA Administrator may require. The 

MBA Administrator would have the negotiation authority that the 

Director of the Office of Personnel Management has with regard to 

the FEHBP to negotiate the bid amount and could also reject a bid 

amount or proportion, if it was not supported by the actuarial 

basis. Private fee-for-service (PFFS) plans would be exempt from 

this negotiation and rejection. 

Certain plans, based in part on their monthly bid amount, may 

be able to provide beneficiary savings. The MA plan would provide 

the enrollee a monthly rebate equal to 75 percent of the average 

per capita savings, if any, as discussed below. The rebate could be 

in the form of a credit towards the MA monthly supplemental beneficiary premium or the MA monthly prescription drug premium, a 

direct monthly payment, or other means approved by the MBA Administrator. 

The MBA Administrator would determine, at the same time payment rates were announced (beginning in 2006), the average of the 

risk adjustment factors, by state, or on a basis other than the state. 

For plans offered in the previous year, the MBA Administrator 

could compute the average based on the previous year’s risk adjustment factors. For plans entering a state, in which no plan was offered in the previous year, the MBA Administrator would estimate 

the average, and could use factors applied in comparable states or 

on a national basis. 

For each MA plan, the MBA Administrator would adjust the FFS 

area-specific non-drug monthly benchmark amount and the 

unadjusted MA statutory non-drug monthly bid amount by the applicable average risk adjustment factor. The average per capita 

monthly savings would equal the amount by which the risk-adjusted benchmark exceeds the risk-adjusted bid. The FFS area-specific non-drug monthly benchmark amount would be an amount 

equal to 1/12 of the annual MA capitation rate calculated for that 

area. 

Beginning in 2006, the MBA Administrator would pay plans as 

follows. For plans below the benchmark (for which there were average per capita monthly savings), the payment would equal the 

unadjusted MA statutory non-drug monthly bid amount, with two 

adjustments. Payment would be adjusted for demographic factors 

including age, disability, gender, health status, and other factors, 

and the amount of the monthly rebate for the plan and year. For 

plans with bids at or above the benchmark (for which there were 

no average per capita monthly savings), the payment amount 

would equal the FFS area-specific non-drug monthly benchmark 

amount, with the demographic and health status adjustments. Additionally, for an MA enrollee who enrolls in Part D and elects 

qualified prescription drug coverage through the plan, the plan 

would receive reimbursement for prescription drugs. This reimbursement would include a direct subsidy payment, a reinsurance 

182

subsidy payment and reimbursement for premiums and cost-sharing reductions for certain low-income individuals. 

The MBA Administrator would not approve a plan if benefits 

were designed to discourage enrollment by certain MA-eligible individuals. The MA monthly bid amount, the MA monthly basic and 

supplemental beneficiary premium and the MA monthly MSA premium, would not vary among individuals enrolled in the plan. 

EFFECTIVE DATE

On or after January 1, 2006. 

REASON FOR CHANGE

Competitive bidding against a benchmark would encourage plans 

to become more efficient, in order to lower their bids and gain market share. Beneficiaries, because they would benefit from enrolling 

in plans with lower bids by receiving 75 percent of the difference 

between the plan’s bid and the benchmark, would be encouraged to 

enroll in more efficient plans. Plan efficiency and beneficiary enrollment in more efficient plans would reduce the costs of Medicare, 

easing the threat to insolvency of the Medicare Part A Trust Fund 

and easing the taxpayers’ burden. Indeed, the Congressional Budget Office has estimated that the increased benchmarks are fully 

paid for through the 25 percent savings to the government. The 

government would share in the savings as beneficiaries make rational and efficient choices. 

CHAPTER 3—ADDITIONAL REFORMS 

Section 231. Making Permanent Change in Medicare Advantage Reporting Deadlines and Annual, Coordinated Election Period 

CURRENT LAW

The Public Health Security and Bioterrorism Preparedness and 

Response Act of 2002 (P.L. 107–188) made temporary changes to 

reporting dates and deadlines: (1) the plan deadline for submitting 

adjusted community rates (ACRs) and other information moved 

from no later than July 1 to no later than the second Monday in 

September for 2002, 2003, and 2004, (2) the annual coordinated 

election period moved from the month of November to November 15 

through December 31 for 2002, 2003, and 2004, and (3) the M+C 

payment rate announcement moved from no later than March 1 to 

no later than the second Monday in May for 2003 and 2004. The 

Secretary is required to mail information to enrollees at least 15 

days before each annual open season, including a list of plan and 

plan options. 

EXPLANATION OF PROVISION

This provision would permanently: (1) move the plan deadline for 

submitting information to the second Monday in September; (2) 

change the annual coordinated election period to November 15 

through December 31, and (3) move the annual payment rate announcement to no later than the second Monday in May. The requirement for providing information comparing plan options would 

be amended to require that the information would be provided to 

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the extent possible at the time of preparation of material for mailing. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The deadlines for reporting and election periods were moved to 

allow for more accurate information from both CMS and plans. As 

these dates were shifted to later in the year, consistent changes 

were made to allow for the annual open season for beneficiary enrollment in private plans. A provision was added to limit CMS’ responsibility for mailing to only those materials available at the 

time of the mailing. 

Section 232. Avoiding Duplicative State Regulations 

CURRENT LAW

Medicare law currently preempts State law or regulation from 

applying to M+C plans to the extent that they are inconsistent 

with Federal requirements imposed on M+C plans, and specifically, 

relating to benefit requirements, the inclusion or treatment of providers, and coverage determinations (including related appeals and 

grievance processes). 

EXPLANATION OF PROVISION

This provision would stipulate that Federal standards established by this legislation would supersede any state law or regulation (other than state licensing laws or state laws relating to plan 

solvency), with respect to MA plans offered by MA organizations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This clarifies that the MA program is a Federal program operated under Federal rules. State laws, do not, and should not apply, 

with the exception of state licensing laws or state laws related to 

plan solvency. There has been some confusion in recent court cases. 

This provision would apply prospectively; thus, it would not affect 

previous and ongoing litigation. 

Section 233. Specialized Medicare Advantage Plans for Special 

Needs Beneficiaries 

CURRENT LAW

One model for providing a specialized M+C plan, EverCare, operates as a demonstration program. EverCare is designed to study 

the effectiveness of managing acute-care needs of nursing home 

residents by pairing physicians and geriatric nurse practitioners. 

EverCare receives a fixed capitated payment, based on a percentage of the adjusted average per capita costs (AAPCC), for all nursing home resident Medicare enrollees. 

184

EXPLANATION OF PROVISION

This provision would establish a new MA option—specialized MA 

plans for special needs beneficiaries (such as the EverCare demonstration). Special needs beneficiaries are defined as those MA-eligible individuals who are institutionalized, entitled to Medicaid, or 

meet requirements determined by the Secretary. Enrollment in 

specialized MA plans could be limited to special needs beneficiaries 

until January 1, 2007. No later than December 31, 2005 the MBA 

Administrator would be required to submit a report to Congress 

that assesses the impact of specialized MA plans for special needs 

beneficiaries on the cost and quality of services provided. No later 

than 6 months after enactment of this Act, the Secretary would be 

required to issue final regulations to establish requirements for 

special needs beneficiaries. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Specialized MA plans for special needs beneficiaries are designed 

to serve beneficiaries with certain needs, thus these plans are not 

meant to handle beneficiaries without special needs. This provision 

allows these plans to serve beneficiaries for whom their programs 

were designed.

Section 234. Medicare MSAs 

CURRENT LAW

BBA 97 authorized a demonstration to test the feasibility of medical savings accounts (MSA) for the Medicare population. This M+C 

option is a combination of a health insurance plan with a large deductible and an M+C MSA. Contributions to an M+C MSA may be 

made annually from the enrollee’s capitation rate after the plan’s 

insurance premium has been paid. These contributions, as well as 

account earnings, are exempt from taxes. Withdrawals used to pay 

unreimbursed enrollee medical expenses are exempt from taxes if 

they would be deductible under the Internal Revenue Code. New 

enrollment is not allowed after 2003, or after the number of enrollees reaches 390,000, if earlier. 

EXPLANATION OF PROVISION

This provision would permanently extend Medicare MSAs and 

remove the enrollment cap. It would eliminate the requirement 

that Medicare MSA plans report on enrollee encounters since 

MSAs are not plans but bank accounts. Non-contract providers furnishing services to enrollees of MSAs would be subject to the same 

balanced billing limitations as non-contract providers furnishing 

services to enrollees of coordinated care plans. 

EFFECTIVE DATE

Upon enactment. 

185

REASON FOR CHANGE

Medicare MSAs are not being offered in the Medicare program 

today, despite the legislative authority granted in 1997 and despite 

the fact that non-Medicare MSAs are being offered. By eliminating 

the cap on enrollment, the time constraint, and the reporting requirements, the Committee hopes to encourage this additional 

choice for seniors. 

Section 235. Extension of Reasonable Cost Contracts 

CURRENT LAW

Medicare reimburses cost-based plans for the actual cost of furnishing covered services, less the estimated value of beneficiary 

cost-sharing. The Secretary may not extend or renew a reasonable 

cost reimbursement contract for any period beyond December 31, 

2004. 

EXPLANATION OF PROVISION

This provision would allow reasonable cost contracts to be extended or renewed indefinitely, with an exception that would begin 

January 1, 2008. These contracts could not be extended or renewed 

for a service area, if during the entire previous year, the area had 

2 or more coordinated care MA plans or 2 or more EFFS plans 

which met the following minimum enrollment requirements: (1) at 

least 5,000 enrollees for the portion of the area within a metropolitan statistical area with a population of more than 250,000 and 

counties contiguous to such a metropolitan statistical area, and (2) 

at least 1,500 enrollees for any other portion of such area. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The uncertainty about the continuation of cost contracts would 

be removed, allowing these plans to operate indefinitely, unless two 

other plans of the same type (i.e., either 2 MA or 2(c) EFFS plans) 

enter the cost contract’s service area. If other plans are willing to 

enter the cost contract’s service area, then the cost contract would 

be required to operate under the same provisions as these other 

private plans. 

Section 236. Extension of Municipal Health Service Demonstration 

Projects 

CURRENT LAW

The Municipal Health Services Demonstration Project operates 

in four cities. These cities use their existing public health programs 

as the nucleus of a coordinated system to provide community-based 

health care for the underserved urban poor. The project provides 

comprehensive health services, including a prescription drug benefit and dental services. 

BBA 97 extended the program through 2000. The BBRA extended it through 2002, and the BIPA extended it through December 31, 2004. 

186

EXPLANATION OF PROVISION

This provision would extend the program until December 31, 

2009, and permit the programs to enroll up to the number of individuals who were enrolled as of January 1, 1996. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

BBA 97 required demonstration participants to become M+C enrollees. In Baltimore, no M+C plans, and in the other, smaller 

sites, private sector options for Medicare beneficiaries are also limited. This provision also closed the program to new enrollees. The 

programs need a certain number of enrollees to remain viable; 

opening enrollment with a cap at levels from 1996 would permit 

these programs to reach the enrollment levels they need to operate 

efficiently. 

Subtitle C—Application of FEHBP-Style Competitive Reforms 

Section 241. Application of FEHBP-Style Competitive Reform Beginning in 2010 

CURRENT LAW

See Section 200. Medicare Modernization and Revitalization and 

Section 201. Establishment of Enhanced Fee-For-Service (EFFS) 

Program under Medicare. 

EXPLANATION OF ROVISION

Beginning in 2010, FEHBP-style competition would begin nationwide in competitive areas. Competitive areas are defined as areas 

in which Medicare beneficiaries have access to two private plans—

either two MA or two EFFS plans—along with traditional FFS 

Medicare. Private plan enrollment in the area must be at least as 

great as private plan enrollment nationwide, or at least 20 percent. 

For example, if private plan enrollment nationwide is 15 percent, 

the area must have private plan enrollment of at least 15 percent 

to become a competitive area. If private plan enrollment nationwide is 40 percent, the area must have private plan enrollment of 

at least 20 percent to trigger competition. In addition, competitive 

MA (CMA) areas would be limited to metropolitan statistical areas, 

or areas with substantial numbers of MA enrollees. The two private plans must be offered during the open season by different organizations, and each must meet minimum enrollment requirements as of March of the previous year. 

In competitive areas, private plans would submit bids and the 

MBA Administrator would calculate FFS amounts, based on the 

adjusted average per capita cost (AAPCC) in the area or region. 

The AAPCC would be adjusted to remove costs associated with direct graduate medical education, and to include costs of services 

provided to Medicare beneficiaries by VA and DoD military facilities. In addition, payments would be adjusted for health and other 

demographic factors. 

187

The competitive benchmark would be set at the weighted average 

of the private plan bids and the FFS amount in the competitive 

area. In order to provide traditional FFS disproportionate influence 

in competitive areas, the weight of the benchmark for FFS would 

equal the nationwide proportion of Medicare beneficiaries enrolled 

in FFS, or the competitive area’s proportion, if higher. The weights 

for all other private plans would equal the national proportion of 

beneficiaries enrolled in private plans, or the regional proportion if 

lower. 

For the first 5 years of competition, the benchmarks for private 

plans would be a blend of the competitive benchmark and the 

older, pre-2010 benchmark. For the first year of competition, the 

private plan benchmark would be based 80 percent on the older 

benchmark and 20 percent on the newer benchmark. For the second year, the private plan benchmark would be based 60 percent 

on the older benchmark and 40 percent on the new benchmark. By 

the fifth year, the private plan’s benchmark would be fully phased 

in, and equal the new competitive benchmark. This phase-in allows 

for a transition to a more competitive system based on the new 

competitive benchmark. 

Premium adjustments for beneficiaries remaining in traditional 

FFS in competitive areas would also be phased-in over the first 5 

years as a competitive area. The FFS amount would be compared 

to the new competitive benchmark. During the first year of competition, 20 percent of the change in beneficiary premiums would 

occur. During the second year of competition, 40 percent of the 

change would be implemented, and so forth, until 100 percent of 

the premium change would be implemented during the fifth year 

of competition. 

Beneficiaries enrolling in plans with bids or FFS amounts below 

the competitive benchmark would receive 75 percent of the difference between the benchmark and bid/FFS amount, and the government would receive 25 percent of the difference. Beneficiaries 

enrolling in plans with bids/FFS amounts above the benchmark 

would pay the excess. Premium adjustments would be moderated 

over a 5-year period for beneficiaries remaining in traditional FFS 

in competitive areas. The traditional FFS beneficiary premium 

would be unaffected in non-competitive areas or regions. 

Beginning in 2010, the MBA Administrator would announce the 

MA area-specific non-drug benchmark yearly. If applicable, the 

MBA Administrator would also announce, for the year and CMA 

area: the competitive MA non-drug benchmark; the national FFS 

market share percentage; the demographic, end-stage renal disease, and health status adjustment factors; the MA area-wide nondrug benchmark amount; the FFS area-specific non-drug amount; 

and MA enrollment. 

To carry out this section, the MBA Administrator would transmit 

the name, social security number, and adjustment amount to the 

Commissioner of SSA at the beginning of each year and at periodic 

times throughout the year. 

EFFECTIVE DATE

On or after January 1, 2010. 

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REASON FOR CHANGE

Market-oriented policymakers have maintained that the best way 

to reform Medicare is to provide beneficiaries with a choice of 

plans, similar to the choice available to members of Congress under 

the Federal Employees Health Benefits Program (FEHBP). The Bipartisan Commission on the Future of Medicare came to the same 

conclusion. 

Medicare must be transformed to bend the growth curve in expenditures to put the program on a sound financial footing. To reduce program growth, true competition, including both traditional 

fee-for-service and private plans, would begin in 2010 in certain 

competitive areas.

As areas of the country show increased enrollment in private 

plans, a more competitive system, based on the structure of the 

FEHBP, would provide for greater beneficiary savings and reductions in government costs. Allowing for competition for enrollees, 

between private plans and traditional FFS Medicare, would level 

the playing field between all options available to Medicare beneficiaries. 

If traditional FFS Medicare is able to provide benefits at a lower 

cost than some or all private plans in a competitive area, then 

beneficiaries remaining in traditional FFS would see their premiums decline. In this case, beneficiaries enrolling in higher-cost 

private plans would be required to pay the extra price stemming 

from that decision. Likewise, if a private plan is able to offer Medicare beneficiaries coverage at a lower cost, then beneficiaries would 

be encouraged to enroll in the private plan by lowering the beneficiaries’ costs of coverage under the private plan. In any case, 

beneficiaries would be entitled to the same defined benefit package 

and payments to plans would be fully adjusted for health and other 

demographic factors. If the traditional FFS plan disproportionately 

enrolls beneficiaries with poor risk, the beneficiary premium would 

be adjusted to compensate. 

This reform is the only provision in the bill that has the potential 

to produce the savings needed for long-term solvency. Although the 

bill provides for bidding against a benchmark prior to 2010, the 

benchmarks prior to 2010 increase each year, by the rate of growth 

in Medicare. Without this stage of competition, private plans would 

not be able to influence the benchmark and would have an incentive to shadow price their benchmarks. A floating benchmark rewards more efficient plans, and it allows these more efficient plans 

to lower the benchmark and government outlays in future years, as 

their market share rises. 

Several features were added in the Chairman’s amendment in 

the nature of a substitute to allow for a smooth transition to a 

more competitive system in 2010 in competitive areas/regions, and 

to prevent shock to the current system. The competitive benchmark, based on private plan bids and traditional FFS rates, would 

be calculated based on the relative enrollment in FFS versus private plans nationwide (or the area/region if FFS enrollment is a 

larger proportion in the area/region). This feature ensures that the 

competitive benchmark is closer to the traditional FFS rate than 

would otherwise occur. Premium changes for beneficiaries remaining in traditional FFS in competitive areas would be phased-in over 

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five years to prevent oscillations. In addition, the competitive 

benchmark would be phased-in over a 5–year period for private 

plans. This would allow for a more gradual change from the benchmarks under the pre-2010 system to the new competitive benchmark for private plans in competitive areas. 

C. TITLE III—COMBATTING WASTE, FRAUD, AND ABUSE

Section 301. Medicare Secondary Payer (MSP) Provisions 

CURRENT LAW

In certain instances, Medicare is prohibited from making payment for a health care claim if payment is expected to be made 

promptly under a worker’s compensation law or plan, under automobile or liability insurance (including a self-insured plan), or 

under no-fault insurance on behalf of a beneficiary. Medicare is 

permitted to make a conditional payment in certain circumstances 

including if Medicare could reasonably expect payment to be made 

under a workers’ compensation plan or no-fault insurance claim 

and Medicare determines that the payment will not be made 

promptly, as determined in accordance with regulations. 

EXPLANATION OF PROVISION

The Secretary would be able to make a Medicare payment if a 

worker’s compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan), or a no-fault 

insurance plan, has not been made or cannot reasonably be expected to be made promptly (as determined in accordance with regulations). This payment would be contingent on reimbursement by 

the primary plan to the Medicare Trust Funds. 

The list of primary plans for which conditional payment could be 

made would be expanded; an entity engaging in a business, trade, 

or profession would be deemed as having a self-insured plan if it 

carries its own risk. Failure to obtain insurance would be required 

as evidence of carrying risk. A primary plan, as well as an entity 

that receives payment from a primary plan, would be required to 

reimburse the Medicare Trust Funds for any payment made by the 

Secretary if the primary plan was obligated to make payment. The 

Secretary’s authority to recover payment from any and all responsible entities and bring action, including the collection of double 

damages, to recover payment under the Medicare Secondary Payer 

provisions also would be clarified. 

EFFECTIVE DATE

Subsection (a) would be effective as if included in the enactment 

of Title III of the Medicare and Medicaid Budget Reconciliation 

Amendments of 1984 (P.L. 98–369). Subsection (b) would be effective upon enactment. 

REASON FOR CHANGE

Recent court decisions such as Thompson v. Goetzmann resulted 

in a narrow interpretation of the statutory reference to ‘‘promptly.’’ 

Liability insurers would have been able to draw out their settlements and avoid repaying Medicare for payment of medical expenses. Moreover, firms that self-insure for product liability would 

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have been able to avoid paying Medicare for past medical payments 

related to the claim. This provision guards the Medicare trust fund 

and saves nearly nine-billion dollars over 10 years. 

Section 302. Competitive Acquisition of Certain Items and Services 

CURRENT LAW

In general, durable medical equipment (DME) is paid for under 

a set of local (or state) fee schedules subject to certain floors and 

ceilings as well as limited to the lower of the actual charge for the 

equipment or the fee schedule amount. Fee schedule amounts received an update of the full consumer price index for urban consumers (CPI–U) in 2003.

BBA 97 authorized the Secretary to conduct up to five demonstration projects to test competitive bidding as a way for Medicare to price and pay for Part B services other than physician services. The Secretary was required to establish up to three competitive acquisition areas for this purpose. Three competitive bidding 

demonstrations for durable medical equipment, prosthetics, 

orthotics, and supplies were successfully implemented: two in Polk 

County, Florida and one in the San Antonio, Texas area. 

EXPLANATION OF PROVISION

The Secretary would be required to establish and implement 

competitive acquisition programs for durable medical equipment, 

medical supplies, items used in infusion, drugs and supplies used 

in conjunction with durable medical equipment, parenteral nutrition, and off-the-shelf orthotics (requiring minimal self-adjustment 

for appropriate use) that would replace the Medicare fee schedule 

payments. Class III devices—devices that sustain or support life, 

are implanted, or present potential unreasonable risk (e.g. 

implantable infusion pumps and heart valve replacements)—are 

subject to premarket approval by the Food and Drug Administration and would not be covered by the competitive bidding system. 

In starting the competitive bidding programs, the Secretary 

would be required to establish competitive acquisition areas, but 

would be able to exempt rural areas and areas with low population 

density within urban areas that are not competitive, unless a significant national market exists through mail order for a particular 

item or service. The programs would be phased-in over three years 

with one-third of the areas implemented each year. High-cost and 

high-volume items and services would be required to be phased-in 

first. The Secretary would be able to exempt items and services for 

which competitive acquisition would not likely result in significant 

savings. The Secretary would be required to establish a process 

where existing rental agreements for covered DME items entered 

into contract before implementation of this program would not be 

affected. The supplier would be required to provide for appropriate 

servicing and replacement of these rental items. 

Certain requirements for the competitive acquisition program 

would be established. Specifically, the Secretary would be allowed 

to award contracts in an area only when the following conditions 

were met: entities met quality and financial standards specified by 

the Secretary or the Program Advisory and Oversight Committee; 

total amounts paid under the contracts would be expected to be 

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less than would be paid otherwise; and beneficiary access to multiple suppliers would be maintained. Beneficiary liability would be 

reduced to 20 percent of the applicable contract award price. 

Contracts would be required to be re-competed at least every 

three years. The Secretary would be required to award contracts to 

multiple entities submitting bids in each area for an item or service 

and would also have the authority to limit the number of contractors in a competitive acquisition area to the number needed to 

meet projected demand for covered items and services. The Secretary would be permitted to waive certain provisions of the Federal Acquisition Regulation that are necessary for the efficient implementation of this program, other than those relating to confidentiality of information. The Secretary would be required to report to 

Congress annually on savings, reductions in cost-sharing, access to 

items and services, and beneficiary satisfaction under the competitive acquisition program. 

A Program Advisory and Oversight Committee with members appointed by the Secretary would be established. The Committee 

would be required to provide advice and technical assistance to the 

Secretary regarding the implementation of the program, data collection requirements, proposals for efficient interaction among 

manufacturers and distributors of the items and services, providers, and beneficiaries, and other functions specified by the Secretary. The provisions of the Federal Advisory Committee Act 

would not apply to this Committee. 

The Secretary would be required to conduct a demonstration program on using competitive acquisition for clinical laboratory tests 

that are furnished without a face-to-face encounter between the individual and the hospital personnel or physician performing the 

tests. The same quality and financial conditions specified for the 

DME competitive acquisition program would apply for clinical laboratory test competitive acquisition. An initial report to Congress 

would be required of the Secretary and must be submitted by December 31, 2005 with progress and final reports, as the Secretary 

would determine appropriate. The General Accounting Office 

(GAO) would be required to report to Congress on the differences 

in reimbursement between public and private payors of clinical diagnostic services. The Secretary would be required to study whether suppliers of DME are soliciting physicians to prescribe certain 

brands or modes of delivery of covered items based on profitability. 

The covered items and services included in the competitive acquisition program would be paid as determined under this program. 

The Secretary would be able to use this payment information to adjust the payment amounts for DME not located in a competitive acquisition area. In this instance, the inherent reasonableness rule 

would not be applied. Orthotics included in a competitive acquisition program would also be paid the amounts determined by this 

program. The Secretary would be able to use this payment information to adjust the payment amounts for such items. In this instance, the regular payment rules established by regulation, including the inherent reasonableness rule, would not be applied. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

Numerous studies conducted by the HHS Office of the Inspector 

General (OIG) as well as GAO have found the government-determined fee schedule for durable medical equipment (DME) too high 

for certain items. For example, the OIG found that Medicare’s reasonable payment methodology paid too much for parenteral nutrition. The OIG also found that Medicare payments for hospital beds 

were substantially higher than rates paid by other payors. Further, 

the OIG discovered that payments for albuterol were six times the 

catalog price for the drug. 

The DME competitive bidding demonstration has been a success. 

The taxpayers and beneficiaries saved significantly and quality 

standards were higher under the demonstration. More, that threequarters of the DME winners were small businesses and beneficiary satisfaction remained high. 

Section 303. Competitive Acquisition of Covered Outpatient Drugs 

and Biologicals 

(a) Adjustment to the Physician Fee Schedule 

CURRENT LAW

The relative value associated with a particular physician service 

is the sum of three components: physician work, practice expense, 

and malpractice expense. Practice expense includes both direct 

costs (such as clinical staff time and medical supplies used to provide a specific service to an individual patient) as well as indirect 

costs such as rent, utilities, and business costs associated with running a practice. When the physician fee schedule was implemented, 

reimbursement for practice expenses was based on historic charges. 

The Social Security Act Amendments of 1994 (PL. 103–432) required the Secretary to develop a methodology for a resource-based 

system for calculating practice expenses for use in CY1998. BBA 97 

delayed the implementation of the methodology until CY1999 and 

established a transition period with full implementation by 

CY2002. BBRA required the Secretary to establish a data collection 

process and data standards for determining practice expense relative values. Under this survey process, the Secretary was required 

to use data collected or developed outside HHS, to the maximum 

extent practicable, consistent with sound data collection practices. 

The Secretary is required to periodically review and adjust the 

relative values affecting physician payment to account for changes 

in medical practice, coding changes, new data on relative value 

components, or the addition of new procedures. Under the budgetneutrality requirement, changes in these factors cannot cause expenditures to differ by more than $20 million from what would 

have been spent if such adjustments had not been made. 

EXPLANATION OF PROVISION

As part of the annual process of establishing the physician fee 

schedule, the Secretary would be required to increase the practice 

expense relative values using supplemental survey data provided 

by entities and organizations. This survey data must meet the Secretary’s criteria for acceptance and include expenses for the administration of drugs and biologicals. 

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The Secretary would be directed to cooperate with representatives of physician specialties affected by reform of the Average 

Wholesale Price (AWP) method of reimbursement for outpatient 

prescription drugs. The Secretary would be required to expedite 

consideration of the Current Procedural Terminology (CPT) codes 

used to bill for the costs associated with the administration of outpatient drugs affected by AWP reform. In addition, the Secretary 

would be required to consult with representatives of advisory physician groups, such as the Practice Expense Advisory Committee, 

when reviewing CPT codes. 

Increases in practice expenses resulting from the use of new survey data submitted by the date of enactment, or consideration of 

CPT codes for drug administration services for drugs affected by 

AWP reform would not be subject to the budget neutrality. The 

Secretary would not be prevented from adjusting the practice expense relative values in subsequent years. The Secretary would be 

required to consult with GAO and groups representing the affected 

physician specialties before publishing the notice of proposed rulemaking. 

The resulting adjustments in practice expense relative value 

units would not be subject to administrative or judicial review. 

They would be considered as a change in law and regulation for 

purposes of determining the sustainable growth rate, used to set 

the payment update for physician services. 

The Secretary would be required to adjust the non-physician 

work pool methodology so that practice expense relative values for 

these services are not disproportionately reduced as a result of the 

above changes. 

Any physician specialty would be permitted to submit survey 

data related to practice expenses through December 31, 2004. 

Budget neutrality would not be waived. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Physicians would be paid appropriate amounts for the administration of outpatient drugs covered by Medicare. It is the Committee’s intent that the Secretary should use the survey data submitted by the American Society of Clinical Oncologists (ASCO) 

since the data meets all requirements for inclusion. The Committee 

directs the Secretary to depart from typical procedures and not average new ASCO survey data on practice expenses with older survey data from the American Medical Associations’ socioeconomic 

monitoring system data. The Committee also directs the Secretary 

not to alter the ASCO survey data by removing any responses, including outliers. The Committee intends that the Secretary use the 

new ASCO survey data in the Secretary’s normal methodology for 

determining practice expenses. 

Furthermore, it is the Committee’s intent that the Secretary use 

current procedures for consideration of CPT codes and modifications to those codes. The provision directs the Secretary to work 

with specialties affected by AWP reform to ensure that CPT codes, 

which would permit appropriate payment for drug administration, 

are in place before AWP reform occurs.

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(b) Payment Based on Competition 

CURRENT LAW

Although Medicare does not currently provide an outpatient prescription drug benefit, coverage of certain outpatient drugs is specifically authorized by statute. Specifically, under Medicare Part B, 

outpatient prescription drugs and biologicals are covered if they are 

usually not self-administered and are provided incident to a physician’s services. Drugs and biologicals are also covered if they are 

necessary for the effective use of covered durable medical equipment, including those that must be put directly into equipment. In 

addition, Medicare will pay for certain self-administered oral cancer and anti-nausea drugs, erythropoietin (used to treat anemia), 

immunosuppressive drugs after covered Medicare organ transplants and hemophilia clotting factors. Vaccines for diseases like 

influenza, pneumonia, and hepatitis B are considered drugs and 

are covered by Medicare. Payments for covered outpatient drugs 

are made under Medicare Part B and are based on 95 percent of 

AWP. The term ‘‘AWP’’ is not defined in statute or regulation, but 

generally, AWP is intended to represent the average price used by 

wholesalers to sell drugs to their customers. It has been based on 

reported prices as published in industry reference publications or 

drug price compendia. There are no uniform criteria for reporting 

these numbers. Moreover, these reported prices do not reflect the 

discounts that manufacturers and wholesalers customarily offer to 

providers and physicians. To differing degrees, the published prices 

on which Medicare payment’s are based are higher than the 

amounts actually paid to acquire a given prescription drug. 

Since covered outpatient prescription drugs are Part B services, 

Medicare pays 80 percent of the recognized amount and the beneficiary is liable for the remaining 20 percent coinsurance amount, 

except in the case of vaccines where no beneficiary cost-sharing is 

imposed. Also, beneficiaries cannot be charged for any amounts in 

excess of the recognized payment amount. 

EXPLANATION OF PROVISION

New sections 1847A and 1847B in Title XVIII of the Social Security Act would be established to provide physicians in the Medicare 

program with an annual choice between two payment and delivery 

systems: (1) a contractor who would deliver drugs to the physician 

and would be reimbursed on prices established through a competitive bidding process, or (2) the physician would be reimbursed for 

covered drugs at the Average Sales Price (ASP). 

Under Section 1847A, the Secretary would be required to establish a competitive acquisition program to acquire and pay for covered outpatient drugs. Under this program, at least two contractors 

would be established in each competitive acquisition area (which 

would be defined as an appropriate geographic region) throughout 

the United States. Each year, a physician would be required to select contractors who would deliver covered drugs and biologicals to 

the physician. There would be two categories of drugs under this 

program: the oncology category (which would include drugs determined by the Secretary as typically primarily billed by oncologists 

or are otherwise used to treat cancer) that would be implemented 

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plemented beginning in 2006. In this case, covered drugs means 

certain drugs currently covered under Section 1842(o) of the Social 

Security Act which are not covered as part of the competitive acquisition for durable medical equipment. Blood clotting factors, 

erythropoetin furnished as treatment for end-stage renal disease 

(ESRD), and radiopharmaceuticals would not be considered covered 

drugs under the competitive acquisition program. Nothing in the 

section would affect the carrier invoice pricing method used to pay 

for radiopharmaceuticals. The Secretary would also be able to exclude other drugs and biologicals or classes of drugs and biologicals 

that are not appropriate for competitive bidding or would not 

produce savings. 

Certain contractor selection and contracting requirements for the 

competitive acquisition program would be established. Specifically, 

the Secretary would be required to establish an annual selection 

process for contractors in each area for each of the two categories 

of drugs. The Secretary may not award the two-year contract to 

any entity that does not have the capacity to supply covered outpatient drugs within the applicable category, or does not meet quality, service, or financial performance and solvency standards established by the Secretary. Specifically the contractor would be required to have: (1) arrangements to ship covered drugs at least 5 

days of the week and on an emergency basis, (2) procedures for the 

prompt response and resolution of physician and beneficiary complaints and inquiries, and (3) grievance resolution procedures, including review by the Medicare Provider Ombudsman established 

in this legislation. At the Secretary’s discretion, the Secretary could 

refuse to contract with an entity that has had its license for distributing drugs (including controlled substances) suspended or revoked 

by the Federal or a State government or that has been excluded 

from Medicare program participation. A contractor would be required to comply with a specified code of conduct, including conflict 

of interest provisions and all applicable provisions relating to the 

prevention of fraud and abuse. A contract would include specifications to ensure secure facilities, safe and appropriate storage of 

covered drugs, maintain record keeping, provide written policies 

and procedures to ensure drug safety, and retain compliance personnel. Either the Secretary or the entity could terminate contracts 

with appropriate advance notice. The Secretary would make the 

list of the available contractors accessible to physicians on an ongoing basis, through a directory posted on the Internet and provided 

by request. 

The Secretary would be able to limit the number of qualified entities in each category and area, but not below two. The Secretary 

would be required to base selection on bid prices for covered drugs, 

bid prices for distribution of those drugs, ability to ensure product 

integrity, customer service, past experience with drug distribution, 

and other factors. Drugs dispensed under this program would be 

acquired directly from the manufacturer or from a distributor directly from the manufacturer. Contractors may be required to comply with additional product integrity safeguards for drugs susceptible to counterfeiting or diversion. The bid prices in an area would 

be effective for that area throughout the two-year contract period, 

but the contract would allow for appropriate price adjustments to 

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able, net acquisition costs as disclosed to the Secretary. The Secretary would not be able to accept a contract for an area if its aggregate average prices exceed 120 percent of the Average Sales 

Price established under 1847B. Under the program, the Secretary 

would be required to compute an area average of the submitted bid 

prices. For drugs and biologicals for which an average bid price has 

not been established due to its establishment as a new Medicare 

covered product, the payment rate would be the payment rate established under 1847B. The Secretary would be able to establish 

average sales price as the reimbursement amount in other exceptional cases. Beneficiary liability would be limited to 20 percent of 

the payment basis for the covered drug or biological, and would be 

collected by the contractor upon drug administration. 

The Secretary would be permitted to waive certain provisions of 

the Federal Acquisition Regulation that are necessary for the efficient implementation of this program, other than those relating to 

confidentiality of information. The contractor supplying the physician in the area would submit the claim for the drug and would 

collect the cost-sharing amount from the beneficiary after administration of the drug. Both program payment and beneficiary cost 

sharing amounts would only be made to the contractor; would only 

be made upon the administration of the drug; and would be based 

on the average bid of prices for the drug and biological in the area. 

The Secretary would be required to establish a process for recovery 

of payments billed at the time of dispensing for drugs that were not 

actually administered. 

The appropriate contractor, as selected by the physician, would 

supply covered drugs directly to the physician, except under the 

circumstances when a beneficiary is able to receive a drug at home. 

The Secretary would be able to specify other non-physician office 

settings where a beneficiary would be able to receive a covered 

drug directly. However, the contractor would not be able to deliver 

drugs to a physician without first receiving a prescription as well 

as other necessary information specified by the Secretary. A physician would not be required to submit a prescription for each individual treatment. The Secretary would establish requirements, including adequate safeguards against fraud and abuse and consistent with safe drug practices, in order for a physician to maintain an inventory of drugs in cases where: the drugs or biologicals 

are immediately required, where the physician could not have reasonably anticipated the immediate requirement, where the contractor could not deliver the product in a timely manner, and in 

emergency situations related to the patient’s health. No applicable 

State requirements relating to the licensing of pharmacies would 

be waived. 

Current rules related to physician assignment and beneficiary 

appeal rights in cases of medical necessity denial would remain unchanged. New physician appeal rights would be established similar 

to those provided to physicians who prescribe durable medical 

equipment or laboratory tests. 

The Secretary would be required to establish an advisory committee to assist in the implementation of this program. The Secretary would be required to report to Congress on savings, reductions in cost-sharing, access to items and services, the availability 

of contractors as well as beneficiary and provider satisfaction under 

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the competitive acquisition program. These reports would be due 

each year from 2005 through 2007. 

The new section 1847B would establish an alternative choice for 

physician reimbursement for covered Part B drugs based on an Average Sales Price methodology (ASP). ASP is calculated for multiple source drugs based on the average of all sales net of volume 

discounts, prompt pay discounts, cash discounts, free goods to physicians, charge backs and rebates other than Medicaid rebates. For 

single source products, ASP is calculated using the above methodology or the Wholesale Acquisition Cost, which ever is lower. In an 

initial period for which sales data is not available, the Secretary 

may determine the amount payable under the section without regard to the manufacturer’s average sales price. In response to a 

public health emergency, the Secretary may use the wholesale acquisition cost instead of the average sales price until the price and 

availability of the drug has stabilized. Prices would be reported to 

the Secretary on a quarterly and confidential basis. 

The Secretary would submit an annual report to the Congress on 

trends in average sales prices, administrative costs associated with 

compliance with this section, the total value of payments made 

under this section, and a comparison of the average manufacturer 

price reported under Medicaid with the average sales price. GAO 

would be required to assess the impact of this program on the delivery of services, particularly with respect to beneficiary access to 

drugs and the site of delivery. MedPAC would be required to submit to Congress specific recommendations with respect to payment 

for blood clotting factors in its 2004 annual report. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Balanced Budget Act of 1997 (BBA 97, P.L. 105–33) specified 

that Medicare payment for covered outpatient prescription drugs 

would equal 95 percent of AWP. Law or regulation does not define 

AWP. Publishing organizations report AWPs provided by drug 

manufacturers. Medicare carriers use the published data to payment for Medicare covered drugs, but AWPs are not grounded in 

any real market transaction, and do not reflect the actual price 

paid by purchasers. Congress has long recognized AWP is a list 

price and not a measure of actual prices. Congress is now able to 

adopt an alternative basis for payment that will more accurately 

reflect actual acquisition costs for physicians. This will ensure that 

Medicare no longer bases its payments on prices that do not reflect 

prices otherwise available through market incentives and transactions. 

AWP for a product is often far greater than the acquisition cost 

paid by suppliers and physicians. Some drug manufacturers use 

AWP to inflate payments made for drugs. As a result of abuses in 

the current system, beneficiaries are paying hundreds of millions 

of dollars in inflated co-payments every year. Medicare also pays 

upwards of one billion dollars in excess payments every year. 

Some physicians assert that the overpayment for drugs covers 

underpayment for practice expenses. They contend that Medicare 

does not adequately reimburse them for the practice expenses assoVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00197 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ciated with providing care in outpatient settings. This section reduces the overpayment for drugs and biologics, while increasing 

physician practice expenses. 

Over the past 6 years, the OIG has issued a number of reports, 

all of which have reached the conclusion that Medicare and its 

beneficiaries pay too much for prescription drugs. The OIG studied 

the prices for 24 Medicare covered drugs that accounted for $3.1 

billion of the $3.9 billion in Medicare drug expenditures in 1999. 

The OIG compared Medicare reimbursement to prices available to 

the physician/supplier community, the Department of Veterans Affairs, and Medicaid. They found that Medicare and its beneficiaries 

would have saved substantial amounts of money on their coinsurance. The savings would have been $761 million a year by paying 

the actual wholesale prices available to physicians and suppliers. 

For each drug, Medicare paid more than the wholesale price available to physicians and suppliers. 

Subsequently, the findings of the report were updated with more 

current drug pricing information and estimated that, of the $3.7 

billion Medicare spent for 24 drugs in 2000, had Medicare paid the 

actual wholesale prices available to physicians and suppliers for 

these 24 drugs, the program and its beneficiaries would save $887 

million a year. If Medicare had paid for these drugs based on catalog prices, according to the OIG, beneficiaries would have paid over 

$175 million less in coinsurance. 

GAO’s September 2001 report found that physicians can obtain 

Medicare-covered drugs at prices below current Medicare payments. In fact, wholesalers’ and Group Purchasing Organizations’ 

(GPO) prices are less than the AWP currently used to establish 

Medicare reimbursement for covered drugs. GAO found that the 

average discount from AWP ranged from 13 percent to 34 percent, 

and that two drugs had discounts of 65 percent and 86 percent. 

In its recommendations to the Congress, the GAO urged CMS to 

take steps to begin reimbursing providers for part B-covered drugs 

and related services at levels reflecting providers’ acquisition costs 

using information about actual market transaction prices. CMS 

should also evaluate expanding competitive bidding approaches to 

setting payment levels, according to the GAO, and that CMS 

should monitor beneficiary access to covered drugs in light of any 

changes to reimbursement. 

The GAO also debunked some common myths generally held by 

many in the health care community. Specifically, the GAO found 

that despite concerns that the discounts available to large purchasers would not be available to physicians with a small number 

of drug claims, physicians with low volumes reported that their 

purchase prices were the same or less than the widely available 

prices GAO documented. GAO also believes that Medicare should 

pay for each service appropriately and not rely on overpayments for 

some services to offset inadequate payments for complementary 

services. The Committee shares this view, and believes the legislation achieves this goal. 

199

Section 304. Demonstration Project for Use of Recovery Audit Contractors 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to conduct a demonstration 

project for up to three years on the use of recovery audit contractors under the Medicare Integrity Program. The recovery audit contractors would identify underpayments and overpayments in the 

Medicare program and would recoup overpayments made to providers. Payment would be made to these contractors by providing 

incentives for good performance. The Secretary would be able to 

waive Medicare statutory provisions to pay for the services of the 

recovery audit contractors. The Secretary would be required to examine the efficacy of using these contractors with respect to duplicative payments, accuracy of coding, and other payment policies in 

which inaccurate payments arise. The demonstration project would 

be required to cover at least two states among the states with the 

highest per-capita utilization rates of Medicare services and have 

at least three contractors. 

Recovery of an overpayment through this project would not prohibit the Secretary or the Attorney General from investigating and 

prosecuting appropriate allegations of fraud and abuse. Fiscal 

intermediaries, carriers, and Medicare Administrative Contractors 

would not be eligible to participate as a recovery audit contractor. 

The Secretary would be required to show preference to contracting 

with entities that have demonstrated more than three years direct 

management experience and a proficiency in recovery audits. Within six months of completion, the Secretary would be required to report to Congress on the project’s savings to the Medicare program, 

including recommendations on the cost-effectiveness of extending 

or expanding the program. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This is a common approach used in the private sector including 

physicians and hospitals to recover payments from insurers. It provides a useful check on whether the other CMS contractors are 

paying accurately and identifying potential fraud problems. 

D. TITLE IV—RURAL HEALTH CARE IMPROVEMENTS

Section 401. Enhanced Disproportionate Share Hospital (DSH) 

Treatment for Rural Hospitals and Urban Hospitals With 

Fewer Than 100 Beds 

CURRENT LAW

Medicare makes additional payments to certain acute hospitals 

that serve a large number of low-income Medicare and Medicaid 

patients as part of its inpatient prospective payment system (PPS). 

As specified by BIPA, starting with discharges occurring on or after 

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April 1, 2001, all hospitals are eligible to receive Medicare disproportionate share hospital (DSH) payments when their DSH percentage or threshold amount exceeds fifteen. 

Different formulas are used to establish a hospital’s DSH payment, depending upon the hospital’s location, number of beds and 

status as a rural referral center (RRC) or sole community hospital 

(SCH). The DSH adjustment that a small urban or rural hospital 

can receive is limited to 5.25 percent of total Medicare inpatient 

payments. 

EXPLANATION OF PROVISION

For discharges after October 1, 2003, a small rural or urban hospital that qualifies for a DSH adjustment would potentially receive 

an increase in DSH payments. The DSH adjustment for these hospitals, except for rural referral centers, would be almost doubled 

but not to exceed a maximum of 10 percent. 

EFFECTIVE DATE

The provision would apply to discharges occurring on or after October 1, 2003. 

REASON FOR CHANGE

MedPAC, an independent advisory committee that advises Congress, recommended this policy in its March 2003 report. MedPAC 

believes this change would mitigate the effects of uncompensated 

care for many rural hospitals and thereby protect Medicare beneficiaries’ access to care in rural communities. Historically, rural 

and small urban hospitals have been treated unfairly with respect 

to DSH payments. 

Section 402. Immediate Establishment of Uniform Standardized 

Amount in Rural and Small Urban Areas 

CURRENT LAW

Medicare pays for inpatient services in acute hospitals in large 

urban areas using a standardized amount that is 1.6 percent larger 

than the standardized amount used to reimburse hospitals in other 

areas (both rural areas and smaller urban areas). The Consolidated 

Appropriations Act of 2003 (P.L. 108–7) provided for a temporary 

payment increase to rural and small urban hospitals; all Medicare 

discharges from April 1, 2003, to September 30, 2003, would be 

paid on the basis of the large urban area amount. 

EXPLANATION OF PROVISION

Beginning for discharges in FY2004, the standardized amount for 

hospitals located in areas other than large urban areas would be 

equal to the amount used to pay hospitals located in large urban 

areas. Technical conforming amendments would also be adopted. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

MedPAC recommends eliminating this differential in payment. 

MedPAC found no statistically significant difference in costs between the cost of hospitals in large urban areas (over one million) 

and other hospitals, after removing the effect of geographic differences in wages, teaching and other Medicare adjustments. 

Section 403. Establishment of Essential Rural Hospital Classification 

CURRENT LAW

No provision in current law. 

EXPLANATION OF PROVISION

An Essential Rural Hospital would be a new designation for the 

purposes of Medicare reimbursement. To be eligible for the Essential Rural Hospital designation, the hospital must have more than 

25 beds and must be located in a rural area. The Secretary must 

then determine that the closure of the hospital would significantly 

diminish the ability of beneficiaries to obtain essential health care 

services based on certain criteria. Specifically, the Secretary must 

determine that (1) a high proportion of Medicare beneficiaries residing in the hospital’s service area receive basic inpatient care 

from the hospital, and (2) there exists, in the service area, a hospital with more than 200 licensed beds that provides specialized 

surgical care to a high percentage of beneficiaries. Regardless of 

the size of the hospital, almost all physicians in the area must have 

admitting privileges and provide their inpatient services primarily 

at the hospital. Also, the Secretary must determine that the closure 

of the hospital would have a significant adverse impact on the 

availability of health care service in the absence of the hospital. 

In making such determination, the Secretary may also consider: 

(1) whether ambulatory care providers in the hospital’s service area 

are insufficient to handle the outpatient care of the hospital, (2) 

whether beneficiaries would have difficulty accessing care, and (3) 

whether the hospital has a commitment to provide graduate medical education in a rural area. The essential rural hospital would 

have to have a quality of care score above the median state scores. 

A hospital classified as an essential rural hospital would not be 

able to change such classification. An essential rural hospital would 

not be able to be treated as a sole community hospital, Medicare 

dependent hospital, or rural referral center. A hospital that is classified as an essential rural hospital for a cost reporting period beginning on or after October 1, 2004 would be reimbursed 102 percent of its reasonable Medicare costs for inpatient and outpatient 

services. Beneficiary cost-sharing amounts would not be affected 

and required billing for such services would not be waived. 

EFFECTIVE DATE

The provision would apply to cost reporting periods beginning on 

or after October 1, 2004. 

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REASON FOR CHANGE

The purpose of this provision is to recognize the impact of certain 

hospitals whose existence is essential in the health care delivery 

system of the community. Some rural hospitals have high fixed 

costs because of the necessity for providing the capacity for essential services in a community. There are also problems with the definition and payment for some communities and rural referral hospitals. This would provide a new crosscutting designation field for 

hospitals that can meet the criteria. 

Section 404. More Frequent Update in Weights Used in Hospital 

Market Basket 

CURRENT LAW

Medicare’s standardized amounts, which serve as the basis for its 

payment per discharge from acute hospitals, are increased annually using an update factor which is determined in part by the projected increase in the hospital market basket. The market basket 

is a fixed-weight hospital input price index, which measures the average change in the price of goods and services hospitals purchased 

in order to furnish inpatient care. CMS revises the cost category 

weights, reevaluates the price proxies for such categories, and 

rebases (or changes the base period) for the market basket every 

five years. CMS implemented a revised and rebased market basket 

using 1997 cost data for use in the FY2003 Medicare hospital payment rates. 

EXPLANATION OF PROVISION

The Secretary would be required to revise the market basket cost 

weights including the labor share to reflect the most currently 

available data and to establish a schedule for revising the cost 

weights more often than once every five years. The Secretary would 

be required to submit a report to Congress by October 1, 2004 on 

the reasons for and the options considered in establishing such a 

schedule. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

At the current time the hospital market basket is only updated 

every ten years using five-year-old data for the weights including 

the labor share. Statisticians at the Department of Labor and other 

experts believe the measures of inflation should be updated on a 

more regular basis to correct consistent inaccuracies over time. 

Section 405. Improvements to the Critical Access Hospital (CAH) 

Program 

(a) Increase in Payment Amounts 

CURRENT LAW

Generally, a critical access hospital (CAH) receives reasonable, 

cost-based reimbursement for care rendered to Medicare beneficiaries. CAHs may elect either a cost-based hospital outpatient 

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service payment or an all-inclusive rate, which is equal to a reasonable cost payment for facility services plus 115 percent of the fee 

schedule payment for professional services. Ambulance services 

that are owned and operated by CAHs are reimbursed on a reasonable cost basis if these ambulance services are 35 miles from another ambulance system. 

EXPLANATION OF PROVISION

Inpatient, outpatient, and covered skilled nursing facility services provided by a CAH would be reimbursed at 102 percent of reasonable costs of services furnished to Medicare beneficiaries. 

EFFECTIVE DATE

This provision would apply to cost reporting periods beginning on 

or after October 1, 2003. 

REASON FOR CHANGE

Small hospitals need the ability to build up reserves and to finance new capital expenditures. This provides a margin for these 

hospitals under the Medicare program, often their most important 

payor. 

(b) Coverage of Costs for Certain Emergency Room On-Call 

Providers 

CURRENT LAW

BIPA required the Secretary to include the costs of compensation 

(and related costs) of on-call emergency room physicians who are 

not present on the premises of a CAH, are not otherwise furnishing 

services, and are not on-call at any other provider or facility when 

determining the allowable, reasonable cost of outpatient CAH services. 

EXPLANATION OF PROVISION

Reimbursement of on-call emergency room providers would be expanded to include the costs associated with physician assistants, 

nurse practitioners, and clinical nurse specialists as well as emergency room physicians for covered Medicare services. 

EFFECTIVE DATE

This provision would apply to costs for services provided on or 

after January 1, 2004. 

REASON FOR CHANGE

In sparsely populated areas, it is often the physician assistant or 

nurse practitioner employed by a physician practice or operating 

independently who is providing the on call services for the emergency room. This recognizes the bonuses that hospitals pay for 

their services.

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(c) Modification of the Isolation Test for Cost-Based CAH Ambulance Services 

CURRENT LAW

Ambulance services provided by a CAH or provided by an entity 

that is owned or operated by a CAH is paid on a reasonable cost 

basis and not the ambulance fee schedule, if the CAH or entity is 

the only provider or supplier of ambulance services that is located 

within a 35-mile drive of the CAH. 

EXPLANATION OF PROVISION

The 35-mile requirement would not apply to the ambulance services that are furnished by a provider or supplier of ambulance services who is determined by the Secretary to be a first responder to 

emergencies. 

EFFECTIVE DATE

This provision would apply to ambulance services furnished on or 

after the first cost reporting period that begins after the date of enactment. 

REASON FOR CHANGE

CAHs may not be eligible for cost-based reimbursement because 

other ambulances may come into the area to transport patients between hospitals or to transfer patients to/from nursing homes. This 

would ensure that CAHs owned-and-operated ambulances would be 

paid cost when they are the first responders to an emergency. 

(d) Reinstatement of Periodic Interim Payment (PIP) 

CURRENT LAW

Eligible hospitals, skilled nursing facilities, and hospices, which 

meet certain requirements, receive Medicare periodic interim payments (PIP) every two weeks; these payments are based on estimated annual costs without regard to the submission of individual 

claims. At the end of the year, a settlement is made to account for 

any difference between the estimated PIP payment and the actual 

amount owed. A CAH is not eligible for PIP payments. 

EXPLANATION OF PROVISION

An eligible CAH would be able to receive payments made on a 

PIP basis for its inpatient services. The Secretary would be required to develop alternative methods based on the expenditures of 

the hospital for these PIP payments. 

EFFECTIVE DATE

This provision would apply to payments made on or after January 1, 2004. 

REASON FOR CHANGE

Small rural hospitals often have significant changes in volume 

due to the season or just on a day-to-day basis. This provision averages payments over time to aid the hospital’s financial stability. 

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(e) Condition for Application of Special Physician Payment 

Adjustment 

CURRENT LAW

As specified by BBRA, CAHs can elect to be paid for outpatient 

services using cost-based reimbursement for its facility fee and at 

115 percent of the fee schedule for professional services otherwise 

included within its outpatient critical access hospital services for 

cost reporting periods starting on or after October 1, 2000. 

EXPLANATION OF PROVISION

The Secretary would not be able to require that all physicians 

providing services in a CAH assign their billing rights to the entity 

in order for the CAH to be able to be paid on the basis of 115 percent of the fee schedule for the professional services provided by 

the physicians. However, a CAH would not receive payment based 

on 115 percent of the fee schedule for any individual physician who 

did not assign billing rights to the CAH. 

EFFECTIVE DATE

This provision would be effective as if it had been included as 

part of BBRA. 

REASON FOR CHANGE

This provision ensures that the intent of Congress is for CMS to 

provide these payments in order to attract physicians to CAHs. 

(f) Flexibility in Bed Limitation for Hospitals 

CURRENT LAW

A CAH is a limited service facility that must provide 24-hour 

emergency services and operate a limited number of inpatient beds 

in which hospital stays can average no more than 96 hours. A CAH 

cannot operate more than 15 acute-care beds at one time, but can 

have an additional 10 swing beds that are set up for skilled nursing facility (SNF) level care. SNF beds in a unit of the facility that 

is licensed as a distinct-part skilled nursing facility at the time of 

the facility’s application for CAH designation are not counted toward these bed limits.

EXPLANATION OF PROVISION

The Secretary would be required to specify standards for determining whether a CAH has seasonal variations in patient admissions that would justify a 5-bed increase in the number of beds it 

can maintain (and still retain its classification as a CAH). CAHs 

that operate swing beds would be able to use up to 25 beds for 

acute care services as long as no more than 10 beds at any time 

are used for non-acute services. Those CAHs with swing beds that 

made this election would not be eligible for the 5-bed seasonal adjustment. A CAH with swing beds that elects to operate only 15 of 

its 25 beds as acute care beds would be eligible for the 5-bed seasonal adjustment. 

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EFFECTIVE DATE

These provisions would only apply to CAH designations made before, on or after January 1, 2004. 

REASON FOR CHANGE

These provisions allow some needed flexibility in the CAH program designation to ensure that if there is a flu epidemic or major 

accident that the hospital would have the capacity to treat those 

patients. 

(g) Additional 5-Year Period of Funding for Grant Program 

CURRENT LAW

The Secretary is able to make grants for specified purposes to 

States or eligible small rural hospitals that apply for such awards. 

The authorization to award the grants expired in FY2002. 

EXPLANATION OF PROVISION

The authorization to award grants would be established from 

FY2004 through FY2008 from the Federal Hospital Insurance 

Trust Fund at amounts of up $25 million each year. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This would continue the planning and monitoring aspects of the 

states for the CAH program. The Committee expects that the 

states would work in cooperation with the critical access hospitals 

in determining the best use of the funds. 

Section 406. Redistribution of Unused Resident Positions 

CURRENT LAW

Medicare has different resident limits for counting residents, its 

indirect medical education (IME) adjustment and for reimbursement for a teaching hospital’s direct graduate medical education 

(DGME) costs. Generally, a hospital’s IME adjustment depends on 

a hospital’s teaching intensity as measured by the ratio of the number of interns and residents per bed. Prior to BBA 97, the number 

of residents that could be counted for IME purposes included only 

those in the hospital inpatient and outpatient departments. Effective October 1, 1997, under certain circumstances a hospital may 

now count residents in non-hospital sites for the purposes of IME. 

Medicare’s DGME payment to teaching hospital is based on its updated cost per resident (subject to a locality adjustment and certain 

payment corridors), the weighted number of approved full-timeequivalent (FTE) residents, and Medicare’s share of inpatient days 

in the hospital. Generally, the resident counts of both IME and 

DGME payments are based on the number of residents in approved 

allopathic and osteopathic teaching programs that were reported by 

the hospital for the cost reporting period ending in calendar year 

1996. The DGME resident limit is based on the unweighted resident counts. Hospitals that established new training programs beVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00206 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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fore August 5, 1997 are partially exempt from the cap. Other exceptions apply to certain hospitals including those with new programs established after that date. Hospitals in rural areas (and 

non-rural hospitals operating training programs in rural areas) can 

be reimbursed for 130 percent of the number of residents allowed 

by their cap. Under certain conditions, an affiliated group of hospitals under a specific arrangement may combine their resident 

limits into an aggregate limit. Subject to these resident limits, a 

teaching hospital’s IME and DGME payments are based on a threeyear rolling average of resident counts, that is, the resident count 

will be based on the average of the resident count in the current 

year and the two preceding years. The rolling average calculation 

includes podiatry and dental residents. 

EXPLANATION OF PROVISION

A teaching hospital’s total number of potentially Medicare-reimbursed resident positions would be reduced for cost reporting periods, starting January 1, 2004, if the resident reference level is less 

than its applicable resident limit. If so, the reduction would equal 

to 75 percent of the difference between the hospital’s limit and its 

resident reference level. The resident reference level would be the 

highest number of allopathic and osteopathic resident positions (before the application of any weighting factors) for the hospital during the reference period. A hospital’s reference period would be the 

3 most recent consecutive cost reporting periods for which a hospital’s cost reports have been settled (or in the absence of such settled cost reports, submitted reports) on or before September 30, 

2002. The Secretary would be able to adjust a hospital’s resident 

reference level, upon the timely request for such an adjustment, for 

the cost reporting period that includes July 1, 2003. 

The Secretary would be authorized to increase the applicable 

resident limits for other hospitals by an aggregate number that 

does not exceed the overall reduction in such limits. No increase 

would be permitted for any portion of cost reporting period that occurs before July 1, 2003 or before the date of a hospital’s application for such an increase. No increase would be permitted unless 

the hospital has applied for such an increase by December 1, 2005. 

The Secretary would consider the need for an increase in the 

physician specialty and the location involved. The Secretary would 

first distribute the increased resident count to programs in hospitals located in rural areas and hospitals that are not in large 

urban areas on a first-come-first-serve basis. The hospital would 

have to demonstrate that the resident positions would be filled; not 

more than 25 positions would be given to any one hospital. These 

hospitals would be reimbursed for DGME for the increase in resident positions at the locality adjusted national average per resident 

amount. Changes in a hospital’s resident count established under 

this section would increase a hospital’s IME payments. These provisions would not apply to reductions in residency programs that 

occurred as part of the voluntary reduction program or would affect 

the ability of certain hospitals to establish a new medical residency 

training programs. The Secretary would be required to submit a report, including recommendations, on whether to extend the application deadline for increases in resident limits no later than July 1, 

2005. 

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EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

An unintended effect of the resident cap was to lock in a maldistribution of DGME and IME resident training positions in the 

country. Due to the strong link between the location of a resident’s 

training and their eventual practice, it is critical to get more residents into training programs in rural areas and small urban cities. 

This provision redistributes unused residency slots, over a five-year 

period, to hospitals that have either reached their cap or have been 

providing DGME residencies without Medicare funding. 

Section 407. Two-Year Extension of Hold Harmless Provisions for 

Small Rural Hospitals and Sole Community Hospitals Under 

Prospective Payment System for Hospital Outpatient Department Services 

CURRENT LAW

The PPS for hospital outpatient departments (HOPDs) was implemented in August 2000 for most acute care hospitals. Under the 

HOPD PPS, Medicare pays for covered services using a fee schedule based on ambulatory payment classifications (APCs). Rural hospitals with no more than 100 beds are paid no less under this PPS 

system than they would have received under the prior reimbursement system for covered HOPD services because of hold harmless 

provisions. The hold harmless provisions apply to services provided 

before January 1, 2004. 

EXPLANATION OF PROVISION

The hold harmless provisions governing HOPD reimbursement 

for small rural hospitals would be extended to January 1, 2006. 

The hold harmless provisions would be extended to sole community 

hospitals located in a rural area starting for services furnished on 

or after January 1, 2004 until January 1, 2006. The Secretary 

would be required to conduct a study to determine if the costs by 

APC groups incurred by rural providers exceed such costs incurred 

by urban providers. If appropriate, the Secretary would provide a 

payment adjustment to reflect the higher costs of rural providers 

by January 1, 2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

During the proposed rule for the start of the HOPD PPS, CMS 

found that rural hospital costs were higher than other hospitals. 

CMS did not recommend adjusting payments due to the poor quality of the data. This continues the hold harmless from any negative 

effect from the PPS for small rural hospitals and extends it to sole 

community hospitals until the Secretary reexamines this issue. 

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Section 408. Exclusion of Certain Rural Health Clinic and Federally Qualified Health Center Services from the Prospective Payment System for Skilled Nursing Facilities 

CURRENT LAW

Under the PPS, skilled nursing facilities (SNFs) are paid a predetermined amount to cover all services provided in a day, including the costs associated with room and board, nursing, therapy, 

and drugs; the daily payment would vary depending upon a patient’s therapy, nursing and special care needs as established by 

one of 44 resource utilization groups (RUGs). Certain services and 

items provided a SNF resident, such as physicians’ services, specified ambulance services, chemotherapy items and services, and certain outpatient services from a Medicare-participating hospital or 

critical access hospital, are excluded from the SNF PPS and paid 

separately under Part B. 

EXPLANATION OF PROVISION

Services provided by a rural health clinic (RHCs) and a federally 

qualified health center (FQHC) after January 1, 2004 would be excluded from SNF PPS, if such services were excluded if furnished 

by an physician or practitioner who was not affiliated with a RHC 

or FQHC.

EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2004. 

REASON FOR CHANGE

In some rural areas, local physicians may be employed in a rural 

health clinic or federally qualified health clinic. This would allow 

them to get paid for their professional services to skilled nursing 

patients like other physicians. 

Section 409. Recognition of Attending Nurse Practitioners as Attending Physicians To Serve Hospice Patients 

CURRENT LAW

Medicare covers hospice services to care for the terminal illnesses 

of the beneficiary. In general, beneficiaries who elect the hospice 

benefit give up other Medicare services that seek to treat the terminal illness or that duplicate services provided by the hospice. 

Services are provided primarily in the patient’s home by a Medicare-approved hospice. Reasonable and necessary medical and support services for the management of the terminal illness are furnished under a written plan-of-care established and periodically reviewed by the patient’s attending physician and the hospice. To be 

eligible for Medicare’s hospice care, a beneficiary must be certified 

as terminally ill by an attending physician and the medical director 

or other physician at the hospice and elect hospice treatment. An 

attending physician who may be an employee of the hospice is identified by the patient as having the most significant role in the determination and delivery of his or her medical care when the patient makes an election to receive hospice care. 

210

EXPLANATION OF PROVISION

A beneficiary would be able to identify a nurse practitioner (who 

is not employed by the hospice) as an attending physician. The 

nurse practitioner would not be able to certify the beneficiary as 

terminally ill. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In rural areas, the independent nurse practitioner provides a significant amount of the care to patients up to and during their terminal illness. This allows them to continue in their clinical role 

with the patient. 

Section 410. Improvement in Payments To Retain Emergency Capacity for Ambulance Services in Rural Areas 

CURRENT LAW

Traditionally, Medicare has paid suppliers of ambulance services 

on a reasonable charge basis and paid provider-based ambulances 

on a reasonable cost basis. BBA 97 provided for the establishment 

of a national fee schedule, which was to be implemented in phases. 

The required fee schedule became effective April 1, 2002 with full 

implementation by January 2006. In the transition period, a gradually decreasing portion of the payment is to be based on the prior 

payment methodology (either reasonable costs or reasonable 

charges which were subject to national limitation amounts). 

The fee schedule payment amount equals the base rate for the 

level of service plus payment for mileage and specified adjustment 

factors. Additional mileage payments are made in rural areas. 

BIPA increased payment for rural ambulance mileage for distances 

greater than 17 miles and up to 50 miles for services provided before January 1, 2004. The amount of the increase was at least onehalf of the payment per mile established in the fee schedule for the 

first 17 miles of transport. 

EXPLANATION OF PROVISION

The Secretary would be required to increase the base rate of the 

fee schedule for ground ambulance services that originate in a 

qualified rural area to account for the higher average costs incurred by providers furnishing a low volume of services. A qualified 

rural area is a county that has not been assigned to a metropolitan 

statistical area (MSA) with a population density of Medicare beneficiaries in the lowest quartile of all rural county populations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The current adjustment may overpay rural ambulances in more 

populated areas and underpays them in less populated areas. Recent analyses by the General Accounting Office suggest that it is 

fixed costs—represented by the base rate—not mileage that are the 

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significant factor for increased costs in rural areas. In particular, 

the ambulances in the lowest 25 percent of rural counties may have 

less than one trip per day.

Section 411. Two-Year Increase for Home Health Services Furnished 

in a Rural Area 

CURRENT LAW

The Medicare home health PPS, implemented on October 1, 

2000, provides a standardized payment for a 60–day episode of care 

furnished to a Medicare beneficiary. Medicare’s payment is adjusted to reflect the type and intensity of care furnished and area 

wages as measured by the hospital wage index. BIPA increased 

PPS payments by 10 percent for home health services furnished in 

the home of beneficiaries living in rural areas during the two-year 

period beginning April 1, 2001, through March 31, 2003, without 

regard to certain budget-neutrality provisions applying to home 

health PPS. The temporary additional payment is not included in 

the base for determination of payment updates. 

EXPLANATION OF PROVISION

The provision would extend a five percent additional payment for 

home health care services furnished in a rural area during FY 2004 

and 2005 without regard to certain budget-neutrality requirements. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC recommends extending the five percent add-on for oneyear while further analysis is done on rural agency home health 

margins. The two-year extension is to provide Congress with time 

to evaluate that information and decide what action is needed, if 

any. 

Section 412. Providing Safe Harbor for Certain Collaborative Efforts that Benefit Medically Underserved Populations 

CURRENT LAW

People who knowingly and willfully offer or pay a kickback, a 

bribe, or rebate to directly or indirectly induce referrals or the provision of services under a Federal program may be subject to financial penalties and imprisonment. Certain exceptions or safe harbors 

that are not considered violations of the anti-kickback statute have 

been established. 

EXPLANATION OF PROVISION

Remuneration in the form of a contract, lease, grant, loan or 

other agreement between a public or non-profit private health center and an individual or entity providing goods or services to the 

health center would not be a violation of the anti-kickback statute 

if such an agreement would contribute to the ability of the health 

center to maintain or increase the availability or quality of services 

provided to a medically underserved population. The Secretary 

would be required to establish standards, on an expedited basis, reVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00211 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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lated to this safe harbor that would consider whether the arrangement: (1) results in savings of Federal grant funds or increased revenues to the health center, (2) expands or limits a patient’s freedom of choice, and (3) protects a health care professional’s independence regarding the provision of medically appropriate treatment. The Secretary would also be able to include other standards 

that are consistent with Congressional intent in enacting this exception. The Secretary would be required to publish an interim 

final rule in the Federal Register no later than 180 days from enactment that would establish these standards. The rule would be 

effective immediately, subject to change after a public comment period of not more than 60 days. 

EFFECTIVE DATE

Upon enactment 

REASON FOR CHANGE

This would finalize policy under development at the Department 

of Health and Human Services. 

Section 413. GAO Study of Geographic Differences 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

GAO would be required to study geographic differences in payment amounts in the physician fee schedule including: (1) an assessment of the validity of each component of the geographic adjustment factors; (2) an evaluation of the measures and the frequency with which they are revised; and (3) an evaluation of the 

methods used to establish the costs of professional liability insurance including the variation between physician specialties and 

among different states, the update to the geographic cost of practice index, and the relative weights for the malpractice component. 

The study, including recommendations concerning use of more current data and use of cost data rather than price proxies, would be 

due to Congress within 1 year of enactment. 

EFFECTIVE DATE

Upon enactment.

Section 414. Treatment of Missing Cost Reporting Periods for Sole 

Community Hospitals 

CURRENT LAW

Sole community hospitals (SCHs) are hospitals that, because of 

factors such as isolated location, weather conditions, travel conditions, or absence of other hospitals, are the sole source of inpatient 

services reasonably available in a geographic area, or are located 

more than 35 road miles from another hospital. The primary advantage of an SCH classification is that these hospitals receive 

Medicare payments based on the current national PPS national 

standardize amount or on hospital-specific per discharge costs from 

either FY 1982, FY1987 or FY1996 updated to the current year, 

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whatever amount would provide the highest Medicare reimbursement. The FY1996 base year option became effective for discharges 

on or after FY2001 on a phased in basis and would be fully implemented for SCH discharges on or after FY2004. 

EXPLANATION OF PROVISION

A hospital would not be able to be denied treatment as a SCH 

or receive payment as a SCH because data are unavailable for any 

cost reporting period due to changes in ownership, changes in fiscal 

intermediaries, or other extraordinary circumstances, so long as 

data from at least one applicable base cost reporting period is 

available. 

EFFECTIVE DATE

The provision would apply to cost reporting periods beginning on 

or after January 1, 2004. 

REASON FOR CHANGE

During changes in fiscal intermediaries or in a change of ownership, historical information on a provider can be lost or misplaced. 

The purpose of the sole community hospital program is to provide 

for additional payment to protect access, which should not be stymied due to human error. Since sole community hospitals are paid 

the higher of any of the base years or the Federal rate, this does 

not result in preferential payments for these hospitals compared to 

other sole community hospitals. 

Section 415. Extension of Telemedicine Demonstration Project 

CURRENT LAW

BBA 97 authorized a telemedicine demonstration project for 

beneficiaries with diabetes mellitus in medically underserved rural 

or inner-city areas. BBRA required the Secretary to award the 

demonstration to the best technical proposal as of the bill’s enactment date, no later than three months after enactment without additional review. BBRA also clarified that qualified medically underserved rural or urban inner-city areas are federally designated 

medically underserved areas or Health Provider Shortage Areas 

(HPSAs) at the time of enrollment in the project. Furthermore, it 

made changes in the project’s data requirements, and limited beneficiary cost-sharing. The demonstration would expire in February 

2004. 

EXPLANATION OF PROVISION

This provision would extend the demonstration for an additional 

four years. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Difficulty finding appropriate participants delayed the demonstration’s start. This extension would provide additional time to 

fully evaluate the clinical effectiveness of the program, and to deVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00213 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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termine the long-term effectiveness of the approach. It would also 

provide more time to collect clinical data to evaluate the project’s 

cost-effectiveness. 

Section 416. Adjustment to the Medicare Inpatient Hospital PPS 

Wage Index to Revise the Labor-Related Share of Such Index 

CURRENT LAW

Hospitals’ DRG payments are adjusted by the hospital wage 

index. The adjusted portion of the payment is determined by the 

labor share. The labor share has three components: wages (50.7 

percent), fringe benefits (11 percent), and rest is the so-called labor 

related costs. 

EXPLANATION OF PROVISION

It reduces the labor share down to 62 percent of wages and 

fringe benefits for those areas with wage index values under 1.0. 

All other areas are held harmless from the change in the labor 

share. 

EFFECTIVE DATE

October 1, 2003. 

REASON FOR CHANGE

MedPAC and others have questioned whether some or all of the 

labor related costs in the labor share should be included. This 

eliminates these costs from the labor share for the areas that benefit from such a change.

Section 417. Medicare Incentive Payment Program Improvements 

for Physician Scarcity 

CURRENT LAW

Under the Medicare Incentive Program, physicians receive a 10 

percent bonus payment for services provided in health professional 

shortage areas. Physicians are responsible for indicating their eligibility for this bonus on their billing forms. 

EXPLANATION OF PROVISION

This provision would establish a new five percent bonus payment 

program for physicians providing care to Medicare beneficiaries in 

physician scarcity areas. The Secretary would calculate two measures of scarcity. A primary care scarcity area would be determined 

based on the number of primary care physicians per Medicare beneficiary—the primary care ratio. A specialty care scarcity area 

would be based on the number of specialty care physicians per 

Medicare beneficiary—the specialty care ratio. The number of physicians would be based on physicians who actively practice medicine or osteopathy, and would exclude physicians whose practice is 

exclusively for the Federal Government, physicians who are retired, or physicians who only provide administrative services. 

The Secretary would rank each county or area based on its primary care ratio. Primary care scarcity counties or areas would be 

those counties or areas with the lowest primary care ratios, such 

that 20 percent of Medicare beneficiaries reside in these counties, 

215

when each county or area is weighted by the number of Medicare 

beneficiaries in the county or area. Specialty care scarcity counties 

or areas would be identified in the same manner, using the specialty care ratio. There would be no administrative or judicial review of the identification of counties or areas, or of a specialty of 

any physician. 

To the extent feasible, the Secretary would treat a rural census 

tract of a metropolitan statistical area, as determined under the 

most recent modification of the Goldsmith Modification, as an 

equivalent area for purposes of qualifying as a primary care scarcity area or specialty care scarcity area. 

The Secretary would be required to publish a list of all areas 

which would qualify as primary care scarcity counties or specialty 

care scarcity counties as part of the proposed and final rules to implement the physician fee schedule. 

The provision would also include improvement to the Medicare 

Incentive Payment Program, which provides a 10 percent bonus to 

physicians in shortage areas. The Secretary would be required to 

establish procedures under which the Secretary, and not the physician furnishing the service, would be responsible for determining 

when a bonus payment should be made. As part of the physician 

proposed and final rule for the physician fee schedule, the Secretary would be required to include a list of all areas which would 

qualify as a health professional shortage area for the upcoming 

year. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The new five percent bonus for physicians in either primary care 

scarcity counties or specialty care scarcity counties would increase 

financial incentives for physicians to provide care to Medicare 

beneficiaries in these areas with a shortage of physicians. This 

bonus payment would make it easier to recruit and retain physicians in these scarcity areas. 

Improvements to the Medicare Incentive Program would shift responsibility for identifying eligibility for the 10 percent bonus from 

physicians to the Secretary. 

E. TITLE V—PROVISIONS RELATING TO PART A 

Subtitle A—Inpatient Hospital Services 

Section 501. Revision of Acute Hospital Payment Updates 

CURRENT LAW

Each year, Medicare’s operating payments to hospitals are increased or updated by a factor that is determined in part by the 

projected annual change in the hospital market basket. Congress 

establishes the update for Medicare’s inpatient PPS for operating 

costs, often several years in advance. 

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EXPLANATION OF PROVISION

Acute hospitals would receive a market basket update minus 0.4 

percent for three years. This results in an average 3.1 percent update for FY2004 through FY2006, equivalent to market basket 

minus 0.4 percent. The Secretary is also directed to compile and 

clarify the procedures and policies for billing for blood and blood 

costs in the hospital outpatient setting as well as the operation of 

the collection of the blood deductible. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC unanimously recommended that Congress increase payments by 3.1 percent instead of the scheduled 3.5 percent. This results in a $3 billion increase in hospital payments for FY 2004. 

This is 0.4 percent less than current law due to expected increases 

in productivity. According to MedPAC, the modest expected productivity increase for hospitals is lower than would be considered to 

be sufficient for many private industries. 

There is little precedent for hospitals to receive a full market 

basket increase. Congress has only given hospitals the full inflationary increase twice since the start of the hospital prospective 

payment system. Congress has legislated multiple-year changes in 

every Medicare bill except in the Omnibus Budget Reconciliation 

Act of 1989. Finally, this is a comparatively generous provision 

since Congress has typically reduced the inflationary offset by 1.2 

percent—three times greater than the 0.4 percent recommended by 

MedPAC and presented in the bill. 

The proposal replaces a historical saw tooth pattern of updates 

ranging from zero to full market basket to put hospitals’ Medicare 

payments on a predictable stable funding path. 

Section 502. Recognition of New Medical Technologies Under Inpatient Hospital PPS 

CURRENT LAW

BIPA established that Medicare’s inpatient hospital payment system should include a mechanism to recognize the costs of new medical services and technologies for discharges beginning on or after 

October 1, 2001. The additional hospital payments can be made by 

means of new technology groups, an add-on payment, a payment 

adjustment, or other mechanism, but cannot be a separate fee 

schedule and must be budget-neutral. A medical service or technology will be considered to be new if it meets criteria established 

by the Secretary after notice and the opportunity for public comment. CMS published the final regulation implementing these provisions on September 7, 2001. This regulation changed the meeting 

schedule for decisions on the creation and implementation of new 

billing codes (ICD–9–CM codes). The regulation also established 

that technology providing a substantial improvement to existing 

treatments would qualify for additional payments. The add-on payment for eligible new technology would occur when the standard diagnosis-related group (DRG) payment was inadequate; this threshVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00216 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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old was established as one standard deviation above the mean 

standardized DRG. In these cases, the add-on payment for new 

technology would be the lesser of (a) 50 percent of the costs of the 

new technology, or (b) 50 percent of the amount by which the costs 

exceeded the standard DRG payment; however, if the new technology payments are estimated to exceed the budgeted target 

amount of one percent of the total operating inpatient payments, 

the add-on payments are reduced prospectively. 

Medicare pays hospitals additional amounts for atypical cases 

that have extraordinarily high costs compared to most discharges 

classified in the same DRG. The additional payment amount is 

equal to 80 percent of the difference between the hospital’s entire 

cost for the stay and the threshold amount. 

EXPLANATION OF PROVISION

The Secretary would be required to add new diagnosis and procedure codes in April 1 of each year that would not be required to 

affect Medicare’s payment or DRG classification until the fiscal 

year that begins after that date. The Secretary would not be able 

to deny a service or technology treatment as a new technology because the service (or technology) has been in use prior to the 2-to3 year period before it was issued a billing code and a sample of 

specific discharges where the service has been used can be identified. When establishing whether DRG payments are inadequate, 

the Secretary would be required to apply a threshold that is 75 percent of one standard deviation for the DRG involved. 

The Secretary would be required to provide additional clarification in regulating the criteria used to determine whether a new 

service represents an advance in technology that substantially improves the existing diagnosis or treatment. The Secretary would be 

required to deem that a technology provides a substantial improvement on an existing treatment if the technology in question: (1) is 

a drug or a biological that is designated under section 506 of the 

Federal Food, Drug, and Cosmetic Act, approved under section 

314.510 or 601.41 of Title 21, Code of Federal Regulations, designated for priority review when the marketing application was 

filed, or (2) is a medical device for which an exemption has been 

granted under section 520(m) of such Act, or for which priority or 

expedited review has been provided under section 515(d)(5). For 

other technologies that may be substantial improvements, the Secretary would be required to: (1) maintain and update a public list 

of pending applications for specific services and technologies to be 

evaluated for eligibility for additional payment; (2) accept comments, recommendations, and data from the public regarding 

whether a service or technology represents a substantial improvement; and (3) provide for a meeting at which organizations representing physicians, beneficiaries, manufacturers or other interested parties may present comments, recommendations, and data 

to the clinical staff of CMS regarding whether a service or technology represents a substantial improvement. These actions would 

occur prior to the publication of the proposed regulation. 

Before establishing an add-on payment as the appropriate reimbursement mechanism, the Secretary would be directed to identify 

one or more DRGs and assign the technology to that DRG, taking 

into account similar clinical or anatomical characteristics and the 

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relative cost of the technology. The Secretary would assign an eligible technology into a DRG where the average cost of care most 

closely approximates the cost of the new technology. In such a case, 

no add-on payment would be made; the application of the budgetneutrality requirement with respect to annual DRG reclassifications and recalculation of associated DRG weights would not be affected. The Secretary would be required to increase the percentage 

associated with add-on payments from 50 percent to the marginal 

rate or the percentage that Medicare reimburses inpatient outlier 

cases. 

The Secretary would be directed to automatically reconsider an 

application as a new technology that was denied for FY2003 as a 

FY2004 application under these new provisions. If such an application were granted, the maximum time period otherwise permitted 

for such classification as a new technology would be extended by 

12 months.

EFFECTIVE DATE

These provisions would be effective for classifications beginning 

in FY2004. 

REASON FOR CHANGE

CMS has only approved one new technology since these provisions were passed. This provision would allow more technologies to 

be covered and recognizes that the breakthrough technologies are 

new costs to the system. 

Section 503. Increase in Federal Rate for Hospitals in Puerto Rico 

CURRENT LAW

Under Medicare’s prospective payment system for inpatient services, a separate standardized amount is used to establish payments 

for discharges from short-term general hospitals in Puerto Rico. 

BBA 97 provides for an adjustment of the Puerto Rico rate from 

a blended amount based on 25 percent of the federal national 

amount and 75 percent of the local amount to a blended amount 

based on a 50/50 split between national and local amounts. 

EXPLANATION OF PROVISION

Hospitals in Puerto Rico would receive Medicare payments based 

on a 50/50 split between federal and local amounts before October 

1, 2003. From FY2004—FY2007, an increasing amount of the payment rate would be based on federal national rates as follows: during FY2004, payment would be 59 percent national and 41 percent 

local; this would change to 67 percent national and 33 percent local 

during FY2005 and 75 percent national and 25 percent local during 

FY2006 and subsequent years. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Puerto Ricans pay the full Hospital Insurance payroll tax but 

they are not afforded equal Medicare payments to their hospitals. 

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This partially redresses the inequality between the rates, and is 

consistent with the MedPAC recommendation. 

Section 504. Wage Index Adjustment Reclassification Reform 

CURRENT LAW

Acute hospitals may apply to the Medicare Geographic Classification Review Board (MGCRB) for a change in classification from a 

rural area to an urban area, or reassignment from one urban area 

to another urban area, based on the level of wages. The MGCRB 

was created to determine whether a hospital should be redesignated to an area of close proximity for purposes of using that area’s 

standardized amount, wage index, or both. If the MGCRB grants 

reclassification, the new wage index would be used to calculate 

Medicare’s payment for inpatient and outpatient services. Generally, hospitals must demonstrate a close proximity to the areas 

where they seek to be reclassified. A hospital can meet this criteria 

if one of two conditions are met: (1) an urban hospital is no more 

than 15 miles and a rural hospital is no more than 35 miles from 

the area where it wants to be reclassified, or (2) at least 50 percent 

of the hospital’s employees are residents of the area. A rural referral center (RRC) or a sole community hospital (SCH) or a hospital 

that is both a RRC and a SCH does not have to meet the proximity 

criteria. After establishing appropriate proximity, a hospital may 

qualify for the payment rate of another area if it proves that its 

incurred costs are comparable to those of hospitals in that area 

under established criteria. To use an area’s wage index, a rural 

hospital must demonstrate that its average hourly wage is equal to 

at least 82 percent of the average hourly wage of hospitals in the 

area to which it seeks redesignation; an urban hospital must demonstrate that its average hourly wage is at least 84 percent of such 

an area. In addition, an urban hospital cannot be reclassified unless its average hourly wage is at least 108 percent of the average 

hourly wage of the area in which it is located. This standard is 106 

percent for rural hospitals seeking reclassification to another area. 

For redesignations starting in FY2003, the average hourly wage 

comparisons used to determine whether a hospital can use another 

area’s wage index are based on 3 years worth of lagged data submitted by hospitals as part of their cost report. For instance, 

FY2003 wage index reclassifications were based on weighted threeyear averages of average hourly wages using data from FY1997, 

FY1998, and FY1999 cost reports. Wage index reclassifications are 

effective for 3 years unless the hospital notifies the MCGRB and 

withdraws or terminates its reclassification. 

EXPLANATION OF PROVISION

The Secretary would be required to establish an application process and payment adjustment to recognize the commuting patterns 

of hospital employees. A hospital that qualified for such a payment 

adjustment would have average hourly wages that exceed the average wages of the area in which it is located and have at least ten 

percent of its employees living in one or more areas that have higher wage index values. This qualifying hospital would have its wage 

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age of its employees who live in these areas. The process would be 

based on the MGCRB reclassification process and schedule with respect to data submitted. Such an adjustment would be effective for 

three years unless a hospital withdraws or terminates its payment. 

A hospital that receives a commuting wage adjustment would not 

be eligible for reclassification into another area by the MCGRB for 

the purposes of using its wage index or standardized amount. 

These commuting wage adjustments would not affect the computation of the wage index of the area in which the hospital is located 

or any other area. It would also be exempt from certain budget 

neutrality requirements. 

ENACTMENT DATE

Upon enactment. 

REASON FOR CHANGE

Labor market areas may differ from the distance requirements in 

the regulations on reclassification. Thus, using commuting patterns 

of employees more clearly reflects the underlying labor market that 

hospitals confront. This policy will have the effect of blurring the 

current hard line of payment adjustments between two adjacent 

MSAs. 

Section 505. MedPAC Report on Specialty Hospitals 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

MedPAC would be required to conduct a study of specialty hospitals compared with other similar general acute hospitals including the number and extent of patients referred by physicians with 

an investment interest in the facility, the quality of care furnished, 

the impact of the specialty hospital on the acute general hospital, 

and the differences in the scope of services, Medicaid utilization 

and the amount of uncompensated care that is furnished. The report, including recommendations, would be due to Congress no 

later than 1 year from enactment. 

ENACTMENT DATE

Upon enactment. 

Subtitle B—Other Services 

Section 511. Payment for Covered Skilled Nursing Facility Services 

CURRENT LAW

Medicare uses a system of daily rates to pay for care in a skilled 

nursing facility (SNF). There are 44 daily rate categories, known 

as resource utilization groups (RUGs), and each group reflects a 

different case mix and intensity of services, such as skilled nursing 

care and/or various therapies and other services. 

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EXPLANATION OF PROVISION

The per diem RUG payment for a SNF resident with acquired 

immune deficiency syndrome (AIDS) would be increased by 128 

percent. This payment increase would not apply after the date 

when the Secretary certifies that the SNF case mix adjustment 

adequately compensates for the facility’s increased costs associated 

with caring for a resident with AIDS. 

ENACTMENT DATE

The provision would be effective for services on or after October 

1, 2003. 

REASON FOR CHANGE

According to prior work by the Urban Institute, AIDS patients 

have much higher costs than other patients in the same resource 

utilization groups in skilled nursing facilities. The adjustment is 

based on that data analysis. 

Section 512. Coverage of Hospice Consultation Services 

CURRENT LAW

Current law authorized coverage of hospice services, in lieu of 

certain other Medicare benefits, for terminally ill beneficiaries who 

elect such coverage. 

EXPLANATION OF PROVISION

Coverage of certain physicians’ services for certain terminally ill 

individuals would be authorized. Persons entitled to these services 

would be individuals who have not elected the hospice benefit and 

have not previously received these physicians’ services. Covered 

services would be those furnished by a physician who is the medical director or employee of a hospice program. Services would include evaluating the individual’s need for pain and symptom management, counseling the individual with respect to end-of-life issues 

and care options, and advising the individual regarding advanced 

care planning. Payment for such services would equal the amount 

established for similar services under the physician fee schedule, 

excluding the practice expense component. 

EFFECTIVE DATE

The provision would apply to consultation services provided by a 

hospice program on or after January 1, 2004.

REASON FOR CHANGE

Many patients, especially those with congestive heart failure, are 

not educated about the option of receiving hospice services to alleviate their pain and suffering. Moreover, hospice lengths of stay 

keep dropping, suggesting that patients are referred too late in 

their illness. This provision would encourage physicians to talk 

more with patients about hospice. 

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F. TITLE VI—PROVISIONS RELATING TO PART B 

Subtitle A—Physicians’ Services 

Section 601. Revision of Updates for Physicians’ Services 

CURRENT LAW

Medicare pays for services of physicians and certain non-physician practitioners on the basis of a fee schedule. The fee schedule, 

in place since 1992, is intended to relate payments for a given service to the actual resources used in providing that service. The fee 

schedule assigns relative values to services. These relative values 

reflect physician work (i.e., the time, skill, and intensity it takes 

to provide the service), practice expenses, and malpractice costs. 

The relative values are adjusted for geographic variations in costs. 

The adjusted relative values are then converted into a dollar payment amount by a conversion factor. 

The law provides a specific formula for calculating the annual 

update to the conversion factor. The intent of the formula is to 

place a restraint on overall increases in spending for physicians’ 

services. Several factors enter into the calculation of the formula. 

These include: (1) the sustainable growth rate (SGR), which is essentially a target for Medicare spending growth for physicians’ 

services, (2) the Medicare economic index (MEI), which measures 

inflation in the inputs needed to produce physicians’ services, and 

(3) an adjustment that modifies the update, which would otherwise 

be allowed by the MEI, to bring spending in line with the SGR target. The SGR target is not a limit on expenditures. Rather, the fee 

schedule update reflects the success or failure in meeting the target. If expenditures exceed the target, the update for a future year 

is reduced. 

The annual percentage update to the conversion factor equals the 

MEI, subject to an adjustment (known as the update adjustment 

factor) to match target spending for physicians’ services under the 

SGR system. (During a transition period, 2001–2005, an additional 

adjustment is made to achieve budget neutrality.) The update adjustment sets the conversion factor at a level so that projected 

spending for the year would meet allowed spending by the end of 

the year. Allowed spending for the year is calculated using the 

SGR. However, in no case can the update adjustment factor be less 

than minus seven percent or more than plus three percent. 

The update adjustment factor is the sum of: (1) the prior year adjustment component, and (2) the cumulative adjustment component. The prior year adjustment component is determined by: (1) 

computing the difference between allowed expenditures for physicians’ services for the prior year and the amount of actual expenditures for that year, (2) dividing this amount by the actual expenditures for that year, and (3) multiplying that amount by 0.75. The 

cumulative adjustment component is determined by: (1) computing 

the difference between allowed expenditures for physicians’ services 

from April 1, 1996 through the end of the prior year and the 

amount of actual expenditures during such period, (2) dividing that 

difference by actual expenditures for the prior year as increased by 

the SGR for the year for which the update adjustment factor is to 

be determined, and (3) multiplying that amount by 0.33. 

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The law also specifies a formula for calculating the SGR that is 

based on changes in four factors: (1) the estimated change in fees, 

(2) the estimated change in average number of Part B enrollees 

(excluding Medicare+Choice beneficiaries), (3) the estimated projected growth in real gross domestic product (GDP) per capita, and 

(4) the estimated change in expenditure due to changes in law or 

regulations. This formula is designed to adjust for how well actual 

expenditures meet SGR target expenditures. 

Provisions in the Consolidated Appropriations Resolution of 2003 

(P.L. 108–7) permitted redeterminations of SGR for prior years to 

correct for faulty data for the number of FFS beneficiaries in 1998 

and 1999. As a result, the conversion factor for 2003 was increased 

1.6 percent over the 2002 level. Other aspects of the formula for 

the annual payment rate were not addressed. 

CMS estimates an update of ¥4.2 percent for 2004, followed by 

a smaller negative update in 2005. 

EXPLANATION OF PROVISION

The update to the conversion factor for 2004 and 2005 would be 

not less than 1.5 percent. 

The formula for calculating the sustainable growth rate would be 

modified. Starting in 2003, the GDP factor would be based on the 

annual average change over the preceding 10 years (a 10-year rolling average.) The current GDP factor measures the 1-year change 

from the preceding year. 

EFFECTIVE DATE

Upon enactment. The 10-year rolling average calculation of the 

GDP would apply to computations of the SGR starting in 2003. 

REASON FOR CHANGE

CMS actuaries project a ¥4.2 percent update for 2004 and a 

smaller negative update for 2005. This provision would prevent 

those negative updates from occurring, and provide for modest increases in physician payment rates. These modest increases would 

ensure continuing access to physician services for Medicare beneficiaries.

The provision also includes a 10–year rolling average calculation 

of GDP as a modest change to the update formula. This change 

would promote stability in the physician updates over time by limiting the volatility of the SGR payments, which now oscillate dramatically based on year-to-year changes in economic performance. 

Section 602. Studies on Access to Physicians Services 

CURRENT LAW

Periodic analyses by the Physician Payment Review Commission, 

MedPAC, and CMS showed that access to physicians’ services remained generally adequate for most beneficiaries through 1999. 

Detailed data is not available for a subsequent period; however, 

several recent surveys show a decline in the percentage of physicians accepting new Medicare patients. 

224

EXPLANATION OF PROVISION

GAO would be required to conduct a study on access of Medicare 

beneficiaries to physicians’ services under Medicare. The study 

would include an assessment of beneficiaries’ use of services 

through an analysis of claims data. It would also examine changes 

in use of physicians’ services over time. Further, it would examine 

the extent to which physicians are not accepting new Medicare 

beneficiaries as patients. GAO would be required to submit a report to Congress on this study within 18 months of enactment. The 

report would include a determination whether data from claims 

submitted by physicians indicate potential access problems for 

beneficiaries in certain geographic areas. The report would also include a determination whether access by beneficiaries to physicians’ services has improved, remained constant, or deteriorated 

over time. 

The Secretary would be required to request the Institute of Medicine to conduct a study on the adequacy of the supply of physicians 

(including specialists) in the country and the factors that affect 

supply. The Secretary would be required to submit the results of 

the study in a report to Congress no later than 2 years of the date 

of enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 603. MedPAC Report on Payment for Physicians’ Services 

CURRENT LAW

Medicare pays for physicians’ services on the basis of a fee schedule. The fee schedule assigns relative values to services. These relative values reflect physician work, practice expenses and malpractice expenses. Resource-based practice expense relative values 

were phased-in beginning in 1999. Beginning in 2002, the values 

were totally resource-based. 

Certain services have a professional component and a technical 

component. The technical component does not include a relative 

value for physician work. A global value includes both the professional and technical components. The physician must bill for the 

global value if the physician furnishes both the professional component and the technical component. 

EXPLANATION OF PROVISION

MedPAC would be required to report to Congress on the effects 

of refinements to the practice expense component in the case of 

services for which there are no physician work relative value units. 

The report is to examine the following by specialty: (1) the effects 

of refinements on payments for physicians services, (2) interaction 

of the practice expense component with other components of and 

adjustments to payment for physicians’ services, (3) appropriateness of the amount of compensation by reason of such refinements, 

(4) effect of such refinements on access to care by Medicare beneficiaries to physicians’ services, and (5) effect of such refinements 

on physician participation under the Medicare program. The report 

would be due within one year of enactment. 

225

EFFECTIVE DATE

Upon enactment. 

Subtitle B—Preventive Services 

Section 611. Coverage of an Initial Preventive Physical Examination 

CURRENT LAW

Medicare covers a number of preventive services. However, it 

does not cover routine physical examinations. 

EXPLANATION OF PROVISION

Medicare would cover an initial free preventive physical examination. The physical examination would be defined as physicians’ 

services consisting of a physical examination with the goal of 

health promotion and disease detection. It would include items and 

services (excluding clinical laboratory tests) consistent with the recommendations of the United States Preventive Services Task Force 

as determined by the Secretary. A covered initial preventive physical examination would be one performed no later than six months 

after the individual’s initial coverage date under Part B. Initial 

preventive physical exams would be included in the definition of 

physicians’ services for purposes of the physician fee schedule. The 

Part B deductible and coinsurance would be waived for initial preventive physical exams. 

EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2004 for those individuals whose coverage begins on or after 

such date.

REASON FOR CHANGE

The US Preventive Services Task Force has recommended coverage of a preventive physical exam. An initial physical exam for 

new Medicare beneficiaries would permit identification of any 

health problems and allow for initiation of appropriate treatment, 

thereby reducing more acute and expensive interactions with the 

health care system in the future. 

Section 612. Coverage of Cholesterol and Blood Lipid Screening 

CURRENT LAW

Medicare covers a number of preventive services. However, it 

does not cover cholesterol and blood lipid screening. 

EXPLANATION OF PROVISION

Medicare coverage of cholesterol and blood lipid screening would 

be authorized. The screening would be defined as diagnostic testing 

of cholesterol and other lipid levels of the blood for the purpose of 

early detection of abnormal cholesterol and other lipid levels. The 

Secretary would be required to establish standards regarding the 

frequency and type of these screening tests, but not more often 

than once every two years. 

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EFFECTIVE DATE

The provision would apply to services furnished on or after January 1, 2005. 

REASON FOR CHANGE

The US Preventive Services Task Force has recommended coverage of cholesterol and blood lipid screening for the elderly. This 

preventive care benefit would allow for early detection and treatment of health problems. 

Section 613. Waiver of Deductible for Colorectal Cancer Screening 

Tests 

CURRENT LAW

Covered colorectal screening tests for prevention purposes include: (1) an annual fecal-occult blood test for individuals age 50 

and older, (2) flexible sigmoidoscopy every four years for individuals age 50 and older, (3) colonoscopy for high-risk individuals 

every two years and for other individuals every 10 years, and (4) 

screening barium enemas every four years for individuals age 50 

and older who are not at high risk of developing colorectal cancer 

or every two years for high risk individuals. Payment is made according to the applicable payment system for the provider performing the test. 

Colorectal cancer screening tests are subject to beneficiary cost 

sharing amounts, including an annual deductible and coinsurance 

amount. 

EXPLANATION OF PROVISION

The Part B deductibles would be waived for colorectal cancer 

screening tests. 

EFFECTIVE DATE

The provision would apply to items and services furnished on or 

after January 1, 2004. 

REASON FOR CHANGE

Beneficiaries have not availed themselves of preventive colorectal 

cancer screening tests to the extent anticipated after Medicare coverage of these tests became available under BBA 97. This provision 

would waive the deductible to increase beneficiary use of these important screening tests. 

Section 614. Improved Payment for Certain Mammography Services 

CURRENT LAW

Screening mammography coverage includes the radiological procedure as well as the physician’s interpretation of the results of the 

procedure. The usual Part B deductible is waived for tests. Payment is made under the physician fee schedule. 

Certain services paid under fee schedules or other payment systems including ambulance services, services for patients with endstage renal disease paid under the ESRD composite rate, professional services of physicians and non-physician practitioners paid 

227

under the physician fee schedule, and laboratory services paid 

under the clinical diagnostic laboratory fee schedule are excluded 

from Medicare’s HOPD PPS. 

EXPLANATION OF PROVISION

Unilateral and bilateral diagnostic mammography as well as 

screening mammography services would be excluded from the 

HOPD PPS. The Secretary would be required to provide an appropriate adjustment to the physician fee schedule for the technical 

component of the diagnostic mammography based on the most recent cost data available. This adjustment would be applied to services provided on or after January 1, 2004. 

EFFECTIVE DATE

The provision would apply to mammography performed on or 

after January 1, 2004. 

REASON FOR CHANGE

Mammography services are paid at a much lower rate under the 

HOPD PPS than in the physician office. This establishes a level 

playing field across sites of service, thereby increasing beneficiary 

access to important preventive services. 

Subtitle C—Other Services 

Section 621. Hospital Outpatient Department (HOPD) Payment Reform 

(a) Payment for Drugs 

CURRENT LAW

Under the HOPD PPS, the unit of payment is the individual 

service or procedure as assigned to one of about 570 ambulatory 

payment classifications (APCs) groups. Services are classified into 

APCs based on their Health Csare Common Procedure Coding System (HCPCS), a standardized coding system used to identify products, supplies, and services for claims processing and payment purposes. To the extent possible, integral services and items including 

drugs are bundled or packaged within each APC. For instance, an 

APC for a surgical procedure would include operating and recovery 

room services, anesthesia and surgical supplies. Medicare’s payment for HOPD services is calculated by multiplying the relative 

weight associated with an APC by a geographically adjusted conversion factor. The conversion factor is updated on a calendar year 

schedule and the annual updates are based on the hospital market 

basket (MB). Currently, the CY 2004 HOPD update would equal 

the projected change in the MB. 

Medicare pays for covered outpatient drugs in one of three ways: 

(1) as a transitional pass-through, (2) as a separate APC, or (3) 

packaged into an APC with other services. 

Transitional pass-through payments are supplemental payments 

to cover the incremental cost associated with certain medical devices, drugs and biologicals that are inputs to an existing service. 

The additional payment for a given item is established for two or 

three years and then the costs are incorporated into the APC relVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00227 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ative weights. BBRA specified that pass-through payments would 

be made for current orphan drugs, as designated under section 526 

of the Federal Food, Drug, and Cosmetic Act; current cancer therapy drugs, biologicals, and brachytherapy; current 

radiophamaceutical drugs and biological products; and new drugs 

and biological agents. 

Generally, CMS has established that a pass-through payment for 

an eligible drug is based on the difference between 95 percent of 

its average wholesale price and the portion of the otherwise applicable APC payment rate attributable to the existing drug, subject 

to a budget neutrality provision. The pass-through amount for new 

drugs with a substitute drug recognized in a separate drug APC 

payment is the difference between 95 percent of new drug AWP 

and the payment rate for the comparable dose of the associated 

drug APC. 

Hospital costs for these drugs are used to establish the beneficiary copayment amounts as well as to project the amount of 

pass-through spending to calculate the uniform reduction to payments under the budget neutrality constraint. These hospital costs 

are imputed by multiplying the drug’s AWP by the applicable cost 

to charge ratio, which varies by the class of drug. Although transitional pass-through payments are subject to a budget neutrality requirement, the applicable budget neutrality requirement (2.5 percent through CY2003) was not effective until April 2002. 

Current drugs and biologicals that have been in transitional 

pass-through status on or prior to January 1, 2000, were removed 

from that payment status effective January 1, 2003. CMS established separate APC payments for certain drugs, including orphan 

drugs, blood and blood products, and selected higher cost drugs in 

CY2003. CMS established a threshold of $150 for a drug to qualify 

for a separate APC payment as a higher-cost drug. Other drugs 

that had qualified for a transitional pass-through payment were 

packaged in to procedural APCs. For example, in some instances, 

brachytherapy seeds (radioactive isotopes used in cancer treatments) were packaged into payments for brachytherapy procedures. 

Essentially, the payment rates for these drug-related APCs are 

based on a relative weight calculated in the same way as procedural APCs are calculated. 

Temporary HCPCS codes are used exclusively to bill passthrough payments for new technology items paid under the HOPD 

PPS. These codes cannot be used to bill other Medicare payment 

systems. These codes are added, changed or deleted on a quarterly 

basis to expedite the processing of requests for pass-through status. 

EXPLANATION OF PROVISION

Starting for services furnished on or after January 1, 2004, certain covered HOPD drugs would be paid no more than 95 percent 

of AWP or less than the transition percentage of the AWP from 

CY2004 through CY2006. In subsequent years, payment would be 

equal to average price for the drug in the area and year established 

by the competitive acquisition program under 1847A. The covered 

HOPD drugs affected by this provision are radiopharmaceuticals 

and outpatient drugs that were paid on a pass-through basis on or 

before December 31, 2002. These would not include drugs for which 

pass-through payments are first made on or after January 1, 2003, 

229

or those drugs for which a temporary HCPCS code has not been assigned. Drugs for which a temporary HCPCS code has not been assigned would be reimbursed at 95 percent of AWP. 

The transition percentage to AWP for sole-source drugs manufactured by one entity is 83 percent in CY2004, 77 percent in CY2005, 

and 71 percent in CY2006. The transition percentage to AWP for 

innovator multiple source drugs is 81.5 percent in CY2004, 75 percent in CY2005, and 68 percent in CY2006. The transition percentage to AWP for multiple source drugs with generic drug competitors is no more than 46 percent in CY2004 through CY2006. Generally, a multiple source drug is a covered drug for which there are 

two or more therapeutically equivalent drug products. An innovator 

multiple source drug is a multiple source drug that was originally 

marketed under an original new drug application approved by the 

Food and Drug Administration (FDA). A sole source drug is not a 

multiple source drug. The additional expenditures resulting from 

these provisions would not be subject to the budget neutrality requirement.

Starting in CY2004, the Secretary would be required to lower the 

threshold for establishing a separate APC group for higher cost 

drugs from $150 to $50. These separate drug APC groups would 

not be eligible for outlier payments because their payment already 

increases when the dose increases. 

Starting in CY2004, Medicare’s transitional pass-through payments for drugs and biologicals covered under a competitive acquisition contract would reflect the amount paid under that contract, 

not 95 percent of AWP. 

REASON FOR CHANGE

A GAO study found significant problems with the reimbursement 

for drugs and biologicals under the hospital outpatient system. 

Some drugs were reimbursed a small amount of AWP while others 

were paid far in excess of AWP. Hospital charges were not designed to specifically capture the resource costs for specific items. 

Some hospitals charge a flat markup on all drugs; some hospitals 

charge a lower markup on low cost drugs compared to high cost 

drugs while others do the opposite. As a result, the APC drug 

prices ranged from paying 0.2 percent of AWP to 29,000 percent of 

95 percent AWP, and paid the median generic drugs more than 

sole source drugs. This provision establishes a glide path to the 

hospital acquisition cost numbers from the Kathpol survey undertaken by CMS. Thereafter, a level playing field with drug prices 

across sites of service would be established. CMS is asked to collect 

data from hospitals on their acquisition to be used to adjust the 

rates if necessary. 

(b) Special Payment for Brachytherapy 

CURRENT LAW

Current drugs and biologicals that have been in transitional 

pass-through status on or prior to January 1, 2000 were removed 

from that payment status effective January 1, 2003. CMS established separate APC payments for certain drugs, including orphan 

drugs, blood and blood products, and selected higher cost drugs in 

CY2003. CMS established a threshold of $150 per claim for a drug 

230

to qualify for a separate APC payment as a higher-cost drug. Other 

drugs that had qualified for a transitional pass-through payment 

were packaged into procedural APCs. For example, in some instances, brachytherapy seeds (radioactive isotopes used in cancer 

treatments) were packaged into payments for brachytherapy procedures. Essentially, the payment rates for these drug-related APCs 

are based on a relative weight calculated in the same way as procedural APCs are calculated. 

EXPLANATION OF PROVISION

From January 1, 2004 through December 31, 2006, Medicare’s 

payments for brachytherapy devices would equal the hospital’s 

charges adjusted to costs. The Secretary would be required to create separate APCs to pay for these devices that reflect to the number, isotope, and radioactive intensity of such devices. This would 

include separate groups for palladium-103 and iodine-125 devices. 

GAO would be required to study the appropriateness of payments 

for brachytherapy devices and submit a report including recommendations to Congress no later than January 1, 2005. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The amount of seeds necessary to treat the patient can vary significantly. This changes the payment methodology to reflect differences in clinical resources. 

(c) Functional Equivalence 

CURRENT LAW

In the November 1, 2002, Federal Register final rule, CMS decided that a new anemia treatment for cancer patients was no 

longer eligible for pass-though payments because it was functionally equivalent (although not structurally identical or therapeutically equivalent) to an existing treatment. The transitional passthrough rate for the drug was reduced to zero starting for services 

in 2003. 

EXPLANATION OF PROVISION

The Secretary would be prohibited from applying a functional 

equivalence standard or any similar standard that deems a particular drug or biological to be similar or identical to another drug 

(and therefore ineligible for pass-through payment status) without 

first developing these standards by regulation. Such regulation 

would be required to: (1) be published after a public comment period, (2) contain criteria that provides for coordination with the 

Food and Drug Administration, and (3) be based on scientific studies that demonstrate the clinical relationship between the drugs in 

question. This provision would apply to the application of a functional equivalent determination on or after the date of enactment. 

The provision prohibits the application of this standard to a drug 

or biological prior to June 13, 2003. 

231

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The concept of functional equivalence is new to the Medicare program and should be open to comment by Congress and the public 

through proposed rulemaking. The FDA should be involved since 

these are scientific issues for which CMS lacks expertise.

(d) Hospital Acquisition Cost Study 

CURRENT LAW

CMS estimates hospital costs to establish beneficiary copayment 

amounts as well as to project the amount of pass-through spending 

to calculate the uniform reduction to payments under the budget 

neutrality constraint. These hospital costs are imputed by multiplying AWP for the drug by the applicable cost to charge ratio, 

which varies by the class of drug. 

EXPLANATION OF PROVISION

The Secretary would be required to study the hospital acquisition 

costs related to covered outpatient drugs that cost $50 and more 

that are reimbursed under the HOPD PPS. The study would encompass a representative sample of urban and rural hospitals. The 

report should include recommendations on the usefulness of the 

cost data and frequency of subsequent data collection and would be 

due to Congress no later than January 1, 2006. The report should 

also discuss whether the data is appropriate for making adjustments to payments made under the competitive acquisition contract established by section 1847A and whether separate estimates 

should be made for overhead costs (i.e. handling and administering 

drugs). 

EFFECTIVE DATE

Upon enactment. 

Section 622. Payment for Ambulance Services 

CURRENT LAW

Traditionally, Medicare has paid suppliers of ambulance services 

on a reasonable charge basis and paid provider-based ambulances 

on a reasonable cost basis. BBA 97 provided for the establishment 

of a national fee schedule, which was to implemented in phases, in 

an efficient and fair manner. The required fee schedule became effective April 1, 2002, with full implementation by January 2006. In 

the transition period, a gradually decreasing portion of the payment is to be based on the prior payment methodology (either reasonable costs or reasonable charges). 

The fee schedule payment amount equals the base rate for the 

level of service plus payment for mileage and specified adjustment 

factors. Additional mileage payments are made in rural areas. 

BIPA increased payment for rural ambulance mileage for distances 

greater than 17 miles and up to 50 miles for services provided before January 1, 2004. The amount of the increase was at least oneVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00231 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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half of the payment per mile established in the fee schedule for the 

first 17 miles of transport. 

EXPLANATION OF PROVISION

The phase-in methodology and schedule for full implementation 

of the ambulance fee schedule would be modified. The calculation 

of ambulance fees in the phase-in period would incorporate a decreasing portion of the payment based on regional fee schedules 

calculated for each of nine census regions for those regions that 

lose financially under the fee schedule. Generally, the regional fee 

schedules would be based on the same methodology and data used 

to construct the national fee schedule. For services provided in 

2004, the blended rate would be based on 20 percent of the national fee schedule and 80 percent of the regional fee schedule; in 

2005 blended rate would be based on a 40 percent national and 60 

percent regional split; in 2006, the blended rate would be based on 

a 60 percent national and 40 percent regional split; from 2007–

2009, the blended rate would be based on an 80 percent national 

and 20 percent regional split; and in 2010 and subsequently, the 

ambulance fee schedule would be based on the national fee schedule. 

Medicare’s payments for ground ambulance services would be increased by one quarter of the amount otherwise established for 

trips longer than 50 miles occurring on or after January 1, 2004 

and before January 1 2009. The payment increase would apply regardless of where the transportation originated. GAO would be required to submit an initial report to Congress on the access and 

supply of ambulance services in regions and states where ambulance payments are reduced by December 31, 2005. GAO would be 

required to submit a final report to Congress by January 1, 2004. 

EFFECTIVE DATE

The provision would apply to ambulance services furnished on or 

after January 1, 2004. 

REASON FOR CHANGE

New PPS systems cannot capture all the reasons for past regional differences in cost. This proposal is modeled on the transition of the hospital inpatient PPS and acts to slow down the losses 

in regions that lose significantly under the new fee schedule. 

Section 623. Renal Dialysis Services 

(a) Demonstration of Alternative Delivery Models 

CURRENT LAW

The Secretary announced a demonstration project establishing a 

disease-management program that would allow organizations experienced with treating end-stage renal disease (ESRD) patients to 

develop financing and delivery approaches to better meet the needs 

of beneficiaries with ESRD. CMS is soliciting a variety of types of 

organizations to coordinate care to patients with ESRD, encourage 

the provision of disease-management services for these patients, 

collect clinical performance data and provide incentives for more effective care. 

233

EXPLANATION OF PROVISION

The provision would require the Secretary to establish an advisory board for the ESRD disease management demonstration. The 

advisory board would be comprised of representatives patient organizations, clinicians, MedPAC, the National Kidney Foundation, 

the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health, ESRD networks, Medicare contractors to monitor quality of care, providers of services 

and renal dialysis facilities furnishing end-stage renal disease services, economists, and researchers. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision would allow more patient oversight of the demonstration of changes to the payments system for such a frail population. 

(b) Restoring Composite Rate Exceptions for Pediatric Facilities 

CURRENT LAW

Prior to BIPA, an increase in the composite rate would trigger 

an opportunity for facilities to request an exception to the composite rate in order to receive higher payments. BIPA prohibited 

the Secretary from granting new exceptions to the composite rate 

from applications received after July 1, 2001. 

EXPLANATION OF PROVISION

The prohibition on exceptions would not apply to pediatric ESRD 

facilities as of October 1, 2002. Pediatric facilities would be defined 

as a renal facility with 50 percent of its patients under 18 years 

old. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Pediatric patients require more nursing oversight and more time 

to receive dialysis treatment. This would recognize the higher costs 

of facilities that treat these patients. 

(c) Increase in Renal Dialysis Composite Rate for Services 

Furnished in 2004 

CURRENT LAW

Dialysis facilities providing care to beneficiaries with end-stage 

renal disease (ESRD) receive a fixed prospectively determined payment amount (the composite rate) for each dialysis treatment. 

BBRA increased the composite rates by 1.2 percent for dialysis 

services furnished in both 2000 and 2001. BIPA subsequently increased the mandated 2001 update to 2.4 percent, an increase that 

was to be implemented on the following schedule in order to avoid 

234

a disruption in claims processing: for services furnished from January through March, 2001, the 1.2 percent increase specified by 

BBRA applied; for the remainder of 2001, a transition increase of 

2.79 percent applied. Effective January 1, 2002, the composite rates 

reflected the 2.4 percent increase. There is no rate increase scheduled for ESRD composite payment rate in 2004. 

EXPLANATION OF PROVISION

The provision would increase the ESRD composite payment rate 

by 1.6 percent for 2004. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Medicare Payment Advisory Commission recommended this 

increase in the composite rate for 2004. 

Section 624. One-Year Moratorium on Therapy Caps; Provisions Relating to Reports 

CURRENT LAW

BBA 97 established annual payment limits per beneficiary for all 

outpatient therapy services provided by non-hospital providers. The 

limits applied to services provided by independent therapists as 

well as to those provided by comprehensive outpatient rehabilitation facilities (CORFs) and other rehabilitation agencies. There are 

two beneficiary limits. The first is a $1,500 per beneficiary annual 

cap for all outpatient physical therapy services and speech language pathology services. The second is a $1,500 per beneficiary 

annual cap for all outpatient occupational therapy services. Beginning in 2002, the amount increases by the Medicare Economic 

Index (MEI), rounded to the nearest multiple of $10. The limits do 

not apply to outpatient services provided by hospitals. BBRA 99 

percent suspended application of the therapy limits in 2000 and 

2001. BIPA extended the suspension through 2002. Although the 

therapy caps were scheduled for implementation in January 2003, 

they are not yet being enforced. CMS has scheduled implementation for July 2003. 

Therapy patients must be under the care of a physician. The 

physician or therapist must develop a treatment plan, and the physician must review the plan periodically. 

BBA 97 required the Secretary to report to Congress by January 

1, 2001, on recommendations for a revised coverage policy of outpatient physical therapy and occupational therapy services based 

on a classification of individuals by diagnostic category and prior 

use of services, in both inpatient and outpatient settings, in place 

of uniform dollar limitations. BIPA required the Secretary to conduct a study on the implications of eliminating Medicare’s in-room 

supervision requirement for physical therapy assistants supervised 

by physical therapists its implication on the physical therapy cap. 

A report on the study was due within 18 months of enactment. 

235

EXPLANATION OF PROVISION

Application of the therapy caps would be suspended during CY 

2004. The Secretary would be required to submit the reports required by BBA 97 and BIPA by December 31, 2003. The Secretary 

would be required to request the Institute of Medicine to identify 

conditions or diseases that should justify conducting an assessment 

of the need to waive the therapy caps. The Secretary would be required to submit to Congress a preliminary report on the conditions 

and diseases identified by July 1, 2004. A final report, including 

recommendations, would be due by October 1, 2004. 

GAO would be required to conduct a study on access to physical 

therapist services in states authorizing access to such services 

without a physician referral compared to states that require such 

a physician referral. The study would: (1) examine the use of and 

referral patterns for physical therapist services for patients age 50 

and older in states that authorize such services without a physician 

referral and in states that require such a referral, (2) examine the 

use of and referral patterns for physical therapist services for patients who are Medicare beneficiaries, (3) examine the physical 

therapist services within the facilities of the Department of Defense, and (4) analyze the potential impact on beneficiaries and on 

Medicare expenditures of eliminating the need for a physician referral for physical therapist services under the Medicare program. 

GAO would be required to submit a report to Congress on the 

study within one year of enactment. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Secretary has not provided a recommendation to Congress of 

criteria, with respect to conditions and diseases, under which a 

waiver of therapy caps would apply for individual Medicare beneficiaries. The implementation of therapy caps would be waived for 

2004 because the Secretary has failed to provide a recommendation. The Secretary would have until October 1, 2004 to provide a 

recommendation to Congress. 

Section 625. Adjustment to Payments for Services Furnished in Ambulatory Surgical Centers 

CURRENT LAW

Medicare uses a fee schedule to pay for the facility services related to a surgery provided in an ACS. The associated physician 

services (surgery and anesthesia) are reimbursed under the physician fee schedule. CMS maintains the list of approved ASC procedures that is required to be updated every 2 years. The Secretary 

is required to update ASC rates based on a survey of the actual audited costs incurred by a representative sample of ASCs every 5 

years beginning no later than January 1, 1995. Between revisions, 

the rates are to be updated annually on a calendar year schedule 

using the CPI–U. From FY1998 through FY2002, the update was 

established as the CPI–U minus 2.0 percentage points, but not less 

than zero. 

236

EXPLANATION OF PROVISION

The update would be reduced two percentage points for five 

years. ASCs would get an increase calculated as the CPI–U minus 

2.0 percentage points (but not less than zero) in each of the fiscal 

years from 2004 through 2008. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

MedPAC made three recommendations regarding ASCs, including a freeze on payments for 2004. This update would allow ASCs 

a small increase in payments while a more permanent solution is 

developed. The Committee urges CMS and ASCs to complete the 

collection of recent ASC charge and cost data, so that the ASC payment system can be analyzed and revised. Furthermore, the Committee recognizes the inconsistency in payments to ASCs and 

HOPD PPS rates for the same procedures. ASCs are urged to cooperate with CMS in providing recent charge and cost data to prevent changes to ASC payments that might not be supported if full 

data were available. 

Section 626. Payment for Certain Shoes and Inserts under the Fee 

Schedule for Orthotics and Prosthetics 

CURRENT LAW

Subject to specified limits and under certain circumstances, 

Medicare would pay for extra-depth shoes with inserts or custom 

molded shoes with inserts for an individual with severe diabetic 

foot disease. Coverage is limited to one of the following within a 

calendar year: (1) one pair of custom-molded shoes (including inserts provided with such shoes) and two additional pairs of inserts, 

or (2) one pair of extra-depth shoes (not including inserts provided 

with such shoes) and three pairs of inserts. An individual may substitute modifications of custom-molded or extra-depth shoes instead 

of obtaining one pair of inserts, other than the initial pair of inserts. Footwear must be fitted and furnished by a podiatrist or 

other qualified individual such as a pedorthist, orthotist, or prosthetist. The certifying physician may not furnish the therapeutic 

shoe unless the physician is the only qualified individual in the 

area. 

Payment is made on a reasonable charge basis, subject to upper 

limits established by the Secretary. These limits are based on 1988 

amounts that were set forth in Section 1833(o) of the Act and then 

adjusted by the same percentage increases allowed for DME fees 

except that if the updated limit is not a multiple of $1, it is rounded to the nearest multiple of $1. The Secretary or a carrier may 

establish lower payment limits than established by statute if shoes 

and inserts of an appropriate quality are readily available at lower 

amounts. 

Although updates in payment for diabetic shoes is related to that 

used to increase the DME fee schedule, the shoes are not subject 

to DME coverage rules or the DME fee schedule. In addition, diaVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00236 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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betic shoes are neither considered DME nor orthotics, but a separate category of coverage under Medicare Part B. 

EXPLANATION OF PROVISION

Payment for diabetic shoes would be limited by the amount that 

would be paid if they were considered to be a prosthetic or orthotic 

device. The Secretary or a carrier would be able to establish lower 

payment limits than these amounts if shoes and inserts of an appropriate quality are readily available at lower amounts. The Secretary would be required to establish a payment amount for an individual substituting modifications to the covered shoe that would 

assure that there is no net increase in Medicare expenditures. 

EFFECTIVE DATE

The provision would apply to items furnished on or after January 

1, 2004. 

REASON FOR CHANGE

The payment for shoes was determined based on an arbitrary 

amount set in the statute. The amount exceeded the retail price for 

some comparable items. This treats diabetic shoes the same as all 

other durable medical equipment. 

Section 627. Waiver of Part B Late Enrollment Penalty for Certain 

Military Retirees; Special Enrollment Period 

CURRENT LAW

A late enrollment penalty is imposed on beneficiaries who do not 

enroll in Medicare Part B upon becoming eligible for Medicare. 

EXPLANATION OF PROVISION

Congress enacted TRICARE for Life, which re-established 

TRICARE health care coverage as a wraparound to Medicare for 

military retirees, age 65 and older. To take advantage of the 

TRICARE for Life program, military retirees must be enrolled in 

Medicare Part B. There is a late enrollment penalty for military retirees who do not enroll in Medicare Part B upon becoming eligible 

for Medicare. This provision would waive the late enrollment penalty for military retirees, 65 and older, who enroll(ed) in the 

TRICARE for Life program from 2001–2004. 

The Secretary would also be required to provide a special enrollment period for these military retirees beginning as soon as possible after enactment and ending December 31, 2004. For the individual who enrolls during the special enrollment period, coverage 

would begin on the first day of the month, following the month in 

which the individual enrolled. 

EFFECTIVE DATE

The provision would apply to premiums for months beginning 

with January 2004. A method would be established to provide rebates of premium penalties paid for by military retirees for months 

on or after January 2004. 

238

REASON FOR CHANGE

The Floyd A. Spence National Defense Authorization Act for FY 

2001 opened TRICARE to Medicare-eligible military retirees for the 

first time, allowing them to keep their military health benefits past 

the age of 65. This benefit became available for the first time on 

January 1, 2001. 

This provision would eliminate two barriers prevent many retirees from accessing these benefits. First, many retirees who received 

military care in military health facilities on a space-available basis 

did not purchase Part B coverage when initially eligible. Upon late 

enrollment, they must pay a 10 percent penalty for each year that 

enrollment was delayed. Second, because Medicare enrollment is 

only available during an annual open enrollment season, from January 1 to March 31 each year, many retirees would have to wait 

until 2004 to secure coverage. 

The waiver of the late-enrollment penalty and provision for a 

special enrollment period would remove these barriers. 

Section 628. Part B Deductible 

CURRENT LAW

Under Part B, Medicare generally pays 80 percent of the approved amount for covered services after the beneficiary pays an 

annual deductible of $100. The Part B deductible has set at $100 

since 1991. 

EXPLANATION OF PROVISION

The Medicare Part B deductible would rise from $100 in 2003 to 

$104 in 2004, and grow with Medicare inflation thereafter. As a result, the Part B deductible would grow at the same rate as expenditures per capita for Part B services. The amount would be rounded 

to the nearest dollar. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

In 1966, Medicare’s $50 Part B deductible equaled about 45 percent of Part B charges. Today’s $100 deductible equals about three 

percent of such charges. Indexing the Part B deductible to grow at 

the same rate as total Part B spending per beneficiary would maintain the deductible at 3 percent of such charges over time. 

An unchanged Part B deductible is a benefit increase over time, 

as costs of medical care rise. Beneficiaries pay about 25 percent of 

this benefit increase, through increased Part B premiums; taxpayers finance the remaining 75 percent. The Part B deductible 

has increased only three times since the beginning of Medicare, 

when it was $50. The deductible has since been increased to $60 

in 1973, $75 in 1982, and $100 in 1991. About one-half of beneficiaries are insulated from Part B deductibles through Medigap, 

Medicaid, or employer-sponsored supplemental insurance that covers the Part B deductible. 

239

Section 629. Extension of Coverage of Intravenous Immune Globulin 

(IVIG) for the Treatment of Primary Immune Deficiency Diseases in the Home 

CURRENT LAW

Currently, Medicare provides reimbursement under Part B for 

the infusion of IVIG in a hospital outpatient or physician office setting. 

EXPLANATION OF CHANGE

The proposal would permit patients with primary immune deficiency to receive IVIG at home instead of in the currently covered 

settings. Unlike the other settings, however, home coverage would 

include only the cost of the drug; patients would be responsible for 

the cost of a nurse or other health care professional to administer 

the infusion. 

EFFECTIVE DATE

Applies to items furnished on or after January 1, 2004. 

REASON FOR CHANGE

Primary immune deficiency diseases are inherited disorders in 

which parts of the body’s immune system are missing or do not 

function properly. These disorders affect more than 50,000 Americans. In order to maintain their health, most primary immune deficiency patients require monthly infusions of a plasma derivative 

known as intravenous immune globulin (IVIG). Without this life 

saving therapy, primary immune deficient patients would be subject to serious infection, illness and premature death. 

Given their compromised immune systems, these patients are 

particularly vulnerable to the many infections to which individuals 

in a hospital or other health care facility are exposed. Home coverage of these infusions for appropriate patients would reduce this 

health risk and be significantly more convenient. 

The Balanced Budget Refinement Act directed the Department of 

Health and Human Services to study the feasibility of allowing the 

existing covered drug to be reimbursed when delivered in the 

home. The study, conducted by the Lewin Group, examined issues 

such as cost, safety, access to care, and the practices of private insurers. The study concluded home coverage of IVIG is appropriate. 

G. TITLE VII—PROVISIONS RELATING TO PARTS A AND B 

Subtitle A—Home Health Services 

Section 701. Update in Home Health Services 

CURRENT LAW

Home health service payments are increased on a federal fiscal 

year basis that begins in October. The FY 2004 statutory update 

would be the full increase in the market basket index. 

EXPLANATION OF PROVISION

This provision would increase home health agency payments by 

the home health market basket percentage increase minus 0.4 perVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00239 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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centage points for 2004 through 2006. The update for subsequent 

years would be the full market basket percentage increase. The 

provision would also change the time frame for the update from the 

federal fiscal year to a calendar year basis. The home health prospective payment rates would not increase for the October 1 

through December 31, 2003, period. 

EFFECTIVE DATE

Upon enactment.s 

REASON FOR CHANGE

The Medicare Payment Advisory Commission recommended that 

Congress should eliminate the update to payment rates for home 

health services for fiscal year 2004. The Medicare margins for all 

agencies are 23.3 percent, even given the October 1, 2003 reduction. The mb-0.4 provides substantial payment increases for home 

heath agencies. However, they would be lower than current law 

and would provide stability.

Section 702. Establishment of Reduced Copayment for a Home 

Health Service Episode of Care for Certain Beneficiaries 

CURRENT LAW

The home health benefit does not have any cost sharing requirement. 

EXPLANATION OF PROVISION

This provision would establish a beneficiary copayment for each 

60–day episode of care beginning January 1, 2004. The amount of 

the copayment would be 1.5 percent of the national average payment per episode in a calendar year, as projected by the Secretary 

before the beginning of the year. The copayment amount would be 

rounded to the nearest multiple of five dollars. For 2004, the copayment would be $40 unless the Secretary provides the results of the 

statutory formula in a timely manner. Medicare payment for each 

episode would be reduced to reflect the copayment amount. Qualified Medicare beneficiaries (low-income beneficiaries for whom 

Medicaid pays Medicare premiums, deductibles, and coinsurance), 

beneficiaries dually eligible for Medicare and Medicaid, and beneficiaries receiving five or fewer home health visits per episode of 

care would not face any cost-sharing requirements. Administrative 

and judicial review of the calculated copayment amounts would be 

prohibited. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Unlike almost all Part B services, the Medicare home health benefit does not have a copayment. The typical beneficiary receives 

about $3,000 worth of free home health care (CBO estimate). At 

the same time, home health spending is increasing rapidly rising 

almost 13 percent a year between 2004 and 2012 (CBO). In fact, 

the Congressional Budget Office estimates home health spending 

241

will have almost tripled in size in that same period. When spending increases, so do beneficiary premiums because they are tied to 

program’s costs. 

Part of the reason for the spending increases it because it is difficult to determine if the beneficiary really needs home health 

(GAO and CMS). Requiring even nominal copays encourages beneficiaries to use care more prudently. 

For the 90 percent of beneficiaries that have supplemental policies or other coverage, the Medicare program collects the copayments by automatically crossing over the claim to their insurance 

companies. Thus, the copayments generate little administrative 

cost for an agency. 

Section 703. MedPAC Study of Medicare Margins of Home Health 

Agencies 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The provision would require MedPAC to study payment margins 

of home health agencies paid under the Medicare prospective payment system. The study would examine whether systematic differences in payment margins were related to differences in case 

mix, as measured by home health resource groups (HHRGs). 

MedPAC would be required to submit a report to Congress on the 

study within two years of enactment. 

EFFECTIVE DATE

Upon enactment. 

Subtitle B—Direct Graduate Medical Education 

Section 711. Extension of Update Limitation on High Cost Programs 

CURRENT LAW

Medicare pays hospitals for its share of direct graduate medical 

education (DGME) costs in approved programs using a count of the 

hospitals number of full-time equivalent residents and a hospitalspecific historic cost per resident, updated for inflation. BBRA 

changed Medicare’s methodology for calculating DGME payments 

to teaching hospitals to incorporate a new benchmark set at the national average amount based on FY1997 hospital specific per resident amounts. Starting in FY2001, hospitals received no less than 

70 percent of a geographically adjusted national average amount. 

BIPA increased this floor to 85 percent of the locality adjusted, updated, and weighted national per resident amounts starting for cost 

report periods beginning during FY2002. Hospitals with per resident amounts above 140 percent of the geographically adjusted national average amount had payments frozen at current levels for 

FY2001 and FY2002, and in FY2003–FY2005 would receive an update equal to the Consumer Price Index (CPI) increase minus two 

percentage points. Currently, hospitals with per resident amounts 

between 85 percent and 140 percent of the geographically adjusted 

242

national average would continue to receive payments based on 

their hospital-specific per resident amounts updated for inflation. 

EXPLANATION OF PROVISION

The hospitals with per resident amounts above 140 percent of the 

geographically adjusted national average amount would not get an 

update from FY2004 through FY2013.

EFFECTIVE DATE

Upon enactment 

REASON FOR CHANGE

The DGME amounts in these high cost hospitals are far higher 

that can be explained by the cost of living and legitimate difference 

in overhead. High quality medical training is delivered in most facilities for a fraction of the cost of high-cost institutions. The Medicare payments to these institutions have nothing to do with actual 

costs of training these physicians. 

Subtitle C—Chronic Care Improvement 

Section 721. Voluntary Chronic Care Improvement Under Traditional Fee-for-Service 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process for providing chronic care improvement programs for Medicare beneficiaries in FFS Medicare (Parts A and B) who have certain chronic 

conditions such as congestive heart failure, diabetes, chronic obstructive pulmonary disease, stroke or other diseases as identified 

by the Secretary. The Secretary would establish administrative regions, Chronic Care Improvement Administrative regions (CCIAs) 

within the United States for chronic care improvement programs. 

Within each CCIA, the Secretary would select at least two contractors under a competitive bidding process on the basis of the ability 

of each bidder to achieve improved health outcomes of the participating beneficiaries and improved financial outcomes of the Medicare program. A contractor would be a disease improvement organization, health insurer, provider organization, group of physicians, 

or any other legal entity that the Secretary determines appropriate. 

Contractors would be required to meet certain clinical, quality improvement, financial, and other requirements specified by the Secretary either directly or indirectly through the use of subcontractors. The Secretary would be able to phase-in implementation of 

the program beginning one-year after enactment. 

Each program would be required to have a method for identifying 

targeted Medicare beneficiaries who would be offered participation 

in the program. The Secretary would be required to assist the program in identifying beneficiaries. Each beneficiary would be assigned to only one contractor that would be responsible for guiding 

beneficiaries in managing their health including all co-morbidities. 

Initial contact with a Medicare beneficiary would be from the SecVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00242 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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retary who would provide information about the program, including 

a description of advantages in participating. The Secretary would 

inform the beneficiary that the contractor would contact the beneficiary directly concerning participation, the voluntary nature of 

program participation, and a means of declining to participate or 

decline being contacted by the program. Each program would be required to develop an individualized, goal-oriented chronic care improvement plan with the beneficiary. The chronic care improvement plan would be required to contain: a single point of contact 

to coordinate care; self-improvement education for the individual 

and support education for health care providers, primary caregivers, and family members; coordination between prescription 

drug benefits, home health, and other health care services; collaboration with physicians and other providers to enhance communication of relevant clinical information; the use of monitoring technologies, where appropriate; and information about hospice care, 

pain and palliative care, and end-of-life care, as appropriate. In developing the chronic care improvement plan, programs would be required to use decision support tools such as evidence-based practice 

guidelines and a clinical information database to track and monitor 

each beneficiary across care settings and evaluate outcomes. The 

program would be required to meet any additional requirements 

that the Secretary finds appropriate. Programs would be accredited 

by qualified organizations to be deemed to have met such requirements as specified by the Secretary. 

Contractor payments for each chronic care improvement program 

would be required to result in Medicare program outlays that 

would otherwise have been incurred in the absence of the program 

for the three-year contract period. The Secretary would be required 

to assure that there would be no net aggregate increase in Medicare payments, in entering into a contract for the program over the 

three-year period. Contracts for chronic care improvement programs would be treated as a risk-sharing arrangement. In addition, 

payment to contractors would be subject to the contractor meeting 

clinical and financial performance standards established by the 

Secretary. 

Program contractors would be required to report to the Secretary 

on the quality of care and efficacy of the program in terms of process measures (such as reductions in errors and re-hospitalization 

rates), beneficiary and provider satisfaction, health outcomes, and 

financial outcomes. The Secretary would be required to submit to 

Congress annual reports on the program including information on 

progress made toward national coverage, common delivery models, 

and information on improvements in health outcomes, as well as financial efficiencies resulting from the program. The Secretary 

would also be required to conduct a randomized clinical trial to assess the potential for cost reductions under Medicare by comparing 

costs of beneficiaries enrolled in chronic care improvement programs and beneficiaries who are eligible to participate but are not 

enrolled. 

Appropriations of such sums as necessary to provide for contracts 

with chronic care improvement programs would be authorized from 

the Medicare Trust Funds. 

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EFFECTIVE DATE

The provision would be effective upon enactment and the Secretary would be required to begin implementing the chronic care 

improvement programs no later than one-year after enactment.

REASON FOR CHANGE

Under current law, FFS Medicare does not offer coordinated care 

programs for the chronically ill. Chronic care management is an 

important issue, because 84 percent of seniors have one or more 

chronic conditions. In addition, individuals with chronic conditions 

account for 80 percent of all health care spending, with two-thirds 

of Medicare spending being spent on seniors with five or more 

chronic conditions. CMS has run demonstration programs in the 

Medicare program, particularly for high cost or especially frail 

adults. CMS is currently managing more than a dozen demonstration programs on disease and case management. A permanent program should be established within FFS Medicare that offers chronic care management to high-cost chronically ill seniors. 

Section 722. Chronic Care Improvement Under Medicare Advantage 

and Enhanced Fee-for-Service Programs 

CURRENT LAW

Under the Medicare+Choice program, organizations are required 

to have quality assurance programs that include measuring outcomes, monitoring and evaluating high volume and high risk services and the care of acute and chronic conditions, and evaluating 

the effectiveness of the efforts. 

EXPLANATION OF PROVISION

Each Medicare Advantage plan offered would be required to have 

a chronic care improvement program for enrollees with multiple or 

sufficiently severe chronic conditions such as congestive heart failure, diabetes, chronic obstructive pulmonary disease, stroke or 

other disease as identified by the Secretary. The program would be 

required to have a method for monitoring and identifying enrollees 

with multiple or sufficiently severe chronic conditions and to develop with an enrollee’s consent an individualized, goal-oriented 

chronic care improvement plan. 

The chronic care improvement plan would be required to include: 

a single point of contact to coordinate care; self-improvement education for the individual and support education for health care providers, primary caregivers, and family members; coordination between prescription drug benefits, home health, and other health 

care services; collaboration with physicians and other providers to 

enhance communication of relevant clinical information; the use of 

monitoring technologies, where appropriate; and information about 

hospice care, pain and palliative care, and end-of-life care, as appropriate. In developing the chronic care improvement plan, programs would be required to use decision support tools such as evidence-based practice guidelines and a clinical information database 

to track and monitor each beneficiary across care settings and 

evaluate health outcomes. The program would be required to meet 

any additional requirements that the Secretary finds appropriate. 

245

Programs that have been accredited by qualified organizations 

would be deemed to have met such requirements as specified by 

the Secretary. 

Each Medicare Advantage organization would be required to report to the Secretary on the quality of care and efficacy of the 

chronic care improvement program. 

EFFECTIVE DATE

The provision would apply for contract years beginning on or 

after one year after enactment. 

REASON FOR CHANGE

Many Medicare Health Maintenance Organizations (HMOs) already provide chronic care management programs. These programs 

target high-cost beneficiaries suffering from one or more chronic 

conditions and coordinate their care within plan. This requirement 

for private plans would continue the chronic care/disease management programs most Medicare HMOs already have in place. 

Section 723. Institute of Medicine Report 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to contract with the Institute of 

Medicine of the National Academy of Sciences to study the barriers 

to effective integrated chronic care improvement for Medicare beneficiaries with multiple or severe chronic conditions across settings 

and over time. The study would examine the statutory and regulatory barriers to coordinating care across settings for Medicare 

beneficiaries in transition from one setting to another. The Institute of Medicine would be required to submit the report of the 

study to the Secretary and Congress no later than 18 months after 

enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 724. MedPAC Report 

CURRENT LAW

No provision.

EXPLANATION OF PROVISION

MedPAC would be required to evaluate the chronic care improvement program. The evaluation would include a description of the 

status concerning implementation of the program, the quality of 

health care services provided to individuals participating in the 

program, and the cost savings attributed to implementation. The 

report of the evaluation would be submitted to Congress not later 

than two years after implementation of the program. 

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EFFECTIVE DATE

Upon enactment. 

Subtitle D—Other Provisions 

Section 731. Modifications to MedPAC 

CURRENT LAW

The Medicare Payment Advisory Commission is a 17-member 

body that reports and makes recommendations to Congress regarding Medicare payment policies. The Comptroller General is required to establish a public disclosure system for Commissioners to 

disclose financial and other potential conflicts of interest. 

EXPLANATION OF PROVISION

MedPAC would be required to examine the budgetary consequences of a recommendation before making the recommendation 

and to review the factors affecting the efficient provision of expenditures for services in different health care sectors under FFS Medicare. MedPAC would be required to submit two additional reports 

no later than June 1, 2003. The first report would study the need 

for current data, and the sources of current data available, to determine the solvency and financial circumstances of hospitals and 

other Medicare providers. MedPAC would be required to examine 

data on uncompensated care, as well as the share of uncompensated care accounted for by the expenses for treating illegal aliens. 

The second report would address investments and capital financing 

of hospitals participating under Medicare and access to capital financing for private and not-for-profit hospitals. The provision 

would also require that members of the Commission be treated as 

employees of Congress for purposes of financial disclosure requirements. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Congress needs to ensure that the Commission remains the objective impartial agency that it is today. Moreover, the Commission 

cannot be removed from the same constraints that Congress itself 

must face through considerations of the budget. 

Section 732. Demonstration Project for Medical Adult Day Care 

Services 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subject to earlier provisions, the Secretary would be required to 

establish a demonstration project under which a home health agency, directly or under arrangement with a medical adult day care facility, provide medical adult day care services as a substitute for 

a portion of home health services otherwise provided in a beneVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00246 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ficiary’s home. Such services would have to be provided as part of 

a plan for an episode of care for home health services established 

for a beneficiary. Payment for the episode would equal 95 percent 

of the amount that would otherwise apply. In no case would the 

agency or facility be able to charge the beneficiary separately for 

the medical adult day care services. The Secretary would reduce 

payments made under the home health prospective payment system to offset any amounts spent on the demonstration project. The 

three-year demonstration project would be conducted at not more 

than five sites, selected by the Secretary, in states that license or 

certify providers of medical adult day care services. Participation of 

up to 15,000 Medicare beneficiaries would be on a voluntary basis. 

When selecting participants, the Secretary would give preference 

to home health agencies that are currently licensed to furnish medical adult day care services and have furnished such services to 

Medicare beneficiaries on a continuous basis for a prior two-year 

period. A medical adult day care facility would: (1) have been licensed or certified by a State to furnish medical adult day care 

services for a continuous two-year period, (2) have been engaged in 

providing skilled nursing services or other therapeutic services directly or under arrangement with a home health agency, and (3) 

would meet quality standards and other requirements as established by the Secretary. The Secretary would be able to waive necessary Medicare requirements except that beneficiaries must be 

homebound in order to be eligible for home health services. 

The Secretary would be required to evaluate the project’s clinical 

and cost effectiveness and submit a report to Congress no later 

than 30 months after its commencement. The report would include: 

(1) an analysis of patient outcomes and comparative costs relative 

to beneficiaries who receive only home health services for the same 

health conditions, and (2) recommendations concerning the extension, expansion, or termination of the project. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

This demonstration would test the delivery of home health services in a group setting. While many of these patients are very frail, 

social interaction may prove to have a clinical benefit. At the same 

time, the current quality standards remain for delivering home 

health care. 

Section 733. Improvements in National and Local Coverage Determination Process To Respond to Changes in Technology 

(a) National and Local Coverage Determination Process 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (a) would require the Secretary to make available to 

the public the general guidelines used in making national coverage 

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quired to include the way in which the Secretary considers evidence to assess whether a procedure or device is reasonable or necessary. The provision would establish a time frame for decisions regarding national coverage determinations of six months after a request when a technology assessment is not required and 12 months 

when a technology assessment is required and in which a clinical 

trial is not requested. Following the six- or 12-month period, the 

Secretary would be required to make a draft of the proposed decision available in the HHS website or by other means; to provide 

a 30-day public comment period; to make a final decision on the request with 60 days following the conclusion of the public comment 

period; and make the clinical evidence and data used in making the 

decision available to the public. In instances where the Medicare 

Coverage Advisory Committee does not review a request for a national coverage determination, the Secretary would be required to 

consult with appropriate outside clinical experts. 

The Secretary would also be required to develop a plan to evaluate new local coverage determinations to decide which local decisions should be adopted nationally and to decide to what extent 

greater consistency can be achieved among local coverage decisions, 

to require the Medicare contractors within an area to consult on 

new local coverage policies, and to disseminate information on local 

coverage determination among Medicare contractors to reduce duplication of effort. 

EFFECTIVE DATE

The provision would be effective for determinations as of January 

1, 2004. 

REASON FOR CHANGE

The General Accounting Office reported in April 2003 problems 

with both the national coverage and local coverage process. Even 

though CMS assigned a 90-day process for coverage decisions, the 

average time was seven months with several taking over a year. 

GAO recommended establishing new time frames and a public 

process. GAO also found the local coverage process resulted in inequities for beneficiaries and wasteful duplication of administrative 

costs. 

(b) Medicare Coverage of Routine Costs Associated With Certain Clinical Trials 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (b) would provide for the coverage of the routine costs 

of care for Medicare beneficiaries participating in clinical trials 

that are conducted in accordance with an investigational device exemption approved under section 530(g) of the Federal Food, Drug, 

and Cosmetic Act. 

249

EFFECTIVE DATE

The provision would be effective for clinical trials begun before, 

on, or after the date of enactment and to items and services furnished on or after enactment. 

REASON FOR CHANGE

There is a discontinuity between the coverage of clinical trials 

using breakthrough devices and the coverage afforded other routine 

clinical trials. This provision would resolve this problem. 

(c) Issuance of Temporary National Codes 

CURRENT LAW

The Secretary issues temporary national Health Care Common 

Procedure Coding System (HCPCS) codes under Medicare Part B 

that are used until permanent codes are established. 

EXPLANATION OF PROVISION

Subsection (c) would require that the Secretary implement revised procedures for the issuance of temporary national HCPCS 

codes.

EFFECTIVE DATE

The provision would be effective not later than one year after enactment. 

REASON FOR CHANGE

Coding for HCPCs under Part B is a patchwork with temporary 

codes allowed for some services and not for others. This would create national uniformity. 

Section 734. Extension of Treatment for Certain Physician Pathology Services Under Medicare 

CURRENT LAW

In general, independent laboratories cannot directly bill for the 

technical component of pathology services provided to Medicare 

beneficiaries who are inpatients or outpatients of acute care hospitals. BIPA permitted independent laboratories with existing arrangements with acute hospitals to bill Medicare separately for the 

technical component of pathology services provided to the hospitals’ 

inpatients and outpatients. The arrangement between the hospital 

and the independent laboratory had to be in effect as of July 22, 

1999. The direct payments for these services apply to services furnished during a two-year period starting on January 1, 2001 and 

ending December 31, 2002. 

EXPLANATION OF PROVISION

Medicare would make direct payments for the technical component for these pathology services. A change in hospital ownership 

would not affect these direct billing arrangements. 

EFFECTIVE DATE

Upon enactment. 

250

REASON FOR CHANGE

Many hospitals do not have on-site pathology services and this 

provision would continue the prior arrangements. 

H. TITLE VIII—MEDICARE BENEFITS ADMINISTRATION

Section 801. Establishment of Medicare Benefits Administration 

CURRENT LAW

The authority for administering the Medicare program resides 

with the Secretary of Health and Human Services. The Secretary 

originally created the agency that administers the Medicare and 

Medicaid programs in 1977 under his administrative authority. 

Regulations regarding Medicare are required to be promulgated by 

the Secretary. The Medicare statute requires the President to appoint the Administrator of CMS (formerly known as the Health 

Care Financing Administration) with the advice and consent of the 

Senate. Title V of the U.S. Codes sets the MBA Administrator’s salary at level IV of the Executive Schedule. The Medicare statute requires the CMS Administrator to appoint a Chief Actuary who reports directly to such Administrator and receives pay at the highest 

rate of basic pay for the Senior Executive Service. 

EXPLANATION OF PROVISION

The section would amend Title XVIII to add a new Section 1809 

that, under subsection (a), would establish a new Medicare Benefits 

Administration (MBA) within the Department of Health and 

Human Services. 

Subsection (b) would provide for an Administrator and Deputy 

Administrator of the MBA. The President with the advice and consent of the Senate would appoint both for 4-year terms. If a successor did not take office at the end of the term, the Administrator 

would continue in office until the successor enters the office. In 

that event, the confirmed successor’s term would be the balance of 

the 4-year period. The Administrator would be paid at level III of 

the Executive Schedule and the Deputy Administrator at level IV 

of the Executive Schedule. The Administrator would be responsible 

for the exercise of all powers and the discharge of duties of the 

MBA and has authority and control over all personnel. The provision would permit the Administrator to prescribe such rules and 

regulations as the Administrator determined necessary or appropriate to carry out the functions of MBA, subject to the Administrative Procedure Act. The Administrator would be able to establish 

different organizational units within the MBA except for any unit, 

component, or provision specifically provided for by section 1809. 

The Administrator may assign duties, delegate, or authorize re-delegations of authority to MBA officers and employees as needed. 

The Secretary shall ensure appropriate coordination between the 

Administrators of MBA and CMS to administer the Medicare program. The provision also would establish a position of Chief Actuary within the MBA who would be appointed by the Administrator 

and paid at the highest rate of basic pay for the Senior Executive 

Service. The Chief Actuary would exercise such duties as are appropriate for the office of Chief Actuary and in accordance with 

professional standards of actuarial independence. 

251

Subsection (c) would prescribe the duties of the Administrator 

and administrative provisions relating to the MBA. In administering parts C, D, and E of Medicare, the Administrator would be 

required to negotiate, enter into, and enforce contracts with PDP 

and MA–EFFS sponsors. The Administrator would be required to 

carry out any duty provided for under Part C, D, or E, including 

implementation of the prescription drug discount card program and 

demonstration programs (carried out in whole or in part under 

Part C, D, or E). The provision specifically prohibits the Administrator from requiring a particular formulary or instituting a price 

structure for the reimbursement of covered drugs; from interfering 

in any way with negotiations between PDP and MA–EFFS sponsors, drug manufacturers, wholesalers, or other suppliers of covered 

drugs; and from otherwise interfering with the competitive nature 

of providing prescription drug coverage. The Administrator would 

be required to submit a report to Congress and the President on 

the administration of parts C, D, and E during the previous year 

by not later than March 31 of each year.

The Administrator, with the approval of the Secretary, would be 

permitted to hire staff to administer the activities of MBA without 

regard to chapter 31 of title 5 of the U.S. Code B other than sections 3110, the prohibition against officials hiring relatives, and 

3112, the hiring preferences given to veterans. The Administrator 

would be required to employ staff with appropriate and necessary 

experience in negotiating contracts in the private sector. The staff 

of MBA would be paid without regard to chapter 51 (other than 

section 5101 requiring classification of positions according to certain principles) and chapter 53 (other than section 5301 relating to 

the principles of pay systems) of title 5 of the U.S. Code. The rate 

of compensation for staff of MBA would not be able to exceed level 

IV of the Executive Schedule. The Administrator would be limited 

in the number of full-time-equivalent (FTEs) employees for the 

MBA to the number of FTEs within CMS performing the functions 

being transferred at the time of enactment. The Secretary, the Administrator of MBA, and the Administrator of CMS would be required to establish an appropriate transition of responsibility to redelegate the administration of Medicare part C from CMS to MBA. 

The provision requires the Secretary to ensure that the Administrator of CMS transfers such information and data as the Administrator of MBA requires to carry out the duties of MBA. 

Subsection (d) would require the Secretary to establish an Office 

of Beneficiary Assistance within MBA to coordinate Medicare beneficiary outreach and education activities, and provide Medicare 

benefit and appeals information to Medicare beneficiaries under 

parts C, D, and E. 

Subsection (e) would establish the Medicare Policy Advisory 

Board (the Board) within the MBA to advise, consult with, and 

make recommendations to the Administrator regarding the administration and payment policies of parts C, D, and E. The Board 

would be required to report to Congress and to the Administrator 

of MBA such reports as the Board determines appropriate and may 

contain recommendations that the Board considers appropriate regarding legislative or administrative changes to improve the administration of parts C, D, and E including: increasing competition 

under part C, D, or E for services furnished to beneficiaries; imVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00251 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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proving efforts to provide beneficiaries information and education 

about Medicare, parts C, D, and E, and Medicare enrollment; evaluating implementation of risk adjustment under parts C and E; 

and improving competition and access to plans under parts C, D, 

and E. The reports would be required to be published in the Federal Register. The reports would be submitted directly to Congress 

and no officer or agency of the government would be allowed to require the Board to submit a report for approval, comments, or review prior to submission to Congress. Not later than 90 days after 

a report is submitted to the Administrator, the Administrator 

would be required to submit to Congress and the President an 

analysis of the recommendations made by the Board. The analysis 

would be required to be published in the Federal Register. 

The Board would be made up of 7 members serving three-year 

terms, with three members appointed by the President, two appointed by the Speaker of the House of Representatives, and two 

appointed by the President pro tempore of the Senate. Board members may be reappointed but may not serve for more than 8 years. 

The Board shall elect the Chair to serve for three years. The Board 

is required to meet at least three times a year and at the call of 

the Chair. 

The Board is required to have a director who, with the approval 

of the Board, may appoint staff without regard to certain sections 

of chapter 31 of title 5 of the United States Code (which addresses 

authority for employment). In addition, the director and staff may 

be paid without regard to certain provisions of chapter 51 and 53 

of title 5 which are related to classification and pay rates and pay 

systems B although the rate of compensation is capped at level IV 

of the Executive Schedule. The Board may contract with and compensate government and private agencies or persons to carry out 

its duties without regard to section 3709 of the Revised Statutes 

(41 U.S.C. (5). 

Subsection (f) authorizes an appropriation of such sums as are 

necessary from the Federal Hospital Insurance Trust Fund and 

from the Federal Supplementary Medical Insurance Trust Fund 

(including the Prescription Drug Account) to carry out section 1808. 

EFFECTIVE DATE

The provision would be effective upon enactment; however, the 

enrollment and eligibility functions and implementation of parts C 

and E would be effective January 1, 2006. 

REASON FOR CHANGE

A new agency, the Medicare Benefits Administration, would provide a more flexible and contemporary structure that is citizen-centered, results-oriented, and market-based. The administration of 

Parts C, D, and E would be separated from the administration of 

other parts of Medicare to ensure appropriate conduct of those 

parts of Medicare involving contracts with private organizations. 

Implementing the M+C program in the past, CMS’s decisions 

have made it difficult for private plans to participate in the program. Indeed, CMS has an inherent conflict of interest in administering traditional FFS while regulating the private plans. Placing 

the administration of Parts C, D, and E under a new MBA would 

create an agency whose main responsibility is the implementation 

253

and operation of successful private plan programs that enhance 

beneficiary choice. 

The MBA would reshape the federal bureaucracy to better coordinate health plans and the prescription drug benefit, and replace a 

current system that is inefficient and outdated. 

Civil service law reforms would permit the MBA to hire the best 

possible staff, with private sector experience in negotiating with 

plans. The MBA would have the ability to create a modern workforce by paying for performance, disciplining bad workers without 

lengthy appeals, and hiring employees more quickly. These changes 

would promote general government efficiency.

(c) Miscellaneous Administrative Provisions 

CURRENT LAW

The Board of Trustees of the Medicare Trust Funds is composed 

of the Commissioner of Social Security, the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and 

Human Services and two members of the public. The Administrator 

of the Centers for Medicare & Medicaid Services serves as the Secretary of the Board of Trustees. 

Title 5 of the U.S. Code sets the Administrator’s salary at level 

IV of the Executive Schedule. 

EXPLANATION OF PROVISION

Paragraph (1) would add the Administrator of MBA as an ex officio member of the Board of Trustees of the Medicare Trust Funds. 

Paragraph (2) would increase the pay level for the Administrator 

of CMS from level IV of the Executive Schedule to level III. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Administrator of the MBA should be a member of the Board 

of Trustees to represent that part of Medicare involving contracts 

with private entities. The Administrator of CMS should be paid at 

the same level as the Administrator of the MBA. 

I. TITLE IX—REGULATORY RELIEF

Subtitle A—Regulatory Reform 

Section 901. Construction; Definition of Supplier 

CURRENT LAW

Section 1861 of the Social Security Act contains definitions of 

services, institutions, and so forth under Medicare. Supplier is not 

explicitly defined. 

EXPLANATION OF PROVISION

Nothing in this title would be construed as compromising or affecting existing legal remedies for addressing fraud or abuse, 

whether it be criminal prosecution, civil enforcement or administrative remedies (including the False Claims Act) or to prevent or imVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00253 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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pede HHS from its efforts to eliminate waste, fraud, or abuse in 

Medicare. The provision also would clarify that consolidation of the 

Medicare administrative contractors does not consolidate the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. The provision would also 

clarify thats term. A supplier means a physician or other practitioner, a facility or other entity (other than a provider of services) 

furnishing items or services under Medicare. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Committees are committed to extending needed regulatory 

relief to providers and suppliers while at the same time protecting 

taxpayers from waste, fraud and abuse. 

Section 902. Issuance of Regulations 

CURRENT LAW

The Secretary must publish a list of all manual instructions, interpretative rules, statements of policy, and guidelines that are 

promulgated to carry out Medicare law in the Federal Register no 

less frequently than every three months. 

There is no explicit statutory instruction on logical outgrowth. 

The courts have repeatedly held that new matter in final regulations must be a logical outgrowth of the proposed rule and is an 

inherent aspect of notice and comment rulemaking. 

EXPLANATION OF PROVISION

The provision would require the Secretary, in consultation with 

the Director of the Office of Management and Budget, to establish 

and publish a regular timeline for the publication of final regulations based on the previous publication of a proposed rule or an interim final regulation. The timeframe established would not be permitted to be longer than three years, except under extraordinary 

circumstances. If the Secretary were to vary the timeline he established, the provision would require him to publish a notice in the 

Federal Register the new timeline and an explanation of the variation. In the case of interim final regulations, the provision would 

require that if the Secretary did not meet his established timeframe, then the interim final regulation would not be able to continue in effect unless the Secretary published a notice of continuation of the regulation that included an explanation of why the regular timeline had not been complied with. 

The provision also would require that a provision of a final regulation that is not a logical outgrowth of the proposed regulation or 

interim final regulation would be treated as a proposed regulation. 

The provision would not be able to take effect until public comment 

occurred and the provision published as a final regulation.

EFFECTIVE DATE

The provision regarding the establishment of regulatory timeframes would be effective upon enactment and would require the 

255

Secretary to provide for an appropriate transition to take into account the backlog of previously published interim final regulation. 

The provision regarding logical outgrowth would be effective for 

final regulations published on or after enactment. 

REASON FOR CHANGE

The volume of Medicare regulations issued by CMS can be difficult for health care providers and suppliers, particularly small 

providers and suppliers, to monitor. By requiring regulations to be 

released on a certain date, providers and suppliers would be better 

able to keep informed of program changes. The Secretary may stagger the notice and comment periods of regulations issued on the 

same day, so that the comment deadlines for these regulations do 

not occur simultaneously, in order to ensure that interested parties 

have the opportunity to comment on multiple regulations. 

The collective impact provision ensures that the Department 

would consider the overall impact of any changes it is making on 

categories of providers and suppliers. If the Department determines 

that many changes affecting a particular category of providers or 

suppliers are underway, the Department should consult with representatives of that category to determine whether providers and 

suppliers would be better able to make the systems changes needed 

to accommodate those changes if all the new regulations were released simultaneously or staggered. Because of the burden implementing multiple regulations simultaneously can cause, the Secretary needs to coordinate new regulations based on an analysis of 

the collective impact the regulatory changes will have on any given 

category of provider or supplier. 

Section 903. Compliance With Changes in Regulations and Policies 

CURRENT LAW

No explicit statutory instruction. As a result of case law, there 

is a strong presumption against retroactive rulemaking. In Bowen 

v. Georgetown University Hospital, the Supreme Court ruled that 

there must be explicit statutory authority to engage in retroactive 

rulemaking. 

EXPLANATION OF PROVISION

The provision would bar retroactive application of any substantive changes in regulation, manual instructions, interpretative 

rules, statements of policy, or guidelines unless the Secretary determines retroactive application is needed to comply with the statute or is in the public interest. No substantive change would go 

into effect until 30 days after the change is issued or published unless it would be needed to comply with statutory changes or was 

in the public interest. Compliance actions would be able to be 

taken for items and services furnished only on or after the effective 

date of the change. If a provider or supplier follows written guidance provided by the Secretary or a Medicare contractor when furnishing items or services or submitting a claim and the guidance 

is inaccurate, the provider or supplier would not be subject to sanction or repayment of overpayment (unless the inaccurate information was due to a clerical or technical operational error). 

256

EFFECTIVE DATE

The prohibition of retroactive application of substantive changes 

would apply to changes issued on or after the date of enactment. 

The provisions affecting compliance with substantive changes 

would apply to compliance actions undertaken on or after the date 

of enactment. The reliance on guidance would take effect upon enactment but would not apply to any sanction for which notice was 

provided on or before the date of enactment. 

REASON FOR CHANGE

This provision would ensure that Medicare’s rules are not generally applied retroactively. It would also ensure providers and suppliers have sufficient time to make any changes to systems needed 

to comply with changes in regulations. This provision would ensure 

that providers and suppliers, who, in good faith, based on the information received from contractors, would not be vulnerable to recovery if it turns out that the contractor was in error. Providers 

should be able to rely on the directions or guidance provided by 

their Medicare contractors. 

Section 904. Reports and Studies Relating to Regulatory Reform 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The GAO would be required to study the feasibility and appropriateness of the Secretary providing legally binding advisory opinions on appropriate interpretation and application of Medicare regulations. The report would be due to Congress one year after enactment. 

The Secretary would be required to report to Congress every two 

years on the administration of Medicare and areas of inconsistency 

or conflict among various provisions under law and regulation. The 

report would include recommendations for legislation or administrative action that the Secretary determines appropriate to further 

reduce such inconsistency or conflicts. The first report would be 

due to Congress two years after enactment. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

The Committees are interested in receiving additional information regarding both advisory opinions and inconsistencies in Medicare regulations. 

Subtitle B—Contracting Reform 

Section 911. Increased Flexibility in Medicare Administration 

CURRENT LAW

The Secretary is authorized to enter into agreements with fiscal 

intermediaries nominated by different provider associations to 

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make Medicare payments for health care services furnished by institutional providers. For Medicare part B claims, the Secretary is 

authorized to enter into contracts only with health insurers (or carriers) to make Medicare payments to physicians, practitioners and 

other health care suppliers. Section 1834(a)(12) of the Act authorizes separate regional carriers for the payment of durable medical 

equipment (DME) claims. The Secretary is also authorized to contract for certain program safeguard activities under the Medicare 

Integrity Program (MIP). 

Certain terms and conditions of the contracting agreements for 

fiscal intermediaries (FIs) and carriers are specified in the Medicare statute. Medicare regulations coupled with long-standing 

agency practices have further limited the way that contracts for 

claims administration services can be established. 

Certain functions and responsibilities of the fiscal intermediaries 

and carriers are specified in the statute as well. The Secretary may 

not require that carriers or intermediaries match data obtained in 

its other activities with Medicare data in order to identify beneficiaries who have other insurance coverage as part of the Medicare 

Secondary Payer (MSP) program. With the exception of prior authorization of DME claims, an entity may not perform activities (or 

receive related payments) under a claims processing contract to the 

extent that the activities are carried out pursuant to a MIP contract. Performance standards with respect to the timeliness of reviews, fair hearings, reconsiderations and exemption decisions are 

established as well. 

A Medicare contract with an intermediary or carrier may require 

any of its employees certifying or making payments provide a surety bond to the United States in an amount established by the Secretary. Neither the contractor nor the contractor’s employee who 

certifies the amount of Medicare payments is liable for erroneous 

payments in the absence of gross negligence or intent to defraud 

the United States. Neither the contractor nor the contractor’s employee who disburses payments is liable for erroneous payments in 

the absence of gross negligence or intent to defraud the United 

States, if such payments are based upon a voucher signed by the 

certifying employee. 

EXPLANATION OF PROVISION

This provision would add Section 1874A to the Social Security 

Act and would permit the Secretary to competitively contract with 

any eligible entity to serve as a Medicare contractor. The provision 

would eliminate the distinction between Part A contractors (fiscal 

intermediaries) and Part B contractors (carriers) and take the separate authorities for fiscal intermediaries and carriers and merge 

them into a single authority for the new contractor. These new contractors would be called Medicare Administrative Contractors 

(MACs) and would assume all the functions of the current fiscal 

intermediaries and carriers: determining the amount of Medicare 

payments required to be made to providers and suppliers, making 

the payments, providing education and outreach to beneficiaries, 

providers and suppliers, communicating with providers and suppliers, and additional functions as are necessary. 

The Secretary would be permitted to renew the MAC contracts 

annually for up to 5 years. All contracts would be required to be 

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re-competed at least every 5 years using competitive processes. 

Federal Acquisition Regulations (FAR) would apply to these contracts except to the extent any provisions are inconsistent with a 

specific Medicare requirement, including incentive contracts. The 

contracts would be required to contain performance requirements 

that would be developed by the Secretary who could consult with 

beneficiary, provider, and supplier organizations, would be consistent with written statements of work and would be used for 

evaluating contractor performance. MAC would be required to furnish the Secretary such timely information as he may require and 

to maintain and provide access to records the Secretary finds necessary. The Secretary could require a surety bond from the MAC 

or certain officers or employees as the Secretary finds appropriate. 

The Secretary would be prohibited from requiring that the MAC 

match data from other activities for Medicare secondary payer purposes. 

The provision would limit liability of certifying and disbursing officers and the Medicare Administrative Contractors except in cases 

of reckless disregard or the intent to defraud the United States. 

This limitation on liability would not limit liability under the False 

Claims Act. The provision also establishes circumstances where 

contractors and their employees would be indemnified, both in the 

contract and as the Secretary determines appropriate. 

The provision would make numerous conforming amendments as 

the authorities for the fiscal intermediaries and carriers are stricken. 

The Secretary would be required to submit a report to Congress 

and the GAO by no later than October 1, 2004, that describes the 

plan for implementing these provisions. The GAO is required to 

evaluate the Secretary’s plan and, within six months of receiving 

the plan, report on the evaluation to Congress and make any recommendations the Comptroller General believes appropriate. The 

Secretary is also required to report to Congress by October 1, 2008 

on the status of implementing the contracting reform provisions including the number of contracts that have been competitively bid, 

the distribution of functions among contracts and contractors, a 

timeline for complete transition to full competition, and a detailed 

description of how the Secretary has modified oversight and management of Medicare contractors to adapt to full competition.

Competitive bidding for the MACs would be required to begin for 

annual contract periods that begin on or after October 1, 2011. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Medicare’s current contracting represents an antiquated, inefficient, and closed system based on cozy relationships between the 

government, contractors and providers. 

Medicare contracting is antiquated because contractors may not 

provide service for the entire Medicare program, or particular functions within the program; rather Fiscal Intermediaries administer 

claims for facilities and carriers administer claims for all other providers. It has failed to keep pace with integrated claims administration practices in the private sector. 

259

Medicare contracting is inefficient because Medicare does not 

award contracts through competitive procedures, but rather on provider nomination. 

Medicare contracting is closed. All but one of the contractors 

today have been with Medicare since the program’s inception 36 

years ago, and only insurers can provide contracting services. 

This provision permits greater flexibility in contracting for administrative services between the Secretary and the Medicare contractors (entities that process claims under part A and part B of 

the Medicare program), including the flexibility to separately contract for all or parts of the contractor functions. The Secretary also 

may contract with a wider range of entities, so that the most efficient and effective contractor can be selected. 

These amendments require the Secretary to contract competitively at least once every five years for the administration of benefits under parts A and B. In conjunction with the elimination of 

cost contracts, it is intended to create incentives for improved service to beneficiaries and to providers of services and suppliers. 

These amendments provide a basis for a unified contracting system for the administration of parts A and B, identical to the recent 

Congressionally mandated structure of the Medicare Integrity Program contractors. Consolidation of contracting duties as set forth in 

this legislation does not constitute consolidation of the Hospital Insurance and Medical Supplementary Insurance Trust Funds, or reflect any position on that issue. In addition, the elimination of provider nomination, which hospitals have rarely been allowed to exercise in recent years, is essential for bringing full and open competition into the contracting functions of the Medicare program. 

The provision establishes a basis for a unified contracting system, identical to the structure implemented for the Medicare Integrity Program contractors. It is important to note, however, that 

consolidation of contracting duties as set forth in this legislation 

does not constitute consolidation of the Hospital Insurance and 

Medical Supplementary Insurance Trust Funds, or reflect any position on that issue. In addition, the Secretary would have the flexibility to choose the best contractor(s) to provide telephone information on suppliers, which is intended to reduce administrative costs 

and improve quality. Since the carrier fair hearing requirement 

was eliminated in previous legislation, the requirements for the 

hearing are eliminated in order to conform to existing law. 

Section 912. Requirements for Information Security for Medicare 

Administrative Contractors 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Medicare administrative contractors (as well as fiscal intermediaries and carriers until the MACs are established) would be 

required to implement a contractor-wide information security program to provide information security for the operation and assets 

of the contractor for Medicare functions. The information security 

program would be required to meet certain requirements for information security programs imposed on Federal agencies under title 

260

44 of the United States Code. Medicare administrative contractors 

would be required to undergo an annual independent evaluation of 

their information security programs. Existing contractors would be 

required to undergo the first independent evaluation within one 

year after the date the contractor begins implementing the information security program and new contractors would be required to 

have such a program in place before beginning the claim determination and payment activities. The results of the independent 

evaluations would be submitted to the Secretary and the HHS Inspector General. The Inspector General of HHS would be required 

to report to Congress annually on the results of the evaluations. 

The Secretary would be required to address the results of the evaluations in required management reports. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The increased reliance by the Federal government on the Internet and related telecommunications technologies has resulted in 

enhanced inter-connectivity and interdependencies associated with 

Federal computer systems and between federal and private computer systems. Over the past several years, this inter-connectivity 

or networking has resulted in increased security vulnerabilities 

that have put at greater risk computer systems and data that are 

critical to ensuring national and economic security and public 

health and welfare, including sensitive, non-public information that 

is collected and maintained by CMS and its business partners.

On May 23, 2001, the Committee on Energy and Commerce held 

a hearing to investigate the extent to which sensitive, non-public 

information related to collecting and processing Medicare claims 

was adequately secure on the computer networks operated by CMS 

and its business partners, including Medicare contractors. That investigation revealed significant weaknesses, which the agency has 

been working to address. Some of the computer security concerns 

identified include weak password management, inadequate access 

controls, excessive user privileges, improper network configurations, and inadequate testing of critical systems. In addition, the 

OIG conducted assessments of financial controls—including electronic data processing controls—at CMS and its major Medicare 

contractors; in every year since 1997, the OIG has identified computer security controls as a material weakness at CMS and its contractors. 

Section 812 is intended to assist CMS in identifying and working 

with contractors to address potential security deficiencies in order 

to ensure that sensitive, non-public information related to the processing of Medicare claims is adequately secure from unauthorized 

access, misuse, or destruction. 

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Subtitle C—Education and Outreach 

Section 921. Provider Education and Technical Assistance 

(a) Coordination of Education Funding 

CURRENT LAW

Medicare provider education activities are funded through the 

program management appropriation and through Education and 

Training component of the Medicare Integrity Program (MIP). Both 

claims processing contractors (fiscal intermediaries and carriers) 

and MIP contractors may undertake provider education activities. 

EXPLANATION OF PROVISIONS

The provision would add Section 1889 to the Social Security Act, 

which would require the Secretary to coordinate the educational activities through the Medicare contractors to maximize the effectiveness of education efforts for providers and suppliers and to report 

to Congress with a description and evaluation of the steps taken 

to coordinate provider education funding. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision is intended to ensure that federal spending on provider education is coordinated and used as efficiently as possible to 

maximize the value obtained from the investment. It is not intended to change the proportion of Medicare Integrity Program 

funds spent on provider education. 

(b) Incentives To Improve Contractor Performance 

CURRENT LAW

No specific statutory provision. Since FY1996, as part of the 

audit required by the Chief Financial Officers Act, an annual estimate of improper payments under FFS has been established. As a 

recent initiative, CMS is implementing a comprehensive error ratetesting program to produce national, contractor specific, benefit category specific and provider specific paid claim error rates. 

EXPLANATION OF PROVISIONS

The Secretary would be required to use specific claims payment 

error rates (or similar methodology) to provide incentives for contractors to implement effective education and outreach programs 

for providers and suppliers and would require the Comptroller General to study the adequacy of the methodology and make recommendations to the Secretary and the Secretary to report to Congress regarding how he intends to used the methodology in assessing Medicare contractor performance. 

EFFECTIVE DATE

Upon enactment. 

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REASON FOR CHANGE

This provision would ensure that the Department monitors contractor performance for claims payment error rates, and it would 

identify best practices for provider education—all with the goal of 

reducing payment errors and helping providers and suppliers better comply with program requirements. It is the Committees’ intent 

that, in consultation with representatives of providers and suppliers, the Secretary shall identify and encourage best practices developed by contractors for educating providers and suppliers. 

(c) Provision of Access to and Prompt Responses From Medicare Administrative Contractors 

CURRENT LAW

No specific statutory provision. Statutory provisions generally instruct carriers to assist providers and others who furnish services 

in developing procedures relating to utilization practices and to 

serve as a channel of communication relating information on program administration. Fiscal intermediaries are generally instructed 

to: (1) provide consultative services to institutions and other agencies to enable them to establish and maintain fiscal records necessary for program participation and payment, and (2) serve as a 

center for any information as well as a channel for communication 

with providers. 

EXPLANATION OF PROVISIONS

The Secretary would be required to develop a strategy for communicating with beneficiaries, providers and suppliers. Medicare 

contractors would be required to provide responses to written inquiries that are clear, concise and accurate within 45 business days 

of the receipt of the inquiry. The Secretary would be required to 

ensure that Medicare contractors have a toll-free telephone number 

where beneficiaries, providers and suppliers may obtain information regarding billing, coding, claims, coverage, and other appropriate Medicare information. Medicare contractors would be required to maintain a system for identifying the person supplying 

information to beneficiaries, providers and supplier and to monitor 

the accuracy, consistency, and timeliness of the information provided. The Secretary would be required to establish and make public standards to monitor the accuracy, consistency, and timeliness 

of written and telephone responses of Medicare contractors as well 

as to evaluate the contractors against these standards. 

EFFECTIVE DATE

The provision would be effective October 1, 2004. 

REASON FOR CHANGE

This provision is intended to improve contractor accountability to 

make contractors more responsive to providers and suppliers, and 

to increase the accuracy and reliability of the information provided 

in response to the questions received. 

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(d) Improved Provider Education and Training 

CURRENT LAW

In FY2003, approximately $122 million was budget by CMS for 

provider education and training. 

EXPLANATION OF PROVISION

The provision would authorize $25 million to be appropriated 

from the Medicare Trust Funds for fiscal years 2005 and 2006, and 

such sums as necessary for succeeding fiscal years for Medicare 

contractors to increase education and training activities for providers and suppliers. Medicare contractors would be required to tailor education and training activities to meet the special needs of 

small providers or suppliers. The provision defines a small provider 

as an institution with fewer than 25 full-time equivalents (FTEs) 

and a small supplier as one with fewer than 10 FTEs. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision acknowledges that contractors are being instructed to significantly improve their provider education and 

training efforts, and accordingly authorizes new funds to be available for those purposes. 

(e) Requirement To Maintain Internet Sites 

CURRENT LAW

No statutory provision. CMS and Medicare contractors currently 

maintain Internet sites. 

EXPLANATION OF PROVISION

The provision would require that the Secretary and the Medicare 

contractors maintain Internet sites to answer frequently asked 

questions and provide published materials of the contractors beginning October 1, 2004. 

EFFECTIVE DATE

The provision would be effective October 1, 2004. 

REASON FOR CHANGE

This provision would facilitate greater ease of provider and supplier access to information provided by Medicare’s contractors. 

(f) Additional Provider Education Provisions 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The provision would bar Medicare contractors from using a 

record of attendance (or non-attendance) at educational activities to 

264

select or track providers or suppliers in conducting any type of 

audit or prepayment review.

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision addresses a concern raised by providers and suppliers that their participation in educational forums has been used 

to trigger audits. Participation in educational forums should be encouraged not discouraged. 

Nothing in this section or section 1893(g) shall be construed as 

preventing the disclosure by a Medicare contractor of information 

on attendance at education activities for law enforcement purposes. 

Nothing in this section or section 1893(g) shall be construed as providing for the disclosure by a Medicare contractor of the claims 

processing screens or computer edits used for identifying claims 

that would be subject to review. 

Section 922. Small Provider Technical Assistance Demonstration 

Program 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a demonstration 

program to provide technical assistance to small providers and suppliers, when they have requested the assistance, to improve compliance with Medicare requirements. If errors are found, the Secretary would be barred from recovering any overpayments barring 

evidence of fraud and if the problem that is the subject of the compliance review has been satisfactorily corrected within 30 days and 

the problem remains corrected. A GAO study is required not later 

than two years after the demonstration program begins. Appropriations would be authorized for $1 million for FY 2005 and $6 million 

for FY 2006 to carry out the demonstration. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Many large providers and suppliers have contracts with private 

consulting firms to help them navigate their interactions with the 

Medicare program. This type of assistance can be prohibitively expensive for small providers and suppliers—but they too are required to comply with complex program rules and regulations. This 

provision creates a new demonstration program to facilitate small 

provider and supplier access to expert technical assistance. The 

demonstration would also test whether encouraging technical assistance on the front-end (to help providers and suppliers play by 

the rules) could save the program money in the long-term by promoting greater program compliance. 

265

Section 923. Medicare Provider Ombudsman; Medicare Beneficiary 

Ombudsman 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

A Medicare Provider Ombudsman would be required to be appointed by the Secretary and located within the Department of 

Health and Human Services. The Provider Ombudsman would be 

required to provide confidential assistance to providers and suppliers regarding complaints, grievances, requests for information, 

and resolution of unclear or conflicting guidance about Medicare. 

The Ombudsman would submit recommendations to the Secretary 

regarding improving the administration of Medicare, addressing recurring patterns of confusion under Medicare, and ways to provide 

for an appropriate and consistent response in cases of self-identified overpayments by providers and suppliers. Such sums as necessary would be authorized to be appropriated for FY2004 and subsequent years. 

A Medicare Beneficiary Ombudsman would be required to be appointed by the Secretary and located within HHS. The Beneficiary 

Ombudsman would be required to have expertise and experience in 

health care, education of, and assistance to Medicare beneficiaries. 

The Beneficiary Ombudsman would be required to receive complaints, grievances, and requests for information submitted by 

Medicare beneficiaries. The Beneficiary Ombudsman would also be 

required to assist beneficiaries in collecting relevant information to 

seek an appeal of a decision or determination made by the Secretary, a Medicare contractor, or a Medicare+Choice organization 

and assisting a beneficiary with any problems arising from un-enrolling in a Medicare+Choice plan. The Beneficiary Ombudsman 

would be required to work with state health insurance counseling 

programs. 

Appropriations would be authorized to be appropriated in such 

sums, as are necessary for fiscal year 2004 and each succeeding fiscal year to carry out the ombudsmen provisions. 

This provision would also require the use of 1–800–Medicare for 

all individuals seeking information about, or assistance with Medicare. Rather than listing individual telephone numbers for Medicare contractors in the Medicare handbook, only 1–800–Medicare 

would be shown. The Comptroller General would be required to 

study the accuracy and consistency of information provided by the 

1–800–Medicare line and to assess whether the information sufficiently answers the questions of beneficiaries. The report on the 

study would be required to be submitted to Congress no later than 

one year after enactment.

EFFECTIVE DATE

The Secretary would be required to appoint both ombudsmen no 

later than one year from the date of enactment. 

266

REASON FOR CHANGE

Providers are currently confronted with a morass of bureaucracy 

and regulation, with no clear individual to assist them. The new 

ombudsman would help providers navigate Medicare’s complicated 

rules and regulations. 

Medicare Provider Ombudsman shall make recommendations to 

the Secretary concerning how to respond to recurring patterns of 

confusion in the Medicare program. Such a recommendation may 

include calling for the suspension of the imposition of provider 

sanctions (except those sanctions relating to the quality of care) or 

where there is widespread confusion in program administration. 

Nothing in this section shall be construed as allowing for the suspension of provider sanctions relating to the quality of care, regardless of whether widespread confusion in the Medicare program exists. 

Beneficiaries confront a morass of bureaucracy and regulation, 

with no clear individual to assist them. This new ombudsman 

would help beneficiaries navigate Medicare’s complicated rules and 

regulations. 

The Committees acknowledge that implementing these new functions would have a cost and have accordingly authorized necessary 

appropriations. 

The beneficiary handbook currently provides a multitude of 

phone numbers, which is very confusing for beneficiaries, rather 

than a single number that can triage and transfer beneficiaries to 

the appropriate person or entity. This provision would promote better access to information for beneficiaries. 

Section 924. Beneficiary Outreach Demonstration Program 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

Subsection (a) would require the Secretary to conduct a threeyear demonstration program where Medicare specialists would provide assistance to beneficiaries in at least six local Social Security 

offices (two would be located in rural areas) that have a high volume of visits by Medicare beneficiaries. The Secretary would be required to evaluate the results of the demonstration regarding the 

feasibility and cost-effectiveness of permanently out-stationing 

Medicare specialists at local Social Security offices and report to 

Congress. 

Subsection (b) would require that the Secretary establish a demonstration project to test the administrative feasibility of providing 

a process for Medicare beneficiaries, providers, suppliers and other 

individuals or entities furnishing items or services under Medicare 

to request and receive a determination as to whether the item or 

service is covered under Medicare by reasons of medical necessity, 

before the item or service involved is furnished to the beneficiary. 

The Secretary would be required to evaluate the demonstration 

and report to Congress by January 1, 2006. 

267

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision makes Medicare experts available in six Social Security Administration offices to assist beneficiaries and answer 

their questions. The demonstration would test whether such 

outsourced Medicare specialists improve beneficiary utilization, understanding of the program, and beneficiary satisfaction. 

Section 925. Inclusion of Additional Information in Notices to Beneficiaries About Skilled Nursing Facility Benefits 

CURRENT LAW

Although the statute requires that beneficiaries receive a statement listing the items and services for which payment has been 

made, there is no explicit statutory instruction that requires the 

notice to include information about the number of days of coverage 

remaining in either the hospital or skilled nursing facility (SNF) 

benefit or the spell of illness. 

EXPLANATION OF PROVISION

The Secretary would be required to provide information about 

the number of days of coverage remaining under the SNF benefit 

and the spell of illness involved in the explanation of Medicare benefits. 

EFFECTIVE DATE

The provision would apply to notices provided on and after the 

calendar quarter beginning more than six months after enactment.

Section 926. Information on Medicare-Certified Skilled Nursing Facilities in Hospital Discharge Plans 

CURRENT LAW

The hospital discharge planning process requires evaluation of a 

patient’s likely need for post-hospital services including hospice and 

home care. 

EXPLANATION OF PROVISION

The Secretary would be required to make information publicly 

available regarding whether SNFs are participating in the Medicare program. Hospital discharge planning would be required to 

evaluate a patient’s need for SNF care. 

EFFECTIVE DATE

The provision would apply to discharge plans made on or after 

the date specified by the Secretary, but no later than six months 

after the Secretary provides information regarding SNFs that participate in the Medicare program. 

268

Subtitle D—Appeals and Recovery 

Section 931. Transfer of Responsibility for Medicare Appeals 

CURRENT LAW

Denials of claims for Medicare payment may be appealed by 

beneficiaries (or providers who are representing the beneficiary) or 

in certain circumstances, providers or suppliers directly. The third 

level of appeal is to an Administrative Law Judge (ALJ). The Social 

Security Administration employs ALJs that hear Medicare cases, a 

legacy from the inception of the Medicare program, when Medicare 

was part of Social Security. 

EXPLANATION OF PROVISION

The Commissioner of SSA and the Secretary would be required 

to develop a plan to transfer the functions of the ALJs who are responsible for hearing Medicare cases from SSA to HHS. This plan 

would be due to Congress no later than October 1, 2004. A GAO 

evaluation of the plan would be due within six months of the plan’s 

submission. ALJ functions would be transferred no earlier than 

July 1, 2005 and no later than October 1, 2005. 

The Secretary would be required to place the ALJs in an administrative office that is organizationally and functionally separate 

from the Centers for Medicare & Medicaid Services and the ALJs 

would be required to report to, and be under the general supervision of the Secretary. No other official within the Department 

would be permitted to supervise the ALJs. The Secretary would be 

required to provide for appropriate geographic distribution of ALJs, 

would have the authority to hire ALJs and support staff, and would 

be required to enter into arrangements with the Commissioner, as 

appropriate, to share office space, support staff and other resources 

with appropriate reimbursement. 

Such sums are authorized to be appropriated as are necessary for 

FY2005 and each subsequent fiscal year to increase the number of 

ALJs, improve education and training of ALJs and to increase the 

staff of the Departmental Appeals Board (the final level of appeal). 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Office of Inspector General has identified moving the functions of the Medicare Administrative Law Judges to the Department of Health and Human Services as an important priority in 

improving the appeals system. This provision makes that transition 

and increases the emphasis on providing training Administrative 

Law Judges and their staffs to increase their expertise in Medicare’s rules and regulations. The Commissioner of SSA and the 

Secretary are instructed to work together on the transition plans 

in order to assure that the transition does not adversely affect the 

SSA ALJ appeals system. 

The transition plan shall include information on the following: 

• Workload—The number of such administrative law judges 

and support staff required now and in the future to hear and 

decide such cases in a timely manner, taking into account the 

269

current and anticipated claims volume, appeals, number of 

beneficiaries, and statutory changes; 

• Cost Projections—Funding levels required under this subsection to hear such cases in a timely manner; 

• Transition Timetable—A timetable for the transition; 

• Regulations—The establishment of specific regulations to 

govern the appeals process; 

• Case Tracking—The development of a unified case tracking 

system that will facilitate the maintenance and transfer of 

case-specific data across both the fee-for-service and managed 

care components of the Medicare program; 

• Feasibility of Precedential Authority—The feasibility of developing a process to give binding, precedential authority to decisions of the Departmental Appeals Board in the Department 

of Health and Human Services that address broad legal issues; 

and 

• Access to Administrative Law Judges—The feasibility of filing appeals with administrative law judges electronically, and 

the feasibility of conducting hearings using tele- or videoconference technologies.

Section 932. Process for Expedited Access to Review 

CURRENT LAW

In general, administrative appeals must be exhausted prior to judicial review. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process where a 

provider, supplier, or a beneficiary may obtain access to judicial review when a 3-member review panel (composed of ALJs, members 

of the Departmental Appeals Board, or qualified individuals from 

qualified independent contractors designated by the Secretary) determines, within 60 days of a complete written request, that it does 

not have the authority to decide the question of law or regulation 

and where material facts are not in dispute. The decision would not 

be subject to review by the Secretary. Interest would be assessed 

on any amount in controversy and would be awarded by the reviewing court in favor of the prevailing party. This expedited access 

to judicial review would also be permitted for cases where the Secretary does not enter into or renew provider agreements. 

Expedited review would also be established for certain remedies 

imposed against SNFs including denied payments and imposition 

of temporary management. The Secretary would be required to develop a process for reinstating approval of nurse aide training programs that have been terminated (before the end of the mandatory 

two-year disapproval period). The appropriation of such sums as 

needed for FY2005 and subsequent years would be authorized to 

reduce by 50 percent the average time for administrative determinations, to increase the number of ALJs and appellate staff at 

the DAB, and to educate these judges and their staffs on long-term 

care issues. 

270

EFFECTIVE DATE

This provision would be effective for appeals filed on or after October 1, 2004. 

REASON FOR CHANGE. 

The provisions in 402 (a–c) on expedited access to judicial review 

ensure that if a review board certifies that there are no material 

facts in dispute and that the appeals process does not have authority to resolve the question at issue, the provider, supplier, or beneficiary may take their case to court in an expedited manner. This 

would facilitate more prompt resolution of challenges to the underlying validity of CMS regulations and determinations. To the extent that any part of an appeal poses a factual dispute that is being 

adjudicated before an administrative tribunal, this provision would 

not authorize the severance of the legal issues from the underlying 

factual dispute. 

Section 933. Revisions to Medicare Appeals Process 

(a) Requiring Full and Early Presentation of Evidence 

CURRENT LAW

No provision. New evidence can be presented at any stage of the 

appeals process. 

EXPLANATION OF PROVISION

The provision would require providers and suppliers to present 

all evidence at the reconsideration that is conducted by a QIC unless good cause precludes the introduction of the evidence. 

EFFECTIVE DATE

October 1, 2004. 

REASON FOR CHANGE

The Office of Inspector General identified this change as a priority to promote more expeditious resolution of appeals of denied 

claims. This provision requires prompt introduction of evidence relevant to a provider appeal. When deciding whether there is good 

cause to introduce new evidence, the adjudicator should ensure, 

after consideration of the totality of the circumstances that disallowing the introduction of such new evidence would unfairly prejudice the case. The totality of the circumstances may include, but 

is not limited to, the following: evidence is not yet available; the 

appellant was not represented at a lower level of appeal; the appellant was not aware of her rights; or the appellant did not understand the proceeding. 

(b) Use of Patients’ Medical Records 

CURRENT LAW

No provision. 

271

EXPLANATION OF PROVISION

The provision would provide for the use of beneficiaries’ medical 

records in qualified independent contractors reconsiderations. 

EFFECTIVE DATE

Upon enactment.

REASON FOR CHANGE

In the determination of whether an item or service is reasonable 

and necessary for an individual, a beneficiary’s medical records 

should be considered with other relevant information. 

(c) Notice Requirements for Medicare Appeals 

CURRENT LAW

No statutory provision. Determinations and denials of appeals 

currently include the policy, regulatory, or statutory reason for the 

denial and information on how to appeal the denial. The Benefits 

Improvement and Protection Act (BIPA) of 2000 changed the appeals process and created a new independent review (the qualified 

independent contractors or QICs), which has not yet been implemented. 

EXPLANATION OF PROVISION

The provision would require that notice of and decisions from determinations, redeterminations, reconsiderations, ALJ appeals, and 

DAB appeals be written in a manner understandable to a beneficiary and that includes, as appropriate, reasons for the determination or decision and notice of the right to appeal decisions and 

the process for further appeal. The initial determination of a claim 

would also be specifically required to include: the reasons for the 

determination, including whether a local review policy or coverage 

determination was used and the procedures for obtaining additional information (including, upon request, the specific provision of 

the policy manual, or regulation used in making the determination). Redeterminations, the first level of appeal, would also specifically be required to include: the specific reasons for the decision; 

as appropriate a summary of the clinical or scientific evidence used 

in making the redetermination; and a description of the procedures 

for obtaining additional information concerning the redetermination (including, upon request, the specific provision of the policy 

manual, or regulation used in making the determination). 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Currently, Medicare only provides beneficiaries with a brief 

statement about the initial determination of her claim on the Medicare Summary Notice. This provision provides additional information to beneficiaries (or providers who appeal on their behalf) about 

Medicare’s denial of their claim for benefits; the reasons for the denial, and the rights to further appeal so that beneficiaries can have 

272

a clear and concise understanding of decisions affecting their medical care. 

(d) Qualified Independent Contractors 

CURRENT LAW

BIPA established a new and independent second level of appeal 

called the qualified independent contractors. BIPA called for at 

least 12 QICs. The QICs have not yet been implemented. 

EXPLANATION OF PROVISION

The provision would clarify eligibility requirements for qualified 

independent contractors and their reviewer employees including 

medical and legal expertise, independence requirements, and the 

prohibition on compensation being linked to decisions rendered. 

The required number of qualified independent contractors would be 

reduced from not fewer than twelve to not fewer than four. 

EFFECTIVE DATE

The provisions regarding the eligibility requirements of QICs and 

QIC reviews would be effective as if included in the enactment of 

BIPA. 

REASON FOR CHANGE

The BIPA 2000 law laid out broad provisions for revision of the 

Medicare appeals process. These provisions strengthen the appeals 

process by enhancing the criteria related to the independence and 

expertise of the reviewers and review entities. 

Section 934. Prepayment Review 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS has instructed the contractors to use random prepayment reviews to develop contractor-wide and program-wide error 

rates. Non-random payment reviews are permitted in certain circumstances laid out in instructions to the contractors. 

EXPLANATION OF PROVISION

Medicare contractors would be permitted to conduct random prepayment reviews only to develop a contractor-wide or program-wide 

error rate or such additional circumstances as the Secretary provides for in regulations that were developed in consultation with 

providers and suppliers. Random prepayment review would only be 

permitted in accordance with standard protocol developed by the 

Secretary. Nonrandom payment reviews would be permitted only 

when there was a likelihood of sustained or high level of payment 

error. The Secretary would be required to issue regulations regarding the termination and termination dates of non-random prepayment review. Variation in termination dates would be permitted 

depending upon the differences in the circumstances triggering prepayment review. 

273

EFFECTIVE DATE

The Secretary would be required to issue the required regulations not later than one year after enactment. The provision regarding the use of standard protocols when conducting prepayment 

reviews would apply to random prepayment reviews conducted on 

or after the date specified by the Secretary (but not later than one 

year after enactment). The remaining provisions would be effective 

one year after enactment. 

REASON FOR CHANGE

These provisions build greater consistency and predictability into 

Medicare’s rules for prepayment review, while protecting program 

integrity. 

Section 935. Recovery of Overpayments 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS negotiates extended repayment plans with providers that 

need additional time to repay Medicare overpayments. 

EXPLANATION OF PROVISION

In situations where repaying an Medicare overpayment within 30 

days would be a hardship for a provider or supplier, the Secretary 

would be required to enter into an extended repayment plan of at 

least six months duration. The repayment plan would not be permitted to go beyond three years (or five years in the case of extreme hardship, as determined by the Secretary). Interest would be 

required to accrue on the balance through the repayment period. 

Hardship would be defined if, for providers that file cost reports, 

the aggregate amount of the overpayment exceeded 10 percent of 

the amount paid by Medicare to the provider for the time period 

covered by the most recently submitted cost report. In the case of 

a provider or supplier that is not required to file a cost report, 

hardship would be defined if the aggregate amount of the overpayment exceeded 10 percent of the amount paid under Medicare for 

the previous calendar year. The Secretary would be required to develop rules for the case of a provider or supplier that was not paid 

under Medicare during the previous year or for only a portion of 

the year. Any other repayment plans that a provider or supplier 

has with the Secretary, would not be taken into account by the Secretary in calculating hardship. If the Secretary has reason to suspect that the provider or supplier may file for bankruptcy or otherwise cease to do business or discontinue participation in Medicare 

or there is an indication of fraud or abuse, the Secretary would not 

be obligated to enter into an extended repayment plan with the 

provider or supplier. If a provider or supplier fails to make a payment according to the repayment plan, the Secretary would be permitted to immediately seek to offset or recover the total outstanding balance of the repayment plan, including interest. 

The Secretary would be prohibited from recouping any overpayments until a reconsideration-level appeal (or a redetermination by 

the fiscal intermediary or carrier if the QICs are not yet in place) 

was decided, if a reconsideration was requested. Interest would be 

274

required to be paid to the provider if the appeal was successful (beginning from the time the overpayment is recouped) or that interest would be required to be paid to the Secretary if the appeal was 

unsuccessful (and if the overpayment was not paid to the Secretary). 

Extrapolation would be limited to those circumstances where 

there is a sustained or high level of payment error, as defined by 

the Secretary in regulation, or document educational intervention 

has failed to correct the payment error. 

Medicare contractors would be permitted to request the periodic 

production of records or supporting documentation for a limited 

sample of submitted claims to ensure that the previous practice is 

not continuing in the case of a provider or supplier with prior overpayments. 

The Secretary would be able to use consent settlements to settle 

projected overpayments under certain conditions. Specifically the 

Secretary would be required to communicate with the provider or 

supplier that medical record review has indicated an overpayment 

exists, the nature of the problems identified, the steps needed to 

address the problems, and afford the provider or supplier 45 days 

to furnish additional information regarding the medical records for 

the claims reviewed. If, after reviewing the additional information 

an overpayment continues to exist, the Secretary would be required 

to provide notice and an explanation of the determination and then 

may offer the provider two mechanisms to resolve the overpayment: either an opportunity for a statistically valid random sample 

or a consent settlement (without waiving any appeal rights). 

The Secretary would be required to establish a process to provide 

notice to certain providers and suppliers in cases where billing 

codes were over-utilized by members of that class in certain areas, 

in consultation with organizations that represent the affected provider or supplier class. 

If post-payment audits were conducted, the Medicare contractor 

would be required to provide the provider or supplier with written 

notice of the intent to conduct the audit. The contractor would further be required to give the provider or supplier a full and understandable explanation of the findings of the audit and permit the 

development of an appropriate corrective action plan, inform the 

provider or supplier of appeal rights and consent settlement options, and give the provider or supplier the opportunity to provide 

additional information to the contractor, unless notice or findings 

would compromise any law enforcement activities. 

The Secretary would be required to establish a standard methodology for Medicare contractors to use in selecting a sample of 

claims for review in cases of abnormal billing patterns.

EFFECTIVE DATE

In general, the provisions would be effective upon enactment. 

The limitation on extrapolation would apply to samples initiated 

after the date that is one year after the date of enactment. The 

Secretary would be required to establish the process for notice of 

over-utilization of billing codes not later than one year after enactment. The Secretary would be required to establish a standard 

methodology for selecting sample claims for abnormal billing patterns not later than one year after enactment. 

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REASON FOR CHANGE

These provisions build greater consistency and predictability into 

Medicare’s rules for recovery of overpayments, while protecting program integrity. 

Section 936. Provider Enrollment Process; Right of Appeal 

CURRENT LAW

No explicit statutory instruction. Under administrative authorities, CMS has established provider enrollment processes in instructions to the contractors. 

EXPLANATION OF PROVISION

The Secretary would be required to establish in regulation a provider enrollment process with hearing rights in the case of a denial 

or non-renewal. The process would be required to include deadlines 

for actions on applications for enrollment and enrollment renewals. 

The Secretary would be required to monitor the performance of the 

Medicare contractors in meeting the deadlines he establishes. Before changing provider enrollment forms, the Secretary would be 

required to consult with providers and suppliers. The provision 

would also establish hearing rights in cases where the applications 

have been denied. 

EFFECTIVE DATE

The enrollment process would be required to be established within six months of enactment. The consultation process on provider 

enrollment forms would be required for changes in the form beginning January 1, 2004. The provision of hearing rights would apply 

to denials that occur one year after enactment or an earlier date 

specified by the Secretary. 

REASON FOR CHANGE

This provision gives providers and suppliers an opportunity to 

appeal denials of their applications to participate in the Medicare 

program. 

ection 937. Process for Correction of Minor Errors and Omissions on 

Claims without Pursuing Appeals Process 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

This provision would require the Secretary to establish a process 

so providers and suppliers could correct minor errors in claims that 

were submitted for payment. 

EFFECTIVE DATE

The proposal would require that the process be developed not 

later than one year after enactment. 

276

REASON FOR CHANGE

Many of the providers and suppliers who testified before the Subcommittee or contacted members directly emphasized the need to 

create a process in which they could correct claims that were denied because they were incomplete or contained minor errors without having to pursue a formal appeal. This provision instructs the 

Secretary to create such a process, which will alleviate pressure on 

the appeals system. The Committees would be concerned, however, 

if this process were to become an incentive for providers to knowingly or negligently submit incomplete information. 

The Committees intend that the process for correction of minor 

errors and omissions on claims cover both the submission of prepayment and post-payment review claims. For example, if in the 

case of a home health claim, the physician has signed the plan of 

care and/or physician’s order but has not dated it, the claim shall 

be returned to the home health agency and may be resubmitted by 

the home health agency with any incomplete or missing information without having to appeal the claim. 

Section 938. Prior Determination Process for Certain Items and 

Services; Advance Beneficiary Notices 

CURRENT LAW

Medicare law prohibits payment for items and services that are 

not medically reasonable and necessary for the diagnosis or treatment of an illness or an injury. Under certain circumstances, however, Medicare will pay for non-covered services that have been 

provided if both the beneficiary and the provider of the services did 

not know and could not have reasonably been expected to know 

that Medicare payment would not be made for these services.

A provider may be held liable for providing uncovered services, 

if, for example, specific requirements are published by the Medicare contractor or the provider has received a denial or reduction 

of payment on the same or similar service. In cases where the provider believes that the service may not be covered as reasonable 

and necessary, an acceptable advance notice of Medicare’s possible 

denial of payment must be given to the patient if the provider does 

not want to accept financial responsibility for the service. The notice must be given in writing, in advance of providing the service; 

include the patient’s name, date and description of service as well 

as reasons why the service would not be covered; and must be 

signed and dated by the patient to indicate that the beneficiary will 

assume financial liability for the service if Medicare payment is denied or reduced. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a process through 

regulation where physicians and beneficiaries can establish whether Medicare covers certain categories of items and services before 

such services are provided. An eligible requestor would be a physician, but only in case of items and services for which the physician 

is paid directly and a Medicare beneficiary who receives an advance beneficiary notice from a physician would receive direct payment for that service. The provisions would establish that: (1) such 

277

prior determinations would be binding on the Medicare contractor, 

absent fraud or misrepresentation of facts, (2) the right to redetermination in the case of a denial, (3) the applicability of existing 

deadlines with respect to those redeterminations, (4) that contractors’ advance determinations (and redeterminations) are not subject to further administrative or judicial review, and (5) an individual retains all rights to usual administrative or judicial review 

after receiving the service or receiving a determination that a service would not be covered. These provisions would not affect a Medicare beneficiary’s right not to seek an advance determination. The 

prior determination process would be established in time to address 

such requests that are filed by 18 months of enactment. The Secretary would be required to collect data on the advance determinations and to establish a beneficiary outreach and education program. GAO is required to report on the use of the advance beneficiary notice and prior determination process within 18 months of 

its implementation. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Committees believe that when there is a question of whether 

Medicare will cover certain care for a beneficiary, the beneficiary 

should have the right to find out what would be covered before getting the service and risking financial liability. Doctors also should 

be able to make such a request on behalf of a particular patient. 

This provision is particularly important for seniors and disabled individuals who tend to be risk adverse and live on fixed incomes. 

Subtitle V—Miscellaneous 

Section 941. Policy Development Regarding Evaluation and Management (E&M) Documentation Guidelines 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would not be permitted to implement any new documentation guidelines for, or clinical examples of, evaluation and 

management (E&M) physician services unless the Secretary: (1) developed the guidelines in collaboration with practicing physicians 

(both generalists and specialists) and provided for an assessment of 

the proposed guidelines by the physician community, (2) established a plan containing specific goals, including a schedule, for improving the use of the guidelines, (3) conducted pilot projects to test 

modifications to the guidelines, (4) finds the guidelines have met 

established objectives, and (5) established and implemented an 

education program on the use of the guidelines with appropriate 

outreach. The Secretary would make changes to existing E&M 

guidelines to reduce paperwork burdens on physicians. The provision establishes objectives for modifications of the E&M guidelines: 

(1) identify clinically relevant documentation needed to code accurately and assess coding levels accurately, (2) decrease the nonVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00277 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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clinically pertinent documentation in the medical record, (3) increase reviewers accuracy, and (4) educate physicians and reviewers. 

The pilot projects would be required to be conducted on a voluntary basis in consultation with practicing physicians (both generalists and specialists) and be of sufficient length to educate physicians and contractors on E&M guidelines. A range of different 

projects would be established and include at least one project: 

using a physician peer review method, using an alternative method 

based on face-to-face encounter time with the patient, in a rural 

area, outside a rural area, and where physicians bill under physician services in a teaching setting and non-teaching setting. The 

projects would examine the effect of modified E&M guidelines on 

different types of physician practices in terms of the cost of compliance. Data collected under these projects would not be the basis for 

overpayment demands or post-payment audits. This protection 

would apply to claims filed as part of the project, would last the 

duration of the project, and would last for as long as the provider 

participated in the project. Each pilot conducted would examine the 

effect of the new E&M documentation guidelines on different types 

of physician practices (including those with fewer than 10 full-time 

equivalent employees) and the costs of physician compliance including education implementation, auditing, and monitoring. The Secretary would be required to submit periodic reports to Congress on 

these pilot projects. 

The provision would require a study of an alternative system for 

documenting physician claims. Specifically the Secretary would be 

required to study developing a simpler system for documenting 

claims for evaluation and management services and to consider 

systems other than current coding and documentation requirements. The Secretary would be required to consult with practicing 

physicians in designing and carrying out the study. This study 

would be due to Congress no later than October 1, 2005. MedPAC 

would be required to analyze the results of the study and report 

to Congress. The Secretary would also be required to study the appropriateness of coding in cases of extended office visits in which 

no diagnosis is made and report to Congress no later than October 

1, 2005. The Secretary would be required to include in the report 

recommendations on how to code appropriately for these visits in 

a manner that takes into account the amount of time the physician 

spent with the patient. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

This provision is designed to promote greater consultation with 

practicing physicians with regard to the complicated evaluation 

and management and coding requirements governing Medicare 

payment for physician services. 

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Section 942. Improvement in Oversight of Technology and Coverage 

(a) Council for Technology and Innovation 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a Council for Technology and Innovation within CMS. The council would be composed 

of senior CMS staff and clinicians with a chairperson designated by 

the Secretary who reports to the CMS Administrator. The Chairperson would serve as the Executive Coordinator for Technology 

and Innovation would be the single point of contact for outside 

groups and entities regarding Medicare coverage, coding, and payment processes. The Council would coordinate Medicare’s coverage, 

coding, and payment processes as well as information exchange 

with other entities with respect to new technologies and procedures, including drug therapies. 

If the National Committee on Vital and Health Statistics has not 

made a recommendation to the Secretary by enactment regarding 

implementation of the ICD–10 coding system for diagnosis and procedures, the Secretary may adopt such standards one year after the 

date of enactment. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

After the FDA pre-market approval, the Medicare program does 

a second evaluation of breakthrough technologies to determine effectiveness and cost of those technologies compared to existing 

technologies. The review is necessary and appropriate, but it can 

take months between FDA approval and the availability of new 

technology for Medicare beneficiaries. By coordinating FDA and 

CMS approval of breakthrough medical devices, where feasible, 

this provision is intended to facilitate a more efficient process for 

the coverage of certain new technology by the Medicare program. 

The ICD–9 coding system was adopted in 1979, and remains in 

effect for diagnosis and procedure coding in hospital inpatient and 

outpatient settings. ICD–9 has ‘‘run out’’ of codes for certain new 

procedures. For example, no code was available for the anthrax attack in 2001. NCVHS began investigating adoption of an updated 

coding system—ICD–10—in 1990. ICD–10 is more clinically accurate, and has available codes for new technologies and procedures. 

In 1996, as part of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, Congress required NCVHS to make a 

recommendation on adoption prior to Secretarial approval. To date, 

NCVHS still has not issued a recommendation. 

ICD–9 has run out of codes for new technologies and procedures. 

ICD–10 has room for those procedures, which would improve accuracy in claims processing. Every developed country in the world except the US and Israel has adopted ICD–10 as the standard coding 

system because it is superior to ICD–9. Some hospitals are eager 

to adopt ICD–10 because ultimately they believe it would improve 

280

efficiency. The Committee agrees, although nothing in this provision requires the Secretary to adopt the ICD–10 in any health care 

setting. 

(b) Methods for Determining Payment Basis for New Lab 

Tests 

CURRENT LAW

Outpatient clinical diagnostic laboratory tests are paid on the 

basis of area wide fee schedules. The law establishes cap on the 

payment amounts, which is currently set at 74 percent of the median for all fee schedules for that test. The cap is set at 100 percent 

of the median for tests performed after January 1, 2001 that the 

Secretary determines are new tests for which no limitation amount 

has previously been established. 

EXPLANATION OF PROVISION

The Secretary would be required to establish procedures (by regulation) for determining the basis for and amount of payments for 

new clinical diagnostic laboratory tests. New laboratory tests would 

be defined as those assigned a new, or substantially revised Health 

Care Procedure Coding System (HCPCS) code on or after January 

1, 2005. The Secretary, as part of this procedure, would be required 

to: (1) provide a list (on an Internet site or other appropriate 

venue) of tests for which payments are being established in that 

year, (2) publish a notice of a meeting in the Federal Register on 

the day the list becomes available, (3) hold the public meeting no 

earlier than 30 days after the notice to receive public comments 

and recommendations, (4) take into account the comments, recommendations and accompanying data in both proposed and final 

payment determinations. The Secretary would set forth the criteria 

for making these determinations; make public the available data 

considered in making such determinations; and could convene other 

public meetings as necessary. 

EFFECTIVE DATE

Effective for codes assigned on or after January 1, 2005. 

(c) GAO Study on Improvements in External Data Collection 

for Use in the Medicare Inpatient Payment System 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

GAO would be required to study which external data could be 

collected by CMS in a shorter time frame for use in calculating 

payments for inpatient hospital services. GAO could evaluate feasibility and appropriateness of using quarterly samples or special 

surveys and would include an analysis of whether other executive 

agencies would be better suited to collect this information. The report would be due to Congress no later than October 1, 2004. 

EFFECTIVE DATE

Upon enactment. 

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Section 943. Treatment of Hospitals for Certain Services Under 

Medicare Secondary Payer (MSP) Provisions 

CURRENT LAW

In certain instances when a beneficiary has other insurance coverage, Medicare becomes the secondary insurance. Medicare Secondary Payer is the Medicare program’s coordination of benefits 

with other insurers. Section 1862(b)(6) of the Social Security Act 

requires an entity furnishing a Part B service to obtain information 

from the beneficiary on whether other insurance coverage is available. 

EXPLANATION OF PROVISION

The Secretary would not require a hospital or a critical access 

hospital to ask questions or obtain information relating to the 

Medicare secondary payer provisions in the case of reference laboratory services if the same requirements are not imposed upon 

those provided by an independent laboratory. Reference laboratory 

services would be those clinical laboratory diagnostic tests and interpretations of it that are furnished without a face-to-face encounter between the beneficiary and the hospital where the hospital 

submits a claim for the services. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Hospitals would not have to directly contact each beneficiary on 

their retirement date, black lung status and other insurance information for reference laboratory services. While current law provisions for a claim containing valid insurance information are maintained, this provision is intended to reduce the amount of paperwork and regulatory burden related to the provision of these reference laboratory services by hospital-based entities. 

Section 944. EMTALA Improvements 

CURRENT LAW

Medicare requires participating hospitals that operate an emergency room to provide necessary screening and stabilization services to a patient in order to determine whether an emergency medical situation exists prior to asking about insurance status of the 

patient. 

Hospitals that are found to be in violation of Emergency Medical 

Treatment and Active Labor Act (EMTALA) requirements may face 

civil monetary penalties and termination of their provider agreement. Prior to imposing a civil monetary penalty, the Secretary is 

required to request a peer review organization (PRO), currently 

called quality improvement organizations (QIOs), to assess whether 

the involved beneficiary had an emergency condition, which had 

not been stabilized and provide a report on its findings. Except in 

the case where a delay would jeopardize the health or safety, the 

Secretary provides a 60-day period for the requested PRO review. 

282

EMTALA is enforced by general guidelines issued by CMS. Patients who present to the emergency room and request services (or 

another person does so on their behalf) are required to be screened 

and stabilized. 

EXPLANATION OF PROVISIONS

Emergency room services provided to screen and stabilize a 

Medicare beneficiary furnished after January 1, 2004, would be 

evaluated as reasonable and necessary on the basis of the information available to the treating physician or practitioner at the time 

the services were ordered; this would include the patient’s presenting symptoms or complaint and not the patient’s principal diagnosis. The Secretary would not be able to consider the frequency 

with which the item or service was provided to the patient before 

or after the time of admission or visit.

The Secretary would be required to establish a procedure to notify hospitals and physicians when an EMTALA investigation is 

closed. 

Except in the case where a delay would jeopardize the health and 

safety of individuals, the Secretary would be required to request a 

PRO review before making a compliance determination that would 

terminate a hospital’s Medicare participation because of EMTALA 

violations and provide a period of 5 business days for such review. 

The PRO shall provide a copy of the report on its findings to the 

hospital or physician that is consistent with existing confidentiality 

requirements. This provision would apply to terminations initiated 

on or after enactment. 

The provision also clarifies the responsibility of the hospital 

when the individual does not request examination or treatment for 

an emergency condition. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Providers have reported that some Medicare contractors are looking at final diagnoses (not presenting symptoms) in applying local 

medical review policies (LMRPs) that match particular tests to particular diagnoses—if a test does not match a listed diagnosis, payment is denied. Other claims are reportedly being denied based on 

LMRPs that set frequency limits for certain tests—if the test’s use 

in the emergency room exceeds a frequency limit, payment is denied. In its January 2001 report entitled The Emergency Medical 

Treatment and Labor Act: The Enforcement Process, at the OIG 

recommended that CMS ensure that peer review occurs before a 

provider is terminated from the Medicare program for an EMTALA 

violation. This section implements that recommendation, making 

the current discretionary PRO review process mandatory in cases 

that involve a question of medical judgment. Finally, it clarifies 

CMS guidelines for persons or individuals who arrive at the emergency room for non-emergency services. 

283

Section 945. Emergency Medical Treatment and Active Labor 

(EMTALA) Task Force 

CURRENT LAW

No provision. 

EXPLANATION OF PROVISION

The Secretary would be required to establish a 17-member technical advisory group under specified requirements to review issues 

related to EMTALA. The advisory group would be comprised of: the 

CMS Administrator; the OIG; four hospital representatives who 

have EMTALA experience, (including 1 person from a public hospital and two of whom have not experienced EMTALA violations); 

five practicing physicians with EMTALA experience; two patient 

representatives; two regional CMS staff involved in EMTALA investigations; one representative from a state survey organization 

and one from a PRO. The Secretary would select qualified individuals who are nominated by organizations representing providers 

and patients. 

The advisory group would be required to: (1) elect a member to 

as chairperson, (2) schedule its first meeting at the direction of the 

Secretary and meet at least twice a year subsequently, (3) terminate 30 months after the date of its first meeting, and (4) be exempt from the Federal Advisory Committee Act. The advisory 

group would review EMTALA regulations; provide advice and recommendations to the Secretary; solicit public comments from interested parties; and disseminate information on the application of the 

EMTALA regulations. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

In its January 2001 report entitled The Emergency Medical 

Treatment and Labor Act: The Enforcement Process, the OIG recommended that CMS establish an EMTALA technical advisory 

group that includes all EMTALA stakeholders to help the agency 

resolve any emerging issues related to implementation of the law. 

Some of these current issues include specialists who refuse to service on call panels and inconsistencies between Stat and Federal law 

governing emergency medical services. In its June 2001 report entitled Emergency Care: EMTALA Implementations and Enforcement 

Issues, the GAO also concluded that the establishment of a technical advisory group could help CMS work with hospitals and physicians to achieve the goals of EMTALA and avoid creating unnecessary burdens for providers. This section implements the OIG recommendation, establishing a 19-member technical advisory group 

within HHS. 

284

Section 946. Authorizing Use of Arrangements To Provide Core Hospice Services in Certain Circumstances 

CURRENT LAW

A hospice is a public agency or private organization, which is primarily engaged in providing and making available certain care to 

a terminally ill Medicare beneficiary under a written plan. 

EXPLANATION OF PROVISIONS

A hospice would be permitted to: (1) enter into arrangements 

with another hospice program to provide care in extraordinary, exigent or other non-routine circumstances, such as unanticipated 

high patient loads, staffing shortages due to illness, or temporary 

travel by a patient outside the hospice’s service area, and (2) bill 

and be paid for the hospice care provided under these arrangements.

EFFECTIVE DATE

For hospice care provided on or after enactment. 

REASON FOR CHANGE

Hospice programs would be allowed to use personnel from other 

hospice programs to provide services to hospice patients. The program is given the flexibility so that a hospice program could continue to serve a patient if he or she was temporarily out of the area 

due to travel. Otherwise, the provision of the care to the patient 

might be delayed by the paperwork and requirements in starting 

up a new service at another agency. It is the intent of Congress 

that the originating hospice maintains control over the billing and 

quality of care. 

Section 947. Application of OSHA Bloodborne Pathogens Standards 

to Certain Hospitals 

CURRENT LAW

Section 1866 establishes certain conditions of participation that 

providers must meet in order to participate in Medicare. 

EXPLANATION OF PROVISION

Public hospitals that are not otherwise subject to the Occupational Safety and Health Act of 1970 would be required to comply 

with the Bloodborne Pathogens standard under section 1910.1030 

of title 29 of the Code of Federal Regulations. A hospital that fails 

to comply with the requirement would be subject to a civil monetary penalty, but would not be terminated from participating in 

Medicare. 

EFFECTIVE DATE

The provision would apply to hospitals as of July 1, 2004. 

REASON FOR CHANGE

Last year, Congress enacted legislation that requires hospitals to 

utilize safe needles. However, that legislation only applies to nongovernment hospitals. Twenty-four states have similar requireVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00284 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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ments on public hospitals. This provision would protect the health 

and safety of health care workers in those facilities by requiring 

public hospitals in the other 26 states and the District of Columbia 

to comply with this important standard. 

Section 948. BIPA-Related Technical Amendments and Corrections 

CURRENT LAW

BIPA established an advisory process for national coverage determinations where panels of experts formed by advisory committees 

could forward their recommendations directly to the Secretary 

without prior approval of the advisory committee or the Executive 

Committee. 

EXPLANATION OF PROVISION

The statutory reference in BIPA would be changed from the Social Security Act to the Public Health Service Act. Other BIPA references would be changed from a policy to a determinations. 

EFFECTIVE DATE

The provision would be effective as if included in BIPA. 

Section 949. Conforming Authority To Waive A Program Exclusion 

CURRENT LAW

The Secretary is required to exclude individuals and entities 

from participation in Federal Health Programs that are (1) convicted of a criminal offense related to health care delivery under 

Medicare or under State health programs, (2) convicted of a criminal offense related to patient abuse or neglect under Federal or 

State law, (3) convicted of a felony relating to fraud, theft, or financial misconduct relating to a health care finance program or operated by the Federal, State or local government, or (4) convicted of 

a felony related to a controlled substance. 

EXPLANATION OF PROVISIONS

The Administrator of a Federal health program would be permitted to waive certain 5-year exclusions if the exclusion of a sole 

community physician or source of specialized services in a community would impose a hardship. The mandatory exclusions that 

could be waived would be those related to convictions associated 

with program-related crimes, health care fraud and controlled substances. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

The Office of Inspector General requested this technical correction.

286

Section 950. Treatment of Certain Dental Claims 

CURRENT LAW

The Medicare benefit does not include most dental services. Some 

insurers may require a claim denial from Medicare before accepting 

the dental claim for payment review, even if Medicare does not 

cover the service. 

EXPLANATION OF PROVISION

A group health plan providing supplemental or secondary coverage to Medicare beneficiaries would not be able to require dentists to obtain a claim denial from Medicare for non-covered dental 

services before paying the claim. 

EFFECTIVE DATE

The provision would be effective 60 days after enactment. 

REASON FOR CHANGE

The Committees are concerned about private insurers requiring 

dentists to submit claims to Medicare for non-covered services before making a determination for coverage under the group health 

plan. Because of this requirement, dentists have been forced to enroll in the Medicare program to submit claims for services that are 

categorically excluded from Medicare coverage. Dentists view Medicare’s enrollment application process as overly burdensome, particularly in light of the fact that Medicare does not cover most dental services. This provision would alleviate the enrollment burden 

placed on dentists providing services clearly excluded from Medicare coverage, consistent with the overarching goal of this legislation to reduce regulatory burdens. 

Section 951. Furnishing Hospitals With Information To Compute 

DSH Formula 

CURRENT LAW

Disproportionate share hospital (DSH) payments under Medicare 

are calculated using a formula that includes the number of patient 

days for patients eligible for Medicaid. 

EXPLANATION OF PROVISION

The provision would require the Secretary to arrange for the information such as number of paid or unpaid Medicaid days, and 

the number of dual eligibles that hospitals need to calculate the 

Medicare DSH payment formula. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Hospitals find it difficult to compute certain critical numbers for 

the purposes of Medicare DSH such as unpaid days used by Medicaid eligibles or Medicare dual eligibles. This helps ensure accuracy for hospitals and for the Trust Fund. 

287

Section 952. Revisions to Reassignment Provisions 

CURRENT LAW

Under certain circumstances, a person or entity other than the 

individual providing the service may receive Medicare payments. 

EXPLANATION OF PROVISION

Entities, as defined by the Secretary, could receive Medicare payments for services provided by a physician or other person if the 

service was provided under a contractual arrangement and if the 

arrangement included joint and several liability (liability for several parties) for overpayment and the entities meet program integrity specifications determined by the Secretary. 

EFFECTIVE DATE

The provision would be effective for payments made on or after 

one year after the date of enactment. 

Section 953. Other Provisions 

CURRENT LAW

No provisions. 

EXPLANATION OF PROVISION

GAO Report on Physician Compensation. No later than six 

months from enactment, GAO would be required to report to Congress on the appropriateness of the updates in the conversion factor 

including the appropriateness of the sustainable growth rate (SGR) 

formula for 2002 and subsequently. The report would examine the 

stability and the predictability of the updates and rate as well as 

the alternatives for use of the SGR in the updates. No later than 

12 months from enactment, GAO would be required to report to 

Congress on all aspects of physician compensation for Medicare 

services. The report would review the alternatives for the physician 

fee schedule.

Annual Publication of List of National Coverage Determinations.

The Secretary would be required to publish an annual list of national coverage determinations made under Medicare in the previous year. Included would be information on how to get more information about the determinations. The list would be published in 

an appropriate annual publication that is publicly available. 

GAO Report on Flexibility in Applying Home Health Conditions 

of Participation to Patients Who Are Not Medicare Beneficiaries.

The GAO would be required to report to Congress on the implications if the Medicare conditions of participation for home health 

agencies were applied flexibly with respect to groups or types of patients who are not Medicare beneficiaries. The report would include 

an analysis of the potential impact of this flexibility on clinical operations and the recipients of such services and an analysis of 

methods for monitoring the quality of care provided to these recipients. The report would be due no later than six month after enactment. 

OIG Report on Notices Relating to Use of Hospital Lifetime Reserve Days. The Inspector General of HHS would be required to reVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00287 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
288

port to Congress on the extent to which hospitals provide notice to 

Medicare beneficiaries, in accordance with applicable requirements, 

before they use the 60 lifetime reserve days under the hospital benefit. The report would also include the appropriateness and feasibility of hospitals providing a notice to beneficiaries before they exhaust the lifetime reserve days. The report would be due no later 

than one year after enactment. 

EFFECTIVE DATE

Upon enactment. 

Section 954. Temporary Suspension of OASIS Requirement for Collection of Data on Non-Medicare and Non-Medicaid Claims 

CURRENT LAW

Under the Conditions of Participation, home health agencies are 

required to complete the OASIS form on all patients. 

EXPLANATION OF PROVISION

The OASIS data collected on non-Medicare or non-Medicaid patients is not collected or used by the Federal government. This provision suspends collection until the Secretary has published final 

regulations regarding the collection and use of this data. Moreover 

it requires a study of how the data is used by the agencies as well 

as recommendations from quality assessment experts. Agencies 

may continue collecting the data during the suspension. 

EFFECTIVE DATE

Upon enactment. 

REASON FOR CHANGE

Data mandates on the collection of data on non-Medicare and 

non-Medicaid patients by the Federal government should be carefully reviewed for privacy issues by the agency.

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 2473. 

MOTION TO REPORT THE BILL

The bill, H.R. 2473, as amended, was ordered favorably reported 

by a rollcall vote of 25 yeas to 15 nays (with a quorum being 

present). The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

289

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

VOTES ON AMENDMENTS

An amendment in the nature of a substitute by Chairman Thomas was agreed to by a rollcall vote of 25 yeas to 15 nays. The vote 

was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

A rollcall vote was conducted on the following amendments to the 

Chairman’s amendment in the nature of a substitute. 

An amendment by Mr. Cardin, which would amend section 

1860D–5(d) of the Social Security Act as proposed to be inserted by 

section 101, to require the U.S. Department of Health and Human 

Services to takes such steps as may be necessary to qualify and 

serve as a prescription drug plan sponsor and to offer a prescription drug plan that offers standard coverage throughout the United 

States, was defeated by a rollcall vote of 15 yeas to 23 nays. The 

vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

290

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An amendment by Mr. McDermott, to strike Subtitle C of Title 

II, eliminating the privatization of plans, was defeated by a rollcall 

vote of 14 yeas to 23 nays. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An amendment by Mrs. Johnson, which would amend section 

1848(c)(2)(H) of the Social Security Act, as proposed to be added by 

section 303(a)(1)(B), to direct the Secretary of Health and Human 

Services to expedite the process for adjusting existing CPT codes 

for costs associated with the administration of covered drugs, was 

agreed to by a rollcall vote of 32 yeas to 5 nays. The vote was as 

follows:

291

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Mr. Doggett, which would amend section 

1860D–3(c) of the Social Security Act as proposed to be inserted by 

section 101, to require each participating manufacturer of a covered 

outpatient drug to enter into arrangements with prescription drug 

plan sponsors or entities offering an MA–EFF prescription plan, 

was defeated by a rollcall vote of 12 yeas to 23 nays The vote was 

as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... ........... ............. Ms. Tubbs Jones .................. ........... ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An en bloc amendment by Mr. Collins, which would add at the 

end of section 1851(j) of the Social Security Act, as added by section 

102(a), to apply fee-for-service Medicare+Choice rules to prescription drug benefits; and as added by section 221(d), to provide the 

same treatment for premiums for MA private fee-for-service plans, 

292

was agreed to by a rollcall vote of 24 yeas to 12 nays, with 2 voting 

present. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... ........... X 

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... ........... X 

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Messrs. Nussle and Pomeroy, which would 

add the following new sections at the end of Title IV: Sec. 416—

Adjustment to the Medicare Inpatient Hospital PPS Wage Index to 

Revise the Labor-Related Share of Such Index; and Sec. 417—

Medicare Incentive Payment Program Improvements for Physician 

Scarcity, was agreed to by a rollcall vote of 39 yeas to 0 nays, with 

1 voting present. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... ........... X

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

A substitute amendment by Mr. Stark was defeated by a rollcall 

vote of 14 yeas to 26 nays. The vote was as follows:

293

Representatives Yea Nay Present Representatives Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

IV. BUDGET EFFECTS OF THE BILL 

The Congressional Budget Office has not submitted a final score 

of the legislation at the time of the filing of this report (July 15, 

2003).

V. OTHER MATTERS REQUIRED TO BE DISCUSSED 

UNDER HOUSE RULES 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee reports that the need for 

this legislation was confirmed by the oversight hearings of the Subcommittee on Health. The hearings were as follows: 

The Subcommittee on Health held a series of hearings on Medicare Reform during the 108th Congress to examine the implications 

of different proposals aimed at helping seniors gain more affordable 

access to prescription drugs. A list of these hearings may be found 

in this report in Section I. Introduction, Part C. Legislative History 

(Page xx). 

B. SUMMARY OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

In compliance with clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the primary 

purpose of H.R. 2473 is to create a prescription drug benefit into 

the Medicare program while modernizing other aspects of the program. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

In compliance with clause 3(d)(1) of rule XIII of the Rules of the 

House of Representatives, relating to constitutional Authority, the 

Committee states that the Committee’s action in reporting the bill 

is derived from Article I of the Constitution, Section 8 (‘‘The ConVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00293 Fmt 6659 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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gress shall have power to lay and collect taxes, duties, imposts, and 

excises, to pay the debts and to provide for * * * the General Welfare of the United States * * *’’). 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

Legislative Counsel has not prepared a Ramseyer at the time of 

the filing of this report (July 15, 2003).

(295)

VII. DISSENTING VIEWS 

We oppose the Republican Medicare bill reported by the Committee on Ways and Means. This is not a bill designed to ensure 

that seniors and people with disabilities get a long overdue Medicare prescription drug benefit that is available and affordable to 

all. Instead, it is an effort by the Republican Majority to complete 

their ideological mission to have Medicare ‘‘wither on the vine’’. 

Despite the legislation’s paltry benefit and fundamentally flawed 

structure, our committee could have reported a bill supported by a 

strong bipartisan majority with only two simple changes that we 

offered as amendments. But Republicans rejected our efforts to find 

a compromise. This absolute refusal to negotiate reinforces our firm 

belief that privatizing Medicare is their real goal in this so-called 

reform effort. 

Prescription drug coverage 

This legislation has a grossly inadequate drug benefit that was 

designed to fit into the Republican budget, not the budget of America’s elderly and disabled citizens. If the majority hadn’t squandered trillions on tax breaks for the wealthy, we would have had 

more resources to improve this benefit. 

Unlike Medicare Part B, where every beneficiary pays the same 

premium, the premium for prescription drug coverage would not be 

set in the statute. Although Republicans claim that the premium 

for this coverage will be $35 per person per month, that is merely 

a guesstimate. Premiums could be much higher and will vary in 

different areas of the country and even among plans in the same 

area. Private insurance premiums in the commercial market are 

rising at double-digit percentages each year, with most insurers citing prescription drugs as the primary driver. Unstable premiums 

translate into an unreliable benefit for senior citizens and other 

Medicare beneficiaries who are living on fixed incomes. In addition, after the initial coverage limit of $2,000, beneficiaries are forced to pay 100 percent of the cost until total drug 

spending reaches $4,900, after which the plan will pick up the 

costs. This patchwork quilt of coverage doesn’t exist today in any 

other public or private plan. Almost half of all beneficiaries—48 

percent—will fall into this gap and only 10 percent will have drug 

needs high enough to get the catastrophic coverage on the other 

side of the gap. This means that a senior citizen with average drug 

spending in 2006 would find themselves with coverage for their 

medications until August, after which they would receive no coverage for the rest of the year while still paying a sizeable premium. 

This legislation also would tie the level of benefits to income. The 

point at which catastrophic coverage would begin would be based 

on a beneficiary’s income. People in the highest category would 

have no coverage from $2,000 to $13,200 in drug spending. If they 

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needed more than $13,200 worth of drugs, coverage would begin 

again. Given that wealthier beneficiaries have already paid more 

through the payroll taxes during their working years, this double 

taxation of Medicare benefits should be rejected. Even worse, however, is that this misguided policy would require the IRS and the 

Department of Health and Human Services (HHS) to share sensitive income data on beneficiaries for the first time. HHS would 

then have to give information to the plan to indicate the level of 

the benefit for each beneficiary, a de facto disclosure of income. It 

appears that beneficiaries who refuse to authorize the sharing of 

this information might be excluded from the drug coverage. It’s an 

offensive invasion of privacy that undermines the social insurance 

nature of Medicare and it ought to be rejected. 

While Republicans purport to protect those on the lower-ends of 

the income scale, even those provisions fall far short. Help for even 

the poorest seniors—those with incomes below $8,980—is contingent on meeting an assets test. This means that they will not get 

the extra help if they have even modest savings ($4,000 or more). 

Data suggest that more than one-third of otherwise eligible low-income beneficiaries would be excluded as a result of this hidden 

hatchet. 

Republican Members of the Ways and Means Committee and the 

President of the United States are fond of saying that Medicare 

beneficiaries should get the same choices as Members of Congress 

do with respect to prescription drug coverage. They like to say that 

as a rhetorical point, but their rhetoric doesn’t match the reality 

of this bill. As Members of Congress, we get our health insurance 

through the Federal Employees Health Benefits Plan like all federal employees. There isn’t a single plan option in FEHBP as bad 

as the one they’re promoting for seniors in Medicare. 

We’re also very concerned that the Republican Medicare bill will 

cause employers to drop retiree prescription drug coverage. The 

Congressional Budget Office informed us at the mark-up that those 

concerns are real. They estimate that 32% of employers who are 

currently providing retiree prescription drug benefits will drop that 

coverage if this bill becomes law as written. That needs to be fixed 

in this bill as well. We should be using this opportunity to reinforce 

the better coverage that is out there, not erode it. 

While there are many other problems in this legislation, we are 

also particularly troubled by the fact that it does nothing to guarantee lower prices. In fact, it includes language that actually prohibits the Secretary of Health and Human Services from ‘‘interfering’’ in negotiations between private plans and drug companies. 

This is an extraordinary prohibition that affects Medicare beneficiaries and taxpayers alike. It is fiscally irresponsible. 

Fundamental flaws 

All of these are very serious concerns, but we would still be willing to accept this bill as a good faith effort to add a prescription 

drug benefit to Medicare if Republicans would accept two changes. 

First, the bill must be amended to include a uniform, defined prescription drug benefit that is universally available through Medicare. Second, the bill must reject proposals to privatize the program. These two changes are critical. 

297

No real Medicare drug benefit 

The lack of a uniform nationally available, defined prescription 

drug benefit in Medicare in the Republican bill is a fundamental 

flaw. The bill relies solely on private plans to provide the new prescription drug benefit. Unlike every other benefit in Medicare—doctor’s visits, hospitalizations, and physical therapy as examples—a 

beneficiary would not have coverage through Medicare for prescription drugs. Instead, a Medicare enrollee would be ‘‘entitled’’ to purchase a private prescription drug plan at varying prices around the 

country, provided one was even available—and affordable—in their 

community. That is not an entitlement at all. 

On top of that, we’re concerned the bill won’t work. Beneficiaries 

who want to remain in traditional Medicare would theoretically 

purchase new private drug-only plans; all others would get their 

prescription drugs through HMOs, PPOs and other managed care 

plans. The bill would divide the country into regions and would require that beneficiaries have the choice of two private drug plans 

(only one of which need be a drug-only plan) in each of those regions. But, there is no provision in the bill to account for the possibility that two plans simply won’t appear in each region! It may be 

that no plans appear. As President Bush’s Medicare Administrator, 

Tom Scully, has said, these drug-only plans ‘‘don’t exist in nature 

and won’t work in practice.’’ We have yet to see any proof from the 

Republican authors of this program or insurance companies that 

these plans will materialize. In fact, Wall Street analysts, insurance companies and pharmaceutical benefit managers have cast 

considerable doubt on this scheme. The legislation would allow the 

government to try to bribe the plans to participate, but if they 

turned down that offer, there is no backup plan and beneficiaries 

would have no place to buy coverage. 

Even worse, if two plans do appear, but the HMO offers a more 

affordable benefit than the drug-only plan, beneficiaries in traditional Medicare may be left with no option but to give up Medicare 

and enroll in an HMO to get prescription drug coverage. That’s 

wrong. We repeatedly inquired about what would happen in such 

a situation, but failed to get any suitable answer from the Republicans. 

Democratic amendments 

Add a guaranteed Medicare benefit. The first key change necessary for us to support the Republican Medicare bill is to provide 

a guaranteed drug benefit managed by Medicare in the same way 

that we manage Medicare Part A (hospital services) and Medicare 

Part B (physician services). We can accept that private plans be allowed to compete to provide Medicare benefits, but only if beneficiaries in traditional Medicare are not disadvantaged as a result. 

All our amendment would do is add a stable, defined drug benefit 

in Medicare that is available everywhere in the country. The Republican private plans could still operate as envisioned under this 

program, but a Medicare option with a national, defined benefit 

would also be in place in every community, regardless of how many 

private plans were offering coverage in the area. That’s the promise 

of Medicare today with respect to health services and it should hold 

true for medications as well. 

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Republicans shouldn’t be threatened by this amendment. If the 

private sector truly is more efficient and able to offer better options 

than government-run Medicare, people will leave the traditional 

Medicare plan and join the private sector options developed in this 

Republican bill. 

This is a sensible amendment that does nothing more than maintain the promise of Medicare since its inception in 1965 and carry 

that promise into the future. However, Republicans opposed this 

amendment on a strictly party line basis. 

Eliminate privatization of Medicare. The second fundamental 

concern we have with the Republican bill is its goal to privatize 

Medicare. Make no mistake about it. The ultimate goal of this bill 

is to end Medicare’s entitlement to defined benefits. Providing a 

drug benefit to seniors is simply the window dressing. It includes 

a whole scheme starting in 2010 that will end Medicare as a defined benefit universally available at a uniform price for all of 

America’s seniors and people with disabilities. Instead, seniors’ 

ability to get the health care they need would depend upon their 

ability to afford a plan that meets their needs. Beneficiaries who 

need or want to stay in traditional Medicare will have to pay more 

to do so. 

Remember, Medicare was created because the private health care 

system would not provide affordable health insurance coverage for 

seniors. We shouldn’t be turning back the clock to those times. But 

that’s exactly what the Republican bill—as written—will do. 

The Bipartisan Commission on the Future of Medicare already 

rejected this proposal. At that time, the Medicare Actuary estimated that converting Medicare to a competitive model of this nature would result in premium increases in traditional Medicare of 

47%. 

Increasing Medicare premiums at that rate would absolutely 

force seniors to leave the program—they wouldn’t be able to afford 

to stay. They would have to go into the ‘‘competitive’’ side of the 

program and join HMOs, PPOs or other similar private plans. 

These private options restrict choice of physicians, hospitals and 

other providers and enforce limitations that don’t exist in traditional Medicare. America’s seniors don’t want to be forced into private health plans that don’t meet their needs and, more importantly, limit their choice of physician and doctor. We won’t support 

any bill that takes away the security of Medicare. This section 

needs to go. Again, we offered an amendment to eliminate it. We 

were defeated on a party line vote. 

Eliminate sweetheart deal for drug companies. This bill creates 

a new bureaucracy to work with the private plans. Embedded in 

the section establishing this new agency is a provision that actually 

prohibits the Secretary of Health and Human Services from ‘‘interfering’’ in negotiations between private plans and drug companies. 

This is an unprecedented restriction of authority for a government 

program of this magnitude. With hundreds of billions of federal dollars at stake, Republicans put their friends in the pharmaceutical 

industry ahead of taxpayers. 

During the anthrax crisis, Secretary Thompson negotiated with 

the manufacturer of the antibiotic Cipro and cut prices by more 

than half. The VA negotiates directly for prescription drugs it purVerDate Jan 31 2003 05:12 Jul 19, 2003 Jkt 019006 PO 00000 Frm 00298 Fmt 6604 Sfmt 6602 E:\HR\OC\HR178P2.XXX HR178P2
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chases on behalf of veterans. Even the office that is responsible for 

the Federal Employees Health Benefits plan does not have its 

hands tied in this fashion. This is an extraordinary prohibition that 

affects Medicare beneficiaries and taxpayers alike. We offered an 

amendment to delete it. But this, too, was defeated on a largely 

party-line vote. 

The Republican bill fails senior citizens 

Democrats have supported Medicare from day one—and have 

consistently worked to improve it. We want a prescription drug 

benefit added to the program. But, we won’t go along with allowing 

the promise of a drug benefit become the Trojan Horse that ends 

Medicare as we know it. We are willing to work with House Republicans on a more limited benefit than we know is needed, but they 

have to be willing to protect the promise of Medicare. The bill reported out of our Committee fails that test, and is a bad deal for 

America’s senior citizens and the individuals with disabilities who 

depend on Medicare.

C. B. RANGEL. 

ROBERT T. MATSUI. 

JIM MCDERMOTT. 

WILLIAM J. JEFFERSON. 

STEPHANIE TUBBS JONES. 

SANDER LEVIN. 

BEN CARDIN. 

MAX SANDLIN. 

PETE STARK. 

MIKE MCNULTY. 

JOHN TANNER. 

XAVIER BECERRA. 

RICHARD E. NEAL. 

JERRY KLECZKA. 

JOHN LEWIS.

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