99–006

107TH CONGRESS REPT. 107–541 " HOUSE OF REPRESENTATIVES ! 2d Session Part 1

MEDICARE MODERNIZATION AND PRESCRIPTION DRUG 

ACT OF 2002 (TITLE VI: PROVISIONS RELATING TO PARTS 

A AND B)

JUNE 26, 2002.—Ordered to be printed 

Mr. TAUZIN, from the Committee on Energy and Commerce, 

submitted the following 

R E P O R T 

[To accompany H.R. 4987]

The Committee on Energy and Commerce, to whom was referred 

the bill (H.R. 4987) to amend title XVIII of the Social Security Act 

to improve payments for home health services and for direct graduate medical education, and for other purposes, having considered 

the same, report favorably thereon without amendment and recommend that the bill do pass.

CONTENTS 

Page 

Purpose and Summary ............................................................................................ 1

Background and Need for Legislation .................................................................... 2

Hearings ................................................................................................................... 3

Committee Consideration ........................................................................................ 3

Committee Votes ...................................................................................................... 3

Committee Oversight Findings ............................................................................... 6

Statement of General Performance Goals and Objectives .................................... 6

New Budget Authority, Entitlement Authority, and Tax Expenditures ............. 6

Committee Cost Estimate ....................................................................................... 6

Congressional Budget Office Estimate ................................................................... 6

Federal Mandates Statement ................................................................................. 6

Advisory Committee Statement .............................................................................. 6

Constitutional Authority Statement ...................................................................... 6

Applicability to Legislative Branch ........................................................................ 7

Section-by-Section Analysis of the Legislation ...................................................... 7

Changes in Existing Law Made by the Bill, as Reported ..................................... 11

PURPOSE AND SUMMARY

The purpose of H.R. 4987 is to preserve the home health benefit 

and shift hospital residency positions to areas where they are needed most. This legislation also establishes two demonstration programs to test new ways to treat Medicare beneficiaries. H.R. 4987 

2

also includes important reforms of the Medicare Payment Advisory 

Commission. 

BACKGROUND AND NEED FOR LEGISLATION

Until 1998, home health care was one of Medicare’s fastest growing benefits. Concerns about rising spending, fraud and abuse, and 

inadequate oversight led Congress to enact a number of initiatives 

to better control Medicare’s home health care costs. In particular, 

the Balanced Budget Act of 1997 (BBA), P.L. 105–33, mandated 

that the Centers for Medicare and Medicaid Services (CMS) move 

away from a cost-based method of payment and implement a prospective payment system (PPS) of fixed, predetermined rates for 

home health services. The BBA also required aggregate Medicare 

home health payments in the first year of the PPS to be reduced 

by 15 percent. 

The home health industry has argued that home health agencies 

have experienced tremendous period of change over the past few 

years and that the 15 percent reduction will serve to exacerbate 

the many challenges facing the industry. H.R. 4987 eliminates the 

scheduled 15 percent reduction in aggregate Medicare home health 

payments, recognizing the drastic and destabilizing effect such a 

one-year cut could have on the home health care community. It 

also adjusts annual updates for home health services to help finance this cut. In addition, the Committee has followed up on the 

regulatory relief legislation considered last year, addressing the 

home health industry’s top regulatory priority in H.R. 4987—the 

Outcomes and Assessment Information Set (OASIS). This legislation creates a task force to examine the data collection and reporting requirements of OASIS. 

Beneficiary access to physician services is also a priority of the 

Committee, particularly the geographic distribution of physicians. 

The Federal government is the largest single financing source for 

graduate medical education, covering the direct costs of approved 

medical education programs (such as salaries of residents, interns, 

and faculty, and other education costs for residents, interns, 

nurses, and allied health professionals training in hospital-operated programs, including the overhead costs for classroom training) 

and indirect costs associated with teaching activities and a teaching hospital’s research mission. There is continuing concern about 

the geographic distribution of physicians across the country and 

the effect such distribution has on beneficiary access to needed 

medical care. Although the total number of physicians has grown 

over the years, there continues to be a significant number of areas 

of the country—both rural and urban—in which there is an inadequate supply of physicians. The current system used to distribute 

medical residency positions tends to contribute to this disparity, 

clustering too many positions in areas where they cannot be filled. 

H.R. 4987 allows CMS to reallocate a certain percentage of unfilled 

residency positions to areas that are having trouble recruiting physicians. This balanced approach shifts some unfilled positions to 

rural and small urban areas. At the same time, it does not take 

away all of the unfilled positions from those hospitals that may be 

making strides to become more efficient through consolidation. 

3

HEARINGS

The Committee on Energy and Commerce has not held hearings 

on the legislation. 

COMMITTEE CONSIDERATION

On Friday, June 21, 2002, the Full Committee met in open markup session and favorably ordered reported a Committee Print on 

Provisions Relating to Parts A and B by voice vote, as amended, 

a quorum being present. Chairman Tauzin then introduced H.R. 

4987 to reflect the Committee’s action. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The following are 

the record votes taken on the amendments offered to the measure, 

including the names of those members voting for and against. A 

motion by Mr. Tauzin to order H.R. 4987 reported to the House, 

as amended, was agreed to by a voice vote.

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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee has not held oversight or legislative hearings on this legislation. 

STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

The objective of H.R. 4987 is to preserve the home health benefit 

and shift hospital residency positions to areas where they are needed most.

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the rules of the 

House of Representatives, the Committee finds that H.R. 4987, to 

amend title XVIII of the Social Security Act to improve payments 

for home health services and for direct graduate medical education, 

and for other purposes, would result in no new or increased budget 

authority, entitlement authority, or tax expenditures or revenues. 

COMMITTEE COST ESTIAMTE

The Committee adopts as its own the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974, which is included in 

the report to accompany H.R. 4984. 

CONGRESSIONAL BUDGET OFFICE ESTIAMTE

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the cost estimate provided by the Congressional 

Budget Office pursuant to section 402 of the Congressional Budget 

Act of 1974 is included in the report to accompany H.R. 4984. 

FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act. 

The estimate is included in the report to accompany H.R. 4984. 

ADVISORY COMMITTEE STATEMENT

An advisory committee within the meaning of section 5(b) of the 

Federal Advisory Committee Act is created by this legislation. 

However, the legislation exempts the task force created in section 

603 from the Federal Advisory Committee Act. 

CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee finds that the Constitutional authority for this legislation is provided in Article I, section 8, clause 

3, which grants Congress the power to regulate commerce with foreign nations, among the several States, and with the Indian tribes. 

7

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of section 102(b)(3) of the Congressional Accountability Act. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

TITLE VI—PROVISIONS RELATING TO PARTS A AND B 

Subtitle A—Home Health Services 

Section 601. Elimination of 15 Percent Reduction in Payment Rates 

Under the Prospective Payment System 

Section 601 eliminates the adjustment to PPS rates based on the 

15 percent reduction in the cost limits and per beneficiary limits 

under the interim payment system. The adjustment would have 

been effective for episodes of home health care concluding on or 

after October 1, 2002. 

This section takes effect as if included in amendments made by 

the Benefits Improvement and Protection Act of 2000 (BIPA), P.L. 

106–554. 

Section 602. Update in Home Health Services 

Section 602 changes the implementation of updates to the home 

health PPS amounts from a fiscal year cycle to a calendar year 

cycle. It also changes the update for 2003 to 2 percent. The update 

in 2004 is set at 1.1 percent and the update in 2005 is set at 2.7 

percent. Beginning in 2003, the total amount of outlier payments 

for home health care services in a given year is limited to no more 

than 3 percent of total projected home health payments. 

This section applies to years beginning with 2003. 

Section 603. OASIS Task Force; Suspension of Certain OASIS Data 

Collection Requirements Pending Task Force Submittal of Report 

Section 603 requires the Secretary to establish and appoint a 

task force to examine the data collection and reporting requirements of OASIS. The task force will be composed of staff from CMS 

with expertise in post-acute care, representatives of home health 

agencies, health care professionals and research and health quality 

experts outside the federal government with experience in postacute care, and advocates for individuals requiring home health 

services. The task force will review and make recommendations to 

the Secretary within 18 months of enactment regarding changes in 

OASIS to improve and simplify data collection for the purposes of 

assessing the quality of home health services and providing consistency in classification of patients into home health resource groups 

for payment under the PPS. The task force is mandated to examine 

the 41 outcome measures currently in use, the timing and frequency of data collection, and the collection of information on 

comorbidities and clinical indicators. The task force is exempt from 

the Federal Advisory Committee Act. Further, starting on January 

1, 2003 and until the task force submits its report, the Secretary 

is prohibited from requiring home health agencies to gather and 

8

submit information on patients that are not covered by Medicare 

and Medicaid. 

This section is effective upon enactment. 

Section 604. MedPAC Study on Medicare Margins of Home Health 

Agencies 

Section 604 directs the Medicare Payment Advisory Commission 

(MedPAC) to conduct a study examining whether systematic differences in payment margins for home health agencies are related 

to differences in case mix. MedPAC must submit a report on this 

study to Congress within 2 years of enactment. 

This section is effective upon enactment. 

Section 605. Review of Application of Absence of Infrequent or Short 

Duration in Establishing Home Confinement for Purposes of 

Eligibility for Home Health Services 

Section 605 directs the Secretary to review the standards used 

by fiscal intermediaries in allowing infrequent or short duration 

absences from the home for individuals eligible to receive home 

health services. The Secretary is directed to specifically examine 

how the infrequent or short duration absence provision applies to 

individuals who have permanent and severe disabilities. The Secretary must submit a report to Congress on this review within 6 

months of enactment and include findings and recommendations 

for changes in guidance or regulations respecting the treatment of 

infrequent or short duration absences. 

Subtitle B—Direct Graduate Medical Education 

Section 611. Extension of Update Limitation on High Cost Programs 

Hospitals with per resident amounts above 140 percent of the 

geographically adjusted national average amount had payments 

frozen at current levels in FY 2001 and FY 2002. Payments will 

continue to be frozen for these hospitals through 2012. 

This section is effective upon enactment. 

Section 612. Redistribution of Unused Resident Positions 

Section 612 redistributes unused resident positions. Starting on 

July 1, 2003, hospitals can apply to receive these unfilled positions 

and applications will be accepted through December 31, 2004. The 

Secretary will consider the need for an increase by specialty and 

location, first distributing an increase to programs or hospitals located in rural or small urban areas on a first-come-first-served 

basis, based on a demonstration that the hospital will fill the positions made available under this clause. No hospital can receive 

more than an increase of 25 full-time equivalent positions during 

this redistribution process. Hospitals will be reimbursed for direct 

graduate medical education costs for the new positions they receive 

at 100 percent of the adjusted national average per resident

amount. Those hospitals that have unfilled positions (they have not 

reached their cap on the number of residents for which Medicare 

will pay direct graduate medical education costs) and have not met 

their cap over the past three cost reporting periods will have their 

cap adjusted. Starting January 1, 2003, their cap will be reduced 

9

by 75 percent of the difference between the cap and the highest 

number of filled positions over the past three cost reporting periods. In other words, their cap will be adjusted to reflect the highest 

number of filled positions over the past three cost reporting periods, plus 25 percent of the remaining unfilled positions. Those hospitals that fill positions during the cost reporting period that includes July 1, 2002 can apply to the Secretary for an adjustment 

to reflect a greater number of filled positions than would otherwise 

be demonstrated based on their past three cost reporting periods. 

Reductions in resident counts would affect a hospital’s indirect 

medical education (IME) adjustment. Any resulting increase in 

resident counts would not affect a hospital’s IME adjustment. The 

Committee encourages the Secretary to consult with appropriate 

service and education organizations in implementing the redistribution of resident positions as described in this section. Section 

612 also directs the Secretary to submit a report to Congress by 

July 1, 2004, which will recommend whether to extend the application deadline for increases in resident limits. 

This section is effective upon enactment. 

Subtitle C—Other Provisions 

Section 621. Modifications to Medicare Payment Advisory Commission (MedPAC) 

Before making any recommendations, MedPAC will examine the 

budget impact of their recommendations either directly or through 

consultation with experts. Section 621 also requires MedPAC to review payment policies under Parts A and B, including the factors 

affecting expenditures for ‘‘the efficient provision of’’ services in different sectors. In addition, MedPAC will conduct a study and submit a report to Congress by June 1, 2003 on the need for current 

data and data sources to determine the solvency and financial circumstances of hospitals and other Medicare providers. They will 

also submit a report to Congress by June 1, 2003 on the investments and capital financing of hospitals participating under the 

Medicare program and related foundations. 

This section is effective upon enactment. 

Section 622. Demonstration Project for Disease Management for 

Certain Medicare Beneficiaries with Diabetes 

Section 622 directs the Secretary to conduct a demonstration 

project that will last no longer than 3 years to understand the impact on costs and health outcomes of applying disease management 

to up to 30,000 Medicare beneficiaries with diabetes. These beneficiaries will be Hispanic, meet specific medical criteria, get their 

physicians’ approval to participate, and will not be enrolled in a 

Medicare+Choice (M+C) plan. Participants will receive disease 

management services for their diabetes and be eligible for payment 

of all prescription drugs whether or not they relate to diabetes 

(with modest cost-sharing). The Secretary will contract with up to 

three disease management organizations, which demonstrate that 

they can produce improved health outcomes and reduce aggregate 

Medicare expenditures. The contracts will require organizations to: 

(1) provide prescription drug coverage; (2) receive a negotiated payment established by the Secretary in an effort to reduce expendiVerDate May 23 2002 07:06 Jun 30, 2002 Jkt 099006 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\HR541P1.XXX pfrm17 PsN: HR541P1
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tures; and, (3) guarantee, through reinsurance, a prohibition on net 

increases in expenditures. Payments will be made through the 

Medicare Trust Funds. The Secretary will establish a working 

group consisting of employees of the Department of Health and 

Human Services (HHS) to oversee the project, establish policy and 

criteria for Medicare disease management programs, identify targeted medical conditions and individuals, select areas for such programs, monitor health outcomes under such programs, measure the 

effectiveness of such programs in meeting budget neutrality requirements, and serve as a central focal point within HHS for dissemination of information on programs. Participants will be offered 

certain protections for the period of the demonstration project that 

are afforded to Medicare beneficiaries enrolled in M+C plans with 

respect to their existing Medicare supplemental insurance policies. 

Section 622 requires the Secretary to submit to Congress an interim report of the project within 2 years of implementation and 

a final report within 6 months of completion. Reports will include 

costs and health outcomes associated with the program and recommendations on the cost-effectiveness of extending or expanding 

the project. In addition, this section requires the Comptroller General to compare Medicare disease management programs to private 

sector programs, identifying the cost-effectiveness of such programs 

and savings realized by such programs. A report will be submitted 

to Congress within 18 months of enactment. 

This section is effective upon enactment. 

Section 623. Demonstration Project for Medical Adult Day Care 

Services 

Section 623 directs the Secretary to establish a demonstration 

project for home health agencies to directly or under arrangements 

with a medical adult day care facility provide medical adult day 

care services as a substitute for certain home health services that 

would otherwise be provided at home. The payment amount for the 

episode of care, including the medical adult day care service, under 

the demonstration project will be at a rate of 95 percent of the 

amount that would otherwise apply for such home health services. 

Home health agencies or medical adult day care facilities may not 

separately charge a beneficiary for medical adult day care services 

furnished under the plan of care. The demonstration project will 

not result in additional expenditures from the Trust Funds—aggregate payments under the home health PPS will be reduced to reflect any increases in amounts expended as a result of the demonstration project. The project will be conducted in up to five sites 

in States chosen by the Secretary that license or certify providers 

of medical adult day care services for a period of 3 years. Up to 

15,000 beneficiaries can participate in the project on a voluntary 

basis. The Secretary will give preference to home health agencies 

that are currently licensed or certified to provide medical adult day 

care services and have provided such services to Medicare beneficiaries for a continuous 2-year period prior to the project. The 

Secretary may waive requirements under title XVIII of the Social 

Security Act except for the requirement that the beneficiary be 

homebound in order to be eligible for home health care. Section 623 

also directs the Secretary to conduct an evaluation of the clinical 

and cost-effectiveness of the demonstration project. A report to 

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Congress will be submitted within 30 months of project initiation 

and will include a comparative analysis of the patient outcomes 

and cost of care between settings of care and recommendations on 

program extension, expansion, or termination. Section 623 defines 

home health agency as it is defined in previous statute. In this section, medical adult day care facility means a facility that has been 

licensed or certified by a State to provide medical adult day care 

services for a continuous 2-year period, is engaged in providing 

skilled nursing services and other therapeutic services directly or 

under agreement with a home health agency, and meets standards 

established by the Secretary to ensure quality of care and patient 

safety. Medical adult day care services are defined as home health 

services provided in a medical adult day care facility, a program of 

supervised activities furnished in a group setting in a facility that 

is designed to promote the physical and mental health of the individuals, and any other services specified by the Secretary. Medicare 

beneficiary under this section means an individual enrolled in either Part A, Part B, or both. 

This section is effective upon enactment. 

The Committee believes it is important for CMS to include in the 

annual Medicare statement of benefits useful information to seniors, such as the ability of seniors to participate in clinical trials. 

Should the Administrator of CMS choose to include such information in this format, the Committee urges the Administrator in such 

statement to direct seniors to government-sponsored sites on the 

world wide web wherein this information is located.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

SOCIAL SECURITY ACT 

* * * * * * *

TITLE XVIII—HEALTH INSURANCE FOR THE AGED AND 

DISABLED 

* * * * * * *

MEDICARE PAYMENT ADVISORY COMMISSION

SEC. 1805. (a)***

(b) DUTIES.—

(1) * * *

(2) SPECIFIC TOPICS TO BE REVIEWED.—

(A) * * *

(B) ORIGINAL MEDICARE FEE-FOR-SERVICE SYSTEM.—Specifically, the Commission shall review payment policies 

under parts A and B, including—

(i) the factors affecting expenditures for the efficient 

provision of services in different sectors, including the 

12

process for updating hospital, skilled nursing facility, 

physician, and other fees, 

* * * * * * *

(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.

* * * * * * *

PART D—MISCELLANEOUS PROVISIONS

* * * * * * *

PAYMENT TO HOSPITALS FOR INPATIENT HOSPITAL SERVICES

SEC. 1886. (a)***

(d)(1)***

* * * * * * *

(5)(A)***

(B) The Secretary shall provide for an additional payment 

amount for subsection (d) hospitals with indirect costs of medical 

education, in an amount computed in the same manner as the adjustment for such costs under regulations (in effect as of January 

1, 1983) under subsection (a)(2), except as follows: 

(i) * * *

* * * * * * *

(v) In determining the adjustment with respect to a hospital 

for discharges occurring on or after October 1, 1997, the total 

number of full-time equivalent interns and residents in the 

fields of allopathic and osteopathic medicine in either a hospital or nonhospital setting may not exceed the number (or, 

130 percent of such number in the case of a hospital located 

in a rural area) of such full-time equivalent interns and residents in the hospital with respect to the hospital’s most recent 

cost reporting period ending on or before December 31, 1996. 

Rules similar to the rules of subsection (h)(4)(F)(ii) shall apply 

for purposes of this clause. The provisions of clause (i) of subparagraph (I) of subsection (h)(4) shall apply with respect to the 

first sentence of this clause in the same manner as it applies 

with respect to subparagraph (F) of such subsection, but the 

provisions of clause (ii) of such subparagraph shall not apply.

* * * * * * *

(h) PAYMENTS FOR DIRECT GRADUATE MEDICAL EDUCATION

COSTS.—

(1) * * *

(2) DETERMINATION OF HOSPITAL-SPECIFIC APPROVED FTE

RESIDENT AMOUNTS.—The Secretary shall determine, for each 

hospital with an approved medical residency training program, 

an approved FTE resident amount for each cost reporting period beginning on or after July 1, 1985, as follows: 

(A) * * *

* * * * * * *

13

(D) AMOUNT FOR SUBSEQUENT COST REPORTING PERI- ODS.—

(i) * * *

* * * * * * *

(iv) ADJUSTMENT IN RATE OF INCREASE FOR HOSPITALS WITH FTE APPROVED AMOUNT ABOVE 140 PERCENT OF LOCALITY ADJUSTED NATIONAL AVERAGE PER

RESIDENT AMOUNT.—

(I) FREEZE FOR FISCAL YEARS 2001 øAND 2002¿

THROUGH 2012.—For a cost reporting period beginning øduring fiscal year 2001 or fiscal year 2002¿

during the period beginning with fiscal year 2001 

and ending with fiscal year 2012, if the approved 

FTE resident amount for a hospital for the preceding cost reporting period exceeds 140 percent of 

the locality adjusted national average per resident 

amount computed under subparagraph (E) for 

that hospital and period, øsubject to subclause 

(III),¿ the approved FTE resident amount for the 

period involved shall be the same as the approved 

FTE resident amount for the hospital for such preceding cost reporting period. 

ø(II) 2 PERCENT DECREASE IN UPDATE FOR FISCAL

YEARS 2003, 2004, AND 2005.—For a cost reporting 

period beginning during fiscal year 2003, fiscal 

year 2004, or fiscal year 2005, if the approved 

FTE resident amount for a hospital for the preceding cost reporting period exceeds 140 percent of 

the locality adjusted national average per resident 

amount computed under subparagraph (E) for 

that hospital and preceding period, the approved 

FTE resident amount for the period involved shall 

be updated in the manner described in subparagraph (D)(i) except that, subject to subclause (III), 

the consumer price index applied for a 12-month 

period shall be reduced (but not below zero) by 2 

percentage points.¿

ø(III)¿ (II) NO ADJUSTMENT BELOW 140 PERCENT.—In no case shall subclause (I) øor (II)¿ reduce an approved FTE resident amount for a hospital for a cost reporting period below 140 percent 

of the locality adjusted national average per resident amount computed under subparagraph (E) 

for such hospital and period. 

* * * * * * *

(4) DETERMINATION OF FULL-TIME-EQUIVALENT RESIDENTS.—

(A) * * *

* * * * * * *

(F) LIMITATION ON NUMBER OF RESIDENTS IN ALLOPATHIC

AND OSTEOPATHIC MEDICINE.—

(i) IN GENERAL.—Such rules shall provide that for 

purposes of a cost reporting period beginning on or 

after October 1, 1997, subject to subparagraph (I), the 

14

total number of full-time equivalent residents before 

application of weighting factors (as determined under 

this paragraph) with respect to a hospital’s approved 

medical residency training program in the fields of 

allopathic medicine and osteopathic medicine may not 

exceed the number (or, 130 percent of such number in 

the case of a hospital located in a rural area) of such 

full-time equivalent residents for the hospital’s most 

recent cost reporting period ending on or before December 31, 1996. 

* * * * * * *

(H) SPECIAL RULES FOR APPLICATION OF SUBPARAGRAPHS

(F) AND (G).—

(i) NEW FACILITIES.—The Secretary shall, consistent 

with the principles of subparagraphs (F) and (G), subject to subparagraph (I), prescribe rules for the application of such subparagraphs in the case of medical 

residency training programs established on or after 

January 1, 1995. In promulgating such rules for purposes of subparagraph (F), the Secretary shall give 

special consideration to facilities that meet the needs 

of underserved rural areas. 

* * * * * * *

(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, 2003, 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, 2001. 

(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, 2002. 

(ii) REDISTRIBUTION.—

15

(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 cost reporting 

period that occurs before July 1, 2003, 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, 2004. 

(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 NA- TIONAL 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: 

16

(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.

* * * * * * *

PROSPECTIVE PAYMENT FOR HOME HEALTH SERVICES

SEC. 1895. (a)***

(b) SYSTEM OF PROSPECTIVE PAYMENT FOR HOME HEALTH SERV- ICES.—

(1) * * *

* * * * * * *

(3) PAYMENT BASIS.— ø(A) INITIAL BASIS.— ø(i) IN GENERAL.—Under such system the Secretary 

shall provide for computation of a standard prospective payment amount (or amounts) as follows: 

ø(I) Such amount (or amounts) shall initially be 

based on the most current audited cost report 

data available to the Secretary and shall be computed in a manner so that the total amounts payable under the system for the 12-month period beginning on the date the Secretary implements the 

system shall be equal to the total amount that 

would have been made if the system had not been 

in effect. 

ø(II) For the 12-month period beginning after 

the period described in subclause (I), such amount 

(or amounts) shall be equal to the amount (or 

amounts) determined under subclause (I), updated 

under subparagraph (B). 

ø(III) For periods beginning after the period described in subclause (II), such amount (or 

amounts) shall be equal to the amount (or 

amounts) that would have been determined under 

subclause (I) that would have been made for fiscal 

year 2001 if the system had not been in effect and 

if section 1861(v)(1)(L)(ix) had not been enacted 

but if the reduction in limits described in clause 

(ii) had been in effect, updated under subparagraph (B). 

Each such amount shall be standardized in a manner 

that eliminates the effect of variations in relative case 

mix and area wage adjustments among different home 

health agencies in a budget neutral manner consistent 

with the case mix and wage level adjustments proVerDate May 23 2002 07:06 Jun 30, 2002 Jkt 099006 PO 00000 Frm 00016 Fmt 6659 Sfmt 6601 E:\HR\OC\HR541P1.XXX pfrm17 PsN: HR541P1
17

vided under paragraph (4)(A). Under the system, the 

Secretary may recognize regional differences or differences based upon whether or not the services or 

agency are in an urbanized area. 

ø(ii) REDUCTION.—The reduction described in this 

clause is a reduction by 15 percent in the cost limits 

and per beneficiary limits described in section 

1861(v)(1)(L), as those limits are in effect on September 30, 2000.¿

(A) INITIAL BASIS.—Under such system the Secretary 

shall provide for computation of a standard prospective 

payment amount (or amounts) as follows: 

(i) Such amount (or amounts) shall initially be based 

on the most current audited cost report data available 

to the Secretary and shall be computed in a manner so 

that the total amounts payable under the system for 

fiscal year 2001 shall be equal to the total amount that 

would have been made if the system had not been in 

effect and if section 1861(v)(1)(L)(ix) had not been enacted. 

(ii) For fiscal year 2002 and for the first quarter of 

fiscal year 2003, such amount (or amounts) shall be 

equal to the amount (or amounts) determined under 

this paragraph for the previous fiscal year, updated 

under subparagraph (B). 

(iii) For 2003, such amount (or amounts) shall be 

equal to the amount (or amounts) determined under 

this paragraph for fiscal year 2002, updated under 

subparagraph (B) for 2003. 

(iv) For 2004 and each subsequent year, such 

amount (or amounts) shall be equal to the amount (or 

amounts) determined under this paragraph for the previous year, updated under subparagraph (B). 

Each such amount shall be standardized in a manner that 

eliminates the effect of variations in relative case mix and 

area wage adjustments among different home health agencies in a budget neutral manner consistent with the case 

mix and wage level adjustments provided under paragraph 

(4)(A). Under the system, the Secretary may recognize regional differences or differences based upon whether or not 

the services or agency are in an urbanized area.

(B) ANNUAL UPDATE.—

(i) IN GENERAL.—The standard prospective payment 

amount (or amounts) shall be adjusted for øeach fiscal 

year (beginning with fiscal year 2002)¿ fiscal year 

2002 and for each subsequent year (beginning with 

2003) in a prospective manner specified by the Secretary by the home health applicable increase percentage (as defined in clause (ii)) applicable to the fiscal 

year or year involved. 

(ii) HOME HEALTH APPLICABLE INCREASE PERCENTAGE.—For purposes of this subparagraph, the term 

‘‘home health applicable increase percentage’’ means, 

with respect to—

18

(I) øeach of fiscal years 2002 and 2003¿ fiscal 

year 2002, the home health market basket percentage increase (as defined in clause (iii)) minus 1.1 

percentage points; 

(II) 2003, øthe home health market basket percentage increase (as defined in clause (iii)) minus 

1.1 percentage points¿ 2.0 percentage points; øor¿

(III) 2004, 1.1 percentage points; 

(IV) 2005, 2.7 percentage points; or

ø(II)¿ (V) any subsequent øfiscal¿ year, the 

home health market basket percentage increase. 

(iii) HOME HEALTH MARKET BASKET PERCENTAGE INCREASE.—For purposes of this subsection, the term 

‘‘home health market basket percentage increase’’

means, with respect to a fiscal year or year, a percentage (estimated by the Secretary before the beginning 

of the fiscal year or year) determined and applied with 

respect to the mix of goods and services included in 

home health services in the same manner as the market basket percentage increase under section 

1886(b)(3)(B)(iii) is determined and applied to the mix 

of goods and services comprising inpatient hospital 

services for the fiscal year or year. 

(iv) ADJUSTMENT FOR CASE MIX CHANGES.—Insofar 

as the Secretary determines that the adjustments 

under paragraph (4)(A)(i) for a previous fiscal year or 

year (or estimates that such adjustments for a future 

fiscal year or year) did (or are likely to) result in a 

change in aggregate payments under this subsection 

during the fiscal year or year that are a result of 

changes in the coding or classification of different 

units of services that do not reflect real changes in 

case mix, the Secretary may adjust the standard prospective payment amount (or amounts) under paragraph (3) for subsequent fiscal years or years so as to 

eliminate the effect of such coding or classification 

changes. 

* * * * * * *

(5) OUTLIERS.—The Secretary may provide for an addition or 

adjustment to the payment amount otherwise made in the case 

of outliers because of unusual variations in the type or amount 

of medically necessary care. The total amount of the additional 

payments or payment adjustments made under this paragraph 

with respect to a fiscal year or year may not exceed ø5¿ 3 percent of the total payments projected or estimated to be made 

based on the prospective payment system under this subsection in that year. 

* * * * * * *

Æ