189
‘‘(ii) through a direct monthly pay-
ment (through electronic funds transfer or 
otherwise); or 
‘‘(iii) through other means approved 
by the Medicare Benefits Administrator, 
or any combination thereof. 
‘‘(2) COMPUTATION OF AVERAGE PER CAPITA 
MONTHLY
SAVINGS.—For purposes of paragraph 
(1)(A), the average per capita monthly savings re-
ferred to in such paragraph for an EFFS plan and 
year is computed as follows: 
‘‘(A) DETERMINATION
OF
REGION-WIDE 
AVERAGE RISK ADJUSTMENT.—
‘‘(i) IN
GENERAL.—The Medicare 
Benefits Administrator shall determine, at 
the same time rates are promulgated under 
section 1853(b)(1) (beginning with 2006), 
for each EFFS region the average of the 
risk adjustment factors described in sub-
section (c)(3) to be applied to enrollees 
under this part in that region. In the case 
of an EFFS region in which an EFFS 
plan was offered in the previous year, the 
Administrator may compute such average 
based upon risk adjustment factors applied
190
under subsection (c)(3) in that region in a 
previous year. 
‘‘(ii) 
TREATMENT
OF
NEW
RE-
GIONS.—In the case of a region in which 
no EFFS plan was offered in the previous 
year, the Administrator shall estimate such 
average. In making such estimate, the Ad-
ministrator may use average risk adjust-
ment factors applied to comparable EFFS 
regions or applied on a national basis. 
‘‘(B) DETERMINATION OF RISK ADJUSTED 
BENCHMARK
AND
RISK-ADJUSTED
BID.—For 
each EFFS plan offered in an EFFS region, 
the Administrator shall—
‘‘(i) adjust the EFFS region-specific 
non-drug monthly benchmark amount (as 
defined in paragraph (3)) by the applicable 
average risk adjustment factor computed 
under subparagraph (A); and 
‘‘(ii) adjust the unadjusted EFFS 
statutory non-drug monthly bid amount by 
such applicable average risk adjustment 
factor. 
‘‘(C) DETERMINATION
OF
AVERAGE
PER 
CAPITA MONTHLY SAVINGS.—The average per
191
capita monthly savings described in this sub-
paragraph is equal to the amount (if any) by 
which—
‘‘(i) 
the 
risk-adjusted 
benchmark 
amount computed under subparagraph 
(B)(i), exceeds 
‘‘(ii) the risk-adjusted bid computed 
under subparagraph (B)(ii). 
‘‘(3) COMPUTATION OF EFFS REGION-SPECIFIC 
NON-DRUG
MONTHLY
BENCHMARK
AMOUNT.—For 
purposes of this part, the term ‘EFFS region-spe-
cific non-drug monthly benchmark amount’ means, 
with respect to an EFFS region for a month in a 
year, an amount equal to 1⁄12 of the average (weight-
ed by number of EFFS eligible individuals in each 
payment area described in section 1853(d)) of the 
annual capitation rate as calculated under section 
1853(c)(1) for that area. 
‘‘(c) 
PAYMENT
OF
PLANS
BASED
ON
BID 
AMOUNTS.—
‘‘(1) NON-DRUG BENEFITS.—Under a contract 
under section 1860E–4(c) and subject to section 
1853(g) (as made applicable under subsection (d)), 
the Administrator shall make monthly payments 
under this subsection in advance to each EFFS or-
192
ganization, with respect to coverage of an individual 
under this part in an EFFS region for a month, in 
an amount determined as follows: 
‘‘(A) PLANS
WITH
BIDS
BELOW
BENCH-
MARK.—In the case of a plan for which there 
are average per capita monthly savings de-
scribed in subsection (b)(2)(C), the payment 
under this subsection is equal to the unadjusted 
EFFS statutory non-drug monthly bid amount, 
adjusted under paragraphs (3) and (4), plus the 
amount of the monthly rebate computed under 
subsection (b)(1)(A) for that plan and year. 
‘‘(B) PLANS
WITH
BIDS
AT
OR
ABOVE 
BENCHMARK.—In the case of a plan for which 
there are no average per capita monthly savings 
described in subsection (b)(2)(C), the payment 
amount under this subsection is equal to the 
EFFS region-specific non-drug monthly bench-
mark amount, adjusted under paragraphs (3) 
and (4). 
‘‘(2) FOR FEDERAL DRUG SUBSIDIES.—In the 
case in which an enrollee who elects under part D 
to be provided qualified prescription drug coverage 
through the plan, the EFFS organization offering 
such plan also is entitled—
193
‘‘(A) to direct subsidy payment under sec-
tion 1860D–8(a)(1); 
‘‘(B) to reinsurance subsidy payments 
under section 1860D–8(a)(2); and 
‘‘(C) to reimbursement for premium and 
cost-sharing reductions for low-income individ-
uals under section 1860D–7(c)(3). 
‘‘(3) DEMOGRAPHIC
RISK
ADJUSTMENT, IN-
CLUDING ADJUSTMENT FOR HEALTH STATUS.—The 
Administrator shall adjust under paragraph (1)(A) 
the unadjusted EFFS statutory non-drug monthly 
bid amount and under paragraph (1)(B) the EFFS 
region-specific non-drug monthly benchmark amount 
for such risk factors as age, disability status, gen-
der, institutional status, and such other factors as 
the Administrator determines to be appropriate, in-
cluding adjustment for health status under section 
1853(a)(3) (as applied under subsection (d)), so as 
to ensure actuarial equivalence. The Administrator 
may add to, modify, or substitute for such adjust-
ment factors if such changes will improve the deter-
mination of actuarial equivalence. 
‘‘(4) ADJUSTMENT FOR INTRA-REGIONAL GEO-
GRAPHIC VARIATIONS.—The Administrator shall also 
adjust such amounts in a manner to take into ac-
194
count variations in payments rates under part C 
among the different payment areas under such part 
included in each EFFS region. 
‘‘(d) 
APPLICATION
OF
ADDITIONAL
PAYMENT 
RULES.—The provisions of section 1853 (other than sub-
sections (a)(1)(A), (d), and (e)) shall apply to an EFFS 
plan under this part, except as otherwise provided in this 
section. 
‘‘PREMIUMS; ORGANIZATIONAL AND FINANCIAL REQUIRE-
MENTS; 
ESTABLISHMENT
OF
STANDARDS; 
CON-
TRACTS WITH EFFS ORGANIZATIONS 
‘‘SEC. 1860E–4. (a) PREMIUMS.—
‘‘(1) IN GENERAL.—The provisions of section 
1854 (other than subsections (a)(6)(C) and (h)), in-
cluding subsection (b)(5) relating to the consolida-
tion of drug and non-drug beneficiary premiums and 
subsection (c) relating to uniform bids and pre-
miums, shall apply to an EFFS plan under this 
part, subject to paragraph (2). 
‘‘(2) CROSS-WALK.—In applying paragraph (1), 
any reference in section 1854(b)(1)(A) or 1854(d) 
to—
‘‘(A) a Medicare Advantage monthly basic 
beneficiary premium is deemed a reference to 
the EFFS monthly basic beneficiary premium 
(as defined in paragraph (3)(A));
195
‘‘(B) a Medicare Advantage monthly pre-
scription drug beneficiary premium is deemed a 
reference to the EFFS monthly prescription 
drug beneficiary premium (as defined in para-
graph (3)(B)); and 
‘‘(C) a Medicare Advantage monthly sup-
plemental beneficiary premium is deemed a ref-
erence to the EFFS monthly supplemental ben-
eficiary premium (as defined in paragraph 
(3)(C)). 
‘‘(3) DEFINITIONS.—For purposes of this part: 
‘‘(A) EFFS MONTHLY BASIC BENEFICIARY 
PREMIUM.—The term ‘EFFS monthly basic 
beneficiary premium’ means, with respect to an 
EFFS plan—
‘‘(i) described in section 1860E–
3(c)(1)(A) (relating to plans providing re-
bates), zero; or 
‘‘(ii) described in section 1860E–
3(c)(1)(B), the amount (if any) by which 
the unadjusted EFFS statutory non-drug 
monthly bid amount exceeds the EFFS re-
gion-specific non-drug monthly benchmark 
amount (as defined in section 1860E–
3(b)(3)).
196
‘‘(B) 
EFFS 
MONTHLY
PRESCRIPTION 
DRUG
BENEFICIARY
PREMIUM.—The 
term 
‘EFFS monthly prescription drug beneficiary 
premium’ means, with respect to an EFFS 
plan, the portion of the aggregate monthly bid 
amount submitted under clause (i) of section 
1860E–3(a)(3)(A) for the year that is attrib-
utable under such section to the provision of 
statutory prescription drug benefits. 
‘‘(C) EFFS 
MONTHLY
SUPPLEMENTAL 
BENEFICIARY
PREMIUM.—The term ‘EFFS 
monthly supplemental beneficiary premium’ 
means, with respect to an EFFS plan, the por-
tion of the aggregate monthly bid amount sub-
mitted under clause (i) of section 1860E–
3(a)(3)(A) for the year that is attributable 
under such section to the provision of nonstatu-
tory benefits.
‘‘(b) ORGANIZATIONAL
AND FINANCIAL REQUIRE-
MENTS.—The provisions of section 1855 shall apply to an 
EFFS plan offered by an EFFS organization under this 
part. 
‘‘(c) STANDARDS.—The provisions of paragraphs (1), 
(3), and (4) of section 1856(b) shall apply to an EFFS 
plan offered by an EFFS organization under this part.
197
‘‘(d) CONTRACTS
WITH EFFS ORGANIZATIONS.—
The provisions of section 1857 shall apply to an EFFS 
plan offered by an EFFS organization under this part, 
except that any reference in such section to part C is 
deemed a reference to this part.’’. 
(b) APPLICATION
OF
MEDIGAP
PROVISIONS
TO 
EFFS PLANS.—Section 1882 of the Social Security Act 
(42 U.S.C. 1395ss) shall be administered as if any ref-
erence to a Medicare+Choice organization offering a 
Medicare+Choice plan under part C of title XVIII of such 
Act were a reference both to a Medicare Advantage orga-
nization offering a Medicare Advantage plan under such 
part and an EFFS organization offering an EFFS plan 
under part E of such title. 
Subtitle B—Medicare Advantage 
Program 
CHAPTER 1—IMPLEMENTATION OF 
PROGRAM 
SEC. 211. IMPLEMENTATION OF MEDICARE ADVANTAGE 
PROGRAM. 
(a) IN GENERAL.—There is hereby established the 
Medicare Advantage program. The Medicare Advantage 
program shall consist of the program under part C of title 
XVIII of the Social Security Act, as amended by this title.
198
(b) REFERENCES.—Any reference to the program 
under part C of title XVIII of the Social Security Act shall 
be deemed a reference to the Medicare Advantage program 
and, with respect to such part, any reference to 
‘‘Medicare+Choice’’ is deemed a reference to ‘‘Medicare 
Advantage’’.
SEC. 212. MEDICARE ADVANTAGE IMPROVEMENTS. 
(a) EQUALIZING PAYMENTS WITH FEE-FOR-SERV-
ICE.—
(1) IN
GENERAL.—Section 1853(c)(1) (42 
U.S.C. 1395w–23(c)(1)) is amended by adding at 
the end the following: 
‘‘(D) BASED
ON
100
PERCENT
OF
FEE-
FOR-SERVICE COSTS.—
‘‘(i) IN GENERAL.—For 2004, the ad-
justed average per capita cost for the year 
involved, 
determined 
under 
section 
1876(a)(4) for the Medicare Advantage 
payment area for services covered under 
parts A and B for individuals entitled to 
benefits under part A and enrolled under 
part B who are not enrolled in a Medicare 
Advantage under this part for the year, 
but adjusted to exclude costs attributable 
to payments under section 1886(h).
199
‘‘(ii) INCLUSION OF COSTS OF VA AND 
DOD
MILITARY
FACILITY
SERVICES
TO 
MEDICARE-ELIGIBLE
BENEFICIARIES.—In 
determining the adjusted average per cap-
ita cost under clause (i) for a year, such 
cost shall be adjusted to include the Sec-
retary’s estimate, on a per capita basis, of 
the amount of additional payments that 
would have been made in the area involved 
under this title if individuals entitled to 
benefits under this title had not received 
services from facilities of the Department 
of Veterans Affairs or the Department of 
Defense.’’.
(2) CONFORMING AMENDMENT.—Such section 
is further amended, in the matter before subpara-
graph (A), by striking ‘‘or (C)’’ and inserting ‘‘(C), 
or (D)’’. 
(b) 
CHANGE
IN
BUDGET
NEUTRALITY
FOR 
BLEND.—Section 1853(c) (42 U.S.C. 1395w–23(c)) is 
amended—
(1) in paragraph (1)(A), by inserting ‘‘(for a 
year other than 2004)’’ after ‘‘multiplied’’; and 
(2) in paragraph (5), by inserting ‘‘(other than 
2004)’’ after ‘‘for each year’’.
200
(c) INCREASING MINIMUM PERCENTAGE INCREASE 
TO NATIONAL GROWTH RATE.—
(1) IN
GENERAL.—Section 1853(c)(1) (42 
U.S.C. 1395w–23(c)(1)) is amended—
(A) in subparagraph (A), by striking ‘‘The 
sum’’ and inserting ‘‘For a year before 2005, 
the sum’’; 
(B) in subparagraph (B)(iv), by striking 
‘‘and each succeeding year’’ and inserting ‘‘, 
2003, and 2004’’; 
(C) in subparagraph (C)(iv), by striking 
‘‘and each succeeding year’’ and inserting ‘‘and 
2003’’; and 
(D) by adding at the end of subparagraph 
(C) the following new clause: 
‘‘(v) For 2004 and each succeeding 
year, the greater of—
‘‘(I) 102 percent of the annual 
Medicare Advantage capitation rate 
under this paragraph for the area for 
the previous year; or 
‘‘(II) the annual Medicare Ad-
vantage capitation rate under this 
paragraph for the area for the pre-
vious year increased by the national
201
per 
capita 
Medicare 
Advantage 
growth percentage, described in para-
graph (6) for that succeeding year, 
but not taking into account any ad-
justment under paragraph (6)(C) for 
a year before 2004.’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
1853(c)(6)(C) (42 U.S.C. 1395w–23(c)(6)(C)) is 
amended by inserting before the period at the end 
the following: ‘‘, except that for purposes of para-
graph (1)(C)(v)(II), no such adjustment shall be 
made for a year before 2004’’.
(d) INCLUSION OF COSTS OF DOD AND VA MILI-
TARY
FACILITY
SERVICES
TO
MEDICARE-ELIGIBLE 
BENEFICIARIES IN CALCULATION OF MEDICARE+CHOICE 
PAYMENT
RATES.—Section 
1853(c)(3) 
(42 
U.S.C. 
1395w–23(c)(3)) is amended—
(1) in subparagraph (A), by striking ‘‘subpara-
graph (B)’’ and inserting ‘‘subparagraphs (B) and 
(E)’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(E) INCLUSION OF COSTS OF DOD AND 
VA MILITARY FACILITY SERVICES TO MEDICARE-
ELIGIBLE BENEFICIARIES.—In determining the
202
area-specific Medicare+Choice capitation rate 
under subparagraph (A) for a year (beginning 
with 2004), the annual per capita rate of pay-
ment for 1997 determined under section 
1876(a)(1)(C) shall be adjusted to include in 
the rate the Secretary’s estimate, on a per cap-
ita basis, of the amount of additional payments 
that would have been made in the area involved 
under this title if individuals entitled to benefits 
under this title had not received services from 
facilities of the Department of Defense or the 
Department of Veterans Affairs.’’. 
(e) EXTENDING SPECIAL RULE FOR CERTAIN INPA-
TIENT
HOSPITAL
STAYS
TO
REHABILITATION
HOS-
PITALS.—
(1) IN GENERAL.—Section 1853(g) (42 U.S.C. 
1395w–23(g)) is amended—
(A) by inserting ‘‘or from a rehabilitation 
facility (as defined in section 1886(j)(1)(A))’’ 
after ‘‘1886(d)(1)(B))’’; and 
(B) in paragraph (2)(B), by inserting ‘‘or 
section 1886(j), as the case may be,’’ after 
‘‘1886(d)’’.
203
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to contract years begin-
ning on or after January 1, 2004. 
(f) MEDPAC STUDY OF AAPCC.—
(1) STUDY.—The Medicare Payment Advisory 
Commission shall conduct a study that assesses the 
method used for determining the adjusted average 
per capita cost (AAPCC) under section 1876(a)(4) 
of 
the 
Social 
Security 
Act 
(42 
U.S.C. 
1395mm(a)(4)) 
as 
applied 
under 
section 
1853(c)(1)(A) of such Act (as amended by sub-
section (a)). Such study shall include an examination 
of—
(A) the bases for variation in such costs 
between different areas, including differences in 
input prices, utilization, and practice patterns; 
(B) the appropriate geographic area for 
payment under the Medicare Advantage pro-
gram under part C of title XVIII of such Act; 
and 
(C) the accuracy of risk adjustment meth-
ods in reflecting differences in costs of pro-
viding care to different groups of beneficiaries 
served under such program.
204
(2) REPORT.—Not later than 18 months after 
the date of the enactment of this Act, the Commis-
sion shall submit to Congress a report on the study 
conducted under paragraph (1). 
(g) REPORT ON IMPACT OF INCREASED FINANCIAL 
ASSISTANCE
TO MEDICARE ADVANTAGE PLANS.—Not 
later than July 1, 2006, the Medicare Benefits Adminis-
trator shall submit to Congress a report that describes the 
impact of additional financing provided under this Act and 
other Acts (including the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999 and BIPA) on 
the availability of Medicare Advantage plans in different 
areas and its impact on lowering premiums and increasing 
benefits under such plans. 
(h) ANNOUNCEMENT OF REVISED MEDICARE AD-
VANTAGE PAYMENT RATES.—Within 6 weeks after the 
date of the enactment of this Act, the Secretary shall de-
termine, and shall announce (in a manner intended to pro-
vide notice to interested parties) Medicare Advantage capi-
tation rates under section 1853 of the Social Security Act 
(42 U.S.C. 1395w–23) for 2004, revised in accordance 
with the provisions of this section.
205
CHAPTER 2—IMPLEMENTATION OF 
COMPETITION PROGRAM
SEC. 221. COMPETITION PROGRAM BEGINNING IN 2006. 
(a) SUBMISSION OF EFFS-LIKE BIDDING INFORMA-
TION BEGINNING
IN 2006.—Section 1854 (42 U.S.C. 
1395w–24) is amended—
(1) by amending the section heading to read as 
follows: 
‘‘PREMIUMS AND BID AMOUNT’’; 
(2) in subsection (a)(1)(A)—
(A) by striking ‘‘(A)’’ and inserting ‘‘(A)(i) 
if the following year is before 2006,’’; and 
(B) by inserting before the semicolon at 
the end the following: ‘‘or (ii) if the following 
year is 2006 or later, the information described 
in paragraph (3) or (6)(A) for the type of plan 
involved’’; and 
(3) by adding at the end of subsection (a) the 
following: 
‘‘(6) SUBMISSION OF BID AMOUNTS BY MEDI-
CARE ADVANTAGE ORGANIZATIONS.—
‘‘(A) INFORMATION TO BE SUBMITTED.—
The information described in this subparagraph 
is as follows: 
‘‘(i) 
The 
monthly 
aggregate 
bid 
amount for provision of all items and serv-
206
ices under this part, which amount shall be 
based on average costs for a typical bene-
ficiary residing in the area, and the actu-
arial basis for determining such amount. 
‘‘(ii) The proportions of such bid 
amount that are attributable to—
‘‘(I) the provision of statutory 
non-drug benefits (such portion re-
ferred 
to 
in 
this 
part 
as 
the 
‘unadjusted Medicare Advantage stat-
utory non-drug monthly bid amount’); 
‘‘(II) the provision of statutory 
prescription drug benefits; and 
‘‘(III) the provision of non-statu-
tory benefits; 
and the actuarial basis for determining 
such proportions. 
‘‘(iii) Such additional information as 
the Administrator may require to verify 
the actuarial bases described in clauses (i) 
and (ii). 
‘‘(B) STATUTORY
BENEFITS
DEFINED.—
For purposes of this part:
207
‘‘(i) The term ‘statutory non-drug 
benefits’ means benefits under section 
1852(a)(1). 
‘‘(ii) The term ‘statutory prescription 
drug benefits’ means benefits under part 
D. 
‘‘(iii) The term ‘statutory benefits’ 
means statutory prescription drug benefits 
and statutory non-drug benefits.
‘‘(C) ACCEPTANCE AND NEGOTIATION OF 
BID AMOUNTS.—
‘‘(i) IN GENERAL.—Subject to clause 
(ii)—
‘‘(I) the Administrator has the 
authority 
to 
negotiate 
regarding 
monthly bid amounts submitted under 
subparagraph (A) (and the proportion 
described in subparagraph (A)(ii)), 
and for such purpose and subject to 
such clause, the Administrator has ne-
gotiation authority that the Director 
of the Office of Personnel Manage-
ment has with respect to health bene-
fits plans under chapter 89 of title 5, 
United States Code; and
208
‘‘(II) the Administrator may re-
ject such a bid amount or proportion 
if the Administrator determines that 
such amount or proportion is not sup-
ported by the actuarial bases provided 
under subparagraph (A). 
‘‘(ii) EXCEPTION.—In the case of a 
plan described in section 1851(a)(2)(C), 
the provisions of clause (i) shall not apply 
and the provisions of paragraph (5)(B), 
prohibiting the review, approval, or dis-
approval of amounts described in such 
paragraph, shall apply to the negotiation 
and rejection of the monthly bid amounts 
and proportion referred to in subparagraph 
(A).’’. 
(b) PROVIDING
FOR BENEFICIARY SAVINGS
FOR 
CERTAIN PLANS.—
(1) IN GENERAL.—Section 1854(b) (42 U.S.C. 
1395w–24(b)) is amended—
(A) by adding at the end of paragraph (1) 
the following new subparagraph: 
‘‘(C) BENEFICIARY REBATE RULE.—
‘‘(i) REQUIREMENT.—The Medicare 
Advantage plan shall provide to the en-
209
rollee a monthly rebate equal to 75 percent 
of the average per capita savings (if any) 
described in paragraph (3) applicable to 
the plan and year involved. 
‘‘(iii) FORM
OF
REBATE.—A rebate 
required under this subparagraph shall be 
provided—
‘‘(I) through the crediting of the 
amount of the rebate towards the 
Medicare Advantage monthly supple-
mentary beneficiary premium or the 
premium imposed for prescription 
drug coverage under part D; 
‘‘(II) through a direct monthly 
payment (through electronic funds 
transfer or otherwise); or 
‘‘(III) through other means ap-
proved by the Medicare Benefits Ad-
ministrator, 
or any combination thereof.’’; and 
(B) by adding at the end the following new 
paragraphs: 
‘‘(3) COMPUTATION OF AVERAGE PER CAPITA 
MONTHLY
SAVINGS.—For purposes of paragraph 
(1)(C)(i), the average per capita monthly savings re-
210
ferred to in such paragraph for a Medicare Advan-
tage plan and year is computed as follows: 
‘‘(A) DETERMINATION OF STATE-WIDE AV-
ERAGE RISK ADJUSTMENT.—
‘‘(i) IN
GENERAL.—The Medicare 
Benefits Administrator shall determine, at 
the same time rates are promulgated under 
section 1853(b)(1) (beginning with 2006), 
for each State the average of the risk ad-
justment factors to be applied under sec-
tion 1853(a)(1)(A) to payment for enroll-
ees in that State. In the case of a State in 
which a Medicare Advantage plan was of-
fered in the previous year, the Adminis-
trator may compute such average based 
upon risk adjustment factors applied in 
that State in a previous year. 
‘‘(ii) TREATMENT OF NEW STATES.—
In the case of a State in which no Medi-
care Advantage plan was offered in the 
previous year, the Administrator shall esti-
mate such average. In making such esti-
mate, the Administrator may use average 
risk adjustment factors applied to com-
211
parable States or applied on a national 
basis. 
‘‘(B) DETERMINATION OF RISK ADJUSTED 
BENCHMARK
AND
RISK-ADJUSTED
BID.—For 
each Medicare Advantage plan offered in a 
State, the Administrator shall—
‘‘(i) adjust the Medicare Advantage 
area-specific non-drug monthly benchmark 
amount (as defined in subsection (j)) by 
the applicable average risk adjustment fac-
tor computed under subparagraph (A); and 
‘‘(ii) adjust the unadjusted Medicare 
Advantage statutory non-drug monthly bid 
amount by such applicable average risk ad-
justment factor. 
‘‘(C) DETERMINATION
OF
AVERAGE
PER 
CAPITA MONTHLY SAVINGS.—The average per 
capita monthly savings described in this sub-
paragraph is equal to the amount (if any) by 
which—
‘‘(i) 
the 
risk-adjusted 
benchmark 
amount computed under subparagraph 
(B)(i), exceeds 
‘‘(ii) the risk-adjusted bid computed 
under subparagraph (B)(ii).
212
‘‘(D) AUTHORITY TO DETERMINE RISK AD-
JUSTMENT FOR AREAS OTHER THAN STATES.—
The Administrator may provide for the deter-
mination and application of risk adjustment 
factors under this paragraph on the basis of 
areas other than States. 
‘‘(4) BENEFICIARY’S
OPTION
OF
PAYMENT 
THROUGH
WITHHOLDING
FROM
SOCIAL
SECURITY 
PAYMENT OR USE OF ELECTRONIC FUNDS TRANS-
FER MECHANISM.—In accordance with regulations, a 
Medicare Advantage organization shall permit each 
enrollee, at the enrollee’s option, to make payment 
of premiums under this part to the organization in-
directly through withholding from benefit payments 
in the manner provided under section 1840 with re-
spect to monthly premiums under section 1839 or 
through an electronic funds transfer mechanism 
(such as automatic charges of an account at a finan-
cial institution or a credit or debit card account) or 
otherwise. All premium payments that are withheld 
under this paragraph that are credited to the Fed-
eral Supplementary Medical Insurance Drug Trust 
Fund shall be paid to the Medicare Advantage orga-
nization involved.’’.
213
(2) PROVISION OF SINGLE CONSOLIDATED PRE-
MIUM.—Section 1854(b) (42 U.S.C. 1395w–24(b)), 
as amended by paragraph (1), is further amended by 
adding at the end the following new paragraph: 
‘‘(5) SINGLE CONSOLIDATED PREMIUM.—In the 
case of an enrollee in a Medicare Advantage plan 
who elects under part D to be provided qualified 
prescription drug coverage through the plan, the Ad-
ministrator shall provide a mechanism for the con-
solidation of the beneficiary premium amount for 
non-drug benefits under this part with the premium 
amount for prescription drug coverage under part D 
provided through the plan.’’. 
(3) COMPUTATION OF MEDICARE ADVANTAGE 
AREA-SPECIFIC
NON-DRUG
BENCHMARK.—Section 
1853 (42 U.S.C. 1395w–23) is amended by adding 
at the end the following new subsection: 
‘‘(j) COMPUTATION
OF
MEDICARE
ADVANTAGE 
AREA-SPECIFIC
NON-DRUG
MONTHLY
BENCHMARK 
AMOUNT.—For purposes of this part, the term ‘Medicare 
Advantage area-specific non-drug monthly benchmark 
amount’ means, with respect to a Medicare Advantage 
payment area for a month in a year, an amount equal 
to 1⁄12 of the annual Medicare Advantage capitation rate 
under section 1853(c)(1) for the area for the year.’’.
214
(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—
(1) IN GENERAL.—Section 1853(a)(1)(A) (42 
U.S.C. 1395w–23) is amended by striking ‘‘in an 
amount’’ and all that follows and inserting the fol-
lowing: ‘‘in an amount determined as follows: 
‘‘(i) PAYMENT
BEFORE
2006.—For 
years before 2006, the payment amount 
shall be equal to 1⁄12 of the annual Medi-
care Advantage capitation rate (as cal-
culated under subsection (c)(1)) with re-
spect to that individual for that area, re-
duced by the amount of any reduction 
elected under section 1854(f )(1)(E) and 
adjusted under clause (iv). 
‘‘(ii) PAYMENT FOR STATUTORY NON-
DRUG BENEFITS BEGINNING WITH 2006.—
For years beginning with 2006—
‘‘(I) PLANS
WITH
BIDS
BELOW 
BENCHMARK.—In the case of a plan 
for which there are average per capita 
monthly savings described in section 
1854(b)(3)(C), the payment under 
this 
subsection 
is 
equal 
to 
the 
unadjusted Medicare Advantage statu-
tory non-drug monthly bid amount,
215
adjusted under clause (iv), plus the 
amount of the monthly rebate com-
puted under section 1854(b)(1)(C)(i) 
for that plan and year. 
‘‘(II) PLANS WITH BIDS AT OR 
ABOVE BENCHMARK.—In the case of a 
plan for which there are no average 
per capita monthly savings described 
in section 1854(b)(3)(C), the payment 
amount under this subsection is equal 
to the Medicare Advantage area-spe-
cific non-drug monthly benchmark 
amount, adjusted under clause (iv). 
‘‘(iii) FOR
FEDERAL
DRUG
SUB-
SIDIES.—In the case in which an enrollee 
who elects under part D to be provided 
qualified 
prescription 
drug 
coverage 
through the plan, the Medicare Advantage 
organization offering such plan also is enti-
tled—
‘‘(I) to direct subsidy payment 
under section 1860D–8(a)(1); 
‘‘(II) to reinsurance subsidy pay-
ments under section 1860D–8(a)(2); 
and
216
‘‘(III) to reimbursement for pre-
mium and cost-sharing reductions for 
low-income individuals under section 
1860D–7(c)(3). 
‘‘(iv) 
DEMOGRAPHIC
ADJUSTMENT, 
INCLUDING
ADJUSTMENT
FOR
HEALTH 
STATUS.—The Administrator shall adjust 
the payment amount under clause (i), the 
unadjusted Medicare Advantage statutory 
non-drug monthly bid amount under clause 
(ii)(I), and the Medicare Advantage area-
specific 
non-drug 
monthly 
benchmark 
amount under clause (ii)(II) for such risk 
factors as age, disability status, gender, in-
stitutional status, and such other factors 
as the Administrator determines to be ap-
propriate, including adjustment for health 
status under paragraph (3), so as to en-
sure actuarial equivalence. The Adminis-
trator may add to, modify, or substitute 
for such adjustment factors if such 
changes will improve the determination of 
actuarial equivalence.’’. 
(d) CONFORMING AMENDMENTS.—
217
(1) PROTECTION AGAINST BENEFICIARY SELEC-
TION.—Section 1852(b)(1)(A) (42 U.S.C. 1395w–
22(b)(1)(A)) is amended by adding at the end the 
following: ‘‘The Administrator shall not approve a 
plan of an organization if the Administrator deter-
mines that the benefits are designed to substantially 
discourage enrollment by certain Medicare Advan-
tage eligible individuals with the organization.’’. 
(2) CONFORMING
AMENDMENT
TO
PREMIUM 
TERMINOLOGY.—Section 1854(b)(2) (42 U.S.C. 
1395w–24(b)(2)) is amended by redesignating sub-
paragraph (C) as subparagraph (D) and by striking 
subparagraphs (A) and (B) and inserting the fol-
lowing: 
‘‘(A) MEDICARE
ADVANTAGE
MONTHLY 
BASIC
BENEFICIARY
PREMIUM.—The 
term 
‘Medicare Advantage monthly basic beneficiary 
premium’ means, with respect to a Medicare 
Advantage plan—
‘‘(i) 
described 
in 
section 
1853(a)(1)(A)(ii)(I) (relating to plans pro-
viding rebates), zero; or 
‘‘(ii) 
described 
in 
section 
1853(a)(1)(A)(ii)(II), the amount (if any) 
by which the unadjusted Medicare Advan-
218
tage statutory non-drug monthly bid 
amount exceeds the Medicare Advantage 
area-specific non-drug monthly benchmark 
amount. 
‘‘(B) MEDICARE
ADVANTAGE
MONTHLY 
PRESCRIPTION DRUG BENEFICIARY PREMIUM.—
The term ‘Medicare Advantage monthly pre-
scription drug beneficiary premium’ means, 
with respect to a Medicare Advantage plan, that 
portion of the bid amount submitted under 
clause (i) of subsection (a)(6)(A) for the year 
that is attributable under such section to the 
provision of statutory prescription drug bene-
fits. 
‘‘(C) MEDICARE
ADVANTAGE
MONTHLY 
SUPPLEMENTAL BENEFICIARY PREMIUM.—The 
term ‘Medicare Advantage monthly supple-
mental beneficiary premium’ means, with re-
spect to a Medicare Advantage plan, the portion 
of the aggregate monthly bid amount submitted 
under clause (i) of subsection (a)(6)(A) for the 
year that is attributable under such section to 
the provision of nonstatutory benefits.’’.
219
(3) REQUIREMENT
FOR
UNIFORM
PREMIUM 
AND
BID
AMOUNTS.—Section 1854(c) (42 U.S.C. 
1395w–24(c)) is amended to read as follows: 
‘‘(c) UNIFORM PREMIUM AND BID AMOUNTS.—The 
Medicare Advantage monthly bid amount submitted under 
subsection (a)(6), the Medicare Advantage monthly basic, 
prescription drug, and supplemental beneficiary pre-
miums, and the Medicare Advantage monthly MSA pre-
mium charged under subsection (b) of a Medicare Advan-
tage organization under this part may not vary among in-
dividuals enrolled in the plan.’’. 
(4) PERMITTING BENEFICIARY REBATES.—
(A) Section 1851(h)(4)(A) (42 U.S.C. 
1395w–21(h)(4)(A)) is amended by inserting 
‘‘except 
as 
provided 
under 
section 
1854(b)(1)(C)’’ after ‘‘or otherwise’’. 
(B) Section 1854(d) (42 U.S.C. 1395w–
24(d)) is amended by inserting ‘‘, except as pro-
vided under subsection (b)(1)(C),’’ after ‘‘and 
may not provide’’. 
(5) OTHER CONFORMING AMENDMENTS RELAT-
ING TO BIDS.—Section 1854 (42 U.S.C. 1395w–24) 
is amended—
220
(A) in the heading of subsection (a), by in-
serting ‘‘AND
BID
AMOUNTS’’ after ‘‘PRE-
MIUMS’’; and 
(B) in subsection (a)(5)(A), by inserting 
‘‘paragraphs (2), (3), and (4) of’’ after ‘‘filed 
under’’. 
(e) ADDITIONAL CONFORMING AMENDMENTS.—
(1) ANNUAL DETERMINATION AND ANNOUNCE-
MENT
OF
CERTAIN
FACTORS.—Section 1853(b)(1) 
(42 U.S.C. 1395w–23(b)(1)) is amended by striking 
‘‘the respective calendar year’’ and all that follows 
and inserting the following: ‘‘the calendar year con-
cerned with respect to each Medicare Advantage 
payment area, the following: 
‘‘(A) PRE-COMPETITION
INFORMATION.—
For years before 2006, the following: 
‘‘(i) MEDICARE
ADVANTAGE
CAPITA-
TION
RATES.—The annual Medicare Ad-
vantage capitation rate for each Medicare 
Advantage payment area for the year. 
‘‘(ii) ADJUSTMENT
FACTORS.—The 
risk and other factors to be used in adjust-
ing such rates under subsection (a)(1)(A) 
for payments for months in that year.
221
‘‘(B) COMPETITION
INFORMATION.—For 
years beginning with 2006, the following: 
‘‘(i) BENCHMARK.—The Medicare Ad-
vantage area-specific non-drug benchmark 
under section 1853(j). 
‘‘(ii) ADJUSTMENT
FACTORS.—The 
adjustment factors applied under section 
1853(a)(1)(A)(iv) (relating to demographic 
adjustment), section 1853(a)(1)(B) (relat-
ing to adjustment for end-stage renal dis-
ease), and section 1853(a)(3) (relating to 
health status adjustment).’’. 
(2) REPEAL OF PROVISIONS RELATING TO AD-
JUSTED COMMUNITY RATE (ACR).—
(A) IN GENERAL.—Subsections (e) and (f) 
of section 1854 (42 U.S.C. 1395w–24) are re-
pealed. 
(B) CONFORMING AMENDMENTS.—(i) Sec-
tion 1839(a)(2) (42 U.S.C. 1395r(a)(2)) is 
amended by striking ‘‘, and to reflect’’ and all 
that follows and inserting a period. 
(ii) Section 1852(a)(1) (42 U.S.C. 1395w–
22(a)(1)) is amended by striking ‘‘title XI’’ and 
all that follows and inserting the following: 
‘‘title XI those items and services (other than
222
hospice care) for which benefits are available 
under parts A and B to individuals residing in 
the area served by the plan.’’. 
(iii) 
Section 
1857(d)(1) 
(42 
U.S.C. 
1395w–27(d)(1)) is amended by striking ‘‘, 
costs, and computation of the adjusted commu-
nity rate’’ and inserting ‘‘and costs’’. 
(f) REFERENCES UNDER PART E.—Section 1859 (42 
U.S.C. 1395w–29) is amended by adding at the end the 
following new subsection: 
‘‘(f) APPLICATION UNDER PART E.—In the case of 
any reference under part E to a requirement or provision 
of this part in the relation to an EFFS plan or organiza-
tion under such part, except as otherwise specified any 
such requirement or provision shall be applied to such or-
ganization or plan in the same manner as such require-
ment or provision applies to a Medicare Advantage private 
fee-for-service plan (and the Medicare Advantage organi-
zation that offers such plan) under this part.’’. 
(g) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments and premiums for 
months beginning with January 2006.
223
CHAPTER 3—ADDITIONAL REFORMS
SEC. 231. MAKING PERMANENT CHANGE IN MEDICARE AD-
VANTAGE REPORTING DEADLINES AND AN-
NUAL, COORDINATED ELECTION PERIOD. 
(a) CHANGE
IN REPORTING DEADLINE.—Section 
1854(a)(1) (42 U.S.C. 1395w–24(a)(1)), as amended by 
section 532(b)(1) of the Public Health Security and Bio-
terrorism Preparedness and Response Act of 2002, is 
amended by striking ‘‘2002, 2003, and 2004 (or July 1 
of each other year)’’ and inserting ‘‘2002 and each subse-
quent year’’. 
(b) DELAY IN ANNUAL, COORDINATED ELECTION 
PERIOD.—Section 1851(e)(3)(B) (42 U.S.C. 1395w–
21(e)(3)(B)), as amended by section 532(c)(1)(A) of the 
Public Health Security and Bioterrorism Preparedness 
and Response Act of 2002, is amended—
(1) by striking ‘‘and after 2005’’; and 
(2) by striking ‘‘, 2004, and 2005’’ and insert-
ing ‘‘and any subsequent year’’. 
(c) 
ANNUAL
ANNOUNCEMENT
OF
PAYMENT 
RATES.—Section 
1853(b)(1) 
(42 
U.S.C. 
1395w–
23(b)(1)), as amended by section 532(d)(1) of the Public 
Health Security and Bioterrorism Preparedness and Re-
sponse Act of 2002, is amended—
(1) by striking ‘‘and after 2005’’; and
224
(2) by striking ‘‘and 2005’’ and inserting ‘‘and 
each subsequent year’’. 
(d) REQUIRING PROVISION OF AVAILABLE INFORMA-
TION COMPARING PLAN OPTIONS.—The first sentence of 
section 
1851(d)(2)(A)(ii) 
(42 
U.S.C. 
1395w–
21(d)(2)(A)(ii)) is amended by inserting before the period 
the following: ‘‘to the extent such information is available 
at the time of preparation of materials for the mailing’’. 
SEC. 232. AVOIDING DUPLICATIVE STATE REGULATION. 
(a) IN GENERAL.—Section 1856(b)(3) (42 U.S.C. 
1395w–26(b)(3)) is amended to read as follows: 
‘‘(3) RELATION TO STATE LAWS.—The stand-
ards established under this subsection shall super-
sede any State law or regulation (other than State 
licensing laws or State laws relating to plan sol-
vency) with respect to Medicare Advantage plans 
which are offered by Medicare Advantage organiza-
tions under this part.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall take effect on the date of the enact-
ment of this Act. 
SEC. 233. SPECIALIZED MEDICARE ADVANTAGE PLANS FOR 
SPECIAL NEEDS BENEFICIARIES. 
(a) TREATMENT AS COORDINATED CARE PLAN.—
Section 1851(a)(2)(A) (42 U.S.C. 1395w–21(a)(2)(A)) is
225
amended by adding at the end the following new sentence: 
‘‘Specialized Medicare Advantage plans for special needs 
beneficiaries (as defined in section 1859(b)(4)) may be 
any type of coordinated care plan.’’. 
(b) SPECIALIZED MEDICARE ADVANTAGE PLAN FOR 
SPECIAL
NEEDS
BENEFICIARIES
DEFINED.—Section 
1859(b) (42 U.S.C. 1395w–29(b)) is amended by adding 
at the end the following new paragraph: 
‘‘(4) 
SPECIALIZED
MEDICARE
ADVANTAGE 
PLANS FOR SPECIAL NEEDS BENEFICIARIES.—
‘‘(A) IN GENERAL.—The term ‘specialized 
Medicare Advantage plan for special needs 
beneficiaries’ means a Medicare Advantage plan 
that exclusively serves special needs bene-
ficiaries (as defined in subparagraph (B)). 
‘‘(B) SPECIAL NEEDS BENEFICIARY.—The 
term ‘special needs beneficiary’ means a Medi-
care Advantage eligible individual who—
‘‘(i) is institutionalized (as defined by 
the Secretary); 
‘‘(ii) is entitled to medical assistance 
under a State plan under title XIX; or 
‘‘(iii) meets such requirements as the 
Secretary may determine would benefit 
from enrollment in such a specialized
226
Medicare Advantage plan described in sub-
paragraph (A) for individuals with severe 
or disabling chronic conditions.’’. 
(c) RESTRICTION ON ENROLLMENT PERMITTED.—
Section 1859 (42 U.S.C. 1395w–29) is amended by add-
ing at the end the following new subsection: 
‘‘(f) RESTRICTION ON ENROLLMENT FOR SPECIAL-
IZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS 
BENEFICIARIES.—In the case of a specialized Medicare 
Advantage plan (as defined in subsection (b)(4)), notwith-
standing any other provision of this part and in accord-
ance with regulations of the Secretary and for periods be-
fore January 1, 2007, the plan may restrict the enrollment 
of individuals under the plan to individuals who are within 
one or more classes of special needs beneficiaries.’’. 
(d) AUTHORITY TO DESIGNATE OTHER PLANS AS 
SPECIALIZED MEDICARE ADVANTAGE PLANS.—In pro-
mulgating regulations to carry out the last sentence of sec-
tion 1851(a)(2)(A) of the Social Security Act (as added 
by subsection (a)) and section 1859(b)(4) of such Act (as 
added by subsection (b)), the Secretary may provide (not-
withstanding section 1859(b)(4)(A) of such Act) for the 
offering of specialized Medicare Advantage plans by Medi-
care Advantage plans that disproportionately serve special
227
needs beneficiaries who are frail, elderly medicare bene-
ficiaries. 
(e) REPORT TO CONGRESS.—Not later than Decem-
ber 31, 2005, the Medicare Benefits Administrator shall 
submit to Congress a report that assesses the impact of 
specialized Medicare Advantage plans for special needs 
beneficiaries on the cost and quality of services provided 
to enrollees. Such report shall include an assessment of 
the costs and savings to the medicare program as a result 
of amendments made by subsections (a), (b), and (c). 
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by 
subsections (a), (b), and (c) shall take effect upon 
the date of the enactment of this Act. 
(2) DEADLINE
FOR
ISSUANCE
OF
REQUIRE-
MENTS FOR SPECIAL NEEDS BENEFICIARIES; TRAN-
SITION.—No later than 6 months after the date of 
the enactment of this Act, the Secretary shall issue 
interim final regulations to establish requirements 
for 
special 
needs 
beneficiaries 
under 
section 
1859(b)(4)(B)(iii) of the Social Security Act, as 
added by subsection (b). 
SEC. 234. MEDICARE MSAS. 
(a) EXEMPTION FROM REPORTING ENROLLEE EN-
COUNTER DATA.—
228
(1) IN
GENERAL.—Section 1852(e)(1) (42 
U.S.C. 1395w–22(e)(1)) is amended by inserting 
‘‘(other than MSA plans)’’ after ‘‘plans’’. 
(2) CONFORMING AMENDMENTS.—Section 1852 
(42 U.S.C. 1395w–22) is amended—
(A) in subsection (c)(1)(I), by inserting be-
fore the period at the end the following: ‘‘if re-
quired under such section’’; and 
(B) in subparagraphs (A) and (B) of sub-
section (e)(2), by striking ‘‘, a non-network 
MSA 
plan,’’ 
and 
‘‘, 
NON-NETWORK
MSA 
PLANS,’’ each place it appears. 
(b) MAKING PROGRAM PERMANENT
AND ELIMI-
NATING CAP.—Section 1851(b)(4) (42 U.S.C. 1395w–
21(b)(4)) is amended—
(1) in the heading, by striking ‘‘ON A DEM-
ONSTRATION BASIS’’; 
(2) by striking the first sentence of subpara-
graph (A); and 
(3) by striking the second sentence of subpara-
graph (C). 
(c) APPLYING LIMITATIONS
ON BALANCE BILL-
ING.—Section 1852(k)(1) (42 U.S.C. 1395w–22(k)(1)) is 
amended by inserting ‘‘or with an organization offering 
a MSA plan’’ after ‘‘section 1851(a)(2)(A)’’.
229
(d) 
ADDITIONAL
AMENDMENT.—Section 
1851(e)(5)(A) (42 U.S.C. 1395w–21(e)(5)(A)) is amend-
ed—
(1) by adding ‘‘or’’ at the end of clause (i); 
(2) by striking ‘‘, or’’ at the end of clause (ii) 
and inserting a semicolon; and 
(3) by striking clause (iii). 
SEC. 235. EXTENSION OF REASONABLE COST CONTRACTS. 
Subparagraph (C) of section 1876(h)(5) (42 U.S.C. 
1395mm(h)(5)) is amended to read as follows: 
‘‘(C)(i) Subject to clause (ii), may be extended or re-
newed under this subsection indefinitely. 
‘‘(ii) For any period beginning on or after January 
1, 2008, a reasonable cost reimbursement contract under 
this subsection may not be extended or renewed for a serv-
ice area insofar as such area, during the entire previous 
year, was within the service area of 2 or more plans which 
were coordinated care Medicare Advantage plans under 
part C or 2 or more enhanced fee-for-service plans under 
part E and each of which plan for that previous year for 
the area involved meets the following minimum enrollment 
requirements: 
‘‘(I) With respect to any portion of the area in-
volved that is within a Metropolitan Statistical Area 
with a population of more than 250,000 and coun-
230
ties contiguous to such Metropolitan Statistical 
Area, 5,000 individuals. 
‘‘(II) With respect to any other portion of such 
area, 1,500 individuals.’’. 
SEC. 236. EXTENSION OF MUNICIPAL HEALTH SERVICE 
DEMONSTRATION PROJECTS. 
Section 9215(a) of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (42 U.S.C. 1395b–1 note), as 
amended by section 6135 of the Omnibus Budget Rec-
onciliation Act of 1989, section 13557 of the Omnibus 
Budget Reconciliation Act of 1993, section 4017 of BBA, 
section 534 of BBRA (113 Stat. 1501A–390), and section 
633 of BIPA, is amended by striking ‘‘December 31, 
2004’’ and inserting ‘‘December 31, 2009’’. 
SEC. 237. STUDY OF PERFORMANCE-BASED PAYMENT SYS-
TEMS. 
(a) IN GENERAL.—The Secretary shall request the 
Institute of Medicine of the National Academy of Sciences 
to—
(1) conduct a study that reviews and evaluates 
public and private sector experiences in establishing 
performance measures and payment incentives under 
the medicare program and linking performance to 
payment; and
231
(2) submit a report to the Secretary and Con-
gress, not later than 18 months after the date of the 
enactment of this Act, regarding such study. 
(b) STUDY.—The study under subsection (a)(1) 
shall—
(1) include a review and evaluation of incentives 
that have been or could be used to encourage quality 
performance, including those aimed at health plans 
and their enrollees, providers and their patients, and 
other incentives that encourage quality-based health 
care purchasing and collaborative efforts to improve 
performance; and 
(2) examine how these measures and incentives 
might be applied in the Medicare Advantage pro-
gram, the Enhanced Fee-For-Service (EFFS) pro-
gram, and traditional fee-for-service programs. 
(c) REPORT RECOMMENDATIONS.—The report under 
subsection (a)(2) shall—
(1) include recommendations regarding appro-
priate performance measures for use in assessing 
and paying for quality; and 
(2) identify options for updating performance 
measures.
232
Subtitle C—Application of FEHBP-
Style Competitive Reforms
SEC. 241. APPLICATION OF FEHBP-STYLE COMPETITIVE RE-
FORM BEGINNING IN 2010.
(a) IDENTIFICATION OF COMPETITIVE EFFS RE-
GIONS; COMPUTATION
OF COMPETITIVE EFFS NON-
DRUG BENCHMARKS UNDER EFFS PROGRAM.—
(1) IN GENERAL.—Section 1860E–3, as added 
by section 201(a), is amended by adding at the end 
the following new subsection: 
‘‘(e) APPLICATION OF COMPETITION.—
‘‘(1) DETERMINATION OF COMPETITIVE EFFS 
REGIONS.—
‘‘(A) IN GENERAL.—For purposes of this 
part, the term ‘competitive EFFS region’ 
means, for a year beginning with 2010, an 
EFFS region that the Administrator finds—
‘‘(i) there will be offered in the region 
during the annual, coordinated election pe-
riod under section 1851(e)(3)(B) (as ap-
plied under section 1860E–1(c)) before the 
beginning of the year at least 2 EFFS 
plans (in addition to the fee-for-service 
program under parts A and B), each of-
fered by a different EFFS organization
233
and each of which met the minimum en-
rollment requirements of paragraph (1) of 
section 1857(b) (as applied without regard 
to paragraph (3) thereof) as of March of 
the previous year; and 
‘‘(ii) during March of the previous 
year at least the percentage specified in 
subparagraph (C) of the number of EFFS 
eligible individuals who reside in the region 
were enrolled in an EFFS plan. 
‘‘(B) PERCENTAGE SPECIFIED.—
‘‘(i) IN
GENERAL.—For purposes of 
subparagraph (A), subject to clause (ii), 
the percentage specified in this subpara-
graph for a year is equal the lesser of 20 
percent or to the sum of—
‘‘(I) the percentage, as estimated 
by the Administrator, of EFFS eligi-
ble individuals in the United States 
who are enrolled in EFFS plans dur-
ing March of the previous year; and 
‘‘(II) the percentage, as esti-
mated by the Administrator, of Medi-
care Advantage eligible individuals in 
the United States who are enrolled in
234
Medicare Advantage plans during 
March of the previous year. 
‘‘(ii) EXCEPTION.—In the case of an 
EFFS region that was a competitive 
EFFS region for the previous year, the 
Medicare Benefits Administrator may con-
tinue to treat the region as meeting the re-
quirement of subparagraph (A)(ii) if the 
region would meet such requirement but 
for a de minimis reduction below the per-
centage specified in clause (i). 
‘‘(2) COMPETITIVE EFFS NON-DRUG MONTHLY 
BENCHMARK AMOUNT.—For purposes of this part, 
the term ‘competitive EFFS non-drug monthly 
benchmark amount’ means, with respect to an 
EFFS region for a month in a year and subject to 
paragraph (8), the sum of the 2 components de-
scribed in paragraph (3) for the region and year. 
The Administrator shall compute such benchmark 
amount for each competitive EFFS region before the 
beginning of each annual, coordinated election pe-
riod under section 1851(e)(3)(B) for each year (be-
ginning with 2010) in which it is designated as such 
a region.
235
‘‘(3) 2 COMPONENTS.—For purposes of para-
graph (2), the 2 components described in this para-
graph for an EFFS region and a year are the fol-
lowing: 
‘‘(A) EFFS COMPONENT.—The product of 
the following: 
‘‘(i) WEIGHTED
AVERAGE
OF
PLAN 
BIDS IN REGION.—The weighted average of 
the EFFS plan bids for the region and 
year (as determined under paragraph 
(4)(A)). 
‘‘(ii) NON-FFS
MARKET
SHARE.—1 
minus the fee-for-service market share per-
centage determined under paragraph (5) 
for the region and the year. 
‘‘(B) 
FEE-FOR-SERVICE
COMPONENT.—
The product of the following: 
‘‘(i) FEE-FOR-SERVICE
REGION-SPE-
CIFIC
NON-DRUG
AMOUNT.—The fee-for-
service region-specific non-drug amount (as 
defined in paragraph (6)) for the region 
and year. 
‘‘(ii) 
FEE-FOR-SERVICE
MARKET 
SHARE.—The fee-for-service market share
236
percentage (determined under paragraph 
(5)) for the region and the year. 
‘‘(4) DETERMINATION OF WEIGHTED AVERAGE 
EFFS PLAN BIDS FOR A REGION.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (3)(A)(i), the weighted average of EFFS 
plan bids for an EFFS region and a year is the 
sum of the following products for EFFS plans 
described in subparagraph (C) in the region 
and year: 
‘‘(i) UNADJUSTED
EFFS
STATUTORY 
NON-DRUG MONTHLY BID AMOUNT.—The 
unadjusted 
EFFS 
statutory 
non-drug 
monthly bid amount (as defined in sub-
section (a)(3)(A)(ii)(I)) for the region and 
year. 
‘‘(ii) PLAN’S SHARE OF EFFS ENROLL-
MENT IN REGION.—The number of individ-
uals described in subparagraph (B), di-
vided by the total number of such individ-
uals for all EFFS plans described in sub-
paragraph (C) for that region and year. 
‘‘(B) COUNTING
OF
INDIVIDUALS.—The 
Administrator shall count, for each EFFS plan 
described in subparagraph (C) for an EFFS re-
237
gion and year, the number of individuals who 
reside in the region and who were enrolled 
under such plan under this part during March 
of the previous year. 
‘‘(C) EXCLUSION OF PLANS NOT OFFERED 
IN PREVIOUS YEAR.—For an EFFS region and 
year, the EFFS plans described in this sub-
paragraph are plans that are offered in the re-
gion and year and were offered in the region in 
March of the previous year. 
‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MAR-
KET SHARE PERCENTAGE.—The Administrator shall 
determine, for a year and an EFFS region, the pro-
portion (in this subsection referred to as the ‘fee-for-
service market share percentage’) of the EFFS eligi-
ble individuals who are residents of the region dur-
ing March of the previous year, of such individuals 
who were not enrolled in an EFFS plan or in a 
Medicare Advantage plan (or, if greater, such pro-
portion determined for individuals nationally). 
‘‘(6) FEE-FOR-SERVICE REGION-SPECIFIC NON-
DRUG AMOUNT.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (3)(B)(i) and section 1839(h)(2)(A), sub-
ject to subparagraph (C), the term ‘fee-for-serv-
238
ice region-specific non-drug amount’ means, for 
a competitive EFFS region and a year, the ad-
justed average per capita cost for the year in-
volved, determined under section 1876(a)(4) for 
such region for services covered under parts A 
and B for individuals entitled to benefits under 
part A and enrolled under this part who are not 
enrolled in an EFFS plan under part E or a 
Medicare Advantage plan under part C for the 
year, but adjusted to exclude costs attributable 
to payments under section 1886(h).
‘‘(B) USE OF FULL RISK ADJUSTMENT TO 
STANDARDIZE FEE-FOR-SERVICE COSTS TO TYP-
ICAL
BENEFICIARY.—In determining the ad-
justed average per capita cost for a region and 
year under subparagraph (A), such costs shall 
be adjusted to fully take into account the demo-
graphic and health status risk factors estab-
lished under subsection (c)(3) so that such per 
capita costs reflect the average costs for a typ-
ical beneficiary residing in the region. 
‘‘(C) INCLUSION OF COSTS OF VA AND DOD 
MILITARY
FACILITY
SERVICES
TO
MEDICARE-
ELIGIBLE BENEFICIARIES.—In determining the 
adjusted average per capita cost under subpara-
239
graph (A) for a year, such cost shall be ad-
justed to include the Administrator’s estimate, 
on a per capita basis, of the amount of addi-
tional payments that would have been made in 
the region involved under this title if individuals 
entitled to benefits under this title had not re-
ceived services from facilities of the Department 
of Veterans Affairs or the Department of De-
fense. 
‘‘(7) APPLICATION
OF
COMPETITION.—In the 
case of an EFFS region that is a competitive EFFS 
region for a year, for purposes of applying sub-
sections (b) and (c)(1) and section 1860E–4(a), any 
reference to an EFFS region-specific non-drug 
monthly benchmark amount shall be treated as a 
reference to the competitive EFFS non-drug month-
ly benchmark amount under paragraph (2) for the 
region and year. 
‘‘(8) PHASE-IN OF BENCHMARK FOR EACH RE-
GION.—
‘‘(A) USE OF BLENDED BENCHMARK.—In 
the case of a region that has not been a com-
petitive EFFS region for each of the previous 
4 years, the competitive EFFS non-drug
240
monthly benchmark amount shall be equal to 
the sum of the following: 
‘‘(i) 
NEW
COMPETITIVE
COMPO-
NENT.—The product of—
‘‘(I) the weighted average phase-
in proportion for that area and year, 
as specified in subparagraph (B); and 
‘‘(II) the competitive EFFS non-
drug monthly benchmark amount for 
the region and year, determined under 
paragraph (2) without regard to this 
paragraph. 
‘‘(ii) 
OLD
COMPETITIVE
COMPO-
NENT.—The product of—
‘‘(I) 1 minus the weighted aver-
age phase-in proportion for that re-
gion and year; and 
‘‘(II) the EFFS region-specific 
non-drug benchmark amount for the 
region and the year. 
‘‘(B) COMPUTATION OF WEIGHTED AVER-
AGE PHASE-IN PROPORTION.—For purposes of 
this paragraph, the ‘weighted average phase-in 
proportion’ for an EFFS region for a year shall 
be determined as follows:
241
‘‘(i) FIRST YEAR (AND REGION NOT 
COMPETITIVE
REGION
IN
PREVIOUS 
YEAR).—If the area was not a competitive 
EFFS region in the previous year, the 
weighted average phase-in proportion for 
the region for the year is equal to 1⁄5. 
‘‘(ii) COMPETITIVE
REGION
IN
PRE-
VIOUS YEAR.—If the region was a competi-
tive EFFS region in the previous year, the 
weighted average phase-in proportion for 
the region for the year is equal to the 
weighted average phase-in proportion de-
termined under this subparagraph for the 
region for the previous year plus 1⁄5, but in 
no case more than 1.’’. 
(2) CONFORMING AMENDMENTS.—
(A) Such section 1860E–3 is further 
amended—
(i) in subsection (b), by adding at the 
end the following new paragraph: 
‘‘(4) APPLICATION
IN
COMPETITIVE
RE-
GIONS.—For special rules applying this sub-
section in competitive EFFS regions, see sub-
section (e)(7).’’;
242
(ii) in subsection (c)(1), by inserting 
‘‘and subsection (e)(7)’’ after ‘‘(as made 
applicable under subsection (d))’’; and 
(iii) in subsection (d) , by striking 
‘‘and (e)’’ and inserting ‘‘(e), and (k)’’. 
(B) Section 1860E–4(a)(1), as inserted by 
section 201(a)(2), is amended by inserting ‘‘, 
except as provided in section 1860E–3(e)(7)’’ 
after ‘‘paragraph (2)’’.
(b) IDENTIFICATION
OF COMPETITIVE MEDICARE 
ADVANTAGE
AREAS; APPLICATION
OF
COMPETITIVE 
MEDICARE
ADVANTAGE
NON-DRUG
BENCHMARKS 
UNDER MEDICARE ADVANTAGE PROGRAM.—
(1) IN GENERAL.—Section 1853, as amended 
by section 221(b)(3), is amended by adding at the 
end the following new subsection: 
‘‘(k) APPLICATION OF COMPETITION.—
‘‘(1) DETERMINATION OF COMPETITIVE MEDI-
CARE ADVANTAGE AREAS.—
‘‘(A) IN GENERAL.—For purposes of this 
part, the terms ‘competitive Medicare Advan-
tage area’ and ‘CMA area’ mean, for a year be-
ginning with 2010, an area (which is a metro-
politan statistical area or other area with a sub-
243
stantial number of Medicare Advantage enroll-
ees) that the Administrator finds—
‘‘(i) there will be offered during the 
annual, coordinated election period under 
section 1851(e)(3)(B) under this part be-
fore the beginning of the year at least 2 
Medicare Advantage plans (in addition to 
the fee-for-service program under parts A 
and B), each offered by a different Medi-
care Advantage organization and each of 
which met the minimum enrollment re-
quirements of paragraph (1) of section 
1857(b) (as applied without regard to 
paragraph (3) thereof) as of March of the 
previous year with respect to the area; and 
‘‘(ii) during March of the previous 
year at least the percentage specified in 
subparagraph (B) of the number of Medi-
care Advantage eligible individuals who re-
side in the area were enrolled in a Medi-
care Advantage plan. 
‘‘(B) PERCENTAGE SPECIFIED.—
‘‘(i) IN
GENERAL.—For purposes of 
subparagraph (A), subject to clause (ii), 
the percentage specified in this subpara-
244
graph for a year is equal the lesser of 20 
percent or to the sum of—
‘‘(I) the percentage, as estimated 
by the Administrator, of EFFS eligi-
ble individuals in the United States 
who are enrolled in EFFS plans dur-
ing March of the previous year; and 
‘‘(II) the percentage, as esti-
mated by the Administrator, of Medi-
care Advantage eligible individuals in 
the United States who are enrolled in 
Medicare Advantage plans during 
March of the previous year. 
‘‘(ii) EXCEPTION.—In the case of an 
area that was a competitive area for the 
previous year, the Medicare Benefits Ad-
ministrator may continue to treat the area 
as meeting the requirement of subpara-
graph (A)(ii) if the area would meet such 
requirement but for a de minimis reduction 
below the percentage specified in clause (i). 
‘‘(2) 
COMPETITIVE
MEDICARE
ADVANTAGE 
NON-DRUG
MONTHLY
BENCHMARK
AMOUNT.—For 
purposes of this part, the term ‘competitive Medi-
care 
Advantage 
non-drug 
monthly 
benchmark
245
amount’ means, with respect to a competitive Medi-
care Advantage area for a month in a year subject 
to paragraph (8), the sum of the 2 components de-
scribed in paragraph (3) for the area and year. The 
Administrator 
shall 
compute 
such 
benchmark 
amount for each competitive Medicare Advantage 
area before the beginning of each annual, coordi-
nated election period under section 1851(e)(3)(B) 
for each year (beginning with 2010) in which it is 
designated as such an area. 
‘‘(3) 2 COMPONENTS.—For purposes of para-
graph (2), the 2 components described in this para-
graph for a competitive Medicare Advantage area 
and a year are the following: 
‘‘(A) 
MEDICARE
ADVANTAGE
COMPO-
NENT.—The product of the following: 
‘‘(i) WEIGHTED
AVERAGE
OF
MEDI-
CARE ADVANTAGE PLAN BIDS IN AREA.—
The weighted average of the plan bids for 
the area and year (as determined under 
paragraph (4)(A)). 
‘‘(ii) NON-FFS
MARKET
SHARE.—1 
minus the fee-for-service market share per-
centage, determined under paragraph (5) 
for the area and year.
246
‘‘(B) 
FEE-FOR-SERVICE
COMPONENT.—
The product of the following: 
‘‘(i) FEE-FOR-SERVICE AREA-SPECIFIC 
NON-DRUG
AMOUNT.—The fee-for-service 
area-specific non-drug amount (as defined 
in paragraph (6)) for the area and year. 
‘‘(ii) 
FEE-FOR-SERVICE
MARKET 
SHARE.—The fee-for-service market share 
percentage, determined under paragraph 
(5) for the area and year. 
‘‘(4) DETERMINATION OF WEIGHTED AVERAGE 
MEDICARE ADVANTAGE BIDS FOR AN AREA.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (3)(A)(i), the weighted average of plan 
bids for an area and a year is the sum of the 
following products for Medicare Advantage 
plans described in subparagraph (C) in the area 
and year: 
‘‘(i) MONTHLY MEDICARE ADVANTAGE 
STATUTORY NON-DRUG BID AMOUNT.—The 
unadjusted Medicare Advantage statutory 
non-drug monthly bid amount. 
‘‘(ii) PLAN’S SHARE OF MEDICARE AD-
VANTAGE
ENROLLMENT
IN
AREA.—The 
number of individuals described in sub-
247
paragraph (B), divided by the total num-
ber of such individuals for all Medicare Ad-
vantage plans described in subparagraph 
(C) for that area and year. 
‘‘(B) COUNTING
OF
INDIVIDUALS.—The 
Administrator shall count, for each Medicare 
Advantage plan described in subparagraph (C) 
for an area and year, the number of individuals 
who reside in the area and who were enrolled 
under such plan under this part during March 
of the previous year. 
‘‘(C) EXCLUSION OF PLANS NOT OFFERED 
IN PREVIOUS YEAR.—For an area and year, the 
Medicare Advantage plans described in this 
subparagraph are plans described in the first 
sentence of section 1851(a)(2)(A) that are of-
fered in the area and year and were offered in 
the area in March of the previous year. 
‘‘(5) COMPUTATION OF FEE-FOR-SERVICE MAR-
KET SHARE PERCENTAGE.—The Administrator shall 
determine, for a year and a competitive Medicare 
Advantage area, the proportion (in this subsection 
referred to as the ‘fee-for-service market share per-
centage’) of Medicare Advantage eligible individuals 
residing in the area who during March of the pre-
248
vious year were not enrolled in a Medicare Advan-
tage plan or in an EFFS plan (or, if greater, such 
proportion determined for individuals nationally). 
‘‘(6) FEE-FOR-SERVICE
AREA-SPECIFIC
NON-
DRUG AMOUNT.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (3)(B)(i) and section 1839(h)(1)(A), sub-
ject to subparagraph (C), the term ‘fee-for-serv-
ice area-specific non-drug amount’ means, for a 
competitive Medicare Advantage area and a 
year, the adjusted average per capita cost for 
the year involved, determined under section 
1876(a)(4) for such area for services covered 
under parts A and B for individuals entitled to 
benefits under part A and enrolled under this 
part who are not enrolled in a Medicare Advan-
tage plan under part C or an EFFS plan under 
part E for the year, but adjusted to exclude 
costs attributable to payments under section 
1886(h).
‘‘(B) USE OF FULL RISK ADJUSTMENT TO 
STANDARDIZE FEE-FOR-SERVICE COSTS TO TYP-
ICAL
BENEFICIARY.—In determining the ad-
justed average per capita cost for an area and 
year under subparagraph (A), such costs shall
249
be adjusted to fully take into account the demo-
graphic and health status risk factors estab-
lished under subsection (a)(1)(A)(iv) so that 
such per capita costs reflect the average costs 
for a typical beneficiary residing in the area. 
‘‘(C) INCLUSION OF COSTS OF VA AND DOD 
MILITARY
FACILITY
SERVICES
TO
MEDICARE-
ELIGIBLE BENEFICIARIES.—In determining the 
adjusted average per capita cost under subpara-
graph (A) for a year, such cost shall be ad-
justed to include the Administrator’s estimate, 
on a per capita basis, of the amount of addi-
tional payments that would have been made in 
the area involved under this title if individuals 
entitled to benefits under this title had not re-
ceived services from facilities of the Department 
of Veterans Affairs or the Department of De-
fense. 
‘‘(7) APPLICATION
OF
COMPETITION.—In the 
case of an area that is a competitive Medicare Ad-
vantage area for a year, for purposes of applying 
subsection 
(a)(1)(A)(ii) 
and 
sections 
1854(b)(2)(A)(ii) and 1854(b)(3)(B)(i), any ref-
erence to a Medicare Advantage area-specific non-
drug monthly benchmark amount shall be treated as
250
a reference to the competitive Medicare Advantage 
non-drug monthly benchmark amount under para-
graph (2) for the area and year. 
‘‘(8) PHASE-IN
OF
BENCHMARK
FOR
EACH 
AREA.—
‘‘(A) USE OF BLENDED BENCHMARK.—In 
the case of an area that has not been a com-
petitive Medicare Advantage area for each of 
the previous 4 years, the competitive Medicare 
Advantage 
non-drug 
monthly 
benchmark 
amount shall be equal to the sum of the fol-
lowing: 
‘‘(i) 
NEW
COMPETITIVE
COMPO-
NENT.—The product of—
‘‘(I) the weighted average phase-
in proportion for that area and year, 
as specified in subparagraph (B); and 
‘‘(II) the competitive Medicare 
Advantage non-drug monthly bench-
mark amount for the area and year, 
determined under paragraph (2) with-
out regard to this paragraph. 
‘‘(ii) 
OLD
COMPETITIVE
COMPO-
NENT.—The product of—
251
‘‘(I) 1 minus the weighted aver-
age phase-in proportion for that area 
and year; and 
‘‘(II) the Medicare Advantage 
area-wide 
non-drug 
benchmark 
amount for the area and the year. 
‘‘(B) COMPUTATION OF WEIGHTED AVER-
AGE PHASE-IN PROPORTION.—For purposes of 
this paragraph, the ‘weighted average phase-in 
proportion’ for a Medicare Advantage payment 
area for a year shall be determined as follows: 
‘‘(i) FIRST
YEAR
(AND
AREA
NOT 
COMPETITIVE AREA IN PREVIOUS YEAR).—
If the area was not a Medicare Advantage 
competitive area in the previous year, the 
weighted average phase-in proportion for 
the area for the year is equal to 1⁄5. 
‘‘(ii) COMPETITIVE AREA IN PREVIOUS 
YEAR.—If the area was a competitive 
Medicare Advantage area in the previous 
year, the weighted average phase-in pro-
portion for the area for the year is equal 
to the weighted average phase-in propor-
tion determined under this subparagraph
252
for the area for the previous year plus 1⁄5, 
but in no case more than 1. 
‘‘(C) MEDICARE
ADVANTAGE
AREA-WIDE 
NON-DRUG
BENCHMARK
AMOUNT.—For pur-
poses of subparagraph (A)(ii)(II), the term 
‘Medicare Advantage area-wide non-drug bench-
mark amount’ means, for an area and year, the 
weighted average of the amounts described in 
section 1853(j) for Medicare Advantage pay-
ment area or areas included in the area (based 
on the number of traditional fee-for-service en-
rollees in such payment area or areas) and 
year.’’. 
(2) APPLICATION.—Section 1854 (42 U.S.C. 
1395w–24) is amended—
(A) in subsection (b)(1)(C)(i), as added by 
section 221(b)(1)(A), by striking ‘‘(i) REQUIRE-
MENT.—The’’ and inserting ‘‘(i) REQUIREMENT 
FOR NON-COMPETITIVE AREAS.—In the case of 
a Medicare Advantage payment area that is not 
a competitive Medicare Advantage area des-
ignated under section 1853(k)(1), the’’; 
(B) in subsection (b)(1)(C), as so added, 
by inserting after clause (i) the following new 
clause:
253
‘‘(ii) REQUIREMENT
FOR
COMPETI-
TIVE
MEDICARE
ADVANTAGE
AREAS.—In 
the case of a Medicare Advantage payment 
area that is designated as a competitive 
Medicare Advantage area under section 
1853(k)(1), if there are average per capita 
monthly savings described in paragraph 
(6) for a Medicare Advantage plan and 
year, the Medicare Advantage plan shall 
provide to the enrollee a monthly rebate 
equal to 75 percent of such savings.’’; and 
(C) by adding at the end of subsection (b), 
as amended by sections 221(b)(1)(B) and 
221(b)(2), the following new paragraph: 
‘‘(6) COMPUTATION OF AVERAGE PER CAPITA 
MONTHLY
SAVINGS
FOR
COMPETITIVE
MEDICARE 
ADVANTAGE
AREAS.—For purposes of paragraph 
(1)(C)(ii), the average per capita monthly savings 
referred to in such paragraph for a Medicare Advan-
tage plan and year shall be computed in the same 
manner as the average per capita monthly savings is 
computed under paragraph (3) except that the ref-
erence to the Medicare Advantage area-specific non-
drug monthly benchmark amount in paragraph 
(3)(B)(i) (or to the benchmark amount as adjusted
254
under paragraph (3)(C)(i)) is deemed to be a ref-
erence to the competitive Medicare Advantage non-
drug monthly benchmark amount (or such amount 
as adjusted in the manner described in paragraph 
(3)(B)(i)).’’. 
(3) ADDITIONAL CONFORMING AMENDMENTS.—
(A) 
PAYMENT
OF
PLANS.—Section 
1853(a)(1)(A)(ii), 
as 
amended 
by 
section 
221(c)(1), is amended—
(i) in subclauses (I) and (II), by in-
serting ‘‘(or, insofar as such payment area 
is a competitive Medicare Advantage area, 
described in section 1854(b)(6))’’ after 
‘‘section 1854(b)(3)(C)’’; and 
(ii) in subclause (II), by inserting 
‘‘(or, insofar as such payment area is a 
competitive Medicare Advantage area, the 
competitive Medicare Advantage non-drug 
monthly benchmark amount)’’ after ‘‘Medi-
care Advantage area-specific non-drug 
monthly benchmark amount’’; and 
(B) DISCLOSURE OF INFORMATION.—Sec-
tion 1853(b)(1)(B), as amended by section 
221(e)(1), is amended to read as follows:
255
‘‘(B) COMPETITION
INFORMATION.—For 
years beginning with 2006, the following: 
‘‘(i) 
BENCHMARKS.—The 
Medicare 
Advantage area-specific non-drug bench-
mark under section 1853(j) and, if applica-
ble, the competitive Medicare Advantage 
non-drug 
benchmark 
under 
section 
1853(k)(2), for the year and competitive 
Medicare Advantage area involved and the 
national fee-for-service market share per-
centage for the area and year. 
‘‘(ii) ADJUSTMENT
FACTORS.—The 
adjustment factors applied under section 
1853(a)(1)(A)(iv) (relating to demographic 
adjustment), section 1853(a)(1)(B) (relat-
ing to adjustment for end-stage renal dis-
ease), and section 1853(a)(3) (relating to 
health status adjustment). 
‘‘(iii) CERTAIN
BENCHMARKS
AND 
AMOUNTS.—In the case of a competitive 
Medicare Advantage area, the Medicare 
Advantage area-wide non-drug benchmark 
amount 
(as 
defined 
in 
subsection 
(k)(8)(C)) and the fee-for-service area-spe-
256
cific non-drug amount (as defined in sec-
tion 1853(k)(6)) for the area. 
‘‘(iv) INDIVIDUALS.—The number of 
individuals 
counted 
under 
subsection 
(k)(4)(B) and enrolled in each Medicare 
Advantage plan in the area.’’. 
(C) DEFINITION OF MONTHLY BASIC PRE-
MIUM.—Section 1854(b)(2)(A)(ii), as amended 
by section 221(d)(2), is amended by inserting 
‘‘(or, in the case of a competitive Medicare Ad-
vantage area, the competitive Medicare Advan-
tage non-drug monthly benchmark amount or, 
in applying this paragraph under part E in the 
case of a competitive EFFS region, the com-
petitive EFFS non-drug monthly benchmark 
amount)’’ after ‘‘benchmark amount’’. 
(c) PREMIUM ADJUSTMENT.—
(1) IN
GENERAL.—Section 1839 (42 U.S.C. 
1395r) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(h)(1)(A) In the case of an individual who resides 
in a competitive Medicare Advantage area under section 
1853(k)(1) (regardless of whether such area is in a com-
petitive EFFS region under section 1860E–3(e)) and who 
is not enrolled in a Medicare Advantage plan under part
257
C or in an EFFS plan under part E, the monthly premium 
otherwise applied under this part (determined without re-
gard to subsections (b) and (f) or any adjustment under 
this subsection) shall be adjusted as follows: If the fee-
for-service area-specific non-drug amount (as defined in 
section 1853(k)(6)) for the competitive Medicare Advan-
tage area in which the individual resides for a month—
‘‘(i) does not exceed the competitive Medicare 
Advantage non-drug benchmark (as determined 
under paragraph (2) of section 1853(k), without re-
gard to paragraph (8) thereof) for such area, the 
amount of the premium for the individual for the 
month shall be reduced by an amount equal to the 
product of the adjustment factor under subpara-
graph (C) and 75 percent of the amount by which 
such competitive benchmark exceeds such fee-for-
service area-specific non-drug amount; or 
‘‘(ii) exceeds such competitive Medicare Advan-
tage non-drug benchmark, the amount of the pre-
mium for the individual for the month shall be ad-
justed to ensure, subject to subparagraph (B), 
that—
‘‘(I) the sum of the amount of the adjusted 
premium and the competitive Medicare Advan-
258
tage non-drug benchmark for the area, is equal 
to 
‘‘(II) the sum of the unadjusted premium 
plus amount of the fee-for-service area-specific 
non-drug amount for the area. 
‘‘(B) In no case shall the actual amount of an adjust-
ment under subparagraph (A)(ii) exceed the product of 
the adjustment factor under subparagraph (C) and the 
amount of the adjustment otherwise computed under sub-
paragraph (A)(ii) without regard to this subparagraph. 
‘‘(C) The adjustment factor under this subparagraph 
for an area for a year is equal to—
‘‘(i) the number of consecutive years (in the 5-
year period ending with the year involved) in which 
such area was a competitive Medicare Advantage 
area; divided by 
‘‘(ii) 5. 
‘‘(2)(A) In the case of an individual who resides in 
an area that is within a competitive EFFS region under 
section 1860E–3(e) but is not within a competitive Medi-
care Advantage area under section 1853(k)(1) and who 
is not enrolled in a Medicare Advantage plan under part 
C or in an EFFS plan under part E, the monthly premium 
otherwise applied under this part (determined without re-
gard to subsections (b) and (f) or any adjustment under
259
this subsection) shall be adjusted as follows: If the fee-
for-service region-specific non-drug amount (as defined in 
section 1860E–3(e)(6)) for a region for a month—
‘‘(i) does not exceed the competitive EFFS non-
drug monthly benchmark amount (as determined 
under paragraph (2) of section 1860E–3(e), without 
regard to paragraph (8) thereof) for such region, the 
amount of the premium for the individual for the 
month shall be reduced by an amount equal to the 
product of the adjustment factor under subpara-
graph (C) and 75 percent of the amount by which 
such competitive benchmark amount exceeds such 
fee-for-service region-specific non-drug benchmark 
amount; or 
‘‘(ii) exceeds such competitive EFFS non-drug 
monthly benchmark amount, the amount of the pre-
mium for the individual for the month shall be ad-
justed to ensure, subject to subparagraph (B), 
that—
‘‘(I) the sum of the amount of the adjusted 
premium and the competitive EFFS non-drug 
monthly benchmark amount for the region, is 
equal to
260
‘‘(II) the sum of the unadjusted premium 
plus the amount of the EFFS region-specific 
non-drug monthly bidfor the region. 
‘‘(B) In no case shall the actual amount of an adjust-
ment under subparagraph (A)(ii) exceed the product of 
the adjustment factor under subparagraph (C) and the 
amount of the adjustment otherwise computed under sub-
paragraph (A)(ii) without regard to this subparagraph. 
‘‘(C) The adjustment factor under this subparagraph 
for an EFFS region for a year is equal to—
‘‘(i) the number of consecutive years (in the 5-
year period ending with the year involved) in which 
such region was a competitive EFFS region; divided 
by 
‘‘(ii) 5. 
‘‘(3) Nothing in this subsection shall be construed as 
preventing a reduction under paragraph (1)(A) or para-
graph (2)(A) in the premium otherwise applicable under 
this part to zero or from requiring the provision of a re-
bate to the extent such premium would otherwise be re-
quired to be less than zero. 
‘‘(4) The adjustment in the premium under this sub-
section shall be effected in such manner as the Medicare 
Benefits Administrator determines appropriate.
261
‘‘(5) In order to carry out this subsection (insofar as 
it is effected through the manner of collection of premiums 
under 1840(a)), the Medicare Benefits Administrator shall 
transmit to the Commissioner of Social Security—
‘‘(A) at the beginning of each year, the name, 
social security account number, and the amount of 
the adjustment (if any) under this subsection for 
each individual enrolled under this part for each 
month during the year; and 
‘‘(B) periodically throughout the year, informa-
tion to update the information previously trans-
mitted under this paragraph for the year.’’. 
(2) NO CHANGE IN MEDICARE’S DEFINED BEN-
EFIT
PACKAGE.—Nothing in this part (or the 
amendments made by this part) shall be construed 
as changing the entitlement to defined benefits 
under parts A and B of title XVIII of the Social Se-
curity Act. 
(3) 
CONFORMING
AMENDMENT.—Section 
1844(c) (42 U.S.C. 1395w(c)) is amended by insert-
ing ‘‘and without regard to any premium adjustment 
effected under section 1839(h)’’ before the period at 
the end. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2010.
262
TITLE III—COMBATTING WASTE, 
FRAUD, AND ABUSE 
SEC. 301. MEDICARE SECONDARY PAYOR (MSP) PROVI-
SIONS. 
(a) TECHNICAL AMENDMENT CONCERNING SEC-
RETARY’S AUTHORITY TO MAKE CONDITIONAL PAYMENT 
WHEN CERTAIN PRIMARY PLANS DO NOT PAY PROMPT-
LY.—
(1) IN
GENERAL.—Section 1862(b)(2) (42 
U.S.C. 1395y(b)(2)) is amended—
(A) in subparagraph (A)(ii), by striking 
‘‘promptly (as determined in accordance with 
regulations)’’; 
(B) in subparagraph (B)—
(i) 
by 
redesignating 
clauses 
(i) 
through (iii) as clauses (ii) through (iv), 
respectively; and 
(ii) by inserting before clause (ii), as 
so redesignated, the following new clause: 
‘‘(i) AUTHORITY
TO
MAKE
CONDI-
TIONAL
PAYMENT.—The Secretary may 
make payment under this title with respect 
to an item or service if a primary plan de-
scribed in subparagraph (A)(ii) has not 
made or cannot reasonably be expected to
263
make payment with respect to such item or 
service promptly (as determined in accord-
ance with regulations). Any such payment 
by the Secretary shall be conditioned on 
reimbursement to the appropriate Trust 
Fund in accordance with the succeeding 
provisions of this subsection.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall be effective as if included in 
the enactment of title III of the Medicare and Med-
icaid Budget Reconciliation Amendments of 1984 
(Public Law 98-369). 
(b) CLARIFYING AMENDMENTS
TO CONDITIONAL 
PAYMENT PROVISIONS.—Section 1862(b)(2) (42 U.S.C. 
1395y(b)(2)) is further amended—
(1) in subparagraph (A), in the matter fol-
lowing clause (ii), by inserting the following sentence 
at the end: ‘‘An entity that engages in a business, 
trade, or profession shall be deemed to have a self-
insured plan if it carries its own risk (whether by a 
failure to obtain insurance, or otherwise) in whole or 
in part.’’; 
(2) in subparagraph (B)(ii), as redesignated by 
subsection (a)(2)(B)—
264
(A) by striking the first sentence and in-
serting the following: ‘‘A primary plan, and an 
entity that receives payment from a primary 
plan, shall reimburse the appropriate Trust 
Fund for any payment made by the Secretary 
under this title with respect to an item or serv-
ice if it is demonstrated that such primary plan 
has or had a responsibility to make payment 
with respect to such item or service. A primary 
plan’s responsibility for such payment may be 
demonstrated by a judgment, a payment condi-
tioned upon the recipient’s compromise, waiver, 
or release (whether or not there is a determina-
tion or admission of liability) of payment for 
items or services included in a claim against the 
primary plan or the primary plan’s insured, or 
by other means.’’; and 
(B) in the final sentence, by striking ‘‘on 
the date such notice or other information is re-
ceived’’ and inserting ‘‘on the date notice of, or 
information related to, a primary plan’s respon-
sibility for such payment or other information is 
received’’; and 
(3) in subparagraph (B)(iii), , as redesignated 
by subsection (a)(2)(B), by striking the first sen-
265
tence and inserting the following: ‘‘In order to re-
cover payment made under this title for an item or 
service, the United States may bring an action 
against any or all entities that are or were required 
or responsible (directly, as an insurer or self-insurer, 
as a third-party administrator, as an employer that 
sponsors or contributes to a group health plan, or 
large group health plan, or otherwise) to make pay-
ment with respect to the same item or service (or 
any portion thereof) under a primary plan. The 
United States may, in accordance with paragraph 
(3)(A) collect double damages against any such enti-
ty. In addition, the United States may recover under 
this clause from any entity that has received pay-
ment from a primary plan or from the proceeds of 
a primary plan’s payment to any entity.’’. 
(c) CLERICAL AMENDMENTS.—Section 1862(b) (42 
U.S.C. 1395y(b)) is amended—
(1) in paragraph (1)(A), by moving the indenta-
tion of clauses (ii) through (v) 2 ems to the left; and 
(2) in paragraph (3)(A), by striking ‘‘such’’ be-
fore ‘‘paragraphs’’.
266
SEC. 302. COMPETITIVE ACQUISITION OF CERTAIN ITEMS 
AND SERVICES. 
(a) IN GENERAL.—Section 1847 (42 U.S.C. 1395w–
3) is amended to read as follows:
‘‘COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND 
SERVICES 
‘‘SEC. 1847. (a) ESTABLISHMENT OF COMPETITIVE 
ACQUISITION PROGRAMS.—
‘‘(1) IMPLEMENTATION OF PROGRAMS.—
‘‘(A) IN
GENERAL.—The Secretary shall 
establish and implement programs under which 
competitive acquisition areas are established 
throughout the United States for contract 
award purposes for the furnishing under this 
part of competitively priced items and services 
(described in paragraph (2)) for which payment 
is made under this part. Such areas may differ 
for different items and services. 
‘‘(B) PHASED-IN IMPLEMENTATION.—The 
programs shall be phased-in—
‘‘(i) among competitive acquisition 
areas over a period of not longer than 3 
years in a manner so that the competition 
under the programs occurs in—
‘‘(I) at least 1⁄3 of such areas in 
2005; and
267
‘‘(II) at least 2⁄3 of such areas in 
2006; and 
‘‘(ii) among items and services in a 
manner such that the programs apply to 
the highest cost and highest volume items 
and services first. 
‘‘(C) WAIVER OF CERTAIN PROVISIONS.—
In carrying out the programs, the Secretary 
may waive such provisions of the Federal Ac-
quisition Regulation as are necessary for the ef-
ficient implementation of this section, other 
than provisions relating to confidentiality of in-
formation and such other provisions as the Sec-
retary determines appropriate. 
‘‘(2) ITEMS AND SERVICES DESCRIBED.—The 
items and services referred to in paragraph (1) are 
the following: 
‘‘(A) DURABLE MEDICAL EQUIPMENT AND 
MEDICAL SUPPLIES.—Covered items (as defined 
in section 1834(a)(13)) for which payment is 
otherwise made under section 1834(a), includ-
ing items used in infusion and drugs and sup-
plies used in conjunction with durable medical 
equipment, but excluding class III devices
268
under the Federal Food, Drug, and Cosmetic 
Act. 
‘‘(B) 
OTHER
EQUIPMENT
AND
SUP-
PLIES.—Items, equipment, and supplies (as de-
scribed in section 1842(s)(2)(D) other than en-
teral nutrients). 
‘‘(C) 
OFF-THE-SHELF
ORTHOTICS.—
Orthotics (described in section 1861(s)(9)) for 
which payment is otherwise made under section 
1834(h) which require minimal self-adjustment 
for appropriate use and does not require exper-
tise in trimming, bending, molding, assembling, 
or customizing to fit to the patient. 
‘‘(3) EXCEPTION AUTHORITY.—In carrying out 
the programs under this section, the Secretary may 
exempt—
‘‘(A) rural areas and areas with low popu-
lation density within urban areas that are not 
competitive, unless there is a significant na-
tional market through mail order for a par-
ticular item or service; and 
‘‘(B) items and services for which the ap-
plication of competitive acquisition is not likely 
to result in significant savings.
269
‘‘(4) SPECIAL
RULE
FOR
CERTAIN
RENTED 
ITEMS OF DURABLE MEDICAL EQUIPMENT.—In the 
case of a covered item for which payment is made 
on a rental basis under section 1834(a), the Sec-
retary shall establish a process by which rental 
agreements for the covered items entered into before 
the application of the competitive acquisition pro-
gram under this section for the item may be contin-
ued notwithstanding this section. In the case of any 
such continuation, the supplier involved shall provide 
for appropriate servicing and replacement, as re-
quired under section 1834(a). 
‘‘(5) PHYSICIAN
AUTHORIZATION.—The Sec-
retary may establish a process under which a physi-
cian may prescribe a particular brand or mode of de-
livery of an item or service if the item or service in-
volved is clinically more appropriate than other simi-
lar items or services. 
‘‘(6) APPLICATION.—For each competitive ac-
quisition area in which the program is implemented 
under this subsection with respect to items and serv-
ices, the payment basis determined under the com-
petition conducted under subsection (b) shall be sub-
stituted for the payment basis otherwise applied 
under section 1834(a).
270
‘‘(b) PROGRAM REQUIREMENTS.—
‘‘(1) IN GENERAL.—The Secretary shall con-
duct a competition among entities supplying items 
and services described in subsection (a)(2) for each 
competitive acquisition area in which the program is 
implemented under subsection (a) with respect to 
such items and services. 
‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—
‘‘(A) IN
GENERAL.—The Secretary may 
not award a contract to any entity under the 
competition conducted in an competitive acqui-
sition area pursuant to paragraph (1) to fur-
nish such items or services unless the Secretary 
finds all of the following: 
‘‘(i) The entity meets quality and fi-
nancial standards specified by the Sec-
retary or developed by the Program Advi-
sory and Oversight Committee established 
under subsection (c). 
‘‘(ii) The total amounts to be paid 
under the contract (including costs associ-
ated with the administration of the con-
tract) are expected to be less than the total 
amounts that would otherwise be paid.
271
‘‘(iii) Beneficiary access to a choice of 
multiple suppliers in the area is main-
tained. 
‘‘(iv) Beneficiary liability is limited to 
20 percent of the applicable contract 
award price, except in such cases where a 
supplier has furnished an upgraded item 
and has executed an advanced beneficiary 
notice. 
‘‘(B) DEVELOPMENT OF QUALITY STAND-
ARDS FOR DME PRODUCTS.—
‘‘(i) IN GENERAL.—The quality stand-
ards specified under subparagraph (A)(i) 
shall not be less than the quality standards 
that would otherwise apply if this section 
did not apply and shall include consumer 
services standards. Not later than July 1, 
2004, the Secretary shall establish new 
quality standards for products subject to 
competitive acquisition under this section. 
Such standards shall be applied prospec-
tively and shall be published on the website 
of the Department of Health and Human 
Services.
272
‘‘(ii) CONSULTATION WITH PROGRAM 
ADVISORY AND OVERSIGHT COMMITTEE.—
The Secretary shall consult with the Pro-
gram Advisory and Oversight Committee 
(established under subsection (c)) to review 
(and advise the Secretary concerning) the 
quality standards referred to in clause (i). 
‘‘(iii) 
CONSTRUCTION.—Nothing 
in 
this subparagraph shall be construed as 
delaying the effective date of the imple-
mentation of the competitive acquisition 
program under this section. 
‘‘(3) CONTENTS OF CONTRACT.—
‘‘(A) IN
GENERAL.—A contract entered 
into with an entity under the competition con-
ducted pursuant to paragraph (1) is subject to 
terms and conditions that the Secretary may 
specify. 
‘‘(B) TERM
OF
CONTRACTS.—The Sec-
retary shall recompete contracts under this sec-
tion not less often than once every 3 years. 
‘‘(4) LIMIT ON NUMBER OF CONTRACTORS.—
‘‘(A) IN
GENERAL.—The Secretary may 
limit the number of contractors in a competitive 
acquisition area to the number needed to meet
273
projected demand for items and services covered 
under the contracts. In awarding contracts, the 
Secretary shall take into account the ability of 
bidding entities to furnish items or services in 
sufficient quantities to meet the anticipated 
needs of beneficiaries for such items or services 
in the geographic area covered under the con-
tract on a timely basis. 
‘‘(B) MULTIPLE WINNERS.—The Secretary 
shall award contracts to multiple entities sub-
mitting bids in each area for an item or service. 
‘‘(5) PAYMENT.—Payment under this part for 
competitively priced items and services described in 
subsection (a)(2) shall be based on the bids sub-
mitted and accepted under this section for such 
items and services. 
‘‘(6) PARTICIPATING CONTRACTORS.—Payment 
shall not be made for items and services described 
in subsection (a)(2) furnished by a contractor and 
for which competition is conducted under this sec-
tion unless—
‘‘(A) the contractor has submitted a bid 
for such items and services under this section; 
and
274
‘‘(B) the Secretary has awarded a contract 
to the contractor for such items and services 
under this section. 
In this section, the term ‘bid’ means a request for 
a proposal for an item or service that includes the 
cost of the item or service, and where appropriate, 
any services that are attendant to the provision of 
the item or service. 
‘‘(7) CONSIDERATION
IN
DETERMINING
CAT-
EGORIES FOR BIDS.—The Secretary shall consider 
the similarity of the clinical efficiency and value of 
specific codes and products, including products that 
may provide a therapeutic advantage to bene-
ficiaries, before delineating the categories and prod-
ucts that will be subject to bidding. 
‘‘(8) AUTHORITY
TO
CONTRACT
FOR
EDU-
CATION, MONITORING, OUTREACH AND COMPLAINT 
SERVICES.—The Secretary may enter into a contract 
with an appropriate entity to address complaints 
from beneficiaries who receive items and services 
from an entity with a contract under this section 
and to conduct appropriate education of and out-
reach to such beneficiaries and monitoring quality of 
services with respect to the program.
275
‘‘(c) PROGRAM ADVISORY
AND OVERSIGHT COM-
MITTEE.—
‘‘(1) ESTABLISHMENT.—There is established a 
Program Advisory and Oversight Committee (herein-
after in this section referred to as the ‘Committee’). 
‘‘(2) MEMBERSHIP; TERMS.—The Committee 
shall consist of such members as the Secretary may 
appoint who shall serve for such term as the Sec-
retary may specify. 
‘‘(3) DUTIES.—
‘‘(A) TECHNICAL ASSISTANCE.—The Com-
mittee shall provide advice and technical assist-
ance to the Secretary with respect to the fol-
lowing functions: 
‘‘(i) The implementation of the pro-
gram under this section. 
‘‘(ii) The establishment of require-
ments for collection of data. 
‘‘(iii) The development of proposals 
for efficient interaction among manufac-
turers and distributors of the items and 
services and providers and beneficiaries. 
‘‘(B) ADDITIONAL
DUTIES.—The Com-
mittee shall perform such additional functions
276
to assist the Secretary in carrying out this sec-
tion as the Secretary may specify. 
‘‘(4) INAPPLICABILITY
OF
FACA.—The provi-
sions of the Federal Advisory Committee Act (5 
U.S.C. App.) shall not apply. 
‘‘(d) ANNUAL REPORTS.—The Secretary shall submit 
to Congress an annual management report on the pro-
grams under this section. Each such report shall include 
information on savings, reductions in beneficiary cost-
sharing, access to and quality of items and services, and 
beneficiary satisfaction. 
‘‘(e) DEMONSTRATION PROJECT FOR CLINICAL LAB-
ORATORY SERVICES.—
‘‘(1) IN GENERAL.—The Secretary shall con-
duct a demonstration project on the application of 
competitive acquisition under this section to clinical 
diagnostic laboratory tests—
‘‘(A) for which payment is otherwise made 
under section 1833(h) or 1834(d)(1) (relating 
to colorectal cancer screening tests); and 
‘‘(B) which are furnished by entities that 
did not have a face-to-face encounter with the 
individual.
277
‘‘(2) TERMS
AND
CONDITIONS.—Such project 
shall be under the same conditions as are applicable 
to items and services described in subsection (a)(2). 
‘‘(3) REPORT.—The Secretary shall submit to 
Congress—
‘‘(A) an initial report on the project not 
later than December 31, 2005; and 
‘‘(B) such progress and final reports on 
the project after such date as the Secretary de-
termines appropriate.’’. 
(b) CONFORMING AMENDMENTS.—
(1) DURABLE
MEDICAL
EQUIPMENT; ELIMI-
NATION OF INHERENT REASONABLENESS AUTHOR-
ITY.—Section 1834(a) (42 U.S.C. 1395m(a)) is 
amended—
(A) in paragraph (1)(B), by striking ‘‘The 
payment basis’’ and inserting ‘‘Subject to sub-
paragraph (E)(i), the payment basis’’; 
(B) in paragraph (1)(C), by striking ‘‘This 
subsection’’ and inserting ‘‘Subject to subpara-
graph (E)(ii), this subsection’’; 
(C) by adding at the end of paragraph (1) 
the following new subparagraph: 
‘‘(E) APPLICATION
OF
COMPETITIVE
AC-
QUISITION; ELIMINATION
OF
INHERENT
REA-
278
SONABLENESS AUTHORITY.—In the case of cov-
ered items and services that are included in a 
competitive acquisition program in a competi-
tive acquisition area under section 1847(a)—
‘‘(i) the payment basis under this sub-
section for such items and services fur-
nished in such area shall be the payment 
basis determined under such competitive 
acquisition program; and 
‘‘(ii) the Secretary may use informa-
tion on the payment determined under 
such competitive acquisition programs to 
adjust the payment amount otherwise rec-
ognized under subparagraph (B)(ii) for an 
area that is not a competitive acquisition 
area under section 1847 and in the case of 
such adjustment, paragraph (10)(B) shall 
not be applied.’’; and 
(D) in paragraph (10)(B), by inserting ‘‘in 
an area and with respect to covered items and 
services for which the Secretary does not make 
a payment amount adjustment under paragraph 
(1)(E)’’ after ‘‘under this subsection’’.
279
(2) OFF-THE-SHELF ORTHOTICS; ELIMINATION 
OF INHERENT REASONABLENESS AUTHORITY.—Sec-
tion 1834(h) (42 U.S.C. 1395m(h)) is amended—
(A) in paragraph (1)(B), by striking ‘‘and 
(E)’’ and inserting ‘‘, (E) , and (H)(i)’’; 
(B) in paragraph (1)(D), by striking ‘‘This 
subsection’’ and inserting ‘‘Subject to subpara-
graph (H)(ii), this subsection’’; 
(C) by adding at the end of paragraph (1) 
the following new subparagraph: 
‘‘(H) APPLICATION OF COMPETITIVE AC-
QUISITION TO ORTHOTICS; ELIMINATION OF IN-
HERENT
REASONABLENESS
AUTHORITY.—In 
the case of orthotics described in paragraph 
(2)(B) of section 1847(a) that are included in 
a competitive acquisition program in a competi-
tive acquisition area under such section—
‘‘(i) the payment basis under this sub-
section for such orthotics furnished in such 
area shall be the payment basis determined 
under such competitive acquisition pro-
gram; and 
‘‘(ii) the Secretary may use informa-
tion on the payment determined under 
such competitive acquisition programs to
280
adjust the payment amount otherwise rec-
ognized under subparagraph (B)(ii) for an 
area that is not a competitive acquisition 
area under section 1847, and in the case 
of such adjustment, paragraphs (8) and 
(9) of section 1842(b) shall not be ap-
plied.’’. 
(c) REPORT ON ACTIVITIES OF SUPPLIERS.—The 
Secretary shall conduct a study to determine the extent 
to which (if any) suppliers of covered items of durable 
medical equipment that are subject to the competitive ac-
quisition program under section 1847 of the Social Secu-
rity Act, as amended by subsection (a), are soliciting phy-
sicians to prescribe certain brands or modes of delivery 
of covered items based on profitability. 
(d) GAO STUDY ON SAFE AND EFFECTIVE HOME IN-
FUSION AND INHALATION THERAPY; STANDARDS.—
(1) STUDY.—The Comptroller General of the 
United States shall conduct a study of the stand-
ards, professional services, and related functions 
necessary for the provision of safe and effective 
home infusion therapy and home inhalation therapy. 
(2) REPORT.—Not later than May 1, 2004, the 
Comptroller General shall submit to Congress a re-
port on the study conducted under paragraph (1).
281
(3) USE OF FINDINGS IN DEVELOPING STAND-
ARDS.—In promulgating regulations to carry out 
section 1847 of the Social Security Act, as amended 
by subsection (a), the Secretary shall ensure that 
quality 
standards 
developed 
under 
subsection 
(b)(2)(B) of such section reflect the findings of the 
Comptroller General set forth in the report under 
paragraph (2).
SEC. 303. COMPETITIVE ACQUISITION OF COVERED OUT-
PATIENT DRUGS AND BIOLOGICALS.
(a) ADJUSTMENT TO PHYSICIAN FEE SCHEDULE.—
(1) ADJUSTMENT IN PRACTICE EXPENSE REL-
ATIVE
VALUE
UNITS.—Section 
1848(c)(2) 
(42 
U.S.C. 1395w–4(c)(2)) is amended—
(A) in subparagraph (B)—
(i) in clause (ii)(II), by striking ‘‘The 
adjustments’’ and inserting ‘‘Subject to 
clause (iv), the adjustments’’; and 
(ii) by adding at the end of subpara-
graph (B), the following new clause: 
‘‘(iv) EXCEPTION
TO
BUDGET
NEU-
TRALITY.—The additional expenditures at-
tributable to clauses (ii) and (iii) of sub-
paragraph (H) shall not be taken into ac-
282
count in applying clause (ii)(II) for 2005.’’; 
and 
(B) by adding at the end the following new 
subparagraph: 
‘‘(H) ADJUSTMENTS
IN
PRACTICE
EX-
PENSE RELATIVE VALUE UNITS FOR 2005.—
‘‘(i) IN GENERAL.—As part of the an-
nual process of establishing the physician 
fee schedule under subsection (b) for 2005, 
the Secretary shall increase the practice 
expense relative value units for 2005 con-
sistent with clauses (ii) and (iii). 
‘‘(ii) USE OF SUPPLEMENTAL SURVEY 
DATA.—For 2005 for any specialty that 
submitted survey data that included ex-
penses for the administration of drugs and 
biologicals for which payment is made 
under section 1842(o) (or section 1847A), 
the Secretary shall use such supplemental 
survey data in carrying out this subpara-
graph insofar as they are collected and 
provided by entities and organizations con-
sistent with the criteria established by the 
Secretary pursuant to section 212(a) of the 
Medicare, Medicaid, and SCHIP Balanced
283
Budget Refinement Act of 1999 and inso-
far as such data are submitted to the Sec-
retary by December 31, 2004.
‘‘(iii) PROVISIONS FOR APPROPRIATE 
REPORTING AND BILLING FOR PHYSICIANS’ 
SERVICES ASSOCIATED WITH THE ADMINIS-
TRATION OF COVERED OUTPATIENT DRUGS 
AND BIOLOGICALS.—
‘‘(I) EVALUATION
OF
CODES.—
The Secretary shall promptly evaluate 
existing codes for physicians’ services 
associated with the administration of 
covered 
outpatient 
drugs 
and 
biologicals (as defined in section 
1847A(a)(2)(A)) to ensure accurate 
reporting and billing for such services. 
‘‘(II) USE
OF
EXISTING
PROC-
ESSES.—In carrying out subclause (I), 
the Secretary shall use existing proc-
esses for the consideration of coding 
changes and, to the extent coding 
changes are made, shall use such 
processes in establishing relative val-
ues for such services.
284
‘‘(III) 
IMPLEMENTATION.—In 
carrying out subclause (I), the Sec-
retary shall consult with representa-
tives of physician specialties affected 
by the implementation of section 
1847A or section 1847B, and shall 
take such steps within the Secretary’s 
authority to expedite such consider-
ations under subclause (II). 
‘‘(iv) SUBSEQUENT, 
BUDGET
NEU-
TRAL
ADJUSTMENTS
PERMITTED.—Noth-
ing in this subparagraph shall be construed 
as preventing the Secretary from providing 
for adjustments in practice expense relative 
value units under (and consistent with) 
subparagraph (B) for years after 2005. 
‘‘(v) CONSULTATION.—Before pub-
lishing the notice of proposed rulemaking 
to carry out this subparagraph, the Sec-
retary shall consult with the Comptroller 
General of the United States and with 
groups representing the physician special-
ties involved. 
‘‘(vi) TREATMENT AS CHANGE IN LAW 
AND
REGULATION
IN
SUSTAINABLE
285
GROWTH RATE DETERMINATION.—The en-
actment of subparagraph (B)(iv) and this 
subparagraph shall be treated as a change 
in law for purposes of applying subsection 
(f)(2)(D).’’. 
(2) PROHIBITION OF ADMINISTRATIVE AND JU-
DICIAL
REVIEW.—Section 1848(i)(1) (42 U.S.C. 
1395w–4(i)(1)) is amended—
(A) by striking ‘‘and’’ at the end of subpara-
graph (D); 
(B) by striking the period at the end of sub-
paragraph (E) and inserting ‘‘, and’’; and 
(C) by adding at the end the following new sub-
paragraph: 
‘‘(F) adjustments in practice expense rel-
ative value units for 2005 under subsection 
(c)(2)(H).’’. 
(3) TREATMENT
OF
OTHER
SERVICES
CUR-
RENTLY IN THE NON-PHYSICIAN WORK POOL.—The 
Secretary shall make adjustments to the non-physi-
cian work pool methodology (as such term is used in 
the regulations promulgated by the Secretary in the 
Federal Register as of December 31, 2002) for de-
termination of practice expense relative value units 
under the physician fee schedule described in section
286
1848(c)(2)(C)(ii) of the Social Security Act so that 
the practice expense relative value units for services 
determined under such methodology are not affected 
relative to the practice expense relative value units 
of other services not determined under such non-
physician work pool methodology, as the result of 
amendments made by paragraph (1).
(b) PAYMENT
BASED
ON
COMPETITION.—Title 
XVIII is amended by inserting after section 1847 (42 
U.S.C. 1395w–3), as amended by section 302, the fol-
lowing new sections: 
‘‘COMPETITIVE ACQUISITION OF COVERED OUTPATIENT 
DRUGS AND BIOLOGICALS 
‘‘SEC. 1847A. (a) IMPLEMENTATION OF COMPETI-
TIVE ACQUISITION.—
‘‘(1) IMPLEMENTATION OF PROGRAM.—
‘‘(A) IN
GENERAL.—The Secretary shall 
establish and implement a competitive acquisi-
tion program under which—
‘‘(i) competitive acquisition areas are 
established throughout the United States 
for contract award purposes for acquisition 
of and payment for categories of covered 
outpatient drugs and biologicals (as de-
fined in paragraph (2)) under this part;
287
‘‘(ii) each physician is given the op-
portunity annually to elect to obtain drugs 
and biologicals under the program or 
under section 1847B; and 
‘‘(iii) each physician who elects to ob-
tain drugs and biologicals under the pro-
gram makes an annual selection under 
paragraph (5) of the contractor through 
which drugs and biologicals within a cat-
egory of drugs and biologicals will be ac-
quired and delivered to the physician under 
this part. 
‘‘(B) IMPLEMENTATION.—The Secretary 
shall implement the program so that the pro-
gram applies to—
‘‘(i) the oncology category beginning 
in 2005; and 
‘‘(ii) the non-oncology category begin-
ning in 2006. 
This section shall not apply in the case of a 
physician who elects section 1847B to apply. 
‘‘(C) WAIVER OF CERTAIN PROVISIONS.—
In order to promote competition, efficient serv-
ice, and product quality, in carrying out the 
program the Secretary may waive such provi-
289
durable medical equipment). Such term does 
not include the following: 
‘‘(i) Blood clotting factors. 
‘‘(ii) Drugs and biologicals furnished 
to individuals in connection with the treat-
ment of end stage renal disease. 
‘‘(iii) Radiopharmaceuticals. 
‘‘(iv) Vaccines. 
‘‘(B) 2 CATEGORIES.—Each of the fol-
lowing shall be a separate category of covered 
outpatient drugs and biologicals, as identified 
by the Secretary: 
‘‘(i) ONCOLOGY
CATEGORY.—A cat-
egory (in this section referred to as the 
‘oncology category’) consisting of those 
covered outpatient drugs and biologicals 
that, as determined by the Secretary, are 
typically primarily billed by oncologists or 
are otherwise used to treat cancer. 
‘‘(ii) NON-ONCOLOGY
CATEGORIES.—
Such numbers of categories (in this section 
referred to as the ‘non-oncology cat-
egories’) consisting of covered outpatient 
drugs and biologicals not described in 
clause (i), and appropriate subcategories of
290
such drugs and biologicals as the Secretary 
may specify. 
‘‘(C) 
PROGRAM.—The 
term 
‘program’ 
means the competitive acquisition program 
under this section. 
‘‘(D) COMPETITIVE
ACQUISITION
AREA; 
AREA.—The terms ‘competitive acquisition area’ 
and ‘area’ mean an appropriate geographic re-
gion established by the Secretary under the pro-
gram. 
‘‘(E) CONTRACTOR.—The term ‘contractor’ 
means an entity that has entered into a con-
tract with the Secretary under this section. 
‘‘(3) APPLICATION
OF
PROGRAM
PAYMENT 
METHODOLOGY.—With respect to covered outpatient 
drugs and biologicals which are supplied under the 
program in an area and which are prescribed by a 
physician who has not elected section 1847B to 
apply—
‘‘(A) the claim for such drugs and 
biologicals shall be submitted by the contractor 
that supplied the drugs and biologicals; 
‘‘(B) collection of amounts of any deduct-
ible and coinsurance applicable with respect to 
such drugs and biologicals shall be the responsi-
291
bility of such contractor and shall not be col-
lected unless the drug or biological is adminis-
tered to the beneficiary involved; and 
‘‘(C) the payment under this section (and 
related coinsurance amounts) for such drugs 
and biologicals—
‘‘(i) shall be made only to such con-
tractor; 
‘‘(ii) shall be conditioned upon the ad-
ministration of such drugs and biologicals; 
and 
‘‘(iii) shall be based on the average of 
the bid prices for such drugs and 
biologicals in the area, as computed under 
subsection (d). 
The Secretary shall provide a process for 
recoupment in the case in which payment is 
made for drugs and biologicals which were 
billed at the time of dispensing but which were 
not actually administered. 
‘‘(4) CONTRACT REQUIRED.—
‘‘(A) IN GENERAL.—Payment may not be 
made under this part for covered outpatient 
drugs and biologicals prescribed by a physician 
who has not elected section 1847B to apply
292
within a category and a competitive acquisition 
area with respect to which the program applies 
unless—
‘‘(i) the drugs or biologicals are sup-
plied by a contractor with a contract under 
this section for such category of drugs and 
biologicals and area; and 
‘‘(ii) the physician has elected such 
contractor under paragraph (5) for such 
category and area. 
‘‘(B) PHYSICIAN
CHOICE.—Subparagraph 
(A) shall not apply for a category of drugs for 
an area if the physician prescribing the covered 
outpatient drug in such category and area has 
elected to apply section 1847B instead of this 
section.
‘‘(5) CONTRACTOR SELECTION PROCESS.—
‘‘(A) IN
GENERAL.—The Secretary shall 
provide a process for the selection of a con-
tractor, on an annual basis and in such exigent 
circumstances as the Secretary may provide and 
with respect to each category of covered out-
patient drugs and biologicals for an area, by 
physicians 
prescribing 
such 
drugs 
and 
biologicals in the area of the contractor under
293
this section that will supply the drugs and 
biologicals within that category and area. Such 
selection shall also include the election de-
scribed in section 1847B(a). 
‘‘(B) INFORMATION
ON
CONTRACTORS.—
The Secretary shall make available to physi-
cians on an ongoing basis, through a directory 
posted on the Department’s Internet website or 
otherwise and upon request, a list of the con-
tractors under this section in the different com-
petitive acquisition areas. 
‘‘(C) SELECTING
PHYSICIAN
DEFINED.—
For purposes of this section, the term ‘selecting 
physician’ means, with respect to a contractor 
and category and competitive acquisition area, 
a physician who has not elected section 1847B 
to apply and has selected to apply under this 
section such contractor for such category and 
area. 
‘‘(b) PROGRAM REQUIREMENTS.—
‘‘(1) CONTRACT
FOR
COVERED
OUTPATIENT 
DRUGS AND BIOLOGICALS.—The Secretary shall con-
duct a competition among entities for the acquisition 
of a covered outpatient drug or biological within
294
each HCPCS code within each category for each 
competitive acquisition area. 
‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—
‘‘(A) IN
GENERAL.—The Secretary may 
not award a contract to any entity under the 
competition conducted in a competitive acquisi-
tion area pursuant to paragraph (1) with re-
spect to the acquisition of covered outpatient 
drugs and biologicals within a category unless 
the Secretary finds that the entity meets all of 
the following with respect to the contract period 
involved: 
‘‘(i) CAPACITY TO SUPPLY COVERED 
OUTPATIENT DRUG OR BIOLOGICAL WITHIN 
CATEGORY.—
‘‘(I) IN
GENERAL.—The entity 
has sufficient arrangements to acquire 
and to deliver covered outpatient 
drugs and biologicals within such cat-
egory in the area specified in the con-
tract at the bid price specified in the 
contract for all physicians that may 
elect such entity. 
‘‘(II) 
SHIPMENT
METHOD-
OLOGY.—The entity has arrangements
295
in effect for the shipment at least 5 
days each week of covered outpatient 
drugs and biologicals under the con-
tract and for the timely delivery (in-
cluding for emergency situations) of 
such drugs and biologicals in the area 
under the contract. 
‘‘(ii) QUALITY, SERVICE, FINANCIAL 
PERFORMANCE
AND
SOLVENCY
STAND-
ARDS.—The entity meets quality, service, 
financial performance, and solvency stand-
ards specified by the Secretary, includ-
ing—
‘‘(I) the establishment of proce-
dures for the prompt response and 
resolution of physician and beneficiary 
complaints and inquiries regarding the 
shipment of covered outpatient drugs 
and biologicals; and 
‘‘(II) a grievance process for the 
resolution of disputes. 
‘‘(B) ADDITIONAL CONSIDERATIONS.—The 
Secretary may refuse to award a contract under 
this section, and may terminate such a con-
tract, with an entity based upon—
296
‘‘(i) the suspension or revocation, by 
the Federal Government or a State govern-
ment, of the entity’s license for the dis-
tribution of drugs or biologicals (including 
controlled substances); or 
‘‘(ii) the exclusion of the entity under 
section 1128 from participation under this 
title. 
‘‘(C) APPLICATION
OF
MEDICARE
PRO-
VIDER
OMBUDSMAN.—For provision providing 
for a program-wide Medicare Provider Ombuds-
man to review complaints, see section 1868(b), 
as added by section 923 of the Medicare Pre-
scription Drug and Modernization Act of 2003. 
‘‘(3) AWARDING MULTIPLE CONTRACTS FOR A 
CATEGORY AND AREA.—In order to provide a choice 
of at least 2 contractors in each competitive acquisi-
tion area for a category of drugs and biologicals, the 
Secretary may limit (but not below 2) the number 
of qualified entities that are awarded such contracts 
for any category and area. The Secretary shall select 
among qualified entities based on the following: 
‘‘(A) The bid prices for covered outpatient 
drugs and biologicals within the category and 
area.
297
‘‘(B) Bid price for distribution of such 
drugs and biologicals. 
‘‘(C) Ability to ensure product integrity. 
‘‘(D) Customer service. 
‘‘(E) Past experience in the distribution of 
drugs and biologicals, including controlled sub-
stances. 
‘‘(F) Such other factors as the Secretary 
may specify. 
‘‘(4) TERMS OF CONTRACTS.—
‘‘(A) IN
GENERAL.—A contract entered 
into with an entity under the competition con-
ducted pursuant to paragraph (1) is subject to 
terms and conditions that the Secretary may 
specify consistent with this section. 
‘‘(B) PERIOD OF CONTRACTS.—A contract 
under this section shall be for a term of 2 
years, but may be terminated by the Secretary 
or the entity with appropriate, advance notice. 
‘‘(C) INTEGRITY OF DRUG AND BIOLOGI-
CAL DISTRIBUTION SYSTEM.—The Secretary—
‘‘(i) shall require that for all drug and 
biological products distributed by a con-
tractor under this section be acquired di-
rectly from the manufacturer or from a
298
distributor that has acquired the products 
directly from the manufacturer; and 
‘‘(ii) may require, in the case of such 
products that are particularly susceptible 
to counterfeit or diversion, that the con-
tractor comply with such additional prod-
uct integrity safeguards as may be deter-
mined to be necessary. 
‘‘(D) IMPLEMENTATION
OF
ANTI-COUN-
TERFEITING, QUALITY, SAFETY, AND RECORD 
KEEPING REQUIREMENTS.—The Secretary shall 
require each contractor to implement (through 
its officers, agents, representatives, and employ-
ees) requirements relating to the storage and 
handling of covered outpatient drugs and 
biologicals and for the establishment and main-
tenance of distribution records for such drugs 
and biologicals. A contract under this section 
may include requirements relating to the fol-
lowing: 
‘‘(i) Secure facilities. 
‘‘(ii) Safe and appropriate storage of 
drugs and biologicals. 
‘‘(iii) Examination of drugs and 
biologicals received and dispensed.
299
‘‘(iv) Disposition of damaged and out-
dated drugs and biologicals. 
‘‘(v) Record keeping and written poli-
cies and procedures. 
‘‘(vi) Compliance personnel. 
‘‘(E) COMPLIANCE
WITH
CODE
OF
CON-
DUCT AND FRAUD AND ABUSE RULES.—Under 
the contract—
‘‘(i) the contractor shall comply with a 
code of conduct, specified or recognized by 
the Secretary, that includes standards re-
lating to conflicts of interest; and 
‘‘(ii) the contractor shall comply with 
all applicable provisions relating to preven-
tion of fraud and abuse, including compli-
ance with applicable guidelines of the De-
partment of Justice and the Inspector 
General of the Department of Health and 
Human Services. 
‘‘(F) DIRECT
DELIVERY
OF
DRUGS
AND 
BIOLOGICALS TO PHYSICIANS.—Under the con-
tract the contractor shall only supply covered 
outpatient drugs and biologicals directly to the 
selecting physicians and not directly to bene-
ficiaries, except under circumstances and set-
300
tings where a beneficiary currently receives a 
drug or biological in the beneficiary’s home or 
other non-physician office setting as the Sec-
retary may provide. The contractor shall not de-
liver drugs and biologicals to a selecting physi-
cian except upon receipt of a prescription for 
such drugs and biologicals, and such necessary 
data as may be required by the Secretary to 
carry out this section. This section does not—
‘‘(i) require a physician to submit a 
prescription for each individual treatment; 
or 
‘‘(ii) change a physician’s flexibility in 
terms of writing a prescription for drugs 
for a single treatment or a course of treat-
ment. 
‘‘(5) PERMITTING
ACCESS
TO
DRUGS
AND 
BIOLOGICALS.—The Secretary shall establish rules 
under this section under which drugs and biologicals 
which are acquired through a contractor under this 
section may be used to resupply inventories of such 
drugs and biologicals which are administered con-
sistent with safe drug practices and with adequate 
safeguards against fraud and abuse. The previous
301
sentence shall apply if the physicians can dem-
onstrate to the Secretary all of the following: 
‘‘(A) The drugs or biologicals are required 
immediately. 
‘‘(B) The physician could not have reason-
ably anticipated the immediate requirement for 
the drugs or biologicals. 
‘‘(C) The contractor could not deliver to 
the physician the drugs or biologicals in a time-
ly manner. 
‘‘(D) The drugs or biologicals were admin-
istered in an emergency situation. 
‘‘(6) CONSTRUCTION.—Nothing in this section 
shall be construed as waiving applicable State re-
quirements relating to licensing of pharmacies.
‘‘(c) BIDDING PROCESS.—
‘‘(1) IN GENERAL.—In awarding a contract for 
a category of drugs and biologicals in an area under 
the program, the Secretary shall consider with re-
spect to each entity seeking to be awarded a con-
tract the prices bid to acquire and supply the cov-
ered outpatient drugs and biologicals for that cat-
egory and area and the other factors referred to in 
subsection (b)(3).
302
‘‘(2) PRICES BID.—The prices bid by an entity 
under paragraph (1) shall be the prices in effect and 
available for the supply of contracted drugs and 
biologicals in the area through the entity for the 
contract period.
‘‘(3) REJECTION
OF
CONTRACT
OFFER.—The 
Secretary shall reject the contract offer of an entity 
with respect to a category of drugs and biologicals 
for an area if the Secretary estimates that the prices 
bid, in the aggregate on average, would exceed 100 
percent of the average sales price (as determined 
under section 1847B).
‘‘(4) BIDDING ON A NATIONAL OR REGIONAL 
BASIS.—Nothing in this section shall be construed 
as precluding a bidder from bidding for contracts in 
all areas of the United States or as requiring a bid-
der to submit a bid for all areas of the United 
States. 
‘‘(5) UNIFORMITY OF BIDS WITHIN AREA.—The 
amount of the bid submitted under a contract offer 
for any covered outpatient drug or biological for an 
area shall be the same for that drug or biological for 
all portions of that area. 
‘‘(6) CONFIDENTIALITY OF BIDS.—The provi-
sions of subparagraph (D) of section 1927(b)(3)
303
shall apply to a bid submitted in a contract offer for 
a covered outpatient drug or biological under this 
section in the same manner as it applies to informa-
tion disclosed under such section, except that any 
reference—
‘‘(A) in that subparagraph to a ‘manufac-
turer or wholesaler’ is deemed a reference to a 
‘bidder’ under this section; 
‘‘(B) in that section to ‘prices charged for 
drugs’ is deemed a reference to a ‘bid’ sub-
mitted under this section; and 
‘‘(C) in clause (i) of that section to ‘this 
section’, is deemed a reference to ‘part B of 
title XVIII’. 
‘‘(7) INCLUSION OF COSTS.—The bid price sub-
mitted in a contract offer for a covered outpatient 
drug or biological shall—
‘‘(A) include all costs related to the deliv-
ery of the drug or biological to the selecting 
physician (or other point of delivery); and 
‘‘(B) include the costs of dispensing (in-
cluding shipping) of such drug or biological and 
management fees, but shall not include any 
costs related to the administration of the drug 
or biological, or wastage, spillage, or spoilage.
304
‘‘(8) PRICE ADJUSTMENTS DURING CONTRACT 
PERIOD; DISCLOSURE
OF
COSTS.—Each contract 
awarded shall provide for—
‘‘(A) disclosure to the Secretary the con-
tractor’s reasonable, net acquisition costs for 
periods specified by the Secretary, not more 
often than quarterly, of the contract; and 
‘‘(B) appropriate price adjustments over 
the period of the contract to reflect significant 
increases or decreases in a contractor’s reason-
able, net acquisition costs, as so disclosed.
‘‘(d) COMPUTATION OF AVERAGE BID PRICES FOR 
A CATEGORY AND AREA.—
‘‘(1) IN GENERAL.—For each year or other con-
tract period for each covered outpatient drug or bio-
logical and area with respect to which a competition 
is conducted under the program, the Secretary shall 
compute an area average of the bid prices submitted, 
in contract offers accepted for the category and 
area, for that year or other contract period. 
‘‘(2) SPECIAL RULES.—The Secretary shall es-
tablish rules regarding the use under this section of 
the alternative payment amount provided under sec-
tion 1847B to the use of a price for specific covered
305
outpatient drugs and biologicals in the following 
cases: 
‘‘(A) NEW DRUGS AND BIOLOGICALS.—A 
covered outpatient drug or biological for which 
an average bid price has not been previously de-
termined. 
‘‘(B) OTHER
CASES.—Such other excep-
tional cases as the Secretary may specify in 
regulations, such as oral drugs under section 
1861(s)(2)(Q) and immmunosuppressives under 
section 1861(s)(2)(J). 
‘‘(e) COINSURANCE.—
‘‘(1) IN
GENERAL.—Coinsurance under this 
part with respect to a covered outpatient drug or bi-
ological for which payment is payable under this sec-
tion shall be based on 20 percent of the payment 
basis under this section. 
‘‘(2) COLLECTION.—Such coinsurance shall be 
collected by the contractor that supplies the drug or 
biological involved and, subject to subsection 
(a)(3)(B), in the same manner as coinsurance is col-
lected for durable medical equipment under this 
part. 
‘‘(f) SPECIAL PAYMENT RULES.—
306
‘‘(1) IN
GENERAL.—The Secretary may not 
provide for an adjustment to reimbursement for cov-
ered outpatient drugs and biologicals unless adjust-
ments to the practice expense payment adjustment 
are made on the basis of supplemental surveys under 
section 1848(c)(2)(H)(ii) of the Social Security Act, 
as added by subsection (a)(1)(B). 
(2) USE
IN
EXCLUSION
CASES.—If the Sec-
retary excludes a drug or biological (or class of 
drugs or biologicals) under subsection (a)(1)(D), the 
Secretary may provide for reimbursement to be 
made under this part for such drugs and biologicals 
(or class) using the payment methodology under sec-
tion 1847B. 
‘‘(3) COORDINATION RULES.—The provisions of 
section 1842(h)(3) shall apply to a contractor with 
respect to covered outpatients drugs and biologicals 
supplied by that contractor in the same manner as 
they apply to a participating supplier. In order to 
administer this section, the Secretary may condition 
payment under this part to a person for the admin-
istration of a drug or biological supplied under this 
section upon person’s provision of information on 
such administration.
307
‘‘(4) APPLICATION OF REQUIREMENT FOR AS-
SIGNMENT.—For provision requiring assignment of 
claims for covered outpatient drugs and biologicals, 
see section 1842(o)(3). 
‘‘(5) PROTECTION FOR BENEFICIARY IN CASE 
OF MEDICAL NECESSITY DENIAL.—For protection of 
beneficiaries against liability in the case of medical 
necessity 
determinations, 
see 
section 
1842(b)(3)(B)(ii)(III). 
‘‘(6) PHYSICIAN ROLE IN APPEALS PROCESS.—
The Secretary shall establish a procedure under 
which a physician who prescribes a drug or biologi-
cal for which payment is made under this section 
has appeal rights that are similar to those provided 
to a physician who prescribes durable medical equip-
ment or a laboratory test. 
‘‘(g) ADVISORY COMMITTEE.—The Secretary shall 
establish an advisory committee that includes representa-
tives of parties affected by the program under this section, 
including physicians, specialty pharmacies, distributors, 
manufacturers, and beneficiaries. The committee shall ad-
vise the Secretary on issues relating to the effective imple-
mentation of this section. 
‘‘(h) ANNUAL REPORTS.—The Secretary shall submit 
to Congress an annual report in each of 2005, 2006, and
308
2007, on the program. Each such report shall include in-
formation on savings, reductions in cost-sharing, access to 
covered outpatient drugs and biologicals, the range of 
choices of contractors available to providers, and bene-
ficiary and provider satisfaction. 
‘‘OPTIONAL USE OF AVERAGE SALES PRICE PAYMENT 
METHODOLOGY 
‘‘SEC. 1847B. (a) IN GENERAL.—
‘‘(1) ELECTION.—In connection with the an-
nual election made by a physician under section 
1847A(a)(5), the physician may elect to apply this 
section to the payment for covered outpatient drugs 
and biologicals instead of the payment methodology 
under section 1847A. 
‘‘(2) IMPLEMENTATION.—This section shall be 
implemented with respect to categories of covered 
outpatient drugs and biologicals described in section 
1847A(a)(2)(B). 
‘‘(3) 
COVERED
OUTPATIENT
DRUGS
AND 
BIOLOGICALS DEFINED.—For purposes of this sec-
tion, the term ‘covered outpatient drugs and 
biologicals’ has the meaning given such term in sec-
tion 1847A(a)(2)(A). 
‘‘(b) COMPUTATION OF PAYMENT AMOUNT.—
‘‘(1) IN GENERAL.—If this section applies with 
respect to a covered outpatient drug or biological,
309
the amount payable for the drug or biological (based 
on a minimum dosage unit) is, subject to applicable 
deductible and coinsurance—
‘‘(A) in the case of a multiple source drug 
(as defined in subsection (c)(6)(C)), 100 per-
cent (or in the case of covered outpatient drugs 
and biologicals furnished during 2005 and 
2006, 112 percent) of the amount determined 
under paragraph (3); or 
‘‘(B) in the case of a single source drug 
(as defined in subsection (c)(6)(D)), 100 per-
cent (or in the case of covered outpatient drugs 
and biologicals furnished during 2005 and 
2006, 112 percent) of the amount determined 
under paragraph (4). 
‘‘(2) SPECIFICATION OF UNIT.—
‘‘(A) 
SPECIFICATION
BY
MANUFAC-
TURER.—The manufacturer of a covered out-
patient drug shall specify the unit associated 
with each National Drug Code as part of the 
submission 
of 
data 
under 
section 
1927(b)(3)(A)(iii). 
‘‘(B) UNIT DEFINED.—In this section, the 
term ‘unit’ means, with respect to a covered 
outpatient drug, the lowest identifiable quantity
310
(such as a capsule or tablet, milligram of mol-
ecules, or grams) of the drug that is dispensed, 
exclusive of any diluent without reference to 
volume measures pertaining to liquids. 
‘‘(3) MULTIPLE SOURCE DRUG.—For all drug 
products included within the same multiple source 
drug, the amount specified in this paragraph is the 
volume-weighted average of the average sales prices 
reported under section 1927(b)(3)(A)(iii) computed 
as follows: 
‘‘(A) Compute the sum of the products (for 
each national drug code assigned to such drug 
products) of—
‘‘(i) the manufacturer’s average sales 
price (as defined in subsection (c)); and 
‘‘(ii) the total number of units speci-
fied under paragraph (2) sold, as reported 
under section 1927(b)(3)(A)(iii). 
‘‘(B) Divide the sum computed under sub-
paragraph (A) by the sum of the total number 
of units under subparagraph (A)(ii) for all na-
tional drug codes assigned to such drug prod-
ucts.
311
‘‘(4) SINGLE
SOURCE
DRUG.—The amount 
specified in this paragraph for a single source drug 
is the lesser of the following: 
‘‘(A) MANUFACTURER’S
AVERAGE
SALES 
PRICE.—The manufacturer’s average sales price 
for a national drug code, as computed using the 
methodology applied under paragraph (3). 
‘‘(B) 
WHOLESALE
ACQUISITION
COST 
(WAC).—The wholesale acquisition cost (as de-
fined in subsection (c)(6)(B)) reported for the 
single source drug. 
‘‘(5) BASIS
FOR
DETERMINATION.—The pay-
ment amount shall be determined under this sub-
section based on information reported under sub-
section (e) and without regard to any special pack-
aging, labeling, or identifiers on the dosage form or 
product or package. 
‘‘(c) MANUFACTURER’S AVERAGE SALES PRICE.—
‘‘(1) IN GENERAL.—For purposes of this sub-
section, subject to paragraphs (2) and (3), the man-
ufacturer’s ‘average sales price’ means, of a covered 
outpatient drug for a NDC code for a calendar quar-
ter for a manufacturer for a unit—
‘‘(A) the manufacturer’s total sales (as de-
fined by the Secretary in regulations for pur-
312
poses of section 1927(c)(1)) in the United 
States for such drug in the calendar quarter; 
divided by 
‘‘(B) the total number of such units of 
such drug sold by the manufacturer in such 
quarter. 
‘‘(2) CERTAIN SALES EXEMPTED FROM COM-
PUTATION.—In calculating the manufacturer’s aver-
age sales price under this subsection, the following 
sales shall be excluded: 
‘‘(A) SALES EXEMPT FROM BEST PRICE.—
Sales exempt from the inclusion in the deter-
mination 
of 
‘best 
price’ 
under 
section 
1927(c)(1)(C)(i). 
‘‘(B) SALES AT NOMINAL CHARGE.—Such 
other sales as the Secretary identifies by regula-
tion as sales to an entity that are nominal in 
price or do not reflect a market price paid by 
an entity to which payment is made under this 
section. 
‘‘(3) SALE PRICE NET OF DISCOUNTS.—In cal-
culating the manufacturer’s average sales price 
under this subsection, such price shall be determined 
taking into account volume discounts, prompt pay 
discounts, cash discounts, the free goods that are
313
contingent 
on 
any 
purchase 
requirement, 
chargebacks, and rebates (other than rebates under 
section 1927), that result in a reduction of the cost 
to the purchaser. A rebate to a payor or other entity 
that does not take title to a covered outpatient drug 
shall not be taken into account in determining such 
price unless the manufacturer has an agreement 
with the payor or other entity under which the pur-
chaser’s price for the drug is reduced as a con-
sequence of such rebate. 
‘‘(4) AUTHORITY
TO
DISREGARD
AVERAGE 
SALES PRICE DURING FIRST QUARTER OF SALES.—
In the case of a covered outpatient drug during an 
initial period (not to exceed a full calendar quarter) 
in which data on the prices for sales for the drug 
is not sufficiently available from the manufacturer to 
compute an average sales price for the drug, the 
Secretary may determine the amount payable under 
this section for the drug without considering the 
manufacturer’s average sales price of that manufac-
turer for that drug. 
‘‘(5) FREQUENCY OF DETERMINATIONS.—
‘‘(A) IN
GENERAL
ON
A
QUARTERLY 
BASIS.—The 
manufacturer’s 
average 
sales 
price, for a covered outpatient drug of a manu-
314
facturer, shall be determined by such manufac-
turer under this subsection on a quarterly basis. 
In making such determination insofar as there 
is a lag in the reporting of the information on 
rebates and chargebacks under paragraph (3) 
so that adequate data are not available on a 
timely basis, the manufacturer shall apply a 
methodology established by the Secretary based 
on a 12-month rolling average for the manufac-
turer to estimate costs attributable to rebates 
and chargebacks. 
‘‘(B) UPDATES IN RATES.—The payment 
rates under subsection (b)(1) and (b)(2)(A) 
shall be updated by the Secretary on a quar-
terly basis and shall be applied based upon the 
manufacturer’s average sales price determined 
for the most recent calendar quarter. 
‘‘(C) USE OF CONTRACTORS; IMPLEMENTA-
TION.—The Secretary may use a carrier, fiscal 
intermediary, or other contractor to determine 
the payment amount under subsection (b). Not-
withstanding any other provision of law, the 
Secretary may implement, by program memo-
randum or otherwise, any of the provisions of 
this section.
315
‘‘(6) DEFINITIONS AND OTHER RULES.—In this 
section: 
‘‘(A) MANUFACTURER.—The term ‘manu-
facturer’ means, with respect to a covered out-
patient drug, the manufacturer (as defined in 
section 1927(k)(5)) whose national drug code 
appears on such drug. 
‘‘(B) WHOLESALE
ACQUISITION
COST.—
The term ‘wholesale acquisition cost’ means, 
with respect to a covered outpatient drug, the 
manufacturer’s list price for the drug to whole-
salers or direct purchasers in the United States, 
not including prompt pay or other discounts, re-
bates or reductions in price, for the most recent 
month for which the information is available, as 
reported in wholesale price guides or other pub-
lications of drug pricing data. 
‘‘(C) MULTIPLE SOURCE DRUG.—The term 
‘multiple source drug’ means, for a calendar 
quarter, a covered outpatient drug for which 
there are 2 or more drug products which—
‘‘(i) are rated as therapeutically equiv-
alent (under the Food and Drug Adminis-
tration’s most recent publication of ‘Ap-
316
proved Drug Products with Therapeutic 
Equivalence Evaluations’), 
‘‘(ii) except as provided in subpara-
graph (E), are pharmaceutically equivalent 
and bioequivalent, as determined under 
subparagraph (F) and as determined by 
the Food and Drug Administration, and 
‘‘(iii) are sold or marketed in the 
United States during the quarter. 
‘‘(D) SINGLE
SOURCE
DRUG.—The term 
‘single source drug’ means a covered outpatient 
drug which is not a multiple source drug and 
which is produced or distributed under an origi-
nal new drug application approved by the Food 
and Drug Administration, including a drug 
product marketed by any cross-licensed pro-
ducers or distributors operating under the new 
drug application, or which is a biological. 
‘‘(E) EXCEPTION FROM PHARMACEUTICAL 
EQUIVALENCE AND BIOEQUIVALENCE REQUIRE-
MENT.—Subparagraph (C)(ii) shall not apply if 
the Food and Drug Administration changes by 
regulation the requirement that, for purposes of 
the publication described in subparagraph 
(C)(i), in order for drug products to be rated as
317
therapeutically equivalent, they must be phar-
maceutically equivalent and bioequivalent, as 
defined in subparagraph (F). 
‘‘(F) 
DETERMINATION
OF
PHARMA-
CEUTICAL
EQUIVALENCE
AND
BIOEQUIVA-
LENCE.—For purposes of this paragraph—
‘‘(i) drug products are pharmaceuti-
cally equivalent if the products contain 
identical amounts of the same active drug 
ingredient in the same dosage form and 
meet compendial or other applicable stand-
ards of strength, quality, purity, and iden-
tity; and 
‘‘(ii) drugs are bioequivalent if they do 
not present a known or potential bio-
equivalence problem, or, if they do present 
such a problem, they are shown to meet an 
appropriate standard of bioequivalence. 
‘‘(G) INCLUSION OF VACCINES.—In apply-
ing provisions of section 1927 under this sec-
tion, ‘other than a vaccine’ is deemed deleted 
from section 1927(k)(2)(B). 
‘‘(d) AUTHORITY TO USE ALTERNATIVE PAYMENT 
IN RESPONSE TO PUBLIC HEALTH EMERGENCY.—In the 
case of a public health emergency under section 319 of
318
the Public Health Service Act in which there is a docu-
mented inability to access covered outpatient drugs and 
biologicals, and a concomitant increase in the price, of a 
drug or biological which is not reflected in the manufac-
turer’s average sales price for one or more quarters, the 
Secretary may use the wholesale acquisition cost (or other 
reasonable measure of drug price) instead of the manufac-
turer’s average sales price for such quarters and for subse-
quent quarters until the price and availability of the drug 
or biological has stabilized and is substantially reflected 
in the applicable manufacturer’s average sales price. 
‘‘(e) REPORTS.—
‘‘(1) QUARTERLY REPORT ON AVERAGE SALES 
PRICE.—For requirements for reporting the manu-
facturer’s average sales price (and, if required to 
make payment, the manufacturer’s wholesale acqui-
sition cost) for the covered outpatient drug or bio-
logical, see section 1927(b)(3). 
‘‘(2) ANNUAL
REPORT
TO
CONGRESS.—The 
Secretary shall submit to the Committees on Energy 
and Commerce and Ways and Means of the House 
of Representatives and the Committee on Finance of 
the Senate an annual report on the operation of this 
section. Such report shall include information on the 
following:
319
‘‘(A) Trends in average sales price under 
subsection (b). 
‘‘(B) Administrative costs associated with 
compliance with this section. 
‘‘(C) Total value of payments made under 
this section. 
‘‘(D) Comparison of the average manufac-
turer price as applied under section 1927 for a 
covered outpatient drug or biological with the 
manufacturer’s average sales price for the drug 
or biological under this section. 
‘‘(f) RESTRICTION ON ADMINISTRATIVE AND JUDI-
CIAL REVIEW.—There shall be no administrative or judi-
cial review under section 1869, section 1878, or otherwise, 
of determinations of manufacturer’s average sales price 
under subsection (c).’’. 
(c) CONTINUATION
OF PAYMENT METHODOLOGY 
FOR RADIOPHARMACEUTICALS.—Nothing in the amend-
ments made by this section shall be construed as changing 
the payment methodology under part B of title XVIII of 
the Social Security Act for radiopharmaceuticals, includ-
ing the use by carriers of invoice pricing methodology.
(d) CONFORMING AMENDMENTS.—
(1) IN GENERAL.—Section 1842(o) (42 U.S.C. 
1395u(o)) is amended—
320
(A) in paragraph (1), by inserting ‘‘, sub-
ject to section 1847A and 1847B,’’ before ‘‘the 
amount payable for the drug or biological’’; and 
(B) by adding at the end of paragraph (2) 
the following: ‘‘This paragraph shall not apply 
in the case of payment under section 1847A or 
1847B.’’. 
(2) NO CHANGE IN COVERAGE BASIS.—Section 
1861(s)(2)(A) (42 U.S.C. 1395x(s)(2)(A)) is amend-
ed by inserting ‘‘(or would have been so included but 
for the application of section 1847A or 1847B)’’ 
after ‘‘included in the physicians’ bills’’. 
(3) 
PAYMENT.—Section 
1833(a)(1)(S) 
(42 
U.S.C. 1395l(a)(1)(S)) is amended by inserting ‘‘(or, 
if applicable, under section 1847A or 1847B)’’ after 
‘‘1842(o)’’. 
(4) CONSOLIDATED REPORTING OF PRICING IN-
FORMATION.—Section 1927 (42 U.S.C. 1396r–8) is 
amended—
(A) in subsection (a)(1), by inserting ‘‘or 
under part B of title XVIII’’ after ‘‘section 
1903(a)’’; 
(B) in subsection (b)(3)(A)—
(i) in clause (i), by striking ‘‘and’’ at 
the end;
321
(ii) in clause (ii), by striking the pe-
riod and inserting ‘‘; and’’; and 
(iii) by adding at the end the fol-
lowing new clause: 
‘‘(iii) for calendar quarters beginning 
on or after April 1, 2004, in conjunction 
with reporting required under clause (i) 
and by national drug code (NDC)—
‘‘(I) the manufacturer’s average 
sales price (as defined in section 
1847B(c)) and the total number of 
units 
specified 
under 
section 
1847B(b)(2)(A); 
‘‘(II) if required to make pay-
ment under section 1847B, the manu-
facturer’s wholesale acquisition cost, 
as defined in subsection (c)(6) of such 
section; and 
‘‘(III) information on those sales 
that were made at a nominal price or 
otherwise 
described 
in 
section 
1847B(c)(2)(B), which information is 
subject to audit by the Inspector Gen-
eral of the Department of Health and 
Human Services;
322
for a covered outpatient drug or biological 
for which payment is made under section 
1847B.’’; 
(C) in subsection (b)(3)(B)—
(i) in the heading, by inserting ‘‘AND 
MANUFACTURER’S AVERAGE SALES PRICE’’ 
after ‘‘PRICE’’; and 
(ii) by inserting ‘‘and manufacturer’s 
average sales prices (including wholesale 
acquisition cost) if required to make pay-
ment’’ after ‘‘manufacturer prices’’; and 
(D) in subsection (b)(3)(D)(i), by inserting 
‘‘and section 1847B’’ after ‘‘this section’’. 
(e) GAO STUDY.—
(1) STUDY.—The Comptroller General of the 
United States shall conduct a study to assess the 
impact of the amendments made by this section on 
the delivery of services, including their impact on—
(A) beneficiary access to drugs and 
biologicals for which payment is made under 
part B of title XVIII of the Social Security Act; 
and 
(B) the site of delivery of such services. 
(2) REPORT.—Not later than 2 years after the 
year in which the amendment made by subsection
323
(a)(1) first takes effect, the Comptroller General 
shall submit to Congress a report on the study con-
ducted under paragraph (1). 
(f) MEDPAC RECOMMENDATIONS ON BLOOD CLOT-
TING FACTORS.—The Medicare Payment Advisory Com-
mission shall submit to Congress, in its annual report in 
2004, specific recommendations regarding a payment 
amount (or amounts) for blood clotting factors and its ad-
ministration under the medicare program. 
(g) ESTABLISHMENT OF PHARMACEUTICAL MANAGE-
MENT FEE WHERE DRUGS PROVIDED THROUGH A CON-
TRACTOR.—Section 1848(a) (42 U.S.C. 1395w–4(a)) is 
amended by adding at the end the following new para-
graph: 
‘‘(5) RECOGNITION OF PHARMACEUTICAL MAN-
AGEMENT FEE IN CERTAIN CASES.—In establishing 
the fee schedule under this section, the Secretary 
shall provide for a separate payment with respect to 
physicians’ services consisting of the unique adminis-
trative and management costs associated with cov-
ered drugs and biologicals which are furnished to 
physicians through a contractor under section 
1847A (compared with such costs if such drugs and 
biologicals were acquired directly by such physi-
cians).’’.
324
(h) STUDY ON CODES FOR NON-ONCOLOGY CODES.—
(1) STUDY.—The Secretary shall conduct a 
study to determine the appropriateness of estab-
lishing and implementing separate codes for non-on-
cology infusions that are based on the level of com-
plexity of the administration and resource consump-
tion. 
(2) REPORT.—Not later than 1 year after the 
date of the enactment of this Act, the Secretary 
shall submit a report to Congress on the study. To 
the extent the Secretary determines it to be appro-
priate, the Secretary may implement appropriate 
changes in the payment methodology for such codes. 
SEC. 304. DEMONSTRATION PROJECT FOR USE OF RECOV-
ERY AUDIT CONTRACTORS. 
(a) IN GENERAL.—The Secretary of Health and 
Human Services shall conduct a demonstration project 
under this section (in this section referred to as the 
‘‘project’’) to demonstrate the use of recovery audit con-
tractors under the Medicare Integrity Program in identi-
fying underpayments and overpayments and recouping 
overpayments under the medicare program for services for 
which payment is made under part A or part B of title 
XVIII of the Social Security Act. Under the project—
325
(1) payment may be made to such a contractor 
on a contingent basis; 
(2) a percentage of the amount recovered may 
be retained by the Secretary and shall be available 
to the program management account of the Centers 
for Medicare & Medicaid Services; and 
(3) the Secretary shall examine the efficacy of 
such use with respect to duplicative payments, accu-
racy of coding, and other payment policies in which 
inaccurate payments arise. 
(b) SCOPE AND DURATION.—
(1) SCOPE.—The project shall cover at least 2 
States that are among the States with—
(A) the highest per capita utilization rates 
of medicare services, and 
(B) at least 3 contractors. 
(2) DURATION.—The project shall last for not 
longer than 3 years. 
(c) WAIVER.—The Secretary of Health and Human 
Services shall waive such provisions of title XVIII of the 
Social Security Act as may be necessary to provide for 
payment for services under the project in accordance with 
subsection (a). 
(d) QUALIFICATIONS OF CONTRACTORS.—
326
(1) IN
GENERAL.—The Secretary shall enter 
into a recovery audit contract under this section 
with an entity only if the entity has staff that has 
the appropriate clinical knowledge of and experience 
with the payment rules and regulations under the 
medicare program or the entity has or will contract 
with another entity that has such knowledgeable and 
experienced staff. 
(2) INELIGIBILITY
OF
CERTAIN
CONTRAC-
TORS.—The Secretary may not enter into a recovery 
audit contract under this section with an entity to 
the extent that the entity is a fiscal intermediary 
under section 1816 of the Social Security Act (42 
U.S.C. 1395h), a carrier under section 1842 of such 
Act (42 U.S.C. 1395u), or a Medicare Administra-
tive Contractor under section 1874A of such Act. 
(3) PREFERENCE
FOR
ENTITIES
WITH
DEM-
ONSTRATED
PROFICIENCY.—In awarding contracts 
to recovery audit contractors under this section, the 
Secretary shall give preference to those risk entities 
that the Secretary determines have demonstrated 
more than 3 years direct management experience 
and a proficiency for cost control or recovery audits 
with private insurers, health care providers, health
327
plans, or under the medicaid program under title 
XIX of the Social Security Act. 
(e) CONSTRUCTION RELATING TO CONDUCT OF IN-
VESTIGATION OF FRAUD.—A recovery of an overpayment 
to a provider by a recovery audit contractor shall not be 
construed to prohibit the Secretary or the Attorney Gen-
eral from investigating and prosecuting, if appropriate, al-
legations of fraud or abuse arising from such overpay-
ment. 
(f) REPORT.—The Secretary of Health and Human 
Services shall submit to Congress a report on the project 
not later than 6 months after the date of its completion. 
Such reports shall include information on the impact of 
the project on savings to the medicare program and rec-
ommendations on the cost-effectiveness of extending or ex-
panding the project.
TITLE IV—RURAL HEALTH CARE 
IMPROVEMENTS 
SEC. 401. ENHANCED DISPROPORTIONATE SHARE HOS-
PITAL (DSH) TREATMENT FOR RURAL HOS-
PITALS AND URBAN HOSPITALS WITH FEWER 
THAN 100 BEDS. 
(a) DOUBLING THE CAP.—
328
(1) IN GENERAL.—Section 1886(d)(5)(F) (42 
U.S.C. 1395ww(d)(5)(F)) is amended by adding at 
the end the following new clause: 
‘‘(xiv)(I) In the case of discharges in a fiscal year 
beginning on or after October 1, 2003, subject to sub-
clause (II), there shall be substituted for the dispropor-
tionate share adjustment percentage otherwise determined 
under clause (iv) (other than subclause (I)) or under 
clause (viii), (x), (xi), (xii), or (xiii), the disproportionate 
share adjustment percentage determined under clause (vii) 
(relating to large, urban hospitals). 
‘‘(II) Under subclause (I), the disproportionate share 
adjustment percentage shall not exceed 10 percent for a 
hospital that is not classified as a rural referral center 
under subparagraph (C).’’. 
(2) 
CONFORMING
AMENDMENTS.—Section 
1886(d)(5)(F) (42 U.S.C. 1395ww(d)(5)(F)) is 
amended—
(A) in each of subclauses (II), (III), (IV), 
(V), and (VI) of clause (iv), by inserting ‘‘sub-
ject to clause (xiv) and’’ before ‘‘for discharges 
occurring’’; 
(B) in clause (viii), by striking ‘‘The for-
mula’’ and inserting ‘‘Subject to clause (xiv), 
the formula’’; and
329
(C) in each of clauses (x), (xi), (xii), and 
(xiii), by striking ‘‘For purposes’’ and inserting 
‘‘Subject to clause (xiv), for purposes’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply with respect to discharges occur-
ring on or after October 1, 2003.
SEC. 
402. 
IMMEDIATE 
ESTABLISHMENT 
OF 
UNIFORM 
STANDARDIZED 
AMOUNT 
IN 
RURAL 
AND 
SMALL URBAN AREAS. 
(a) IN GENERAL.—Section 1886(d)(3)(A) (42 U.S.C. 
1395ww(d)(3)(A)) is amended—
(1) in clause (iv), by inserting ‘‘and ending on 
or before September 30, 2003,’’ after ‘‘October 1, 
1995,’’; and 
(2) by redesignating clauses (v) and (vi) as 
clauses (vii) and (viii), respectively, and inserting 
after clause (iv) the following new clauses: 
‘‘(v) For discharges occurring in the fiscal year 
beginning on October 1, 2003, the average standard-
ized amount for hospitals located in areas other than 
a large urban area shall be equal to the average 
standardized amount for hospitals located in a large 
urban area.’’. 
(b) CONFORMING AMENDMENTS.—
330
(1) COMPUTING DRG-SPECIFIC RATES.—Section 
1886(d)(3)(D) (42 U.S.C. 1395ww(d)(3)(D)) is 
amended—
(A) in the heading, by striking ‘‘IN DIF-
FERENT AREAS’’; 
(B) in the matter preceding clause (i), by 
striking ‘‘, each of’’; 
(C) in clause (i)—
(i) in the matter preceding subclause 
(I), by inserting ‘‘for fiscal years before fis-
cal year 2004,’’ before ‘‘for hospitals’’; and 
(ii) in subclause (II), by striking 
‘‘and’’ after the semicolon at the end; 
(D) in clause (ii)—
(i) in the matter preceding subclause 
(I), by inserting ‘‘for fiscal years before fis-
cal year 2004,’’ before ‘‘for hospitals’’; and 
(ii) in subclause (II), by striking the 
period at the end and inserting ‘‘; and’’; 
and 
(E) by adding at the end the following new 
clause: 
‘‘(iii) for a fiscal year beginning after fiscal 
year 2003, for hospitals located in all areas, to 
the product of—
331
‘‘(I) 
the 
applicable 
standardized 
amount (computed under subparagraph 
(A)), reduced under subparagraph (B), 
and adjusted or reduced under subpara-
graph (C) for the fiscal year; and 
‘‘(II) the weighting factor (determined 
under paragraph (4)(B)) for that diag-
nosis-related group.’’. 
(2) TECHNICAL CONFORMING SUNSET.—Section 
1886(d)(3) (42 U.S.C. 1395ww(d)(3)) is amended—
(A) in the matter preceding subparagraph 
(A), by inserting ‘‘, for fiscal years before fiscal 
year 1997,’’ before ‘‘a regional adjusted DRG 
prospective payment rate’’; and 
(B) in subparagraph (D), in the matter 
preceding clause (i), by inserting ‘‘, for fiscal 
years before fiscal year 1997,’’ before ‘‘a re-
gional DRG prospective payment rate for each 
region,’’.
SEC. 403. ESTABLISHMENT OF ESSENTIAL RURAL HOS-
PITAL CLASSIFICATION. 
(a) CLASSIFICATION.—Section 1861(mm) (42 U.S.C. 
1395x(mm)) is amended—
(1) in the heading by adding ‘‘ESSENTIAL 
RURAL HOSPITALS’’ at the end; and
332
(2) by adding at the end the following new 
paragraphs: 
‘‘(4)(A) The term ‘essential rural hospital’ means a 
subsection 
(d) 
hospital 
(as 
defined 
in 
section 
1886(d)(1)(B)) that is located in a rural area (as defined 
for purposes of section 1886(d)), has more than 25 li-
censed acute care inpatient beds, has applied to the Sec-
retary for classification as such a hospital, and with re-
spect to which the Secretary has determined that the clo-
sure of the hospital would significantly diminish the ability 
of medicare beneficiaries to obtain essential health care 
services. 
‘‘(B) The determination under subparagraph (A) 
shall be based on the following criteria: 
‘‘(i) HIGH PROPORTION OF MEDICARE BENE-
FICIARIES RECEIVING CARE FROM HOSPITAL.—(I) A 
high percentage of such beneficiaries residing in the 
area of the hospital who are hospitalized (during the 
most recent year for which complete data are avail-
able) receive basic inpatient medical care at the hos-
pital. 
‘‘(II) For a hospital with more than 200 li-
censed beds, a high percentage of such beneficiaries 
residing in such area who are hospitalized (during
333
such recent year) receive specialized surgical inpa-
tient care at the hospital. 
‘‘(III) Almost all physicians described in section 
1861(r)(1) in such area have privileges at the hos-
pital and provide their inpatient services primarily at 
the hospital. 
‘‘(IV) The hospital inpatient score for quality of 
care is not less than the median hospital score for 
qualify of care for hospitals in the State, as estab-
lished under standards of the utilization and quality 
control peer review organization under part B of 
title XI or other quality standards recognized by the 
Secretary. 
‘‘(ii) SIGNIFICANT
ADVERSE
IMPACT
IN
AB-
SENCE
OF
HOSPITAL.—If the hospital were to 
close—
‘‘(I) there would be a significant amount of 
time needed for residents to reach emergency 
treatment, resulting in a potential significant 
harm to beneficiaries with critical illnesses or 
injuries; 
‘‘(II) there would be an inability in the 
community to stablize emergency cases for 
transfers to another acute care setting, result-
334
ing in a potential for significant harm to medi-
care beneficiaries; and 
‘‘(III) any other nearby hospital lacks the 
physical and clinical capacity to take over the 
hospital’s typical admissions. 
‘‘(C) In making such determination, the Secretary 
may also consider the following: 
‘‘(i) Free-standing ambulatory surgery centers, 
office-based oncology care, and imaging center serv-
ices are insufficient in the hospital’s area to handle 
the outpatient care of the hospital. 
‘‘(ii) Beneficiaries in nearby areas would be ad-
versely affected if the hospital were to close as the 
hospital provides specialized knowledge and services 
to a network of smaller hospitals and critical access 
hospitals. 
‘‘(iii) Medicare beneficiaries would have dif-
ficulty in accessing care if the hospital were to close 
as the hospital provides significant subsidies to sup-
port ambulatory care in local clinics, including men-
tal health clinics and to support post acute care. 
‘‘(iv) The hospital has a committment to pro-
vide graduate medical education in a rural area. 
A hospital classified as an essential rural hospital may not 
change such classification and a hospital so classified shall
335
not be treated as a sole community hospital, medicare de-
pendent hospital, or rural referral center for purposes of 
section 1886.’’. 
(b) PAYMENT BASED ON 102 PERCENT OF ALLOWED 
COSTS.—
(1) INPATIENT
HOSPITAL
SERVICES.—Section 
1886(d) (42 U.S.C. 1395ww(d)) is amended by add-
ing at the end the following: 
‘‘(11) In the case of a hospital classified as an essen-
tial rural hospital under section 1861(mm)(4) for a cost 
reporting period, the payment under this subsection for 
inpatient hospital services for discharges occurring during 
the period shall be based on 102 percent of the reasonable 
costs for such services. Nothing in this paragraph shall 
be construed as affecting the application or amount of 
deductibles or copayments otherwise applicable to such 
services under part A or as waiving any requirement for 
billing for such services.’’. 
(2) HOSPITAL OUTPATIENT SERVICES.—Section 
1833(t)(13) (42 U.S.C. 1395l(t)(13)) is amended by 
adding at the end the following new subparagraph: 
‘‘(B) SPECIAL
RULE
FOR
ESSENTIAL 
RURAL HOSPITALS.—In the case of a hospital 
classified as an essential rural hospital under 
section 1861(mm)(4) for a cost reporting pe-
336
riod, the payment under this subsection for cov-
ered OPD services during the period shall be 
based on 102 percent of the reasonable costs 
for such services. Nothing in this subparagraph 
shall be construed as affecting the application 
or amount of deductibles or copayments other-
wise applicable to such services under this part 
or as waiving any requirement for billing for 
such services.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to cost reporting periods beginning 
on or after October 1, 2004. 
SEC. 404. MORE FREQUENT UPDATE IN WEIGHTS USED IN 
HOSPITAL MARKET BASKET. 
(a) MORE FREQUENT UPDATES IN WEIGHTS.—After 
revising the weights used in the hospital market basket 
under section 1886(b)(3)(B)(iii) of the Social Security Act 
(42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the most cur-
rent data available, the Secretary shall establish a fre-
quency for revising such weights, including the labor 
share, in such market basket to reflect the most current 
data available more frequently than once every 5 years. 
(b) REPORT.—Not later than October 1, 2004, the 
Secretary shall submit a report to Congress on the fre-
quency established under subsection (a), including an ex-
337
planation of the reasons for, and options considered, in 
determining such frequency. 
SEC. 405. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL 
PROGRAM. 
(a) INCREASE IN PAYMENT AMOUNTS.—
(1) 
IN
GENERAL.—Sections 
1814(l), 
1834(g)(1), and 1883(a)(3) (42 U.S.C. 1395f(l); 
1395m(g)(1); 42 U.S.C. 1395tt(a)(3)) are each 
amended by inserting ‘‘equal to 102 percent of’’ be-
fore ‘‘the reasonable costs’’. 
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to payments for serv-
ices furnished during cost reporting periods begin-
ning on or after October 1, 2003. 
(b) COVERAGE OF COSTS FOR CERTAIN EMERGENCY 
ROOM ON-CALL PROVIDERS.—
(1) IN
GENERAL.—Section 1834(g)(5) (42 
U.S.C. 1395m(g)(5)) is amended—
(A) in the heading—
(i) by inserting ‘‘CERTAIN’’ before 
‘‘EMERGENCY’’; and 
(ii) by striking ‘‘PHYSICIANS’’ and in-
serting ‘‘PROVIDERS’’; 
(B) by striking ‘‘emergency room physi-
cians who are on-call (as defined by the Sec-
338
retary)’’ and inserting ‘‘physicians, physician 
assistants, nurse practitioners, and clinical 
nurse specialists who are on-call (as defined by 
the Secretary) to provide emergency services’’; 
and 
(C) by striking ‘‘physicians’ services’’ and 
inserting ‘‘services covered under this title’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply with respect to costs 
incurred for services provided on or after January 1, 
2004. 
(c) MODIFICATION OF THE ISOLATION TEST FOR 
COST-BASED CAH AMBULANCE SERVICES.—
(1) IN
GENERAL.—Section 1834(l)(8) (42 
U.S.C. 1395m(l)), as added by section 205(a) of 
BIPA (114 Stat. 2763A–482), is amended by add-
ing at the end the following: ‘‘The limitation de-
scribed in the matter following subparagraph (B) in 
the previous sentence shall not apply if the ambu-
lance services are furnished by such a provider or 
supplier of ambulance services who is a first re-
sponder to emergencies in accordance with local pro-
tocols (as determined by the Secretary).’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to ambulances services
339
furnished on or after the first cost reporting period 
that begins after the date of the enactment of this 
Act. 
(d) REINSTATEMENT OF PERIODIC INTERIM PAY-
MENT (PIP).—
(1) IN
GENERAL.—Section 1815(e)(2) (42 
U.S.C. 1395g(e)(2)) is amended—
(A) in the matter before subparagraph (A), 
by inserting ‘‘, in the cases described in sub-
paragraphs (A) through (D)’’ after ‘‘1986’’; 
and 
(B) by striking ‘‘and’’ at the end of sub-
paragraph (C); 
(C) by adding ‘‘and’’ at the end of sub-
paragraph (D); and 
(D) by inserting after subparagraph (D) 
the following new subparagraph: 
‘‘(E) inpatient critical access hospital services;’’. 
(2) DEVELOPMENT OF ALTERNATIVE METHODS 
OF PERIODIC INTERIM PAYMENTS.—With respect to 
periodic interim payments to critical access hospitals 
for inpatient critical access hospital services under 
section 1815(e)(2)(E) of the Social Security Act, as 
added by paragraph (1), the Secretary shall develop
340
alternative methods for such payments that are 
based on expenditures of the hospital. 
(3) REINSTATEMENT
OF
PIP.—The amend-
ments made by paragraph (1) shall apply to pay-
ments made on or after January 1, 2004. 
(e) CONDITION FOR APPLICATION OF SPECIAL PHY-
SICIAN PAYMENT ADJUSTMENT.—
(1) IN
GENERAL.—Section 1834(g)(2) (42 
U.S.C. 1395m(g)(2)) is amended by adding after 
and below subparagraph (B) the following: 
‘‘The Secretary may not require, as a condition for 
applying subparagraph (B) with respect to a critical 
access hospital, that each physician providing profes-
sional services in the hospital must assign billing 
rights with respect to such services, except that such 
subparagraph shall not apply to those physicians 
who have not assigned such billing rights.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall be effective as if included in 
the enactment of section 403(d) of the Medicare, 
Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (113 Stat. 1501A–371). 
(f) FLEXIBILITY
IN BED LIMITATION
FOR HOS-
PITALS.—Section 1820 (42 U.S.C. 1395i–4) is amended—
341
(1) in subsection (c)(2)(B)(iii), by inserting 
‘‘subject to paragraph (3)’’ after ‘‘(iii) provides’’; 
(2) by adding at the end of subsection (c) the 
following new paragraph: 
‘‘(3) INCREASE IN MAXIMUM NUMBER OF BEDS 
FOR HOSPITALS WITH STRONG SEASONAL CENSUS 
FLUCTUATIONS.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (C), in the case of a hospital that dem-
onstrates that it meets the standards estab-
lished under subparagraph (B) and has not 
made the election described in subsection 
(f)(2)(A), the bed limitations otherwise applica-
ble under paragraph (2)(B)(iii) and subsection 
(f) shall be increased by 5 beds. 
‘‘(B) STANDARDS.—The Secretary shall 
specify standards for determining whether a 
critical access hospital has sufficiently strong 
seasonal variations in patient admissions to jus-
tify the increase in bed limitation provided 
under subparagraph (A).’’; and 
(3) in subsection (f)—
(A) by inserting ‘‘(1)’’ after ‘‘(f)’’; and 
(B) by adding at the end the following new 
paragraph:
342
‘‘(2)(A) A hospital may elect to treat the reference 
in paragraph (1) to ‘15 beds’ as a reference to ‘25 beds’, 
but only if no more than 10 beds in the hospital are at 
any time used for non-acute care services. A hospital that 
makes such an election is not eligible for the increase pro-
vided under subsection (c)(3)(A). 
‘‘(B) The limitations in numbers of beds under the 
first sentence of paragraph (1) are subject to adjustment 
under subsection (c)(3).’’. 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to designations made 
before, on, or after January 1, 2004. 
(g) ADDITIONAL 5-YEAR PERIOD OF FUNDING FOR 
GRANT PROGRAM.—
(1) IN GENERAL.—Section 1820(g) (42 U.S.C. 
1395i–4(g)) is amended by adding at the end the 
following new paragraph: 
‘‘(4) FUNDING.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), payment for grants made under this 
subsection during fiscal years 2004 through 
2008 shall be made from the Federal Hospital 
Insurance Trust Fund. 
‘‘(B) ANNUAL AGGREGATE LIMITATION.—
In no case may the amount of payment pro-
343
vided for under subparagraph (A) for a fiscal 
year exceed $25,000,000.’’. 
(2) CONFORMING AMENDMENT.—Section 1820 
(42 U.S.C. 1395i–4) is amended by striking sub-
section (j).
SEC. 406. REDISTRIBUTION OF UNUSED RESIDENT POSI-
TIONS. 
(a) IN GENERAL.—Section 1886(h)(4) (42 U.S.C. 
1395ww(h)(4)) is amended—
(1) in subparagraph (F)(i), by inserting ‘‘sub-
ject to subparagraph (I),’’ after ‘‘October 1, 1997,’’; 
(2) in subparagraph (H)(i), by inserting ‘‘sub-
ject to subparagraph (I),’’ after ‘‘subparagraphs (F) 
and (G),’’; and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(I) REDISTRIBUTION
OF
UNUSED
RESI-
DENT POSITIONS.—
‘‘(i) REDUCTION IN LIMIT BASED ON 
UNUSED POSITIONS.—
‘‘(I) IN
GENERAL.—If a hos-
pital’s resident level (as defined in 
clause (iii)(I)) is less than the other-
wise applicable resident limit (as de-
fined in clause (iii)(II)) for each of
344
the reference periods (as defined in 
subclause (II)), effective for cost re-
porting periods beginning on or after 
January 1, 2004, the otherwise appli-
cable resident limit shall be reduced 
by 75 percent of the difference be-
tween such limit and the reference 
resident level specified in subclause 
(III) (or subclause (IV) if applicable). 
‘‘(II) REFERENCE PERIODS DE-
FINED.—In this clause, the term ‘ref-
erence periods’ means, for a hospital, 
the 3 most recent consecutive cost re-
porting periods of the hospital for 
which cost reports have been settled 
(or, if not, submitted) on or before 
September 30, 2002. 
‘‘(III) 
REFERENCE
RESIDENT 
LEVEL.—Subject to subclause (IV), 
the reference resident level specified in 
this subclause for a hospital is the 
highest resident level for the hospital 
during any of the reference periods. 
‘‘(IV) ADJUSTMENT PROCESS.—
Upon the timely request of a hospital,
345
the Secretary shall adjust (subject to 
audit) the reference resident level for 
a hospital to be the resident level for 
the hospital for the cost reporting pe-
riod that includes July 1, 2003. 
‘‘(V) 
AFFILIATION.—With 
re-
spect to hospitals which are members 
of the same affiliated group (as de-
fined by the Secretary under subpara-
graph (H)(ii)), the provisions of this 
section shall be applied with respect to 
such an affiliated group by deeming 
the affiliated group to be a single hos-
pital. 
‘‘(ii) REDISTRIBUTION.—
‘‘(I) IN
GENERAL.—The Sec-
retary is authorized to increase the 
otherwise applicable resident limits for 
hospitals by an aggregate number es-
timated by the Secretary that does 
not exceed the aggregate reduction in 
such limits attributable to clause (i) 
(without taking into account any ad-
justment under subclause (IV) of such 
clause).
346
‘‘(II) EFFECTIVE DATE.—No in-
crease under subclause (I) shall be 
permitted or taken into account for a 
hospital for any portion of a cost re-
porting period that occurs before July 
1, 2004, or before the date of the hos-
pital’s application for an increase 
under this clause. No such increase 
shall be permitted for a hospital un-
less the hospital has applied to the 
Secretary for such increase by Decem-
ber 31, 2005. 
‘‘(III) CONSIDERATIONS
IN
RE-
DISTRIBUTION.—In determining for 
which hospitals the increase in the 
otherwise applicable resident limit is 
provided under subclause (I), the Sec-
retary 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 
deter-
mining for which hospitals and resi-
dency training programs an increase
347
in the otherwise applicable resident 
limit is provided under subclause (I), 
the Secretary shall first distribute the 
increase to programs of hospitals lo-
cated in rural areas or in urban areas 
that are not large urban areas (as de-
fined 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 in-
crease of 25 full-time equivalent posi-
tions 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, notwith-
standing any other provision of this 
subsection, the approved FTE resi-
dent amount is deemed to be equal to 
the locality adjusted national average
348
per resident amount computed under 
subparagraph (E) for that hospital. 
‘‘(VI) CONSTRUCTION.—Nothing 
in this clause shall be construed as 
permitting the redistribution of reduc-
tions in residency positions attrib-
utable to voluntary reduction pro-
grams under paragraph (6) or as af-
fecting the ability of a hospital to es-
tablish 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 re-
spect to a hospital, the total number 
of full-time equivalent residents, be-
fore the application of weighting fac-
tors (as determined under this para-
graph), in the fields of allopathic and 
osteopathic medicine for the hospital. 
‘‘(II) OTHERWISE
APPLICABLE 
RESIDENT
LIMIT.—The term ‘other-
wise applicable resident limit’ means, 
with respect to a hospital, the limit
349
otherwise applicable under subpara-
graphs (F)(i) and (H) on the resident 
level for the hospital determined with-
out regard to this subparagraph.’’. 
(b) CONFORMING AMENDMENT
TO IME.—Section 
1886(d)(5)(B)(v) (42 U.S.C. 1395ww(d)(5)(B)(v)) is 
amended by adding at the end the following: ‘‘The provi-
sions of subparagraph (I) of subsection (h)(4) shall apply 
with respect to the first sentece of this clause in the same 
manner as it applies with respect to subparagraph (F) of 
such subsection.’’. 
(c) REPORT
ON
EXTENSION
OF
APPLICATIONS 
UNDER REDISTRIBUTION PROGRAM.—Not later than July 
1, 2005, the Secretary shall submit to Congress a report 
containing recommendations regarding whether to extend 
the deadline for applications for an increase in resident 
limits under section 1886(h)(4)(I)(ii)(II) of the Social Se-
curity Act (as added by subsection (a)). 
SEC. 407. TWO-YEAR EXTENSION OF HOLD HARMLESS PRO-
VISIONS FOR SMALL RURAL HOSPITALS AND 
SOLE COMMUNITY HOSPITALS UNDER PRO-
SPECTIVE PAYMENT SYSTEM FOR HOSPITAL 
OUTPATIENT DEPARTMENT SERVICES. 
(a) HOLD HARMLESS PROVISIONS.—
350
(1) IN GENERAL.—Section 1833(t)(7)(D)(i) (42 
U.S.C. 1395l(t)(7)(D)(i)) is amended—
(A) in the heading, by striking ‘‘SMALL’’ 
and inserting ‘‘CERTAIN’’; 
(B) by inserting ‘‘or a sole community hos-
pital (as defined in section 1886(d)(5)(D)(iii)) 
located in a rural area’’ after ‘‘100 beds’’; and 
(C) by striking ‘‘2004’’ and inserting 
‘‘2006’’. 
(2) EFFECTIVE DATE.—The amendment made 
by subsection (a)(2) shall apply with respect to pay-
ment for OPD services furnished on and after Janu-
ary 1, 2004. 
(b) STUDY; ADJUSTMENT.—
(1) STUDY.—The Secretary shall conduct a 
study to determine if, under the prospective payment 
system for hospital outpatient department services 
under section 1833(t) of the Social Security Act (42 
U.S.C. 1395l(t)), costs incurred by rural providers 
of services by ambulatory payment classification 
groups (APCs) exceed those costs incurred by urban 
providers of services. 
(2) ADJUSTMENT.—Insofar as the Secretary 
determines under paragraph (1) that costs incurred 
by rural providers exceed those costs incurred by
351
urban providers of services, the Secretary shall pro-
vide for an appropriate adjustment under such sec-
tion 1833(t) to reflect those higher costs by January 
1, 2005. 
SEC. 408. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC 
AND FEDERALLY QUALIFIED HEALTH CEN-
TER SERVICES FROM THE PROSPECTIVE PAY-
MENT SYSTEM FOR SKILLED NURSING FA-
CILITIES. 
(a) IN GENERAL.—Section 1888(e)(2)(A) (42 U.S.C. 
1395yy(e)(2)(A)) is amended—
(1) in clause (i)(II), by striking ‘‘clauses (ii) 
and (iii)’’ and inserting ‘‘clauses (ii), (iii), and (iv)’’; 
and 
(2) by adding at the end the following new 
clause: 
‘‘(iv) EXCLUSION OF CERTAIN RURAL 
HEALTH CLINIC AND FEDERALLY QUALI-
FIED
HEALTH
CENTER
SERVICES.—Serv-
ices described in this clause are—
‘‘(I) rural health clinic services 
(as defined in paragraph (1) of sec-
tion 1861(aa)); and
352
‘‘(II) Federally qualified health 
center services (as defined in para-
graph (3) of such section); 
that would be described in clause (ii) if 
such services were not furnished by an in-
dividual affiliated with a rural health clinic 
or a Federally qualified health center.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to services furnished on or after 
January 1, 2004. 
SEC. 409. RECOGNITION OF ATTENDING NURSE PRACTI-
TIONERS AS ATTENDING PHYSICIANS TO 
SERVE HOSPICE PATIENTS. 
(a) IN
GENERAL.—Section 1861(dd)(3)(B) (42 
U.S.C. 1395x(dd)(3)(B)) is amended by inserting ‘‘or 
nurse practitioner (as defined in subsection (aa)(5))’’ after 
‘‘the physician (as defined in subsection (r)(1))’’. 
(b) CLARIFICATION OF HOSPICE ROLE OF NURSE 
PRACTITIONERS.—Section 1814(a)(7)(A)(i)(I) (42 U.S.C. 
1395f(a)(7)(A)(i)(I)) is amended by inserting ‘‘(which for 
purposes of this subparagraph does not include a nurse 
practitioner)’’ after ‘‘attending physician (as defined in 
section 1861(dd)(3)(B))’’.
353
SEC. 410. IMPROVEMENT IN PAYMENTS TO RETAIN EMER-
GENCY CAPACITY FOR AMBULANCE SERV-
ICES IN RURAL AREAS. 
Section 1834(l) (42 U.S.C. 1395m(l)) is amended—
(1) by redesignating paragraph (8), as added by 
section 221(a) of BIPA (114 Stat. 2763A–486), as 
paragraph (9); and 
(2) by adding at the end the following new 
paragraph: 
‘‘(10) ASSISTANCE
FOR
RURAL
PROVIDERS 
FURNISHING
SERVICES
IN
LOW
MEDICARE
POPU-
LATION DENSITY AREAS.—
‘‘(A) IN GENERAL.—In the case of ground 
ambulance services furnished on or after Janu-
ary 1, 2004, for which the transportation origi-
nates in a qualified rural area (as defined in 
subparagraph (B)), the Secretary shall provide 
for a percent increase in the base rate of the fee 
schedule for a trip established under this sub-
section. In establishing such percent increase, 
the Secretary shall estimate the average cost 
per trip for the base rate in the lowest quartile 
as compared to the average cost for the base 
rate for such services that is in the highest 
quartile of all rural county populations.
354
‘‘(B) QUALIFIED RURAL AREA DEFINED.—
For purposes of subparagraph (A), the term 
‘qualified rural area’ is a rural area (as defined 
in section 1886(d)(2)(D)) with a population 
density of medicare beneficiaries residing in the 
area that is in the lowest quartile of all rural 
county populations.’’. 
SEC. 411. TWO-YEAR INCREASE FOR HOME HEALTH SERV-
ICES FURNISHED IN A RURAL AREA. 
(a) IN GENERAL.—In the case of home health serv-
ices furnished in a rural area (as defined in section 
1886(d)(2)(D) of the Social Security Act (42 U.S.C. 
1395ww(d)(2)(D))) during 2004 and 2005, the Secretary 
shall increase the payment amount otherwise made under 
section 1895 of such Act (42 U.S.C. 1395fff ) for such 
services by 5 percent. 
(b) WAIVING BUDGET NEUTRALITY.—The Secretary 
shall not reduce the standard prospective payment amount 
(or amounts) under section 1895 of the Social Security 
Act (42 U.S.C. 1395fff ) applicable to home health services 
furnished during a period to offset the increase in pay-
ments resulting from the application of subsection (a).
355
SEC. 412. PROVIDING SAFE HARBOR FOR CERTAIN COL-
LABORATIVE EFFORTS THAT BENEFIT MEDI-
CALLY UNDERSERVED POPULATIONS. 
(a) IN GENERAL.—Section 1128B(b)(3) (42 U.S.C. 
1320a–7(b)(3)), as amended by section 101(b)(2), is 
amended—
(1) in subparagraph (F), by striking ‘‘and’’ 
after the semicolon at the end; 
(2) in subparagraph (G), by striking the period 
at the end and inserting ‘‘; and’’; and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(H) any remuneration between a public 
or nonprofit private health center entity de-
scribed under clause (i) or (ii) of section 
1905(l)(2)(B) and any individual or entity pro-
viding goods, items, services, donations or 
loans, or a combination thereof, to such health 
center entity pursuant to a contract, lease, 
grant, loan, or other agreement, if such agree-
ment contributes to the ability of the health 
center entity to maintain or increase the avail-
ability, or enhance the quality, of services pro-
vided to a medically underserved population 
served by the health center entity.’’.
356
(b) RULEMAKING
FOR EXCEPTION
FOR HEALTH 
CENTER ENTITY ARRANGEMENTS.—
(1) ESTABLISHMENT.—
(A) 
IN
GENERAL.—The 
Secretary 
of 
Health and Human Services (in this subsection 
referred to as the ‘‘Secretary’’) shall establish, 
on an expedited basis, standards relating to the 
exception described in section 1128B(b)(3)(H) 
of the Social Security Act, as added by sub-
section (a), for health center entity arrange-
ments to the antikickback penalties. 
(B) FACTORS
TO
CONSIDER.—The Sec-
retary shall consider the following factors, 
among others, in establishing standards relating 
to the exception for health center entity ar-
rangements under subparagraph (A): 
(i) Whether the arrangement between 
the health center entity and the other 
party results in savings of Federal grant 
funds or increased revenues to the health 
center entity. 
(ii) Whether the arrangement between 
the health center entity and the other 
party restricts or limits a patient’s freedom 
of choice.
357
(iii) Whether the arrangement be-
tween the health center entity and the 
other party protects a health care profes-
sional’s independent medical judgment re-
garding medically appropriate treatment. 
The Secretary may also include other standards 
and criteria that are consistent with the intent 
of Congress in enacting the exception estab-
lished under this section. 
(2) INTERIM
FINAL
EFFECT.—No later than 
180 days after the date of enactment of this Act, the 
Secretary shall publish a rule in the Federal Reg-
ister consistent with the factors under paragraph 
(1)(B). Such rule shall be effective and final imme-
diately on an interim basis, subject to such change 
and revision, after public notice and opportunity (for 
a period of not more than 60 days) for public com-
ment, as is consistent with this subsection. 
SEC. 413. GAO STUDY OF GEOGRAPHIC DIFFERENCES IN 
PAYMENTS FOR PHYSICIANS’ SERVICES. 
(a) STUDY.—The Comptroller General of the United 
States shall conduct a study of differences in payment 
amounts under the physician fee schedule under section 
1848 of the Social Security Act (42 U.S.C. 1395w–4) for
358
physicians’ services in different geographic areas. Such 
study shall include—
(1) an assessment of the validity of the geo-
graphic adjustment factors used for each component 
of the fee schedule; 
(2) an evaluation of the measures used for such 
adjustment, including the frequency of revisions; and 
(3) an evaluation of the methods used to deter-
mine professional liability insurance costs used in 
computing the malpractice component, including a 
review of increases in professional liability insurance 
premiums and variation in such increases by State 
and physician specialty and methods used to update 
the geographic cost of practice index and relative 
weights for the malpractice component. 
(b) REPORT.—Not later than 1 year after the date 
of the enactment of this Act, the Comptroller General shall 
submit to Congress a report on the study conducted under 
subsection (a). The report shall include recommendations 
regarding the use of more current data in computing geo-
graphic cost of practice indices as well as the use of data 
directly representative of physicians’ costs (rather than 
proxy measures of such costs).
359
SEC. 414. TREATMENT OF MISSING COST REPORTING PERI-
ODS FOR SOLE COMMUNITY HOSPITALS. 
(a) IN GENERAL.—Section 1886(b)(3)(I) (42 U.S.C. 
1395ww(b)(3)(I)) is amended by adding at the end the 
following new clause: 
‘‘(iii) In no case shall a hospital be denied treatment 
as a sole community hospital or payment (on the basis 
of a target rate as such as a hospital) because data are 
unavailable for any cost reporting period due to changes 
in ownership, changes in fiscal intermediaries, or other ex-
traordinary circumstances, so long as data for at least one 
applicable base cost reporting period is available.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to cost reporting periods begin-
ning on or after January 1, 2004. 
SEC. 415. EXTENSION OF TELEMEDICINE DEMONSTRATION 
PROJECT. 
Section 4207 of Balanced Budget Act of 1997 (Pub-
lic Law 105–33) is amended—
(1) in subsection (a)(4), by striking ‘‘4-year’’ 
and inserting ‘‘8-year’’; and 
(2) 
in 
subsection 
(d)(3), 
by 
striking 
‘‘$30,000,000’’ and inserting ‘‘$60,000,000’’.
360
SEC. 416. ADJUSTMENT TO THE MEDICARE INPATIENT HOS-
PITAL PPS WAGE INDEX TO REVISE THE 
LABOR-RELATED SHARE OF SUCH INDEX. 
(a) IN GENERAL.—Section 1886(d)(3)(E) (42 U.S.C. 
1395ww(d)(3)(E)) is amended—
(1) by striking ‘‘WAGE
LEVELS.—The Sec-
retary’’ and inserting ‘‘WAGE LEVELS.—
‘‘(i) IN GENERAL.—Except as provided in 
clause (ii), the Secretary’’; and 
(2) by adding at the end the following new 
clause: 
‘‘(ii) ALTERNATIVE
PROPORTION
TO
BE 
ADJUSTED BEGINNING IN FISCAL YEAR 2004.—
‘‘(I) IN
GENERAL.—Except as pro-
vided in subclause (II), for discharges oc-
curring on or after October 1, 2003, the 
Secretary shall substitute the ‘62 percent’ 
for the proportion described in the first 
sentence of clause (i). 
‘‘(II) HOLD HARMLESS FOR CERTAIN 
HOSPITALS.—If the application of sub-
clause (I) would result in lower payments 
to a hospital than would otherwise be 
made, then this subparagraph shall be ap-
plied as if this clause had not been en-
acted.’’.
361
(b) 
WAIVING
BUDGET
NEUTRALITY.—Section 
1886(d)(3)(E) (42 U.S.C. 1395ww(d)(3)(E)), as amended 
by subsection (a), is amended by adding at the end of 
clause (i) the following new sentence: ‘‘The Secretary shall 
apply the previous sentence for any period as if the 
amendments made by section 402(a) of the Medicare Pre-
scription Drug and Modernization Act of 2003 had not 
been enacted.’’. 
SEC. 417. MEDICARE INCENTIVE PAYMENT PROGRAM IM-
PROVEMENTS FOR PHYSICIAN SCARCITY. 
(a) ADDITIONAL BONUS PAYMENT
FOR CERTAIN 
PHYSICIAN SCARCITY AREAS.—
(1) IN
GENERAL.—Section 1833 (42 U.S.C. 
1395l) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(u) INCENTIVE PAYMENTS FOR PHYSICIAN SCAR-
CITY AREAS.—
‘‘(1) IN GENERAL.—In the case of physicians’ 
services furnished in a year—
‘‘(A) by a primary care physician in a pri-
mary care scarcity county (identified under 
paragraph (4)); or 
‘‘(B) by a physician who is not a primary 
care physician in a specialist care scarcity coun-
ty (as so identified),
362
in addition to the amount of payment that would 
otherwise be made for such services under this part, 
there also shall be paid an amount equal to 5 per-
cent of the payment amount for the service under 
this part. 
‘‘(2) DETERMINATION
OF
RATIOS
OF
PHYSI-
CIANS
TO
MEDICARE
BENEFICIARIES
IN
AREA.—
Based upon available data, the Secretary shall peri-
odically determine, for each county or equivalent 
area in the United States, the following: 
‘‘(A) NUMBER OF PHYSICIANS PRACTICING 
IN THE AREA.—The number of physicians who 
furnish physicians’ services in the active prac-
tice of medicine or osteopathy in that county or 
area, other than physicians whose practice is 
exclusively for the Federal Government, physi-
cians who are retired, or physicians who only 
provide administrative services. Of such num-
ber, the number of such physicians who are—
‘‘(i) primary care physicians; or 
‘‘(ii) physicians who are not primary 
care physicians. 
‘‘(B) 
NUMBER
OF
MEDICARE
BENE-
FICIARIES RESIDING IN THE AREA.—The num-
ber of individuals who are residing in the coun-
363
ty and are entitled to benefits under part A or 
enrolled under this part, or both. 
‘‘(C) DETERMINATION OF RATIOS.—
‘‘(i) PRIMARY CARE RATIO.—The ratio 
(in this paragraph referred to as the ‘pri-
mary care ratio’) of the number of primary 
care physicians (determined under sub-
paragraph (A)(i)), to number of medicare 
beneficiaries determined under subpara-
graph (B). 
‘‘(ii) SPECIALIST
CARE
RATIO.—The 
ratio (in this paragraph referred to as the 
‘specialist care ratio’) of the number of 
other physicians (determined under sub-
paragraph (A)(ii)), to number of medicare 
beneficiaries determined under subpara-
graph (B). 
‘‘(3) RANKING OF COUNTIES.—The Secretary 
shall rank each such county or area based separately 
on its primary care ratio and its specialist care ratio. 
‘‘(4) IDENTIFICATION OF COUNTIES.—The Sec-
retary shall identify—
‘‘(A) those counties and areas (in this 
paragraph referred to as ‘primary care scarcity 
counties’) with the lowest primary care ratios
364
that represent, if each such county or area were 
weighted by the number of medicare bene-
ficiaries determined under paragraph (2)(B), an 
aggregate total of 20 percent of the total of the 
medicare beneficiaries determined under such 
paragraph; and 
‘‘(B) those counties and areas (in this sub-
section referred to as ‘specialist care scarcity 
counties’) with the lowest specialist care ratios 
that represent, if each such county or area were 
weighted by the number of medicare bene-
ficiaries determined under paragraph (2)(B), an 
aggregate total of 20 percent of the total of the 
medicare beneficiaries determined under such 
paragraph. 
There is no administrative or judicial review respect-
ing the identification of a county or area or the as-
signment of a specialty of any physician under this 
paragraph. 
‘‘(5) RURAL CENSUS TRACKS.—To the extent 
feasible, the Secretary shall treat a rural census 
tract of a metropolitan statistical area (as deter-
mined under the most recent modification of the 
Goldsmith Modification, originally published in the 
Federal Register on February 27, 1992 (57 Fed.
365
Reg. 6725) as an equivalent area for purposes of 
qualifying as a primary care scarcity county or spe-
cialist care scarcity county under this subsection. 
‘‘(6) PHYSICIAN DEFINED.—For purposes of 
this paragraph, the term ‘physician’ means a physi-
cian described in section 1861(r)(1) and the term 
‘primary care physician’ means a physician who is 
identified in the available data as a general practi-
tioner, family practice practitioner, general internist, 
or obstetrician or gynecologist. 
‘‘(7) PUBLICATION OF LIST OF COUNTIES.—In 
carrying out this subsection for a year, the Secretary 
shall include, as part of the proposed and final rule 
to implement the physician fee schedule under sec-
tion 1848 for the year, a list of all areas which will 
qualify as a primary care scarcity county or spe-
cialist care scarcity county under this subsection for 
the year involved.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by subsection (a) shall apply to physicians’ services 
furnished or after January 1, 2004. 
(b) IMPROVEMENT TO MEDICARE INCENTIVE PAY-
MENT PROGRAM.—
(1) IN GENERAL.—Section 1833(m) (42 U.S.C. 
1395l(m)) is amended—
366
(A) by inserting ‘‘(1)’’ after ‘‘(m)’’; and 
(B) by adding at the end the following new 
paragraphs: 
‘‘(2) The Secretary shall establish procedures under 
which the Secretary, and not the physician furnishing the 
service, is responsible for determining when a payment is 
required to be made under paragraph (1). 
‘‘(3) In carrying out paragraph (1) for a year, the 
Secretary shall include, as part of the proposed and final 
rule to implement the physician fee schedule under section 
1848 for the year, a list of all areas which will qualify 
as a health professional shortage area under paragraph 
(1) for the year involved.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to physicians’ services 
furnished or after January 1, 2004.
SEC. 418. RURAL HOSPICE DEMONSTRATION PROJECT. 
(a) IN GENERAL.—The Secretary shall conduct a 
demonstration project for the delivery of hospice care to 
medicare beneficiaries in rural areas. Under the project 
medicare beneficiaries who are unable to receive hospice 
care in the home for lack of an appropriate caregiver are 
provided such care in a facility of 20 or fewer beds which 
offers, within its walls, the full range of services provided
367
by hospice programs under section 1861(dd) of the Social 
Security Act (42 U.S.C. 1395x(dd)). 
(b) SCOPE OF PROJECT.—The Secretary shall con-
duct the project under this section with respect to no more 
than 3 hospice programs over a period of not longer than 
5 years each. 
(c) COMPLIANCE
WITH CONDITIONS.—Under the 
demonstration project—
(1) the hospice program shall comply with oth-
erwise applicable requirements, except that it shall 
not be required to offer services outside of the home 
or 
to 
meet 
the 
requirements 
of 
section 
1861(dd)(2)(A)(iii) of the Social Security Act; and 
(2) payments for hospice care shall be made at 
the rates otherwise applicable to such care under 
title XVIII of such Act. 
The Secretary may require the program to comply with 
such additional quality assurance standards for its provi-
sion of services in its facility as the Secretary deems ap-
propriate. 
(d) REPORT.—Upon completion of the project, the 
Secretary shall submit a report to Congress on the project 
and shall include in the report recommendations regarding 
extension of such project to hospice programs serving 
rural areas.
368
TITLE V—PROVISIONS 
RELATING TO PART A 
Subtitle A—Inpatient Hospital 
Services 
SEC. 501. REVISION OF ACUTE CARE HOSPITAL PAYMENT 
UPDATES. 
Section 
1886(b)(3)(B)(i) 
(42 
U.S.C. 
1395ww(b)(3)(B)(i)) is amended—
(1) by striking ‘‘and’’ at the end of subclause 
(XVIII); 
(2) by striking subclause (XIX); and 
(3) by inserting after subclause (XVIII) the fol-
lowing new subclauses: 
‘‘(XIX) for each of fiscal years 2004 through 
2006, the market basket percentage increase minus 
0.4 percentage points for hospitals in all areas; and 
‘‘(XX) for fiscal year 2007 and each subsequent 
fiscal year, the market basket percentage increase 
for hospitals in all areas.’’.
SEC. 502. RECOGNITION OF NEW MEDICAL TECHNOLOGIES 
UNDER INPATIENT HOSPITAL PPS. 
(a) IMPROVING TIMELINESS
OF DATA COLLEC-
TION.—Section 
1886(d)(5)(K) 
(42 
U.S.C. 
1395ww(d)(5)(K)) is amended by adding at the end the 
following new clause:
369
‘‘(vii) Under the mechanism under this subpara-
graph, the Secretary shall provide for the addition of new 
diagnosis and procedure codes in April 1 of each year, but 
the addition of such codes shall not require the Secretary 
to adjust the payment (or diagnosis-related group classi-
fication) under this subsection until the fiscal year that 
begins after such date.’’. 
(b) ELIGIBILITY
STANDARD
FOR
TECHNOLOGY 
OUTLIERS.—
(1) MINIMUM
PERIOD
FOR
RECOGNITION
OF 
NEW
TECHNOLOGIES.—Section 
1886(d)(5)(K)(vi) 
(42 U.S.C. 1395ww(d)(5)(K)(vi)) is amended—
(A) by inserting ‘‘(I)’’ after ‘‘(vi)’’; and 
(B) by adding at the end the following new 
subclause: 
‘‘(II) Under such criteria, a service or technology 
shall not be denied treatment as a new service or tech-
nology on the basis of the period of time in which the serv-
ice or technology has been in use if such period ends before 
the end of the 2-to-3-year period that begins on the effec-
tive date of implementation of a code under ICD–9–CM 
(or a successor coding methodology) that enables the iden-
tification of specific discharges in which the service or 
technology has been used.’’.
370
(2) ADJUSTMENT
OF
THRESHOLD.—Section 
1886(d)(5)(K)(ii)(I) 
(42 
U.S.C. 
1395ww(d)(5)(K)(ii)(I)) is amended by inserting 
‘‘(applying a threshold specified by the Secretary 
that is the lesser of 75 percent of the standardized 
amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard de-
viation for the diagnosis-related group involved)’’ 
after ‘‘is inadequate’’. 
(3) CRITERION
FOR
SUBSTANTIAL
IMPROVE-
MENT.—Section 
1886(d)(5)(K)(vi) 
(42 
U.S.C. 
1395ww(d)(5)(K)(vi)), as amended by paragraph 
(1), is further amended by adding at the end the fol-
lowing subclause: 
‘‘(III) The Secretary shall by regulation provide for 
further clarification of the criteria applied to determine 
whether a new service or technology represents an advance 
in medical technology that substantially improves the diag-
nosis or treatment of beneficiaries. Under such criteria, 
in determining whether a new service or technology rep-
resents an advance in medical technology that substan-
tially improves the diagnosis or treatment of beneficiaries, 
the Secretary shall deem a service or technology as meet-
ing such requirement if the service or technology is a drug 
or biological that is designated under section 506 of the
371
Federal Food, Drug, and Cosmetic Act, approved under 
section 314.510 or 601.41 of title 21, Code of Federal 
Regulations, or designated for priority review when the 
marketing application for such drug or biological was filed 
or is a medical device for which an exemption has been 
granted under section 520(m) of such Act, or for which 
priority review has been provided under section 515(d)(5) 
of such Act. Nothing in this subclause shall be construed 
as effecting the authority of the Secretary to determine 
whether items and services are medically necessary and 
appropriate under section 1862(a)(1).’’. 
(4) PROCESS
FOR
PUBLIC
INPUT.—Section 
1886(d)(5)(K) (42 U.S.C. 1395ww(d)(5)(K)), as 
amended by paragraph (1), is amended—
(A) in clause (i), by adding at the end the 
following: ‘‘Such mechanism shall be modified 
to meet the requirements of clause (viii).’’; and 
(B) by adding at the end the following new 
clause: 
‘‘(viii) The mechanism established pursuant to clause 
(i) shall be adjusted to provide, before publication of a 
proposed rule, for public input regarding whether a new 
service or technology not described in the second sentence 
of clause (vi)(III) represents an advance in medical tech-
372
nology that substantially improves the diagnosis or treat-
ment of beneficiaries as follows: 
‘‘(I) The Secretary shall make public and peri-
odically update a list of all the services and tech-
nologies for which an application for additional pay-
ment under this subparagraph is pending. 
‘‘(II) The Secretary shall accept comments, rec-
ommendations, and data from the public regarding 
whether the service or technology represents a sub-
stantial improvement. 
‘‘(III) The Secretary shall provide for a meeting 
at which organizations representing hospitals, physi-
cians, medicare beneficiaries, manufacturers, and 
any other interested party may present comments, 
recommendations, and data to the clinical staff of 
the Centers for Medicare & Medicaid Services before 
publication of a notice of proposed rulemaking re-
garding whether service or technology represents a 
substantial improvement.’’. 
(c) PREFERENCE FOR USE OF DRG ADJUSTMENT.—
Section 1886(d)(5)(K) (42 U.S.C. 1395ww(d)(5)(K)) is 
further amended by adding at the end the following new 
clause: 
‘‘(ix) Before establishing any add-on payment under 
this subparagraph with respect to a new technology, the
373
Secretary shall seek to identify one or more diagnosis-re-
lated groups associated with such technology, based on 
similar clinical or anatomical characteristics and the cost 
of the technology. Within such groups the Secretary shall 
assign an eligible new technology into a diagnosis-related 
group where the average costs of care most closely approx-
imate the costs of care of using the new technology. No 
add-on payment under this subparagraph shall be made 
with respect to such new technology and this clause shall 
not affect the application of paragraph (4)(C)(iii).’’. 
(d) IMPROVEMENT IN PAYMENT FOR NEW TECH-
NOLOGY.—Section 
1886(d)(5)(K)(ii)(III) 
(42 
U.S.C. 
1395ww(d)(5)(K)(ii)(III)) is amended by inserting after 
‘‘the estimated average cost of such service or technology’’ 
the following: ‘‘(based on the marginal rate applied to 
costs under subparagraph (A))’’. 
(e) ESTABLISHMENT OF NEW FUNDING FOR HOS-
PITAL INPATIENT TECHNOLOGY.—
(1) 
IN
GENERAL.—Section 
1886(d)(5)(K)(ii)(III) 
(42 
U.S.C. 
1395ww(d)(5)(K)(ii)(III)) is amended by striking 
‘‘subject to paragraph (4)(C)(iii),’’. 
(2) NOT BUDGET NEUTRAL.—There shall be no 
reduction or other adjustment in payments under 
section 1886 of the Social Security Act because an
374
additional payment is provided under subsection 
(d)(5)(K)(ii)(III) of such section. 
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The Secretary shall imple-
ment the amendments made by this section so that 
they apply to classification for fiscal years beginning 
with fiscal year 2005. 
(2) RECONSIDERATIONS OF APPLICATIONS FOR 
FISCAL YEAR 2004 THAT ARE DENIED.—In the case 
of an application for a classification of a medical 
service or technology as a new medical service or 
technology under section 1886(d)(5)(K) of the Social 
Security Act (42 U.S.C. 1395ww(d)(5)(K)) that was 
filed for fiscal year 2004 and that is denied—
(A) the Secretary shall automatically re-
consider the application as an application for 
fiscal year 2005 under the amendments made 
by this section; and 
(B) the maximum time period otherwise 
permitted for such classification of the service 
or technology shall be extended by 12 months. 
SEC. 503. INCREASE IN FEDERAL RATE FOR HOSPITALS IN 
PUERTO RICO. 
Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is 
amended—
375
(1) in subparagraph (A)—
(A) in clause (i), by striking ‘‘for dis-
charges beginning on or after October 1, 1997, 
50 percent (and for discharges between October 
1, 1987, and September 30, 1997, 75 percent)’’ 
and inserting ‘‘the applicable Puerto Rico per-
centage (specified in subparagraph (E))’’; and 
(B) in clause (ii), by striking ‘‘for dis-
charges beginning in a fiscal year beginning on 
or after October 1, 1997, 50 percent (and for 
discharges between October 1, 1987, and Sep-
tember 30, 1997, 25 percent)’’ and inserting 
‘‘the applicable Federal percentage (specified in 
subparagraph (E))’’; and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(E) For purposes of subparagraph (A), for dis-
charges occurring—
‘‘(i) on or after October 1, 1987, and before Oc-
tober 1, 1997, the applicable Puerto Rico percentage 
is 75 percent and the applicable Federal percentage 
is 25 percent; 
‘‘(ii) on or after October 1, 1997, and before 
October 1, 2003, the applicable Puerto Rico percent-
376
age is 50 percent and the applicable Federal per-
centage is 50 percent; 
‘‘(iii) during fiscal year 2004, the applicable 
Puerto Rico percentage is 41 percent and the appli-
cable Federal percentage is 59 percent; 
‘‘(iv) during fiscal year 2005, the applicable 
Puerto Rico percentage is 33 percent and the appli-
cable Federal percentage is 67 percent; and 
‘‘(v) on or after October 1, 2005, the applicable 
Puerto Rico percentage is 25 percent and the appli-
cable Federal percentage is 75 percent.’’. 
SEC. 504. WAGE INDEX ADJUSTMENT RECLASSIFICATION 
REFORM . 
(a) IN
GENERAL.—Section 1886(d) (42 U.S.C. 
1395ww(d)) is amended by adding at the end the fol-
lowing: 
‘‘(11)(A) In order to recognize commuting patterns 
among Metropolitan Statistical Areas and between such 
Areas and rural areas, the Secretary shall establish a proc-
ess, upon application of a subsection (d) hospital that es-
tablishes that it is a qualifying hospital described in sub-
paragraph (B), for an increase of the wage index applied 
under paragraph (3)(E) for the hospital in the amount 
computed under subparagraph (D).
377
‘‘(B) A qualifying hospital described in this subpara-
graph is a subsection (d) hospital—
‘‘(i) the average wages of which exceed the av-
erage wages for the area in which the hospital is lo-
cated; and 
‘‘(ii) which has at least 10 percent of its em-
ployees who reside in one or more higher wage index 
areas. 
‘‘(C) For purposes of this paragraph, the term ‘high-
er wage index area’ means, with respect to a hospital, an 
area with a wage index that exceeds that of the area in 
which the hospital is located. 
‘‘(D) The increase in the wage index under subpara-
graph (A) for a hospital shall be equal to the percentage 
of the employees of the hospital that resides in any higher 
wage index area multiplied by the sum of the products, 
for each higher wage index area of—
‘‘(i) the difference between (I) the wage index 
for such area, and (II) the wage index of the area 
in which the hospital is located (before the applica-
tion of this paragraph); and 
‘‘(ii) the number of employees of the hospital 
that reside in such higher wage index area divided 
by the total number of such employees that reside in 
all high wage index areas.
378
‘‘(E) The process under this paragraph shall be based 
upon the process used by the Medicare Geographic Classi-
fication Review Board under paragraph (10) with respect 
to data submitted by hospitals to the Board on the loca-
tion of residence of hospital employees and wages under 
the applicable schedule established for geographic reclassi-
fication. 
‘‘(F) A reclassification under this paragraph shall be 
effective for a period of 3 fiscal years, except that the Sec-
retary shall establish procedures under which a subsection 
(d) hospital may elect to terminate such reclassification 
before the end of such period. 
‘‘(G) A hospital that is reclassified under this para-
graph for a period is not eligible for reclassification under 
paragraphs (8) or (10) during that period. 
‘‘(H) Any increase in a wage index under this para-
graph for a hospital shall not be taken into account for 
purposes of—
‘‘(i) computing the wage index for the area in 
which the hospital is located or any other area; or 
‘‘(ii) applying any budget neutrality adjustment 
with respect to such index under paragraph 
(8)(D).’’.
379
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall first apply to the wage index for dis-
charges occurring on or after October 1, 2004. 
SEC. 505. MEDPAC REPORT ON SPECIALTY HOSPITALS. 
(a) MEDPAC STUDY.—The Medicare Payment Advi-
sory Commission shall conduct a study of specialty hos-
pitals compared with other similar general acute care hos-
pitals under the medicare program. Such study shall ex-
amine—
(1) whether there are excessive self-referrals; 
(2) quality of care furnished; 
(3) the impact of specialty hospitals on such 
general acute care hospitals; and 
(4) differences in the scope of services, medicaid 
utilization, and uncompensated care furnished. 
(b) REPORT.—Not later than 1 year after the date 
of the enactment of this Act, the Secretary shall submit 
to Congress a report on the study conducted under sub-
section (a), and shall include any recommendations for 
legislation or administrative change as the Secretary de-
termines appropriate.
380
Subtitle B—Other Provisions 
SEC. 511. PAYMENT FOR COVERED SKILLED NURSING FA-
CILITY SERVICES. 
(a) ADJUSTMENT
TO
RUGS
FOR
AIDS RESI-
DENTS.—Paragraph (12) of section 1888(e) (42 U.S.C. 
1395yy(e)) is amended to read as follows: 
‘‘(12) ADJUSTMENT
FOR
RESIDENTS
WITH 
AIDS.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), in the case of a resident of a skilled 
nursing facility who is afflicted with acquired 
immune deficiency syndrome (AIDS), the per 
diem amount of payment otherwise applicable 
shall be increased by 128 percent to reflect in-
creased costs associated with such residents. 
‘‘(B) SUNSET.—Subparagraph (A) shall 
not apply on and after such date as the Sec-
retary certifies that there is an appropriate ad-
justment in the case mix under paragraph 
(4)(G)(i) to compensate for the increased costs 
associated with residents described in such sub-
paragraph.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
paragraph (1) shall apply to services furnished on or after 
October 1, 2003.
381
SEC. 512. COVERAGE OF HOSPICE CONSULTATION SERV-
ICES. 
(a) COVERAGE OF HOSPICE CONSULTATION SERV-
ICES.—Section 1812(a) (42 U.S.C. 1395d(a)) is amend-
ed—
(1) by striking ‘‘and’’ at the end of paragraph 
(3); 
(2) by striking the period at the end of para-
graph (4) and inserting ‘‘; and’’; and 
(3) by inserting after paragraph (4) the fol-
lowing new paragraph: 
‘‘(5) for individuals who are terminally ill, have 
not made an election under subsection (d)(1), and 
have not previously received services under this 
paragraph, services that are furnished by a physi-
cian who is either the medical director or an em-
ployee of a hospice program and that consist of—
‘‘(A) an evaluation of the individual’s need 
for pain and symptom management; 
‘‘(B) counseling the individual with respect 
to end-of-life issues and care options; and 
‘‘(C) advising the individual regarding ad-
vanced care planning.’’. 
(b) PAYMENT.—Section 1814(i) (42 U.S.C. l395f(i)) 
is amended by adding at the end the following new para-
graph:
382
‘‘(4) The amount paid to a hospice program with re-
spect to the services under section 1812(a)(5) for which 
payment may be made under this part shall be equal to 
an amount equivalent to the amount established for an 
office or other outpatient visit for evaluation and manage-
ment associated with presenting problems of moderate se-
verity under the fee schedule established under section 
1848(b), other than the portion of such amount attrib-
utable to the practice expense component.’’. 
(c) 
CONFORMING
AMENDMENT.—Section 
1861(dd)(2)(A)(i) (42 U.S.C. 1395x(dd)(2)(A)(i)) is 
amended by inserting before the comma at the end the 
following: ‘‘and services described in section 1812(a)(5)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to services provided by a hospice 
program on or after January 1, 2004.
SEC. 513. CORRECTION OF TRUST FUND HOLDINGS. 
(a) IN GENERAL.—Within 120 days after the effec-
tive date of this section, the Secretary of the Treasury 
shall take the actions described in subsection (b) with re-
spect to the Federal Hospital Insurance Trust Fund (in 
this section referred to as the ‘‘Trust Fund’’) with the goal 
being that, after the actions are taken, the holdings of the 
Trust Fund will replicate, to the extent practicable in the 
judgment of the Secretary of the Treasury, in consultation