II 

109TH CONGRESS 

1ST SESSION S. 1002 

To amend title XVIII of the Social Security Act to make improvements 

in payments to hospitals under the medicare program, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MAY 11, 2005 

Mr. GRASSLEY (for himself and Mr. BAUCUS) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL 

To amend title XVIII of the Social Security Act to make 

improvements in payments to hospitals under the medicare program, and for other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Hospital Fair Competi5 tion Act of 2005’’. 

6 SEC. 2. HOSPITAL PAYMENT IMPROVEMENTS. 

7 (a) USE OF ESTIMATED COSTS RATHER THAN AV8 ERAGE CHARGES IN ESTABLISHING WEIGHTING FACTORS

9 FOR DIAGNOSIS-RELATED GROUPS UNDER THE INPA10 TIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM.— 
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•S 1002 IS

1 (1) IN GENERAL.—Section 1886(d)(4)(B) of 

2 the Social Security Act (42 U.S.C. 

3 1395ww(d)(4)(B)) is amended— 

4 (A) by inserting ‘‘(i)’’ after ‘‘(B)’’; and 

5 (B) by adding at the end the following new 

6 clause: 

7 ‘‘(ii) For fiscal years beginning after fiscal year 2006, 

8 in establishing the weighting factors under clause (i), the 

9 Secretary shall ensure (to the extent feasible) that such 

10 factors reflect the estimated costs of furnishing care in 

11 each diagnosis-related group.’’. 

12 (2) NO REQUIREMENT FOR ANNUAL ADJUST13 MENT FOR CHANGES IN COSTS.—Section 

14 1886(d)(4)(C)(i) of the Social Security Act (42 

15 U.S.C. 1395ww(d)(4)(C)(i)) is amended by adding 

16 at the end the following new sentence: ‘‘Notwith17 standing the preceding sentence, the Secretary may 

18 adjust the weighting factors established under sub19 paragraph (B) less frequently than annually (but in 

20 no case less frequently than once every 5 years) in 

21 carrying out the requirement under clause (ii) of 

22 such subparagraph.’’. 

23 (b) CALCULATION OF WEIGHTING FACTORS AT HOS24 PITAL LEVEL UNDER THE INPATIENT HOSPITAL PRO25 SPECTIVE PAYMENT SYSTEM.—Section 1886(d)(4)(B) of 
3 

•S 1002 IS

1 the Social Security Act (42 U.S.C. 1395ww(d)(4)(B)), as 

2 amended by subsection (a)(1), is amended by adding at 

3 the end the following new clause: 

4 ‘‘(iii) For fiscal years beginning after fiscal year 

5 2006, in establishing the weighting factors under clause 

6 (i), the Secretary shall calculate such factors at a hospital 

7 level and then aggregate such factors to a national level.’’. 

8 (c) ADJUSTMENT OF WEIGHTING FACTORS FOR DI9 AGNOSIS-RELATED GROUPS UNDER THE INPATIENT HOS10 PITAL PROSPECTIVE PAYMENT SYSTEM TO FINANCE

11 HIGH-COST OUTLIER CASES AND TO ACCOUNT FOR

12 CHANGES IN THE DISTRIBUTION OF SUCH CASES.— 

13 (1) PPS HOSPITALS.— 

14 (A) IN GENERAL.—Section 1886(d)(3)(B) 

15 of the Social Security Act (42 U.S.C. 

16 1395ww(d)(3)(B)) is amended to read as fol17 lows: 

18 ‘‘(B) REDUCING FOR VALUE OF OUTLIER PAY19 MENTS.— 

20 ‘‘(i) REDUCTION OF AVERAGE STANDARD21 IZED AMOUNTS.—The Secretary shall, for dis22 charges occurring before fiscal year 2007, re23 duce each of the average standardized amounts 

24 determined under subparagraph (A) by a factor 

25 equal to the proportion of payments under this 
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1 subsection (as estimated by the Secretary) 

2 based on DRG prospective payment amounts 

3 which are additional payments described in 

4 paragraph (5)(A) (relating to outlier payments). 

5 ‘‘(ii) REDUCTION OF WEIGHTING FAC6 TORS.—The Secretary shall, for discharges oc7 curring after fiscal year 2006, reduce each of 

8 the weighting factors determined under para9 graph (4)(B) by a factor equal to the propor10 tion of payments in the diagnosis-related group 

11 under this subsection (as estimated by the Sec12 retary) based on DRG prospective payment 

13 amounts which are additional payments de14 scribed in paragraph (5)(A) (relating to outlier 

15 payments).’’. 

16 (B) ANNUAL ADJUSTMENT TO ACCOUNT

17 FOR PROJECTED CHANGES IN THE DISTRIBU18 TION OF OUTLIER PAYMENTS WITHIN DIAG19 NOSIS-RELATED GROUPS.—Section 

20 1886(d)(4)(C)(i) of the Social Security Act (42 

21 U.S.C. 1395ww(d)(4)(C)(i)), as amended by 

22 subsection (a)(2), is amended by inserting ‘‘, in23 cluding, for discharges occurring after fiscal 

24 year 2006, projected changes in the distribution 

25 of additional payments described in paragraph 
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1 (5)(A) within diagnosis-related groups’’ before 

2 the period at the end of the first sentence. 

3 (C) CONFORMING AMENDMENTS.—Section 

4 1886(d)(3)(D) of the Social Security Act (42 

5 U.S.C. 1395ww(d)(3)(D)) is amended— 

6 (i) in clauses (i)(I), (ii)(I), and (iii)(I), 

7 by striking ‘‘reduced under subparagraph 

8 (B)’’ and inserting ‘‘reduced under sub9 paragraph (B)(i)’’; and 

10 (ii) in clause (iii)(II), by inserting ‘‘, 

11 and, in the case of a fiscal year beginning 

12 after 2006, reduced under subparagraph 

13 (B)(ii)’’ before the period at the end. 

14 (2) PUERTO RICO HOSPITALS.— 

15 (A) COMPUTING PUERTO RICO DRG-SPE16 CIFIC RATES.—Section 1886(d)(9)(C)(ii) of the 

17 Social Security Act (42 U.S.C. 

18 1395ww(d)(9)(C)(ii)) is amended— 

19 (i) by inserting ‘‘, for discharges oc20 curring before fiscal year 2007,’’ after 

21 ‘‘The Secretary shall’’; and 

22 (ii) by striking ‘‘fiscal year 2004 and 

23 thereafter’’ and inserting ‘‘fiscal years 

24 2004, 2005, and 2006’’. 
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1 (B) CONFORMING AMENDMENTS.—Section 

2 1886(d)(9)(C)(iii)(II) of the Social Security Act 

3 (42 U.S.C. 1395ww(d)(9)(C)(iii)(II)) is amend4 ed by inserting ‘‘and reduced under paragraph 

5 (3)(B)(ii)’’ after ‘‘paragraph (4)(B)’’. 

6 (d) ENSURING THAT DIAGNOSTIC-RELATED GROUPS

7 APPROPRIATELY CAPTURE THE DIFFERENCE IN SEVER8 ITY OF ILLNESS OF PATIENTS.—Section 1886(d)(4)(A) of 

9 the Social Security Act (42 U.S.C. 1395ww(d)(4)(A)) is 

10 amended by adding at the end the following new sentence: 

11 ‘‘In establishing the classification of inpatient discharges 

12 by diagnosis-related groups under the preceding sentence, 

13 the Secretary shall ensure that such groups appropriately 

14 capture the difference in severity of illness of patients.’’. 

15 (e) PHASE-IN OF CHANGES TO THE INPATIENT HOS16 PITAL PROSPECTIVE PAYMENT SYSTEM.—Section 

17 1886(d) of the Social Security Act (42 U.S.C. 1395ww(d)) 

18 is amended by adding at the end the following new para19 graph: 

20 ‘‘(14) Notwithstanding the preceding provisions of 

21 this subsection, the Secretary shall phase in the applica22 tion of the amendments made by subsections (a), (b), (c), 

23 and (d) of section 2 of the Hospital Fair Competition Act 

24 of 2005 over a 3-fiscal year period beginning with fiscal 

25 year 2007. In implementing the phase-in under the pre-
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1 ceding sentence, the Secretary shall take into account the 

2 negative impact that the phase-in may have on certain 

3 hospitals.’’. 

4 SEC. 3. PROHIBITION ON CERTAIN PHYSICIAN SELF REFER5 RALS. 

6 (a) PROHIBITION.—Section 1877(d) of the Social Se7 curity Act (42 U.S.C. 1395nn(d)) is amended in each of 

8 paragraphs (2)(B) and (3)(B) by striking ‘‘effective for 

9 the 18-month period beginning on the date of enactment 

10 of the Medicare Prescription Drug, Improvement, and 

11 Modernization Act of 2003’’ and inserting ‘‘on and after 

12 December 8, 2003’’. 

13 (b) REVISIONS TO THE REQUIREMENTS TO QUALIFY

14 FOR THE EXCEPTION TO THE DEFINITION OF SPECIALTY

15 HOSPITAL.—Section 1877(h)(7)(B) of the Social Security 

16 Act (42 U.S.C. 1395nn(h)(7)(B)) is amended— 

17 (1) by redesignating clauses (iii), (iv), and (v) 

18 as clauses (vi), (vii), and (viii), respectively; 

19 (2) by inserting after clause (ii) the following 

20 new clauses: 

21 ‘‘(iii) for which the percent of invest22 ment in the hospital by physician investors 

23 at any time on or after June 8, 2005, is 

24 no greater than the percent of such invest-
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1 ment by physician investors as of such 

2 date; 

3 ‘‘(iv) for which the percent of invest4 ment in the hospital by any physician in5 vestor at any time on or after June 8, 

6 2005, is no greater than the percent of 

7 such investment by such physician as of 

8 such date; 

9 ‘‘(v) for which the number of oper10 ating rooms at the hospital at any time on 

11 or after June 8, 2005, is no greater than 

12 the number of such rooms as of such 

13 date;’’; and 

14 (3) by striking clause (vii), as so redesignated, 

15 and inserting the following: 

16 ‘‘(vii) for which— 

17 ‘‘(I) during the period beginning 

18 on December 8, 2003, and ending on 

19 June 7, 2005, any increase in the 

20 number of beds occurs only in the fa21 cilities on the main campus of the 

22 hospital and does not exceed 50 per23 cent of the number of beds in the hos24 pital as of November 18, 2003, or 5 

25 beds, whichever is greater; and 
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1 ‘‘(II) the number of beds at the 

2 hospital at any time on or after June 

3 8, 2005, is no greater than the num4 ber of such beds as of such date; 

5 and’’. 

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall take effect on June 8, 2005. 

8 SEC. 4. PERMISSIBLE COORDINATED CARE INCENTIVE AR9 RANGEMENTS BETWEEN HOSPITALS AND 

10 PHYSICIANS. 

11 (a) ESTABLISHMENT OF REQUIREMENTS FOR AR12 RANGEMENTS AND EXEMPTION FROM IMPOSITION OF

13 CIVIL MONETARY PENALTIES.—Section 1128A of the So14 cial Security Act (42 U.S.C. 1320a–7a) is amended by 

15 adding at the end the following new subsection: 

16 ‘‘(o) ARRANGEMENTS BETWEEN HOSPITALS AND

17 PHYSICIANS.— 

18 ‘‘(1) IN GENERAL.—Subsection (b) shall not 

19 apply to an arrangement that meets the require20 ments under paragraph (2). 

21 ‘‘(2) REQUIREMENTS.— 

22 ‘‘(A) ESTABLISHMENT.—The Secretary 

23 shall establish requirements for arrangements 

24 between hospitals or critical access hospitals 

25 and physicians in which physicians share in the 
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1 savings experienced by the hospital or critical 

2 access hospital by reason of cost-reduction ef3 forts that involve the physicians. 

4 ‘‘(B) PROTECTIONS.—In establishing the 

5 requirements under subparagraph (A), the Sec6 retary shall ensure that— 

7 ‘‘(i) the quality of care provided to in8 dividuals is protected under the arrange9 ment; and 

10 ‘‘(ii) financial incentives that could af11 fect physician referrals are minimized. 

12 ‘‘(C) MONITOR.—The Secretary shall es13 tablish procedures to monitor arrangements de14 scribed in subparagraph (A) to ensure that 

15 such agreements meet the requirements under 

16 such subparagraph.’’. 

17 (b) EXEMPTION FROM CRIMINAL PENALTIES.—Sec18 tion 1128B(b)(3) of the Social Security Act (42 U.S.C. 

19 1320a–7b(b)(3)) is amended— 

20 (1) in subparagraph (G), by striking ‘‘and’’ at 

21 the end; 

22 (2) in subparagraph (H), as added by section 

23 237(d) of the Medicare Prescription Drug, Improve24 ment, and Modernization Act of 2003 (Public Law 

25 108–173; 117 Stat. 2213)— 
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1 (A) by moving such subparagraph 2 ems to 

2 the left; and 

3 (B) by striking the period at the end and 

4 inserting a semicolon; 

5 (3) by redesignating subparagraph (H), as 

6 added by section 431(a) of the Medicare Prescrip7 tion Drug, Improvement, and Modernization Act of 

8 2003 (Public Law 108–173; 117 Stat. 2287), as 

9 subparagraph (I); 

10 (4) in subparagraph (I), as so redesignated— 

11 (A) by moving such subparagraph 2 ems to 

12 the left; and 

13 (B) by striking the period at the end and 

14 inserting ‘‘; and’’; and 

15 (5) by adding at the end the following new sub16 paragraph: 

17 ‘‘(J) an arrangement that meets the require18 ments established under section 1128A(o).’’. 

19 (c) EXEMPTION FROM LIMITATION ON CERTAIN

20 PHYSICIAN REFERRALS.—Section 1877(e) of the Social 

21 Security Act (42 U.S.C. 1395nn(e)) is amended by adding 

22 at the end the following new paragraph: 
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•S 1002 IS

1 ‘‘(9) ARRANGEMENTS BETWEEN HOSPITALS

2 AND PHYSICIANS.—An arrangement that meets the 

3 requirements established under section 1128A(o).’’. 

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