(d) WAIVER AUTHORITY.—The Secretary may waive 
such requirements of title XVIII of the Social Security Act 
(42 U.S.C. 1395 et seq.) as may be necessary for the pur-
pose of carrying out the demonstration program under 
this section. 
(e) REPORT.—Not later than 6 months after the 
completion of the demonstration program under this sec-
tion, the Secretary shall submit to Congress a report on 
such program, together with recommendations for such 
legislation and administrative action as the Secretary de-
termines to be appropriate. 
(f) DEFINITIONS.—In this section: 
(1) RURAL COMMUNITY HOSPITAL DEFINED.—
(A) IN GENERAL.—The term ‘‘rural com-
munity hospital’’ means a hospital (as defined 
in section 1861(e) of the Social Security Act 
(42 U.S.C. 1395x(e))) that—
(i) is located in a rural area (as de-
fined in section 1886(d)(2)(D) of such Act 
(42 U.S.C. 1395ww(d)(2)(D))) or treated 
as being so located pursuant to section 
1886(d)(8)(E) of such Act (42 U.S.C. 
1395ww(d)(8)(E));
(ii) subject to paragraph (2), has 
fewer than 51 acute care inpatient beds, as 
reported in its most recent cost report; 
(iii) makes available 24-hour emer-
gency care services; and 
(iv) is not eligible for designation, or 
has not been designated, as a critical ac-
cess hospital under section 1820. 
(B) TREATMENT OF PSYCHIATRIC AND RE-
HABILITATION UNITS.—For purposes of para-
graph (1)(B), beds in a psychiatric or rehabili-
tation unit of the hospital which is a distinct 
part of the hospital shall not be counted. 
(2) COVERED
INPATIENT
HOSPITAL
SERV-
ICES.—The term ‘‘covered inpatient hospital serv-
ices’’ means inpatient hospital services, and includes 
extended care services furnished under an agreement 
under section 1883 of the Social Security Act (42 
U.S.C. 1395tt). 
SEC. 112. WAGE INDEX ADJUSTMENT RECLASSIFICATION 
REFORM. 
(a) IN
GENERAL.—Section 1886(d) (42 U.S.C. 
1395ww(d)), as amended by section 106, is amended by 
adding at the end the following new paragraph:
‘‘(13)(A) In order to recognize commuting patterns 
among geographic areas, the Secretary shall establish a 
process through application or otherwise for an increase 
of the wage index applied under paragraph (3)(E) for sub-
section (d) hospitals located in a qualifying county de-
scribed in subparagraph (B) in the amount computed 
under subparagraph (D) based on out-migration of hos-
pital employees who reside in that county to any higher 
wage index area. 
‘‘(B) The Secretary shall establish criteria for a 
qualifying county under this subparagraph based on the 
out-migration referred to in subparagraph (A) and dif-
ferences in the area wage indices. Under such criteria the 
Secretary shall, utilizing such data as the Secretary deter-
mines to be appropriate, establish—
‘‘(i) a threshold percentage, established by the 
Secretary, of the weighted average of the area wage 
index or indices for the higher wage index areas in-
volved; 
‘‘(ii) a threshold (of not less than 10 percent) 
for minimum out-migration to a higher wage index 
area or areas; and 
‘‘(iii) a requirement that the average hourly 
wage of the hospitals in the qualifying county equals 
or exceeds the average hourly wage of all the hos-
pitals in the area in which the qualifying county is 
located. 
‘‘(C) For purposes of this paragraph, the term ‘high-
er wage index area’ means, with respect to a county, an 
area with a wage index that exceeds that of the county. 
‘‘(D) The increase in the wage index under subpara-
graph (A) for a qualifying county shall be equal to the 
percentage of the hospital employees residing in the quali-
fying county who are employed 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 higher wage 
index area, and 
‘‘(II) the wage index of the qualifying 
county; and 
‘‘(ii) the number of hospital employees residing 
in the qualifying county who are employed in such 
higher wage index area divided by the total number 
of hospital employees residing in the qualifying 
county who are employed in any higher wage index 
area. 
‘‘(E) The process under this paragraph may be based 
upon the process used by the Medicare Geographic Classi-
fication Review Board under paragraph (10). As the Sec-
retary determines to be appropriate to carry out such 
process, the Secretary may require hospitals (including 
subsection (d) hospitals and other hospitals) and critical 
access hospitals, as required under section 1866(a)(1)(T), 
to submit data regarding the location of residence, or the 
Secretary may use data from other sources. 
‘‘(F) A wage index increase under this paragraph 
shall be effective for a period of 3 fiscal years, except that 
the Secretary shall establish procedures under which a 
subsection (d) hospital may elect to waive the application 
of such wage index increase. 
‘‘(G) A hospital in a county that has a wage index 
increase under this paragraph for a period and that has 
not waived the application of such an increase under sub-
paragraph (F) is not eligible for reclassification under 
paragraph (8) or (10) during that period. 
‘‘(H) Any increase in a wage index under this para-
graph for a county shall not be taken into account for 
purposes of—
‘‘(i) computing the wage index for portions of 
the wage index area (not including the county) in 
which the county is located; or 
‘‘(ii) applying any budget neutrality adjustment 
with respect to such index under paragraph (8)(D).
‘‘(I) The thresholds described in subparagraph (B), 
data on hospital employees used under this paragraph, 
and any determination of the Secretary under the process 
described in subparagraph (E) shall be final and shall not 
be subject to judicial review.’’. 
(b) 
CONFORMING
AMENDMENTS.—Section 
1866(a)(1) (42 U.S.C. 1395cc(a)(1)) is amended—
(1) in subparagraph (R), by striking ‘‘and’’ at 
the end; 
(2) in subparagraph (S), by striking the period 
at the end and inserting ‘‘, and’’; and 
(3) by inserting after subparagraph (S) the fol-
lowing new subparagraph: 
‘‘(T) in the case of hospitals and critical access 
hospitals, to furnish to the Secretary such data as 
the Secretary determines appropriate pursuant to 
subparagraph (E) of section 1886(d)(12) to carry 
out such section.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall first apply to the wage index for dis-
charges occurring on or after October 1, 2004. In initially 
implementing such amendments, the Secretary may mod-
ify the deadlines otherwise applicable under clauses (ii) 
and (iii)(I) of section 1886(d)(10)(C) of the Social Secu-
rity Act (42 U.S.C. 1395ww(d)(10)(C)), for submission of,
and actions on, applications relating to changes in hospital 
geographic reclassification. 
SEC. 113. REVISION OF THE INDIRECT MEDICAL EDU-
CATION (IME) ADJUSTMENT PERCENTAGE. 
(a) IN GENERAL.—Section 1886(d)(5)(B)(ii) (42 
U.S.C. 1395ww(d)(5)(B)(ii)) is amended—
(1) in subclause (VI), by striking ‘‘and’’ after 
the semicolon at the end; 
(2) in subclause (VII)—
(A) by inserting ‘‘and before April 1, 
2004,’’ after ‘‘on or after October 1, 2002,’’; 
and 
(B) by striking the period at the end and 
inserting a semicolon; and 
(3) by adding at the end the following new sub-
clauses: 
‘‘(VIII) on or after April 1, 2004, and be-
fore October 1, 2004, ‘c’ is equal to 1.47; 
‘‘(IX) during fiscal year 2005, ‘c’ is equal 
to 1.42; 
‘‘(X) during fiscal year 2006, ‘c’ is equal 
to 1.37; 
‘‘(XI) during fiscal year 2007, ‘c’ is equal 
to 1.32; and
‘‘(XII) on or after October 1, 2007, ‘c’ is 
equal to 1.35.’’. 
(b) CONFORMING AMENDMENT RELATING TO DE-
TERMINATION
OF
STANDARDIZED
AMOUNT.—Section 
1886(d)(2)(C)(i) (42 U.S.C. 1395ww(d)(2)(C)(i)) is 
amended—
(1) by striking ‘‘1999 or’’ and inserting 
‘‘1999,’’; and 
(2) by inserting ‘‘, or the Medicare Prescription 
Drug, Improvement, and Modernization Act of 
2003’’ after ‘‘2000’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to discharges occurring on or after 
April 1, 2004. 
SEC. 114. INCREASE IN FEDERAL RATE FOR HOSPITALS IN 
PUERTO RICO. 
Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is 
amended—
(1) in subparagraph (A)—
(A) in clause (i), by striking ‘‘for 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 
April 1, 2004, the applicable Puerto Rico percentage 
is 50 percent and the applicable Federal percentage 
is 50 percent; 
‘‘(iii) on or after April 1, 2004, and before Oc-
tober 1, 2004, the applicable Puerto Rico percentage 
is 37.5 percent and the applicable Federal percent-
age is 62.5 percent; and
‘‘(iv) on or after October 1, 2004, the applica-
ble Puerto Rico percentage is 25 percent and the ap-
plicable Federal percentage is 75 percent.’’.
SEC. 115. CLARIFICATIONS TO CERTAIN EXCEPTIONS TO 
MEDICARE LIMITS ON PHYSICIAN REFER-
RALS. 
(a) LIMITS ON PHYSICIAN REFERRALS.—
(1) OWNERSHIP AND INVESTMENT INTERESTS 
IN WHOLE HOSPITALS.—
(A) IN GENERAL.—Section 1877(d)(3) (42 
U.S.C. 1395nn(d)(3)) is amended—
(i) by striking ‘‘, and’’ at the end of 
subparagraph (A) and inserting a semi-
colon; and 
(ii) by redesignating subparagraph 
(B) as subparagraph (C) and inserting 
after subparagraph (A) the following new 
subparagraph: 
‘‘(B) effective for the 18-month period be-
ginning on November 18, 2003, the hospital is 
not a specialty hospital (as defined in sub-
section (h)(7)); and’’. 
(B) DEFINITION.—Section 1877(h) (42 
U.S.C. 1395nn(h)) is amended by adding at the 
end the following:
‘‘(7) SPECIALTY HOSPITAL.—
‘‘(A) IN GENERAL.—For purposes of this 
section, except as provided in subparagraph 
(B), the term ‘specialty hospital’ means a sub-
section (d) hospital that is primarily or exclu-
sively engaged in the care and treatment of one 
of the following categories: 
‘‘(i) Patients with a cardiac condition. 
‘‘(ii) Patients with an orthopedic con-
dition. 
‘‘(iii) Patients receiving a surgical 
procedure. 
‘‘(iv) Any other specialized category of 
services that the Secretary designates as 
inconsistent with the purpose of permitting 
physician ownership and investment inter-
ests in a hospital under this section. 
‘‘(B) EXCEPTION.—For purposes of this 
section, the term ‘specialty hospital’ does not 
include any hospital—
‘‘(i) determined by the Secretary—
‘‘(I) to be in operation before No-
vember 18, 2003; or 
‘‘(II) under development as of 
such date;
‘‘(ii) for which the number of physi-
cian investors at any time on or after such 
date is no greater than the number of such 
investors as of such date; 
‘‘(iii) for which the type of categories 
described in subparagraph (A) at any time 
on or after such date is no different than 
the type of such categories as of such date; 
‘‘(iv) for which any increase in the 
number of beds occurs only in the facilities 
on the main campus of the hospital and 
does not exceed 50 percent of the number 
of beds in the hospital as of November 18, 
2003, or 5 beds, whichever is greater; and 
‘‘(v) that meets such other require-
ments as the Secretary may specify.’’. 
(2) OWNERSHIP AND INVESTMENT INTERESTS 
IN
A
RURAL
PROVIDER.—Section 1877(d)(2) (42 
U.S.C. 1395nn(d)(2)) is amended to read as follows: 
‘‘(2) RURAL PROVIDERS.—In the case of des-
ignated health services furnished in a rural area (as 
defined in section 1886(d)(2)(D)) by an entity, if—
‘‘(A) substantially all of the designated 
health services furnished by the entity are fur-
nished to individuals residing in such a rural 
area; and 
‘‘(B) effective for the 18-month period be-
ginning on November 18, 2003, the entity is 
not a specialty hospital (as defined in sub-
section (h)(7)).’’. 
(b) APPLICATION OF EXCEPTION FOR HOSPITALS 
UNDER
DEVELOPMENT.—For 
purposes 
of 
section 
1877(h)(7)(B)(i)(II) of the Social Security Act, as added 
by subsection (a)(1)(B), in determining whether a hospital 
is under development as of November 18, 2003, the Sec-
retary shall consider—
(1) whether architectural plans have been com-
pleted, funding has been received, zoning require-
ments have been met, and necessary approvals from 
appropriate State agencies have been received; and 
(2) any other evidence the Secretary determines 
would indicate whether a hospital is under develop-
ment as of such date. 
(c) STUDIES.—
(1) MEDPAC STUDY.—The Medicare Payment 
Advisory Commission, in consultation with the 
Comptroller General of the United States, shall con-
duct a study to determine—
(A) any differences in the costs of health 
care services furnished to patients by physician-
owned specialty hospitals and the costs of such 
services furnished by local full-service commu-
nity hospitals within specific diagnosis-related 
groups; 
(B) the extent to which specialty hospitals, 
relative to local full-service community hos-
pitals, treat patients in certain diganosis-related 
groups within a category, such as cardiology, 
and an analysis of the selection; 
(C) the financial impact of physician-
owned specialty hospitals on local full-service 
community hospitals; 
(D) how the current diagnosis-related 
group system should be updated to better re-
flect the cost of delivering care in a hospital 
setting; and 
(E) the proportions of payments received, 
by type of payer, between the specialty hospitals 
and local full-service community hospitals. 
(2) HHS STUDY.—The Secretary shall conduct 
a study of a representative sample of specialty hos-
pitals—
(A) to determine the percentage of patients 
admitted to physician-owned specialty hospitals 
who are referred by physicians with an owner-
ship interest; 
(B) to determine the referral patterns of 
physician owners, including the percentage of 
patients they referred to physician-owned spe-
cialty hospitals and the percentage of patients 
they referred to local full-service community 
hospitals for the same condition; 
(C) to compare the quality of care fur-
nished in physician-owned specialty hospitals 
and in local full-service community hospitals for 
similar conditions and patient satisfaction with 
such care; and 
(D) to assess the differences in uncompen-
sated care, as defined by the Secretary, between 
the specialty hospital and local full-service com-
munity hospitals, and the relative value of any 
tax exemption available to such hospitals. 
(3) REPORTS.—Not later than 15 months after 
the date of the enactment of this Act, the Commis-
sion and the Secretary, respectively, shall each sub-
mit to Congress a report on the studies conducted 
under paragraphs (1) and (2), respectively, and shall
include any recommendations for legislation or ad-
ministrative changes.
SEC. 116. 1-TIME APPEALS PROCESS FOR HOSPITAL WAGE 
INDEX CLASSIFICATION. 
(a) ESTABLISHMENT OF PROCESS.—
(1) IN GENERAL.—The Secretary shall establish 
by instruction or otherwise a process under which a 
hospital may appeal the wage index classification 
otherwise applicable to the hospital and select an-
other area within the State (or, at the discretion of 
the Secretary, within a contiguous State) to which to 
be reclassified. 
(2) PROCESS REQUIREMENTS.—The process es-
tablished under paragraph (1) shall be consistent 
with the following: 
(A) Such an appeal shall be filed by not 
later than April 1, 2004. 
(B) Such an appeal shall be heard by the 
Medicare Geographic Reclassification Review 
Board. 
(C) There shall be no further administra-
tive or judicial review of a decision of such 
Board. 
(3) RECLASSIFICATION UPON SUCCESSFUL AP-
PEAL.—If the Medicare Geographic Reclassification
Review Board determines that the hospital is a 
qualifying hospital (as defined in subsection (c)), the 
hospital shall be reclassified to the area selected 
under paragraph (1). Such reclassification shall 
apply with respect to discharges occurring during 
the 3-fiscal-year period beginning with fiscal year 
2005. 
(4) INAPPLICABILITY
OF
CERTAIN
PROVI-
SIONS.—Except as the Secretary may provide, the 
provisions of paragraphs (8) and (10) of section 
1886(d) of the Social Security Act (42 U.S.C. 
1395ww(d)) shall not apply to an appeal under this 
section. 
(b) APPLICATION
OF RECLASSIFICATION.—In the 
case of an appeal decided in favor of a qualifying hospital 
under subsection (a), the wage index reclassification shall 
not affect the wage index computation for any area or for 
any other hospital and shall not be effected in a budget 
neutral manner. The provisions of this section shall not 
affect payment for discharges occurring after the end of 
the 3-fiscal-year period referred to in subsection (a). 
(c) QUALIFYING HOSPITAL DEFINED.—For purposes 
of this section, the term ‘‘qualifying hospital’’ means a 
subsection 
(d) 
hospital 
(as 
defined 
in 
section
1886(d)(1)(B) of the Social Security Act, 42 U.S.C. 
1395ww(d)(1)(B)) that—
(1) does not qualify for a change in wage index 
classification under paragraph (8) or (10) of section 
1886(d) of the Social Security Act (42 U.S.C. 
1395ww(d)) on the basis of requirements relating to 
distance or commuting; and 
(2) meets such other criteria, such as quality, 
as the Secretary may specify by instruction or other-
wise. 
The Secretary may modify the wage comparison guidelines 
promulgated under section 1886(d)(10)(D) of such Act 
(42 U.S.C. 1395ww(d)(10)(D)) in carrying out this sec-
tion. 
(d) WAGE INDEX CLASSIFICATION.—For purposes of 
this section, the term ‘‘wage index classification’’ means 
the geographic area in which it is classified for purposes 
of determining for a fiscal year the factor used to adjust 
the DRG prospective payment rate under section 1886(d) 
of the Social Security Act (42 U.S.C. 1395ww(d)) for area 
differences in hospital wage levels that applies to such hos-
pital under paragraph (3)(E) of such section. 
(e) LIMITATION ON EXPENDITURES.—The aggregate 
amount of additional expenditures resulting from the ap-
plication of this section shall not exceed $500,000,000.
stay, that would otherwise be paid for under the 
prospective payment system for covered skilled 
nursing facility services (under section 1888(e) 
of 
the 
Social 
Security 
Act 
(42 
U.S.C. 
1395yy(e)); and 
(B) for such services for residents in a 
skilled nursing facility after a part A stay. 
(4) CREDENTIALING REQUIREMENTS.—Whether 
the Secretary should establish credentialing or other 
requirements for technicians that furnish diagnostic 
ultrasound services to medicare beneficiaries. 
(b) REPORT.—Not later than 2 years 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), and shall include any recommendations for 
legislation or administrative change as the Comptroller 
General determines appropriate. 
TITLE II—PROVISIONS 
RELATING TO PART B ONLY 
SEC. 201. REVISION OF UPDATES FOR PHYSICIANS’ SERV-
ICES. 
(a) UPDATE FOR 2004 AND 2005.—
(1) IN GENERAL.—Section 1848(d) (42 U.S.C. 
1395w–4(d)) is amended by adding at the end the 
following new paragraph:
‘‘(5) UPDATE FOR 2004 AND 2005.—The update 
to the single conversion factor established in para-
graph (1)(C) for each of 2004 and 2005 shall be not 
less than 1.5 percent.’’. 
(2) 
CONFORMING
AMENDMENT.—Paragraph 
(4)(B) of such section is amended, in the matter be-
fore clause (i), by inserting ‘‘and paragraph (5)’’ 
after ‘‘subparagraph (D)’’. 
(3) NOT TREATED AS CHANGE IN LAW AND 
REGULATION IN SUSTAINABLE GROWTH RATE DE-
TERMINATION.—The amendments made by this sub-
section shall not be treated as a change in law for 
purposes of applying section 1848(f)(2)(D) of the 
Social Security Act (42 U.S.C. 1395w–4(f)(2)(D)). 
(b) USE OF 10-YEAR ROLLING AVERAGE IN COM-
PUTING GROSS DOMESTIC PRODUCT.—
(1) IN
GENERAL.—Section 1848(f)(2)(C) (42 
U.S.C. 1395w–4(f)(2)(C)) is amended—
(A) by striking ‘‘projected’’ and inserting 
‘‘annual average’’; and 
(B) by striking ‘‘from the previous applica-
ble period to the applicable period involved’’ 
and inserting ‘‘during the 10-year period ending 
with the applicable period involved’’.
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to computations of the 
sustainable growth rate for years beginning with 
2003. 
SEC. 202. 2-YEAR EXTENSION OF HOLD HARMLESS PROVI-
SIONS FOR SMALL RURAL HOSPITALS AND 
SOLE COMMUNITY HOSPITALS UNDER THE 
PROSPECTIVE PAYMENT SYSTEM FOR HOS-
PITAL OUTPATIENT DEPARTMENT SERVICES. 
(a) HOLD HARMLESS PROVISIONS.—
(1) IN GENERAL.—Section 1833(t)(7)(D)(i) (42 
U.S.C. 1395l(t)(7)(D)(i)) is amended—
(A) in the heading, by striking ‘‘SMALL’’ 
and inserting ‘‘CERTAIN’’; 
(B) by inserting ‘‘or a sole community 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 paragraph (1)(B) shall apply with respect to cost 
reporting periods beginning on and after January 1, 
2004. 
(b) STUDY; AUTHORIZATION OF ADJUSTMENT.—Sec-
tion 1833(t) (42 U.S.C. 1395l(t)) is amended—
(1) by redesignating paragraph (13) as para-
graph (16); and 
(2) by inserting after paragraph (12) the fol-
lowing new paragraph: 
‘‘(13) AUTHORIZATION
OF
ADJUSTMENT
FOR 
RURAL HOSPITALS.—
‘‘(A) STUDY.—The Secretary shall conduct 
a study to determine if, under the system under 
this subsection, costs incurred by hospitals lo-
cated in rural areas by ambulatory payment 
classification groups (APCs) exceed those costs 
incurred by hospitals located in urban areas. 
‘‘(B) AUTHORIZATION OF ADJUSTMENT.—
Insofar as the Secretary determines under sub-
paragraph (A) that costs incurred by hospitals 
located in rural areas exceed those costs in-
curred by hospitals located in urban areas, the 
Secretary shall provide for an appropriate ad-
justment under paragraph (2)(E) to reflect 
those higher costs by January 1, 2006.’’. 
SEC. 203. ESTABLISHMENT OF FLOOR ON WORK GEO-
GRAPHIC ADJUSTMENT. 
Section 1848(e)(1) (42 U.S.C. 1395w–4(e)(1)) is 
amended—
(1) in subparagraph (A), by striking ‘‘subpara-
graphs (B) and (C)’’ and inserting ‘‘subparagraphs 
(B), (C), and (E)’’; and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(E) FLOOR AT 1.0 ON WORK GEOGRAPHIC 
INDEX.—After calculating the work geographic 
index in subparagraph (A)(iii), for purposes of 
payment for services furnished on or after Jan-
uary 1, 2004, and before January 1, 2007, the 
Secretary shall increase the work geographic 
index to 1.00 for any locality for which such 
work geographic index is less than 1.00.’’. 
SEC. 204. MEDICARE INCENTIVE PAYMENT PROGRAM IM-
PROVEMENTS FOR PHYSICIAN SCARCITY. 
(a) ADDITIONAL INCENTIVE PAYMENT FOR CERTAIN 
PHYSICIAN SCARCITY AREAS.—Section 1833 (42 U.S.C. 
1395l) is amended by adding at the end the following new 
subsection: 
‘‘(u) INCENTIVE PAYMENTS FOR PHYSICIAN SCAR-
CITY AREAS.—
‘‘(1) IN GENERAL.—In the case of physicians’ 
services furnished on or after January 1, 2005, and 
before January 1, 2008—
‘‘(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), 
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 estab-
lish 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-
ty and are entitled to benefits under part A or 
enrolled under this part, or both (in this sub-
section referred to as ‘individuals’). 
‘‘(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 the number of indi-
viduals determined under subparagraph 
(B). 
‘‘(ii) SPECIALIST
CARE
RATIO.—The 
ratio (in this paragraph referred to as the 
‘specialist care ratio’) of the number of 
other physicians (determined under sub-
paragraph (A)(ii)), to the number of indi-
viduals determined under subparagraph 
(B).
‘‘(3) RANKING OF COUNTIES.—The Secretary 
shall rank each such county or area based separately 
on its primary care ratio and its specialist care ratio. 
‘‘(4) IDENTIFICATION OF COUNTIES.—
‘‘(A) IN
GENERAL.—The Secretary shall 
identify—
‘‘(i) those counties and areas (in this 
paragraph referred to as ‘primary care 
scarcity counties’) with the lowest primary 
care ratios that represent, if each such 
county or area were weighted by the num-
ber of individuals determined under para-
graph (2)(B), an aggregate total of 20 per-
cent of the total of the individuals deter-
mined under such paragraph; and 
‘‘(ii) those counties and areas (in this 
subsection referred to as ‘specialist care 
scarcity counties’) with the lowest spe-
cialist care ratios that represent, if each 
such county or area were weighted by the 
number of individuals determined under 
paragraph (2)(B), an aggregate total of 20 
percent of the total of the individuals de-
termined under such paragraph.
‘‘(B) PERIODIC
REVISIONS.—The Sec-
retary shall periodically revise the counties or 
areas identified in subparagraph (A) (but not 
less often than once every three years) unless 
the Secretary determines that there is no new 
data available on the number of physicians 
practicing in the county or area or the number 
of individuals residing in the county or area, as 
identified in paragraph (2). 
‘‘(C) 
IDENTIFICATION
OF
COUNTIES 
WHERE SERVICE IS FURNISHED.—For purposes 
of paying the additional amount specified in 
paragraph (1), if the Secretary uses the 5-digit 
postal ZIP Code where the service is furnished, 
the dominant county of the postal ZIP Code (as 
determined by the United States Postal Service, 
or otherwise) shall be used to determine wheth-
er the postal ZIP Code is in a scarcity county 
identified in subparagraph (A) or revised in 
subparagraph (B). 
‘‘(D) JUDICIAL REVIEW.—There shall be 
no administrative or judicial review under sec-
tion 1869, 1878, or otherwise, respecting—
‘‘(i) the identification of a county or 
area;
‘‘(ii) the assignment of a specialty of 
any physician under this paragraph; 
‘‘(iii) the assignment of a physician to 
a county under paragraph (2); or 
‘‘(iv) the assignment of a postal ZIP 
Code to a county or other area under this 
subsection. 
‘‘(5) RURAL CENSUS TRACTS.—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. 
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; 
POSTING ON WEBSITE.—With respect to a year for
which a county or area is identified or revised under 
paragraph (4), the Secretary shall identify such 
counties or areas as part of the proposed and final 
rule to implement the physician fee schedule under 
section 1848 for the applicable year. The Secretary 
shall post the list of counties identified or revised 
under paragraph (4) on the Internet website of the 
Centers for Medicare & Medicaid Services.’’. 
(b) IMPROVEMENT TO MEDICARE INCENTIVE PAY-
MENT PROGRAM.—
(1) IN GENERAL.—Section 1833(m) (42 U.S.C. 
1395l(m)) is amended—
(A) by inserting ‘‘(1)’’ after ‘‘(m)’’; 
(B) in paragraph (1), as designated by 
subparagraph (A)—
(i) by inserting ‘‘in a year’’ after ‘‘In 
the case of physicians’ services furnished’’; 
and 
(ii) by inserting ‘‘as identified by the 
Secretary prior to the beginning of such 
year’’ after ‘‘as a health professional short-
age area’’; and 
(C) by adding at the end the following new 
paragraphs:
‘‘(2) For each health professional shortage area iden-
tified in paragraph (1) that consists of an entire county, 
the Secretary shall provide for the additional payment 
under paragraph (1) without any requirement on the phy-
sician to identify the health professional shortage area in-
volved. The Secretary may implement the previous sen-
tence using the method specified in subsection (u)(4)(C). 
‘‘(3) The Secretary shall post on the Internet website 
of the Centers for Medicare & Medicaid Services a list of 
the health professional shortage areas identified in para-
graph (1) that consist of a partial county to facilitate the 
additional payment under paragraph (1) in such areas. 
‘‘(4) There shall be no administrative or judicial re-
view under section 1869, section 1878, or otherwise, re-
specting—
‘‘(A) the identification of a county or area; 
‘‘(B) the assignment of a specialty of any physi-
cian under this paragraph; 
‘‘(C) the assignment of a physician to a county 
under this subsection; or 
‘‘(D) the assignment of a postal zip code to a 
county or other area under this subsection.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to physicians’ services 
furnished on or after January 1, 2005.
(c) GAO STUDY OF GEOGRAPHIC DIFFERENCES IN 
PAYMENTS FOR PHYSICIANS’ SERVICES.—
(1) STUDY.—The Comptroller General of the 
United States shall conduct a study of differences in 
payment amounts under the physician fee schedule 
under section 1848 of the Social Security Act (42 
U.S.C. 1395w–4) for physicians’ services in different 
geographic areas. Such study shall include—
(A) an assessment of the validity of the ge-
ographic adjustment factors used for each com-
ponent of the fee schedule; 
(B) an evaluation of the measures used for 
such adjustment, including the frequency of re-
visions; 
(C) an evaluation of the methods used to 
determine professional liability insurance costs 
used in computing the malpractice component, 
including a review of increases in professional 
liability insurance premiums and variation in 
such increases by State and physician specialty 
and methods used to update the geographic cost 
of practice index and relative weights for the 
malpractice component; and 
(D) an evaluation of the effect of the ad-
justment to the physician work geographic
index under section 1848(e)(1)(E) of the Social 
Security Act, as added by section 203, on phy-
sician location and retention in areas affected 
by such adjustment, taking into account—
(i) differences in recruitment costs 
and retention rates for physicians, includ-
ing specialists, between large urban areas 
and other areas; and 
(ii) the mobility of physicians, includ-
ing specialists, over the last decade. 
(2) 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 paragraph (1). The report 
shall include recommendations regarding the use of 
more current data in computing geographic cost of 
practice indices as well as the use of data directly 
representative of physicians’ costs (rather than 
proxy measures of such costs). 
SEC. 205. PAYMENT FOR RURAL AND URBAN AMBULANCE 
SERVICES. 
(a) PHASE-IN PROVIDING FLOOR USING BLEND OF 
FEE SCHEDULE AND REGIONAL FEE SCHEDULES.—Sec-
tion 1834(l) (42 U.S.C. 1395m(l)) is amended—
(1) in paragraph (2)(E), by inserting ‘‘con-
sistent with paragraph (11)’’ after ‘‘in an efficient 
and fair manner’’; and 
(2) by redesignating paragraph (8), as added by 
section 221(a) of BIPA (114 Stat. 2763A–486), as 
paragraph (9); and 
(3) by adding at the end the following new 
paragraph: 
‘‘(10) PHASE-IN
PROVIDING
FLOOR
USING 
BLEND
OF
FEE
SCHEDULE
AND
REGIONAL
FEE 
SCHEDULES.—In carrying out the phase-in under 
paragraph (2)(E) for each level of ground service 
furnished in a year, the portion of the payment 
amount that is based on the fee schedule shall be the 
greater of the amount determined under such fee 
schedule (without regard to this paragraph) or the 
following blended rate of the fee schedule under 
paragraph (1) and of a regional fee schedule for the 
region involved: 
‘‘(A) For 2004 (for services furnished on 
or after July 1, 2004), the blended rate shall be 
based 20 percent on the fee schedule under 
paragraph (1) and 80 percent on the regional 
fee schedule.
‘‘(B) For 2005, the blended rate shall be 
based 40 percent on the fee schedule under 
paragraph (1) and 60 percent on the regional 
fee schedule. 
‘‘(C) For 2006, the blended rate shall be 
based 60 percent on the fee schedule under 
paragraph (1) and 40 percent on the regional 
fee schedule. 
‘‘(D) For 2007, 2008, and 2009, the 
blended rate shall be based 80 percent on the 
fee schedule under paragraph (1) and 20 per-
cent on the regional fee schedule. 
‘‘(E) For 2010 and each succeeding year, 
the blended rate shall be based 100 percent on 
the fee schedule under paragraph (1). 
For purposes of this paragraph, the Secretary shall 
establish a regional fee schedule for each of the nine 
census divisions (referred to in section 1886(d)(2)) 
using the methodology (used in establishing the fee 
schedule under paragraph (1)) to calculate a re-
gional conversion factor and a regional mileage pay-
ment rate and using the same payment adjustments 
and the same relative value units as used in the fee 
schedule under such paragraph.’’.
(b) ADJUSTMENT IN PAYMENT FOR CERTAIN LONG 
TRIPS.—Section 1834(l), as amended by subsection (a), 
is amended by adding at the end the following new para-
graph: 
‘‘(11) ADJUSTMENT IN PAYMENT FOR CERTAIN 
LONG
TRIPS.—In the case of ground ambulance 
services furnished on or after July 1, 2004, and be-
fore January 1, 2009, regardless of where the trans-
portation originates, the fee schedule established 
under this subsection shall provide that, with respect 
to the payment rate for mileage for a trip above 50 
miles the per mile rate otherwise established shall be 
increased by 1⁄4 of the payment per mile otherwise 
applicable to miles in excess of 50 miles in such 
trip.’’. 
(c) IMPROVEMENT IN PAYMENTS TO RETAIN EMER-
GENCY CAPACITY FOR AMBULANCE SERVICES IN RURAL 
AREAS.—
(1) IN GENERAL.—Section 1834(l) (42 U.S.C. 
1395m(l)), as amended by subsections (a) and (b), 
is amended by adding at the end the following new 
paragraph: 
‘‘(12) ASSISTANCE
FOR
RURAL
PROVIDERS 
FURNISHING SERVICES IN LOW POPULATION DEN-
SITY AREAS.—
‘‘(A) IN GENERAL.—In the case of ground 
ambulance services furnished on or after July 
1, 2004, and before January 1, 2010, for which 
the transportation originates in a qualified 
rural area (identified under subparagraph 
(B)(iii)), the Secretary shall provide for a per-
cent increase in the base rate of the fee sched-
ule for a trip established under this subsection. 
In establishing such percent increase, the Sec-
retary shall estimate the average cost per trip 
for such services (not taking into account mile-
age) in the lowest quartile as compared to the 
average cost per trip for such services (not tak-
ing into account mileage) in the highest quartile 
of all rural county populations. 
‘‘(B) 
IDENTIFICATION
OF
QUALIFIED 
RURAL AREAS.—
‘‘(i) DETERMINATION OF POPULATION 
DENSITY IN AREA.—Based upon data from 
the United States decennial census for the 
year 2000, the Secretary shall determine, 
for each rural area, the population density 
for that area.
‘‘(ii) RANKING OF AREAS.—The Sec-
retary shall rank each such area based on 
such population density. 
‘‘(iii) IDENTIFICATION OF QUALIFIED 
RURAL AREAS.—The Secretary shall iden-
tify those areas (in subparagraph (A) re-
ferred to as ‘qualified rural areas’) with 
the lowest population densities that rep-
resent, if each such area were weighted by 
the population of such area (as used in 
computing such population densities), an 
aggregate total of 25 percent of the total 
of the population of all such areas. 
‘‘(iv) RURAL AREA.—For purposes of 
this paragraph, the term ‘rural area’ has 
the meaning given such term in section 
1886(d)(2)(D). If feasible, the Secretary 
shall treat a rural census tract of a metro-
politan statistical area (as determined 
under the most recent modification of the 
Goldsmith Modification, originally pub-
lished in the Federal Register on February 
27, 1992 (57 Fed. Reg. 6725) as a rural 
area for purposes of this paragraph.
‘‘(v) JUDICIAL REVIEW.—There shall 
be no administrative or judicial review 
under section 1869, 1878, or otherwise, re-
specting the identification of an area under 
this subparagraph.’’. 
(2) USE OF DATA.—In order to promptly imple-
ment section 1834(l)(12) of the Social Security Act, 
as added by paragraph (1), the Secretary may use 
data furnished by the Comptroller General of the 
United States. 
(d) TEMPORARY INCREASE
FOR GROUND AMBU-
LANCE
SERVICES.—Section 
1834(l) 
(42 
U.S.C. 
1395m(l)), as amended by subsections (a), (b), and (c), 
is amended by adding at the end the following new para-
graph: 
‘‘(13) TEMPORARY INCREASE FOR GROUND AM-
BULANCE SERVICES.—
‘‘(A) IN GENERAL.—After computing the 
rates with respect to ground ambulance services 
under the other applicable provisions of this 
subsection, in the case of such services fur-
nished on or after July 1, 2004, and before 
January 1, 2007, for which the transportation 
originates in—
‘‘(i) a rural area described in para-
graph (9) or in a rural census tract de-
scribed in such paragraph, the fee schedule 
established under this section shall provide 
that the rate for the service otherwise es-
tablished, after the application of any in-
crease under paragraphs (11) and (12), 
shall be increased by 2 percent; and 
‘‘(ii) an area not described in clause 
(i), the fee schedule established under this 
subsection shall provide that the rate for 
the service otherwise established, after the 
application of any increase under para-
graph (11), shall be increased by 1 per-
cent. 
‘‘(B) APPLICATION
OF
INCREASED
PAY-
MENTS AFTER 2006.—The increased payments 
under subparagraph (A) shall not be taken into 
account in calculating payments for services 
furnished after the period specified in such sub-
paragraph.’’. 
(e) IMPLEMENTATION.—The Secretary may imple-
ment the amendments made by this section, and revise 
the conversion factor applicable under section 1834(l) of 
the Social Security Act (42 U.S.C. 1395m(l)) for purposes
of implementing such amendments, on an interim final 
basis, or by program instruction. 
(f) GAO REPORT ON COSTS AND ACCESS.—Not later 
than December 31, 2005, the Comptroller General of the 
United States shall submit to Congress an initial report 
on how costs differ among the types of ambulance pro-
viders and on access, supply, and quality of ambulance 
services in those regions and States that have a reduction 
in payment under the medicare ambulance fee schedule 
(under section 1834(l) of the Social Security Act, as 
amended by this Act). Not later than December 31, 2007, 
the Comptroller General shall submit to Congress a final 
report on such access and supply. 
(g) TECHNICAL AMENDMENTS.—(1) Section 221(c) 
of BIPA (114 Stat. 2763A–487) is amended by striking 
‘‘subsection (b)(2)’’ and inserting ‘‘subsection (b)(3)’’. 
(2) Section 1861(v)(1) (42 U.S.C. 1395x(v)(1)) is 
amended by moving subparagraph (U) 4 ems to the left. 
SEC. 206. PROVIDING APPROPRIATE COVERAGE OF RURAL 
AIR AMBULANCE SERVICES. 
(a) 
COVERAGE.—Section 
1834(l) 
(42 
U.S.C. 
1395m(l)), as amended by subsections (a), (b), (c), and 
(d) of section 205, is amended by adding at the end the 
following new paragraph:
‘‘(14) PROVIDING APPROPRIATE COVERAGE OF 
RURAL AIR AMBULANCE SERVICES.—
‘‘(A) IN
GENERAL.—The regulations de-
scribed in section 1861(s)(7) shall provide, to 
the extent that any ambulance services (wheth-
er ground or air) may be covered under such 
section, that a rural air ambulance service (as 
defined in subparagraph (C)) is reimbursed 
under this subsection at the air ambulance rate 
if the air ambulance service— 
‘‘(i) is reasonable and necessary based 
on the health condition of the individual 
being transported at or immediately prior 
to the time of the transport; and 
‘‘(ii) complies with equipment and 
crew requirements established by the Sec-
retary. 
‘‘(B) SATISFACTION OF REQUIREMENT OF 
MEDICALLY
NECESSARY.—The requirement of 
subparagraph (A)(i) is deemed to be met for a 
rural air ambulance service if—
‘‘(i) subject to subparagraph (D), 
such service is requested by a physician or 
other qualified medical personnel (as speci-
fied by the Secretary) who reasonably de-
termines or certifies that the individual’s 
condition is such that the time needed to 
transport the individual by land or the in-
stability of transportation by land poses a 
threat to the individual’s survival or seri-
ously endangers the individual’s health; or 
‘‘(ii) such service is furnished pursu-
ant to a protocol that is established by a 
State or regional emergency medical serv-
ice (EMS) agency and recognized or ap-
proved by the Secretary under which the 
use of an air ambulance is recommended, 
if such agency does not have an ownership 
interest in the entity furnishing such serv-
ice. 
‘‘(C) RURAL AIR AMBULANCE SERVICE DE-
FINED.—For purposes of this paragraph, the 
term ‘rural air ambulance service’ means fixed 
wing and rotary wing air ambulance service in 
which the point of pick up of the individual oc-
curs in a rural area (as defined in section 
1886(d)(2)(D)) or in a rural census tract of a 
metropolitan statistical area (as determined 
under the most recent modification of the Gold-
smith Modification, originally published in the
Federal Register on February 27, 1992 (57 
Fed. Reg. 6725)). 
‘‘(D) LIMITATION.—
‘‘(i) 
IN
GENERAL.—Subparagraph 
(B)(i) shall not apply if there is a financial 
or employment relationship between the 
person requesting the rural air ambulance 
service and the entity furnishing the ambu-
lance service, or an entity under common 
ownership with the entity furnishing the 
air ambulance service, or a financial rela-
tionship between an immediate family 
member of such requester and such an en-
tity. 
‘‘(ii) EXCEPTION.—Where a hospital 
and the entity furnishing rural air ambu-
lance services are under common owner-
ship, clause (i) shall not apply to remu-
neration (through employment or other re-
lationship) by the hospital of the requester 
or immediate family member if the remu-
neration is for provider-based physician 
services furnished in a hospital (as de-
scribed in section 1887) which are reim-
bursed under part A and the amount of
the remuneration is unrelated directly or 
indirectly to the provision of rural air am-
bulance services.’’. 
(b) CONFORMING AMENDMENT.—Section 1861(s)(7) 
(42 U.S.C. 1395x(s)(7)) is amended by inserting ‘‘, sub-
ject to section 1834(l)(14),’’ after ‘‘but’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this subsection shall apply to services furnished on or after 
January 1, 2005.
SEC. 207. TREATMENT OF CERTAIN CLINICAL DIAGNOSTIC 
LABORATORY TESTS FURNISHED TO HOS-
PITAL OUTPATIENTS IN CERTAIN RURAL 
AREAS. 
(a) IN GENERAL.—Notwithstanding subsections (a), 
(b), and (h) of section 1833 of the Social Security Act 
(42 U.S.C. 1395l) and section 1834(d)(1) of such Act (42 
U.S.C. 1395m(d)(1)), in the case of a clinical diagnostic 
laboratory test covered under part B of title XVIII of such 
Act that is furnished during a cost reporting period de-
scribed in subsection (b) by a hospital with fewer than 
50 beds that is located in a qualified rural area (identified 
under paragraph (12)(B)(iii) of section 1834(l) of the So-
cial Security Act (42 U.S.C. 1395m(l)), as added by sec-
tion 205(c)) as part of outpatient services of the hospital, 
the amount of payment for such test shall be 100 percent
of the reasonable costs of the hospital in furnishing such 
test. 
(b) APPLICATION.—A cost reporting period described 
in this subsection is a cost reporting period beginning dur-
ing the 2-year period beginning on July 1, 2004. 
(c) PROVISION AS PART OF OUTPATIENT HOSPITAL 
SERVICES.—For purposes of subsection (a), in deter-
mining whether clinical diagnostic laboratory services are 
furnished as part of outpatient services of a hospital, the 
Secretary shall apply the same rules that are used to de-
termine whether clinical diagnostic laboratory services are 
furnished as an outpatient critical access hospital service 
under section 1834(g)(4) of the Social Security Act (42 
U.S.C. 1395m(g)(4)). 
SEC. 208. EXTENSION OF TELEMEDICINE DEMONSTRATION 
PROJECT. 
Section 4207 of the Balanced Budget Act of 1997 
(Public Law 105–33) is amended—
(1) in subsection (a)(4), by striking ‘‘4-year’’ 
and inserting ‘‘8-year’’; and 
(2) 
in 
subsection 
(d)(3), 
by 
striking 
‘‘$30,000,000’’ and inserting ‘‘$60,000,000’’.
SEC. 209. REPORT ON DEMONSTRATION PROJECT PERMIT-
TING SKILLED NURSING FACILITIES TO BE 
ORIGINATING TELEHEALTH SITES; AUTHOR-
ITY TO IMPLEMENT. 
(a) EVALUATION.—The Secretary, acting through the 
Administrator of the Health Resources and Services Ad-
ministration in consultation with the Administrator of the 
Centers for Medicare & Medicaid Services, shall evaluate 
demonstration projects conducted by the Secretary under 
which skilled nursing facilities (as defined in section 
1819(a) of the Social Security Act (42 U.S.C. 1395i–3(a)) 
are treated as originating sites for telehealth services. 
(b) REPORT.—Not later than January 1, 2005, the 
Secretary shall submit to Congress a report on the evalua-
tion conducted under subsection (a). Such report shall in-
clude recommendations on mechanisms to ensure that per-
mitting a skilled nursing facility to serve as an originating 
site for the use of telehealth services or any other service 
delivered via a telecommunications system does not serve 
as a substitute for in-person visits furnished by a physi-
cian, or for in-person visits furnished by a physician as-
sistant, nurse practitioner or clinical nurse specialist, as 
is otherwise required by the Secretary. 
(c) AUTHORITY TO EXPAND ORIGINATING TELE-
HEALTH SITES TO INCLUDE SKILLED NURSING FACILI-
TIES.—Insofar as the Secretary concludes in the report
required under subsection (b) that it is advisable to permit 
a skilled nursing facility to be an originating sites for tele-
health services under section 1834(m) of the Social Secu-
rity Act (42 U.S.C. 1395m(m)), and that the Secretary 
can establish the mechanisms to ensure such permission 
does not serve as a substitute for in-person visits furnished 
by a physician, or for in-person visits furnished by a physi-
cian assistant, nurse practitioner or clinical nurse spe-
cialist, the Secretary may deem a skilled nursing facility 
to be an originating site under paragraph (4)(C)(ii) of 
such section beginning on January 1, 2006. 
SEC. 210. 5-YEAR AUTHORIZATION OF REIMBURSEMENT 
FOR ALL MEDICARE PART B SERVICES FUR-
NISHED BY CERTAIN INDIAN HOSPITALS AND 
CLINICS. 
Section 1880(e)(1)(A) (42 U.S.C. 1395qq(e)(1)(A)) 
is amended by inserting ‘‘(and for items and services fur-
nished during the 5-year period beginning on January 1, 
2005, all items and services for which payment may be 
made under part B)’’ after ‘‘for services described in para-
graph (2)’’. 
SEC. 211. MEDPAC REPORT ON PAYMENT FOR PHYSICIANS’ 
SERVICES. 
(a) PRACTICE EXPENSE COMPONENT.—Not later 
than 1 year after the date of the enactment of this Act,
the Medicare Payment Advisory Commission shall submit 
to Congress a report on the effect of refinements to the 
practice expense component of payments for physicians’ 
services, after the transition to a full resource-based pay-
ment system in 2002, under section 1848 of the Social 
Security Act (42 U.S.C. 1395w–4). Such report shall ex-
amine the following matters by physician specialty: 
(1) The effect of such refinements on payment 
for physicians’ services. 
(2) The interaction of the practice expense com-
ponent with other components of and adjustments to 
payment for physicians’ services under such section. 
(3) The appropriateness of the amount of com-
pensation by reason of such refinements. 
(4) The effect of such refinements on access to 
care by medicare beneficiaries to physicians’ serv-
ices. 
(5) The effect of such refinements on physician 
participation under the medicare program. 
(b) VOLUME OF PHYSICIANS’ SERVICES.—Not later 
than 1 year after the date of the enactment of this Act, 
the Medicare Payment Advisory Commission shall submit 
to Congress a report on the extent to which increases in 
the volume of physicians’ services under part B of the 
medicare program are a result of care that improves the
not apply, as of October 1, 2002, to pediatric 
facilities that do not have an exception rate de-
scribed in subparagraph (C) in effect on such 
date. For purposes of this subparagraph, the 
term ‘pediatric facility’ means a renal facility 
at least 50 percent of whose patients are indi-
viduals under 18 years of age.’’. 
(2) CONFORMING
AMENDMENT.—The fourth 
sentence 
of 
section 
1881(b)(7) 
(42 
U.S.C. 
1395rr(b)(7)) is amended by striking ‘‘The Sec-
retary’’ and inserting ‘‘Subject to section 422(a)(2) 
of the Medicare, Medicaid, and SCHIP Benefits Im-
provement and Protection Act of 2000, the Sec-
retary’’. 
(c) INSPECTOR
GENERAL
STUDIES
ON
ESRD 
DRUGS.—
(1) IN
GENERAL.—The Inspector General of 
the Department of Health and Human Services shall 
conduct two studies with respect to drugs and 
biologicals (including erythropoietin) furnished to 
end-stage renal disease patients under the medicare 
program which are separately billed by end stage 
renal disease facilities. 
(2) STUDIES ON ESRD DRUGS.—
(A) EXISTING
DRUGS.—The first study 
under paragraph (1) shall be conducted with re-
spect to such drugs and biologicals for which a 
billing code exists prior to January 1, 2004. 
(B) NEW
DRUGS.—The second study 
under paragraph (1) shall be conducted with re-
spect to such drugs and biologicals for which a 
billing code does not exist prior to January 1, 
2004. 
(3) MATTERS
STUDIED.—Under each study 
conducted under paragraph (1), the Inspector Gen-
eral shall—
(A) determine the difference between the 
amount of payment made to end stage renal 
disease facilities under title XVIII of the Social 
Security Act for such drugs and biologicals and 
the acquisition costs of such facilities for such 
drugs and biologicals and which are separately 
billed by end stage renal disease facilities, and 
(B) estimate the rates of growth of ex-
penditures for such drugs and biologicals billed 
by such facilities. 
(4) REPORTS.—
(A) EXISTING
ESRD
DRUGS.—Not later 
than April 1, 2004, the Inspector General shall
report to the Secretary on the study described 
in paragraph (2)(A). 
(B) NEW ESRD DRUGS.—Not later than 
April 1, 2006, the Inspector General shall re-
port to the Secretary on the study described in 
paragraph (2)(B). 
(d) BASIC CASE-MIX ADJUSTED COMPOSITE RATE 
FOR RENAL DIALYSIS FACILITY SERVICES.—(1) Section 
1881(b) (42 U.S.C. 1395rr(b)) is amended by adding at 
the end the following new paragraphs: 
‘‘(12)(A) In lieu of payment under paragraph (7) be-
ginning with services furnished on January 1, 2005, the 
Secretary shall establish a basic case-mix adjusted pro-
spective payment system for dialysis services furnished by 
providers of services and renal dialysis facilities in a year 
to individuals in a facility and to such individuals at home. 
The case-mix under such system shall be for a limited 
number of patient characteristics. 
‘‘(B) The system described in subparagraph (A) shall 
include—
‘‘(i) the services comprising the composite rate 
established under paragraph (7); and 
‘‘(ii) the difference between payment amounts 
under this title for separately billed drugs and 
biologicals (including erythropoietin) and acquisition
costs of such drugs and biologicals, as determined by 
the Inspector General reports to the Secretary as re-
quired by section 623(c) of the Medicare Prescrip-
tion Drug, Improvement, and Modernization Act of 
2003—
‘‘(I) beginning with 2005, for such drugs 
and biologicals for which a billing code exists 
prior to January 1, 2004; and 
‘‘(II) beginning with 2007, for such drugs 
and biologicals for which a billing code does not 
exist prior to January 1, 2004, 
adjusted to 2005, or 2007, respectively, as deter-
mined to be appropriate by the Secretary. 
‘‘(C)(i) In applying subparagraph (B)(ii) for 2005, 
such payment amounts under this title shall be determined 
using the methodology specified in paragraph (13)(A)(i). 
‘‘(ii) For 2006, the Secretary shall provide for an ad-
justment to the payments under clause (i) to reflect the 
difference between the payment amounts using the meth-
odology under paragraph (13)(A)(i) and the payment 
amount determined using the methodology applied by the 
Secretary under paragraph (13)(A)(iii) of such paragraph, 
as estimated by the Secretary. 
‘‘(D) The Secretary shall adjust the payment rates 
under such system by a geographic index as the Secretary
determines to be appropriate. If the Secretary applies a 
geographic index under this paragraph that differs from 
the index applied under paragraph (7) the Secretary shall 
phase-in the application of the index under this paragraph 
over a multiyear period. 
‘‘(E)(i) Such system shall be designed to result in the 
same aggregate amount of expenditures for such services, 
as estimated by the Secretary, as would have been made 
for 2005 if this paragraph did not apply. 
‘‘(ii) The adjustment made under subparagraph 
(B)(ii)(II) shall be done in a manner to result in the same 
aggregate amount of expenditures after such adjustment 
as would otherwise have been made for such services for 
2006 or 2007, respectively, as estimated by the Secretary, 
if this paragraph did not apply. 
‘‘(F) Beginning with 2006, the Secretary shall annu-
ally increase the basic case-mix adjusted payment amounts 
established under this paragraph, by an amount deter-
mined by—
‘‘(i) applying the estimated growth in expendi-
tures for drugs and biologicals (including erythro-
poietin) that are separately billable to the component 
of the basic case-mix adjusted system described in 
subparagraph (B)(ii); and
‘‘(ii) converting the amount determined in 
clause (i) to an increase applicable to the basic case-
mix adjusted payment amounts established under 
subparagraph (B). 
Nothing in this paragraph shall be construed as providing 
for an update to the composite rate component of the basic 
case-mix adjusted system under subparagraph (B). 
‘‘(G) There shall be no administrative or judicial re-
view under section 1869, section 1878, or otherwise, of 
the case-mix system, relative weights, payment amounts, 
the geographic adjustment factor, or the update for the 
system established under this paragraph, or the deter-
mination of the difference between medicare payment 
amounts and acquisition costs for separately billed drugs 
and biologicals (including erythropoietin) under this para-
graph and paragraph (13). 
‘‘(13)(A) The payment amounts under this title for 
separately billed drugs and biologicals furnished in a year, 
beginning with 2004, are as follows: 
‘‘(i) For such drugs and biologicals (other than 
erythropoietin) furnished in 2004, the amount deter-
mined under section 1842(o)(1)(A)(v) for the drug 
or biological. 
‘‘(ii) For such drugs and biologicals (including 
erythropoietin) furnished in 2005, the acquisition
(2) Paragraph (7) of such section is amended in the 
first sentence by striking ‘‘The Secretary’’ and inserting 
‘‘Subject to paragraph (12), the Secretary’’. 
(3) Paragraph (11)(B) of such section is amended by 
inserting ‘‘subject to paragraphs (12) and (13)’’ before 
‘‘payment for such item’’. 
(e) DEMONSTRATION OF BUNDLED CASE-MIX AD-
JUSTED PAYMENT SYSTEM FOR ESRD SERVICES.—
(1) IN GENERAL.—The Secretary shall establish 
a demonstration project of the use of a fully case-
mix adjusted payment system for end stage renal 
disease services under section 1881 of the Social Se-
curity Act (42 U.S.C. 1395rr) for patient character-
istics identified in the report under subsection (f) 
that bundles into such payment rates amounts for—
(A) drugs and biologicals (including eryth-
ropoietin) furnished to end stage renal disease 
patients under the medicare program which are 
separately billed by end stage renal disease fa-
cilities (as of the date of the enactment of this 
Act); and 
(B) clinical laboratory tests related to such 
drugs and biologicals. 
(2) FACILITIES INCLUDED IN THE DEMONSTRA-
TION.—In conducting the demonstration under this
subsection, the Secretary shall ensure the participa-
tion of a sufficient number of providers of dialysis 
services and renal dialysis facilities, but in no case 
to exceed 500. In selecting such providers and facili-
ties, the Secretary shall ensure that the following 
types of providers are included in the demonstration: 
(A) Urban providers and facilities. 
(B) Rural providers and facilities. 
(C) Not-for-profit providers and facilities. 
(D) For-profit providers and facilities. 
(E) Independent providers and facilities. 
(F) Specialty providers and facilities, in-
cluding pediatric providers and facilities and 
small providers and facilities. 
(3) TEMPORARY ADD-ON PAYMENT FOR DIALY-
SIS SERVICES FURNISHED UNDER THE DEMONSTRA-
TION.—
(A) IN GENERAL.—During the period of 
the demonstration project, the Secretary shall 
increase payment rates that would otherwise 
apply under section 1881(b) of such Act (42 
U.S.C. 1395rr(b)) by 1.6 percent for dialysis 
services furnished in facilities in the demonstra-
tion site.
(B) RULES OF CONSTRUCTION.—Nothing 
in this subsection shall be construed as—
(i) as an annual update under section 
1881(b) of the Social Security Act (42 
U.S.C. 1395rr(b)); 
(ii) as increasing the baseline for pay-
ments under such section; or 
(iii) requiring the budget neutral im-
plementation of the demonstration project 
under this subsection. 
(4) 3-YEAR PERIOD.—The Secretary shall con-
duct the demonstration under this subsection for the 
3-year period beginning on January 1, 2006. 
(5) USE OF ADVISORY BOARD.—
(A) IN
GENERAL.—In carrying out the 
demonstration under this subsection, the Sec-
retary shall establish an advisory board com-
prised of representatives described in subpara-
graph (B) to provide advice and recommenda-
tions with respect to the establishment and op-
eration of such demonstration. 
(B) REPRESENTATIVES.—Representatives 
referred to in subparagraph (A) include rep-
resentatives of the following: 
(i) Patient organizations.
(ii) Individuals with expertise in end 
stage renal dialysis services, such as clini-
cians, economists, and researchers. 
(iii) The Medicare Payment Advisory 
Commission, established under section 
1805 of the Social Security Act (42 U.S.C. 
1395b–6). 
(iv) 
The 
National 
Institutes 
of 
Health. 
(v) Network organizations under sec-
tion 1881(c) of the Social Security Act (42 
U.S.C. 1395rr(c)). 
(vi) Medicare contractors to monitor 
quality of care. 
(vii) Providers of services and renal 
dialysis facilities furnishing end stage renal 
disease services. 
(C) TERMINATION OF ADVISORY PANEL.—
The advisory panel shall terminate on Decem-
ber 31, 2008. 
(6) AUTHORIZATION
OF
APPROPRIATIONS.—
There are authorized to be appropriated, in appro-
priate part from the Federal Hospital Insurance 
Trust Fund and the Federal Supplementary Medical 
Insurance Trust Fund, $5,000,000 in fiscal year
2006 to conduct the demonstration under this sub-
section. 
(f) REPORT ON A BUNDLED PROSPECTIVE PAYMENT 
SYSTEM FOR END STAGE RENAL DISEASE SERVICES.—
(1) REPORT.—
(A) IN GENERAL.—Not later than October 
1, 2005, the Secretary shall submit to Congress 
a report detailing the elements and features for 
the design and implementation of a bundled 
prospective payment system for services fur-
nished by end stage renal disease facilities in-
cluding, to the maximum extent feasible, bun-
dling of drugs, clinical laboratory tests, and 
other items that are separately billed by such 
facilities. The report shall include a description 
of the methodology to be used for the establish-
ment of payment rates, including components of 
the new system described in paragraph (2). 
(B) RECOMMENDATIONS.—The Secretary 
shall include in such report recommendations 
on elements, features, and methodology for a 
bundled prospective payment system or other 
issues related to such system as the Secretary 
determines to be appropriate.
(2) ELEMENTS AND FEATURES OF A BUNDLED 
PROSPECTIVE
PAYMENT
SYSTEM.—The report re-
quired under paragraph (1) shall include the fol-
lowing elements and features of a bundled prospec-
tive payment system: 
(A) BUNDLE OF ITEMS AND SERVICES.—A 
description of the bundle of items and services 
to be included under the prospective payment 
system. 
(B) CASE MIX.—A description of the case-
mix adjustment to account for the relative re-
source use of different types of patients. 
(C) WAGE INDEX.—A description of an ad-
justment to account for geographic differences 
in wages. 
(D) RURAL AREAS.—The appropriateness 
of establishing a specific payment adjustment to 
account for additional costs incurred by rural 
facilities. 
(E) OTHER
ADJUSTMENTS.—Such other 
adjustments as may be necessary to reflect the 
variation in costs incurred by facilities in caring 
for patients with end stage renal disease.
(F) UPDATE
FRAMEWORK.—A method-
ology for appropriate updates under the pro-
spective payment system. 
(G) ADDITIONAL
RECOMMENDATIONS.—
Such other matters as the Secretary determines 
to be appropriate. 
SEC. 213. 2-YEAR MORATORIUM ON THERAPY CAPS; PROVI-
SIONS RELATING TO REPORTS. 
(a) ADDITIONAL MORATORIUM ON THERAPY CAPS.—
(1) 2004 AND
2005.—Section 1833(g)(4) (42 
U.S.C. 1395l(g)(4)) is amended by striking ‘‘and 
2002’’ and inserting ‘‘2002, 2004, and 2005’’. 
(2) REMAINDER OF 2003.—For the period be-
ginning on the date of the enactment of this Act and 
ending of December 31, 2003, the Secretary shall 
not apply the provisions of paragraphs (1), (2), and 
(3) of section 1833(g) to expenses incurred with re-
spect to services described in such paragraphs dur-
ing such period. Nothing in the preceding sentence 
shall be construed as affecting the application of 
such paragraphs by the Secretary before the date of 
the enactment of this Act. 
(b) PROMPT SUBMISSION OF OVERDUE REPORTS ON 
PAYMENT AND UTILIZATION OF OUTPATIENT THERAPY 
SERVICES.—Not later than March 31, 2004, the Secretary
shall submit to Congress the reports required under sec-
tion 4541(d)(2) of the Balanced Budget Act of 1997 
(Public Law 105–33; 111 Stat. 457) (relating to alter-
natives to a single annual dollar cap on outpatient ther-
apy) and under section 221(d) of the Medicare, Medicaid, 
and SCHIP Balanced Budget Refinement Act of 1999 
(Appendix F, 113 Stat. 1501A–352), as enacted into law 
by section 1000(a)(6) of Public Law 106–113 (relating 
to utilization patterns for outpatient therapy). 
(c) GAO REPORT IDENTIFYING CONDITIONS AND 
DISEASES JUSTIFYING WAIVER OF THERAPY CAP.—
(1) STUDY.—The Comptroller General of the 
United States shall identify conditions or diseases 
that may justify waiving the application of the ther-
apy caps under section 1833(g) of the Social Secu-
rity Act (42 U.S.C. 1395l(g)) with respect to such 
conditions or diseases. 
(2) REPORT TO CONGRESS.—Not later than Oc-
tober 1, 2004, the Comptroller General shall submit 
to Congress a report on the conditions and diseases 
identified under paragraph (1), and shall include a 
recommendation of criteria, with respect to such 
conditions and disease, under which a waiver of the 
therapy caps would apply.
100
SEC. 214. PAYMENT FOR CLINICAL DIAGNOSTIC LABORA-
TORY TESTS. 
Section 
1833(h)(2)(A)(ii)(IV) 
(42 
U.S.C. 
1395l(h)(2)(A)(ii)(IV)) is amended by striking ‘‘and 1998 
through 2002’’ and inserting ‘‘, 1998 through 2002, and 
2004 through 2008’’. 
TITLE III—PROVISIONS 
RELATING TO PARTS A AND B 
SEC. 301. 1-YEAR INCREASE FOR HOME HEALTH SERVICES 
FURNISHED IN A RURAL AREA. 
(a) IN GENERAL.—With respect to episodes and vis-
its ending on or after April 1, 2004, and before April 1, 
2005, in the case of home health services furnished in a 
rural area (as defined in section 1886(d)(2)(D) of the So-
cial Security Act (42 U.S.C. 1395ww(d)(2)(D))), the Sec-
retary 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).
101
(c) NO EFFECT ON SUBSEQUENT PERIODS.—The 
payment increase provided under subsection (a) for a pe-
riod under such subsection—
(1) shall not apply to episodes and visits ending 
after such period; and 
(2) shall not be taken into account in calcu-
lating the payment amounts applicable for episodes 
and visits occurring after such period. 
SEC. 302. REDISTRIBUTION OF UNUSED RESIDENT POSI-
TIONS. 
(a) IN
GENERAL.—Section 1886(h) (42 U.S.C. 
1395ww(h)(4)) is amended—
(1) in paragraph (4)(F)(i), by inserting ‘‘sub-
ject to paragraph (7),’’ after ‘‘October 1, 1997,’’; 
(2) in paragraph (4)(H)(i), by inserting ‘‘and 
subject to paragraph (7)’’ after ‘‘subparagraphs (F) 
and (G)’’; and 
(3) by adding at the end the following new 
paragraph: 
‘‘(7) REDISTRIBUTION OF UNUSED RESIDENT 
POSITIONS.—
‘‘(A) REDUCTION IN LIMIT BASED ON UN-
USED POSITIONS.—
‘‘(i) PROGRAMS SUBJECT TO REDUC-
TION.—
102
‘‘(I) IN
GENERAL.—Except as 
provided in subclause (II), if a hos-
pital’s reference resident level (speci-
fied in clause (ii)) is less than the oth-
erwise applicable resident limit (as de-
fined in subparagraph (C)(ii)), effec-
tive for portions of cost reporting pe-
riods occurring on or after July 1, 
2005, the otherwise applicable resi-
dent limit shall be reduced by 75 per-
cent of the difference between such 
otherwise applicable resident limit and 
such reference resident level. 
‘‘(II) EXCEPTION
FOR
SMALL 
RURAL
HOSPITALS.—This subpara-
graph shall not apply to a hospital lo-
cated in a rural area (as defined in 
subsection (d)(2)(D)(ii)) with fewer 
than 250 acute care inpatient beds. 
‘‘(ii) REFERENCE RESIDENT LEVEL.—
‘‘(I) IN
GENERAL.—Except as 
otherwise provided in subclauses (II) 
and (III), the reference resident level 
specified in this clause for a hospital 
is the resident level for the most re-
103
cent cost reporting period of the hos-
pital ending on or before September 
30, 2002, for which a cost report has 
been settled (or, if not, submitted 
(subject to audit)), as determined by 
the Secretary. 
‘‘(II) USE OF MOST RECENT AC-
COUNTING PERIOD TO RECOGNIZE EX-
PANSION OF EXISTING PROGRAMS.—If 
a hospital submits a timely request to 
increase its resident level due to an 
expansion of an existing residency 
training program that is not reflected 
on the most recent settled cost report, 
after audit and subject to the discre-
tion of the Secretary, the reference 
resident level for such hospital is the 
resident level for the cost reporting 
period that includes July 1, 2003, as 
determined by the Secretary. 
‘‘(III) 
EXPANSIONS
UNDER 
NEWLY APPROVED PROGRAMS.—Upon 
the timely request of a hospital, the 
Secretary shall adjust the reference 
resident level specified under sub-
104
clause (I) or (II) to include the num-
ber of medical residents that were ap-
proved in an application for a medical 
residency training program that was 
approved by an appropriate accred-
iting organization (as determined by 
the Secretary) before January 1, 
2002, but which was not in operation 
during the cost reporting period used 
under subclause (I) or (II), as the 
case may be, as determined by the 
Secretary. 
‘‘(iii) AFFILIATION.—The provisions 
of clause (i) shall be applied to hospitals 
which are members of the same affiliated 
group (as defined by the Secretary under 
paragraph (4)(H)(ii)) as of July 1, 2003. 
‘‘(B) REDISTRIBUTION.—
‘‘(i) IN GENERAL.—The Secretary is 
authorized to increase the otherwise appli-
cable resident limit for each qualifying hos-
pital that submits a timely application 
under this subparagraph by such number 
as the Secretary may approve for portions 
of cost reporting periods occurring on or
105
after July 1, 2005. The aggregate number 
of increases in the otherwise applicable 
resident limits under this subparagraph 
may not exceed the Secretary’s estimate of 
the aggregate reduction in such limits at-
tributable to subparagraph (A). 
‘‘(ii) 
CONSIDERATIONS
IN
REDIS-
TRIBUTION.—In determining for which 
hospitals the increase in the otherwise ap-
plicable resident limit is provided under 
clause (i), the Secretary shall take into ac-
count the demonstrated likelihood of the 
hospital filling the positions within the first 
3 cost reporting periods beginning on or 
after July 1, 2005, made available under 
this subparagraph, as determined by the 
Secretary. 
‘‘(iii) PRIORITY
FOR
RURAL
AND 
SMALL URBAN AREAS.—In determining for 
which hospitals and residency training pro-
grams an increase in the otherwise applica-
ble resident limit is provided under clause 
(i), the Secretary shall distribute the in-
crease to programs of hospitals located in 
the following priority order:
106
‘‘(I) First, to hospitals located in 
rural areas (as defined in subsection 
(d)(2)(D)(ii)). 
‘‘(II) Second, to hospitals located 
in urban areas that are not large 
urban areas (as defined for purposes 
of subsection (d)). 
‘‘(III) Third, to other hospitals in 
a State if the residency training pro-
gram involved is in a specialty for 
which there are not other residency 
training programs in the State. 
Increases of residency limits within the 
same priority category under this clause 
shall be determined by the Secretary. 
‘‘(iv) LIMITATION.—In no case shall 
more than 25 full-time equivalent addi-
tional residency positions be made available 
under this subparagraph with respect to 
any hospital. 
‘‘(v) APPLICATION OF LOCALITY AD-
JUSTED
NATIONAL
AVERAGE
PER
RESI-
DENT
AMOUNT.—With respect to addi-
tional residency positions in a hospital at-
tributable to the increase provided under
107
this subparagraph, notwithstanding any 
other provision of this subsection, the ap-
proved FTE resident amount is deemed to 
be equal to the locality adjusted national 
average per resident amount computed 
under paragraph (4)(E) for that hospital. 
‘‘(vi) 
CONSTRUCTION.—Nothing 
in 
this subparagraph shall be construed as 
permitting the redistribution of reductions 
in residency positions attributable to vol-
untary reduction programs under para-
graph (6), under a demonstration project 
approved as of October 31, 2003, under 
the authority of section 402 of Public Law 
90–248, or as affecting the ability of a 
hospital to establish new medical residency 
training 
programs 
under 
paragraph 
(4)(H). 
‘‘(C) RESIDENT
LEVEL
AND
LIMIT
DE-
FINED.—In this paragraph: 
‘‘(i) RESIDENT
LEVEL.—The term 
‘resident level’ means, with respect to a 
hospital, the total number of full-time 
equivalent residents, before the application 
of weighting factors (as determined under
108
paragraph (4)), in the fields of allopathic 
and osteopathic medicine for the hospital. 
‘‘(ii) OTHERWISE
APPLICABLE
RESI-
DENT LIMIT.—The term ‘otherwise appli-
cable resident limit’ means, with respect to 
a hospital, the limit otherwise applicable 
under subparagraphs (F)(i) and (H) of 
paragraph (4) on the resident level for the 
hospital determined without regard to this 
paragraph. 
‘‘(D) JUDICIAL REVIEW.—There shall be 
no administrative or judicial review under sec-
tion 1869, 1878, or otherwise, with respect to 
determinations made under this paragraph.’’. 
(b) 
CONFORMING
PROVISIONS.—(1) 
Section 
1886(d)(5)(B) (42 U.S.C. 1395ww(d)(5)(B)) is amend-
ed—
(A) in the second sentence of clause (ii), by 
striking ‘‘For discharges’’ and inserting ‘‘Subject to 
clause (ix), for discharges’’; 
(B) in clause (v), by adding at the end the fol-
lowing: ‘‘The provisions of subsection (h)(7) shall 
apply with respect to the first sentence of this clause 
in the same manner as it applies with respect to 
subsection (h)(4)(F)(i).’’; and
109
(C) by adding at the end the following new 
clause: 
‘‘(ix) For discharges occurring on or after July 
1, 2005, insofar as an additional payment amount 
under this subparagraph is attributable to resident 
positions redistributed to a hospital under subsection 
(h)(7)(B), in computing the indirect teaching adjust-
ment factor under clause (ii) the adjustment shall be 
computed in a manner as if ‘c’ were equal to 0.66 
with respect to such resident positions.’’. 
(2) Chapter 35 of title 44, United States Code, shall 
not apply with respect to applications under section 
1886(h)(7) of the Social Security Act, as added by sub-
section (a)(3). 
(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)).
110
TITLE IV—OTHER PROVISIONS 
SEC. 401. MEDICAID DISPROPORTIONATE SHARE HOSPITAL 
(DSH) PAYMENTS. 
(a) TEMPORARY INCREASE.—Section 1923(f)(3) (42 
U.S.C. 1396r–4(f)(3)) is amended—
(1) in subparagraph (A), by striking ‘‘subpara-
graph (B)’’ and inserting ‘‘subparagraphs (B) and 
(C)’’; and 
(2) by adding at the end the following new sub-
paragraphs: 
‘‘(C) SPECIAL, TEMPORARY INCREASE IN 
ALLOTMENTS
ON
A
ONE-TIME, 
NON-CUMU-
LATIVE
BASIS.—The DSH allotment for any 
State (other than a State with a DSH allot-
ment determined under paragraph (5))—
‘‘(i) for fiscal year 2004 is equal to 
116 percent of the DSH allotment for the 
State for fiscal year 2003 under this para-
graph, notwithstanding subparagraph (B); 
and 
‘‘(ii) for each succeeding fiscal year is 
equal to the DSH allotment for the State 
for fiscal year 2004 or, in the case of fiscal 
years beginning with the fiscal year speci-
fied in subparagraph (D) for that State,
111
the DSH allotment for the State for the 
previous fiscal year increased by the per-
centage change in the consumer price 
index for all urban consumers (all items; 
U.S. city average), for the previous fiscal 
year. 
‘‘(D) FISCAL YEAR SPECIFIED.—For pur-
poses of subparagraph (C)(ii), the fiscal year 
specified in this subparagraph for a State is the 
first fiscal year for which the Secretary esti-
mates that the DSH allotment for that State 
will equal (or no longer exceed) the DSH allot-
ment for that State under the law as in effect 
before the date of the enactment of this sub-
paragraph.’’.
(b) INCREASE IN FLOOR FOR TREATMENT AS A LOW 
DSH STATE.—Section 1923(f)(5) (42 U.S.C. 1396r–
4(f)(5)) is amended—
(1) in the paragraph heading, by striking ‘‘EX-
TREMELY’’; 
(2) by striking ‘‘In the case of’’ and inserting 
the following: 
‘‘(A) FOR
FISCAL
YEARS
2001
THROUGH 
2003 FOR EXTREMELY LOW DSH STATES.—In 
the case of’’;
112
(3) by inserting ‘‘before fiscal year 2004’’ after 
‘‘In subsequent years’’; and 
(4) by adding at the end the following: 
‘‘(B) FOR FISCAL YEAR 2004 AND SUBSE-
QUENT FISCAL YEARS.—In the case of a State 
in which the total expenditures under the State 
plan (including Federal and State shares) for 
disproportionate share hospital adjustments 
under this section for fiscal year 2000, as re-
ported to the Administrator of the Centers for 
Medicare & Medicaid Services as of August 31, 
2003, is greater than 0 but less than 3 percent 
of the State’s total amount of expenditures 
under the State plan for medical assistance 
during the fiscal year, the DSH allotment for 
the State with respect to—
‘‘(i) fiscal year 2004 shall be the DSH 
allotment for the State for fiscal year 2003 
increased by 16 percent; 
‘‘(ii) each succeeding fiscal year before 
fiscal year 2009 shall be the DSH allot-
ment for the State for the previous fiscal 
year increased by 16 percent; and 
‘‘(iii) fiscal year 2009 and any subse-
quent fiscal year, shall be the DSH allot-
113
ment for the State for the previous year 
subject to an increase for inflation as pro-
vided in paragraph (3)(A).’’. 
(c) IN GENERAL.—Section 1923(f)(5) (42 U.S.C. 
1396r–4(f)(5)) is amended to read as follows: 
‘‘(5) SPECIAL RULE FOR LOW DSH STATES.—In 
the case of a State in which the total expenditures 
under the State plan (including Federal and State 
shares) for disproportionate share hospital adjust-
ments under this section for fiscal year 2000, as re-
ported to the Administrator of the Centers for Medi-
care & Medicaid Services as of August 31, 2003, is 
greater than 0 but less than 3 percent of the State’s 
total amount of expenditures under the State plan 
for medical assistance during the fiscal year, the 
DSH allotment for the State with respect to—
‘‘(A) fiscal year 2004 shall be the DSH al-
lotment for the State for fiscal year 2003 in-
creased by 16 percent; 
‘‘(B) each succeeding fiscal year before fis-
cal year 2009 shall be the DSH allotment for 
the State for the previous fiscal year increased 
by 16 percent; and 
‘‘(C) fiscal year 2009 and any subsequent 
fiscal year, shall be the DSH allotment for the
114
State for the previous year subject to an in-
crease for inflation as provided in paragraph 
(3)(A).’’.
(d) ALLOTMENT ADJUSTMENT.—Section 1923(f) of 
the Social Security Act (42 U.S.C. 1396r–4(f)) is amend-
ed—
(1) in paragraph (3)(A), by striking ‘‘The 
DSH’’ and inserting ‘‘Except as provided in para-
graph (6), the DSH’’; 
(2) by redesignating paragraph (6) as para-
graph (7); and 
(3) by inserting after paragraph (5) the fol-
lowing: 
‘‘(6) ALLOTMENT ADJUSTMENT.—Only with re-
spect to fiscal year 2004 or 2005, if a statewide 
waiver under section 1115 is revoked or terminated 
before the end of either such fiscal year and there 
is no DSH allotment for the State, the Secretary 
shall—
‘‘(A) permit the State whose waiver was 
revoked or terminated to submit an amendment 
to its State plan that would describe the meth-
odology to be used by the State (after the effec-
tive date of such revocation or termination) to 
identify and make payments to disproportionate
115
share hospitals, including children’s hospitals 
and institutions for mental diseases or other 
mental health facilities (other than State-owned 
institutions or facilities), on the basis of the 
proportion of patients served by such hospitals 
that are low-income patients with special needs; 
and 
‘‘(B) provide for purposes of this sub-
section for computation of an appropriate DSH 
allotment for the State for fiscal year 2004 or 
2005 (or both) that would not exceed the 
amount allowed under paragraph (3)(B)(ii) and 
that does not result in greater expenditures 
under this title than would have been made if 
such waiver had not been revoked or termi-
nated. 
In determining the amount of an appropriate DSH 
allotment under subparagraph (B) for a State, the 
Secretary shall take into account the level of DSH 
expenditures for the State for the fiscal year pre-
ceding the fiscal year in which the waiver com-
menced.’’. 
(e) INCREASED REPORTING AND OTHER REQUIRE-
MENTS TO ENSURE THE APPROPRIATE USE OF MED-
ICAID DSH PAYMENT ADJUSTMENTS.—Section 1923 (42
116
U.S.C. 1396r–4) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(j) ANNUAL REPORTS AND OTHER REQUIREMENTS 
REGARDING PAYMENT ADJUSTMENTS.—With respect to 
fiscal year 2004 and each fiscal year thereafter, the Sec-
retary shall require a State, as a condition of receiving 
a payment under section 1903(a)(1) with respect to a pay-
ment adjustment made under this section, to do the fol-
lowing: 
‘‘(1) REPORT.—The State shall submit an an-
nual report that includes the following: 
‘‘(A) An identification of each dispropor-
tionate share hospital that received a payment 
adjustment under this section for the preceding 
fiscal year and the amount of the payment ad-
justment made to such hospital for the pre-
ceding fiscal year. 
‘‘(B) Such other information as the Sec-
retary determines necessary to ensure the ap-
propriateness of the payment adjustments made 
under this section for the preceding fiscal year. 
‘‘(2) INDEPENDENT
CERTIFIED
AUDIT.—The 
State shall annually submit to the Secretary an inde-
pendent certified audit that verifies each of the fol-
lowing:
117
‘‘(A) The extent to which hospitals in the 
State have reduced their uncompensated care 
costs to reflect the total amount of payment ad-
justments under this section. 
‘‘(B) Payments under this section to hos-
pitals that comply with the requirements of sub-
section (g). 
‘‘(C) Only the uncompensated care costs of 
providing inpatient hospital and outpatient hos-
pital services to individuals described in para-
graph (1)(A) of such subsection are included in 
the calculation of the hospital-specific limits 
under such subsection. 
‘‘(D) The State included all payments 
under this title, including supplemental pay-
ments, in the calculation of such hospital-spe-
cific limits. 
‘‘(E) The State has separately documented 
and retained a record of all of its costs under 
this title, claimed expenditures under this title, 
uninsured costs in determining payment adjust-
ments under this section, and any payments 
made on behalf of the uninsured from payment 
adjustments under this section.’’.
118
SEC. 402. 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(e)(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 health 
center entity described under clause (i) or (ii) 
of section 1905(l)(2)(B) and any individual or 
entity providing goods, items, services, dona-
tions, loans, or a combination thereof, to such 
health center entity pursuant to a contract, 
lease, grant, loan, or other agreement, if such 
agreement contributes to the ability of the 
health center entity to maintain or increase the 
availability, or enhance the quality, of services 
provided to a medically underserved population 
served by the health center entity.’’. 
(b) RULEMAKING
FOR EXCEPTION
FOR HEALTH 
CENTER ENTITY ARRANGEMENTS.—
119
(1) ESTABLISHMENT.—
(A) IN GENERAL.—The Secretary shall es-
tablish, on an expedited basis, standards relat-
ing to the exception described in section 
1128B(b)(3)(H) of the Social Security Act, as 
added by subsection (a), for health center entity 
arrangements to the antikickback penalties. 
(B) FACTORS
TO
CONSIDER.—The 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 an individual’s 
freedom of choice. 
(iii) Whether the arrangement be-
tween the health center entity and the 
other party protects a health care profes-
120
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) DEADLINE.—Not later than 1 year after 
the date of the enactment of this Act the Secretary 
shall publish final regulations establishing the stand-
ards described in paragraph (1). 
SEC. 403. OFFICE OF RURAL HEALTH POLICY IMPROVE-
MENTS. 
Section 711(b) (42 U.S.C. 912(b)) is amended—
(1) in paragraph (3), by striking ‘‘and’’ after 
the comma at the end; 
(2) in paragraph (4), by striking the period at 
the end and inserting ‘‘, and’’; and 
(3) by inserting after paragraph (4) the fol-
lowing new paragraph: 
‘‘(5) administer grants, cooperative agreements, 
and contracts to provide technical assistance and 
other activities as necessary to support activities re-
lated to improving health care in rural areas.’’.
121
SEC. 404. MEDPAC STUDY ON RURAL HOSPITAL PAYMENT 
ADJUSTMENTS. 
(a) IN GENERAL.—The Medicare Payment Advisory 
Commission shall conduct a study of the impact of sec-
tions 101 through 106, 112, 202, and 207. The Commis-
sion shall analyze the effect on total payments, growth in 
costs, capital spending, and such other payment effects 
under those sections. 
(b) REPORTS.—
(1) INTERIM
REPORT.—Not later than 18 
months after the date of the enactment of this Act, 
the Commission shall submit to Congress an interim 
report on the matters studied under subsection (a) 
with respect only to changes to the critical access 
hospital provisions under section 405. 
(2) FINAL REPORT.—Not later than 3 years 
after the date of the enactment of this Act, the 
Commission shall submit to Congress a final report 
on all matters studied under subsection (a). 
SEC. 405. FRONTIER EXTENDED STAY CLINIC DEMONSTRA-
TION PROJECT. 
(a) AUTHORITY
TO
CONDUCT
DEMONSTRATION 
PROJECT.—The Secretary shall waive such provisions of 
the medicare program established under title XVIII of the 
Social Security Act (42 U.S.C. 1395 et seq.) as are nec-
essary to conduct a demonstration project under which
122
frontier extended stay clinics described in subsection (b) 
in isolated rural areas are treated as providers of items 
and services under the medicare program. 
(b) CLINICS DESCRIBED.—A frontier extended stay 
clinic is described in this subsection if the clinic—
(1) is located in a community where the closest 
short-term acute care hospital or critical access hos-
pital is at least 75 miles away from the community 
or is inaccessible by public road; and 
(2) is designed to address the needs of—
(A) seriously or critically ill or injured pa-
tients who, due to adverse weather conditions or 
other reasons, cannot be transferred quickly to 
acute care referral centers; or 
(B) patients who need monitoring and ob-
servation for a limited period of time. 
(c) SPECIFICATION OF CODES.—The Secretary shall 
determine the appropriate life-safety codes for such clinics 
that treat patients for needs referred to in subsection 
(b)(2). 
(d) FUNDING.—
(1) IN GENERAL.—Subject to paragraph (2), 
there are authorized to be appropriated, in appro-
priate part from the Federal Hospital Insurance 
Trust Fund and the Federal Supplementary Medical
123
Insurance Trust Fund, such sums as are necessary 
to conduct the demonstration project under this sec-
tion. 
(2) BUDGET NEUTRAL IMPLEMENTATION.—In 
conducting the demonstration project under this sec-
tion, the Secretary shall ensure that the aggregate 
payments made by the Secretary under the medicare 
program do not exceed the amount which the Sec-
retary would have paid under the medicare program 
if the demonstration project under this section was 
not implemented. 
(e) 3-YEAR PERIOD.—The Secretary shall conduct 
the demonstration under this section for a 3-year period. 
(f) REPORT.—Not later than the date that is 1 year 
after the date on which the demonstration project con-
cludes, the Secretary shall submit to Congress a report 
on the demonstration project, together with such rec-
ommendations for legislation or administrative action as 
the Secretary determines appropriate. 
(g) DEFINITIONS.—In this section, the terms ‘‘hos-
pital’’ and ‘‘critical access hospital’’ have the meanings 
given such terms in subsections (e) and (mm), respec-
tively, of section 1861 of the Social Security Act (42 
U.S.C. 1395x).
Æ