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[House Report 107-541]
[From the U.S. Government Publishing Office]

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 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.

                                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.

                      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.

                  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. Beginningin 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 post-acute 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 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 
residentamount. 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 
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 expenditures; 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 thecost-
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 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 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) * * *

           *       *       *       *       *       *       *

                  (D) Amount for subsequent cost reporting 
                periods.--
                          (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 [and 2002] through 2012.--
                                For a cost reporting period 
                                beginning [during 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, 
                                [subject 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.
                                  [(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.]
                                  [(III)] (II) No adjustment 
                                below 140 percent.--In no case 
                                shall subclause (I) [or (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 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.--
                                  (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 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.

           *       *       *       *       *       *       *

              PROSPECTIVE PAYMENT FOR HOME HEALTH SERVICES

  Sec. 1895. (a) * * *
  (b) System of Prospective Payment for Home Health Services.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Payment basis.--
                  [(A) Initial basis.--
                          [(i) In general.--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 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.
                                  [(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).
                                  [(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 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.
                          [(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 [each 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--
                                  (I) [each 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, [the home health 
                                market basket percentage 
                                increase (as defined in clause 
                                (iii)) minus 1.1 percentage 
                                points] 2.0 percentage points; 
                                [or]
                                  (III) 2004, 1.1 percentage 
                                points;
                                  (IV) 2005, 2.7 percentage 
                                points; or
                                  [(II)] (V) any subsequent 
                                [fiscal] 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 [5] 3 
        percent of the total payments projected or estimated to 
        be made based on the prospective payment system under 
        this subsection in that year.

           *       *       *       *       *       *       *

                                  
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