I 
108TH CONGRESS 
1ST SESSION H. R. 3549
To amend titles XVIII and XIX of the Social Security Act to improve 
payments to providers of services and physicians furnishing services 
to Medicare and Medicaid beneficiaries, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
NOVEMBER 20, 2003
Mr. HILL (for himself, Mr. SANDLIN, Mr. LAMPSON, Mr. MCINTYRE, Mr. 
ETHERIDGE, Mr. HOYER, Mr. TANNER, Mr. WU, and Ms. PELOSI) intro-
duced the following bill; which was referred to the Committee on Ways 
and Means, and in addition to the Committee on Energy and Commerce, 
for a period to be subsequently determined by the Speaker, in each case 
for consideration of such provisions as fall within the jurisdiction of the 
committee concerned 
A BILL 
To amend titles XVIII and XIX of the Social Security Act 
to improve payments to providers of services and physi-
cians furnishing services to Medicare and Medicaid bene-
ficiaries, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENTS TO SOCIAL SECU-
RITY ACT; REFERENCES TO BIPA AND SEC-
RETARY; TABLE OF CONTENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Rural Healthcare Improvement Act of 2003’’. 
(b) AMENDMENTS TO SOCIAL SECURITY ACT.—Ex-
cept as otherwise specifically provided, whenever in divi-
sion A of this Act an amendment is expressed in terms 
of an amendment to or repeal of a section or other provi-
sion, the reference shall be considered to be made to that 
section or other provision of the Social Security Act. 
(c) BIPA; SECRETARY.—In this Act: 
(1) BIPA.—The term ‘‘BIPA’’ means the 
Medicare, Medicaid, and SCHIP Benefits Improve-
ment and Protection Act of 2000, as enacted into 
law by section 1(a)(6) of Public Law 106–554. 
(2) SECRETARY.—The term ‘‘Secretary’’ means 
the Secretary of Health and Human Services.
(d) TABLE OF CONTENTS.—The table of contents of 
this Act is as follows:
Sec. 1. Short title; amendments to Social Security Act; references to BIPA and 
Secretary; table of contents. 
TITLE I—PROVISIONS RELATING TO PART A ONLY 
Sec. 101. Equalizing urban and rural standardized payment amounts under the 
medicare inpatient hospital prospective payment system. 
Sec. 102. Enhanced disproportionate share hospital (DSH) treatment for rural 
hospitals and urban hospitals with fewer than 100 beds. 
Sec. 103. Adjustment to the medicare inpatient hospital prospective payment 
system wage index to revise the labor-related share of such 
index.
Sec. 104. More frequent update in weights used in hospital market basket. 
Sec. 105. Improvements to critical access hospital program. 
Sec. 106. Medicare inpatient hospital payment adjustment for low-volume hos-
pitals. 
Sec. 107. Treatment of missing cost reporting periods for sole community hos-
pitals. 
Sec. 108. Recognition of attending nurse practitioners as attending physicians 
to serve hospice patients. 
Sec. 109. Rural hospice demonstration project. 
Sec. 110. Exclusion of certain rural health clinic and federally qualified health 
center services from the prospective payment system for skilled 
nursing facilities. 
Sec. 111. Rural community hospital demonstration program. 
Sec. 112. Wage index adjustment reclassification reform. 
Sec. 113. Revision of the indirect medical education (IME) adjustment percent-
age. 
Sec. 114. Increase in Federal rate for hospitals in Puerto Rico. 
Sec. 115. Clarifications to certain exceptions to medicare limits on physician re-
ferrals. 
Sec. 116. 1-Time appeals process for hospital wage index classification. 
Sec. 117. Study on portable diagnostic ultrasound services for beneficiaries in 
skilled nursing facilities. 
TITLE II—PROVISIONS RELATING TO PART B ONLY 
Sec. 201. Revision of updates for physicians’ services. 
Sec. 202. 2-year extension of hold harmless provisions for small rural hospitals 
and sole community hospitals under the prospective payment 
system for hospital outpatient department services. 
Sec. 203. Establishment of floor on work geographic adjustment. 
Sec. 204. Medicare incentive payment program improvements for physician 
scarcity. 
Sec. 205. Payment for rural and urban ambulance services. 
Sec. 206. Providing appropriate coverage of rural air ambulance services. 
Sec. 207. Treatment of certain clinical diagnostic laboratory tests furnished to 
hospital outpatients in certain rural areas. 
Sec. 208. Extension of telemedicine demonstration project. 
Sec. 209. Report on demonstration project permitting skilled nursing facilities 
to be originating telehealth sites; authority to implement. 
Sec. 210. 5-year authorization of reimbursement for all medicare part B serv-
ices furnished by certain Indian hospitals and clinics. 
Sec. 211. MedPAC report on payment for physicians’ services. 
Sec. 212. Payment for renal dialysis services. 
Sec. 213. 2-year moratorium on therapy caps; provisions relating to reports. 
Sec. 214. Payment for clinical diagnostic laboratory tests. 
TITLE III—PROVISIONS RELATING TO PARTS A AND B 
Sec. 301. 1-year increase for home health services furnished in a rural area. 
Sec. 302. Redistribution of unused resident positions. 
TITLE IV—OTHER PROVISIONS 
Sec. 401. Medicaid disproportionate share hospital (DSH) payments. 
Sec. 402. Providing safe harbor for certain collaborative efforts that benefit 
medically underserved populations.
Sec. 403. Office of Rural Health Policy improvements. 
Sec. 404. MedPAC study on rural hospital payment adjustments. 
Sec. 405. Frontier extended stay clinic demonstration project.
TITLE I—PROVISIONS RELATING 
TO PART A ONLY 
SEC. 101. EQUALIZING URBAN AND RURAL STANDARDIZED 
PAYMENT AMOUNTS UNDER THE MEDICARE 
INPATIENT 
HOSPITAL 
PROSPECTIVE 
PAY-
MENT SYSTEM. 
(a) IN GENERAL.—Section 1886(d)(3)(A)(iv) (42 
U.S.C. 1395ww(d)(3)(A)(iv)) is amended—
(1) by striking ‘‘(iv) For discharges’’ and in-
serting ‘‘(iv)(I) Subject to subclause (II), for dis-
charges’’; and 
(2) by adding at the end the following new sub-
clause: 
‘‘(II) For discharges occurring in a fiscal year 
(beginning with fiscal year 2004), the Secretary 
shall compute a standardized amount for hospitals 
located in any area within the United States and 
within each region equal to the standardized amount 
computed for the previous fiscal year under this sub-
paragraph for hospitals located in a large urban area 
(or, beginning with fiscal year 2005, for all hospitals 
in the previous fiscal year) increased by the applica-
ble percentage increase under subsection (b)(3)(B)(i) 
for the fiscal year involved.’’.
(b) CONFORMING AMENDMENTS.—
(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—
‘‘(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,’’. 
(3) ADDITIONAL
TECHNICAL
AMENDMENT.—
Section 
1886(d)(3)(A)(iii) 
(42 
U.S.C.
1395ww(d)(3)(A)(iii)) is amended by striking ‘‘in an 
other urban area’’ and inserting ‘‘in an urban area’’. 
(c) EQUALIZING URBAN AND RURAL STANDARDIZED 
PAYMENT AMOUNTS UNDER THE MEDICARE INPATIENT 
HOSPITAL PROSPECTIVE PAYMENT SYSTEM FOR HOS-
PITALS IN PUERTO RICO.—
(1) IN GENERAL.—Section 1886(d)(9)(A) (42 
U.S.C. 1395ww(d)(9)(A)), as amended by section 
504, is amended—
(A) in clause (i), by striking ‘‘and’’ after 
the comma at the end; and 
(B) by striking clause (ii) and inserting the 
following new clause: 
‘‘(ii) the applicable Federal percentage (speci-
fied in subparagraph (E)) of—
‘‘(I) for discharges beginning in a fiscal 
year beginning on or after October 1, 1997, and 
before October 1, 2003, the discharge-weighted 
average of—
‘‘(aa) the national adjusted DRG pro-
spective payment rate (determined under 
paragraph (3)(D)) for hospitals located in 
a large urban area, 
‘‘(bb) such rate for hospitals located 
in other urban areas, and
‘‘(cc) such rate for hospitals located in 
a rural area, 
for such discharges, adjusted in the manner 
provided in paragraph (3)(E) for different area 
wage levels; and 
‘‘(II) for discharges in a fiscal year begin-
ning on or after October 1, 2003, the national 
DRG prospective payment rate determined 
under paragraph (3)(D)(iii) for hospitals lo-
cated in any area for such discharges, adjusted 
in the manner provided in paragraph (3)(E) for 
different area wage levels. 
As used in this section, the term ‘subsection (d) Puerto 
Rico hospital’ means a hospital that is located in Puerto 
Rico and that would be a subsection (d) hospital (as de-
fined in paragraph (1)(B)) if it were located in one of the 
50 States.’’. 
(2) APPLICATION OF PUERTO RICO STANDARD-
IZED AMOUNT BASED ON LARGE URBAN AREAS.—
Section 1886(d)(9)(C) (42 U.S.C. 1395ww(d)(9)(C)) 
is amended— 
(A) in clause (i)—
(i) by striking ‘‘(i) The Secretary’’ 
and inserting ‘‘(i)(I) For discharges in a
fiscal year after fiscal year 1988 and be-
fore fiscal year 2004, the Secretary’’; and 
(ii) by adding at the end the following 
new subclause: 
‘‘(II) For discharges occurring in a fiscal year 
(beginning with fiscal year 2004), the Secretary 
shall compute an average standardized amount for 
hospitals located in any area of Puerto Rico that is 
equal to the average standardized amount computed 
under subclause (I) for fiscal year 2003 for hospitals 
in a large urban area (or, beginning with fiscal year 
2005, for all hospitals in the previous fiscal year) in-
creased by the applicable percentage increase under 
subsection (b)(3)(B) for the fiscal year involved.’’; 
(B) in clause (ii), by inserting ‘‘(or for fis-
cal year 2004 and thereafter, the average 
standardized amount)’’ after ‘‘each of the aver-
age standardized amounts’’; and 
(C) in clause (iii)(I), by striking ‘‘for hos-
pitals located in an urban or rural area, respec-
tively’’. 
(d) IMPLEMENTATION.—
(1) IN GENERAL.—The amendments made by 
subsections (a), (b), and (c)(1) of this section shall 
have no effect on the authority of the Secretary,
under subsection (b)(2) of section 402 of Public Law 
108–89, to delay implementation of the extension of 
provisions equalizing urban and rural standardized 
inpatient hospital payments under subsection (a) of 
such section 402. 
(2) APPLICATION OF PUERTO RICO STANDARD-
IZED AMOUNT BASED ON LARGE URBAN AREAS.—
The authority of the Secretary referred to in para-
graph (1) shall apply with respect to the amend-
ments made by subsection (c)(2) of this section in 
the same manner as that authority applies with re-
spect to the extension of provisions equalizing urban 
and rural standardized inpatient hospital payments 
under subsection (a) of such section 402, except that 
any reference in subsection (b)(2)(A) of such section 
402 is deemed to be a reference to April 1, 2004. 
SEC. 102. ENHANCED DISPROPORTIONATE SHARE HOS-
PITAL (DSH) TREATMENT FOR RURAL HOS-
PITALS AND URBAN HOSPITALS WITH FEWER 
THAN 100 BEDS. 
(a) DOUBLING
THE CAP.—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 occurring on or 
after April 1, 2004, subject to subclause (II), there shall
be substituted for the disproportionate 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 hos-
pitals). 
‘‘(II) Under subclause (I), the disproportionate share 
adjustment percentage shall not exceed 12 percent for a 
hospital that is not classified as a rural referral center 
under subparagraph (C).’’. 
(b) CONFORMING AMENDMENTS.—Section 1886(d) 
(42 U.S.C. 1395ww(d)) is amended—
(1) in paragraph (5)(F)—
(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 
(C) in each of clauses (x), (xi), (xii), and 
(xiii), by striking ‘‘For purposes’’ and inserting 
‘‘Subject to clause (xiv), for purposes’’; and 
(2) in paragraph (2)(C)(iv)—
(A) by striking ‘‘or’’ before ‘‘the enactment 
of section 303’’; and 
(B) by inserting before the period at the 
end the following: ‘‘, or the enactment of sec-
tion 102(a)(1) of the Rural Healthcare Im-
provement Act of 2003’’. 
SEC. 103. ADJUSTMENT TO THE MEDICARE INPATIENT HOS-
PITAL 
PROSPECTIVE 
PAYMENT 
SYSTEM 
WAGE INDEX TO REVISE THE LABOR-RE-
LATED SHARE OF SUCH INDEX. 
(a) ADJUSTMENT.—
(1) IN GENERAL.—Section 1886(d)(3)(E) (42 
U.S.C. 1395ww(d)(3)(E)) is amended—
(A) by striking ‘‘WAGE LEVELS.—The Sec-
retary’’ and inserting ‘‘WAGE LEVELS.—
‘‘(i) IN GENERAL.—Except as provided in 
clause (ii), the Secretary’’; and 
(B) by adding at the end the following new 
clause: 
‘‘(ii) ALTERNATIVE
PROPORTION
TO
BE 
ADJUSTED BEGINNING IN FISCAL YEAR 2005.—
For discharges occurring on or after October 1, 
2004, the Secretary shall substitute ‘62 per-
cent’ for the proportion described in the first 
sentence of clause (i), unless the application of
this clause would result in lower payments to a 
hospital than would otherwise be made.’’. 
(2) 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 
103(a)(1) of the Rural Healthcare Improvement Act 
of 2003 had not been enacted.’’. 
(b) APPLICATION TO PUERTO RICO HOSPITALS.—
Section 
1886(d)(9)(C)(iv) 
(42 
U.S.C. 
1395ww(d)(9)(C)(iv)) is amended—
(1) by inserting ‘‘(I)’’ after ‘‘(iv)’’; 
(2) by striking ‘‘paragraph (3)(E)’’ and insert-
ing ‘‘paragraph (3)(E)(i)’’; and 
(3) by adding at the end the following new sub-
clause: 
‘‘(II) For discharges occurring on or after Octo-
ber 1, 2004, the Secretary shall substitute ‘62 per-
cent’ for the proportion described in the first sen-
tence of clause (i), unless the application of this sub-
clause would result in lower payments to a hospital 
than would otherwise be made.’’.
SEC. 104. 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) INCORPORATION
OF EXPLANATION
IN RULE-
MAKING.—The Secretary shall include in the publication 
of the final rule for payment for inpatient hospital services 
under section 1886(d) of the Social Security Act (42 
U.S.C. 1395ww(d)) for fiscal year 2006, an explanation 
of the reasons for, and options considered, in determining 
frequency established under subsection (a). 
SEC. 105. 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), and 1395tt(a)(3)) are each amended 
by inserting ‘‘equal to 101 percent of’’ before ‘‘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 January 1, 2004. 
(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-
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 amendments made 
by paragraph (1) shall apply with respect to costs
incurred for services furnished on or after January 
1, 2005. 
(c) AUTHORIZATION
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’’; 
(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
TIMING 
METHODS OF PERIODIC INTERIM PAYMENTS.—With 
respect to periodic interim payments to critical ac-
cess hospitals for inpatient critical access hospital 
services under section 1815(e)(2)(E) of the Social 
Security Act, as added by paragraph (1), the Sec-
retary shall develop alternative methods for the tim-
ing of such payments.
(3) AUTHORIZATION OF PIP.—The amendments 
made by paragraph (1) shall apply to payments 
made on or after July 1, 2004. 
(d) CONDITION FOR APPLICATION OF SPECIAL PRO-
FESSIONAL SERVICE 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 or other practi-
tioner providing professional services in the hospital 
must assign billing rights with respect to such serv-
ices, except that such subparagraph shall not apply 
to those physicians and practitioners who have not 
assigned such billing rights.’’. 
(2) EFFECTIVE DATE.—
(A) IN GENERAL.—Except as provided in 
subparagraph (B), the amendment made by 
paragraph (1) shall apply to cost reporting peri-
ods beginning on or after July 1, 2004. 
(B) RULE OF APPLICATION.—In the case 
of a critical access hospital that made an elec-
tion under section 1834(g)(2) of the Social Se-
curity Act (42 U.S.C. 1395m(g)(2)) before No-
vember 1, 2003, the amendment made by para-
graph (1) shall apply to cost reporting periods 
beginning on or after July 1, 2001. 
(e) REVISION
OF
BED
LIMITATION
FOR
HOS-
PITALS.—
(1) IN
GENERAL.—Section 1820(c)(2)(B)(iii) 
(42 U.S.C. 1395i–4(c)(2)(B)(iii)) is amended by 
striking ‘‘15 (or, in the case of a facility under an 
agreement described in subsection (f), 25)’’ and in-
serting ‘‘25’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
1820(f) (42 U.S.C. 1395i–4(f)) is amended by strik-
ing ‘‘and the number of beds used at any time for 
acute care inpatient services does not exceed 15 
beds’’. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to designations made 
before, on, or after January 1, 2004, but any elec-
tion made pursuant to regulations promulgated to 
carry out such amendments shall only apply prospec-
tively. 
(f) PROVISIONS RELATING TO FLEX GRANTS.—
(1) ADDITIONAL
4-YEAR
PERIOD
OF
FUND-
ING.—Section 1820(j) (42 U.S.C. 1395i–4(j)) is 
amended by inserting before the period at the end
the following: ‘‘, and for making grants to all States 
under paragraphs (1) and (2) of subsection (g), 
$35,000,000 in each of fiscal years 2005 through 
2008’’. 
(2) ADDITIONAL REQUIREMENTS AND ADMINIS-
TRATION.—Section 1820(g) (42 U.S.C. 1395i–4(g)) 
is amended by adding at the end the following new 
paragraphs: 
‘‘(4) ADDITIONAL
REQUIREMENTS
WITH
RE-
SPECT TO FLEX GRANTS.—With respect to grants 
awarded under paragraph (1) or (2) from funds ap-
propriated for fiscal year 2005 and subsequent fiscal 
years—
‘‘(A) CONSULTATION
WITH
THE
STATE 
HOSPITAL ASSOCIATION AND RURAL HOSPITALS 
ON
THE
MOST
APPROPRIATE
WAYS
TO
USE 
GRANTS.—A State shall consult with the hos-
pital association of such State and rural hos-
pitals located in such State on the most appro-
priate ways to use the funds under such grant. 
‘‘(B) LIMITATION
ON
USE
OF
GRANT 
FUNDS
FOR
ADMINISTRATIVE
EXPENSES.—A 
State may not expend more than the lesser of—
‘‘(i) 15 percent of the amount of the 
grant for administrative expenses; or
‘‘(ii) the State’s federally negotiated 
indirect rate for administering the grant. 
‘‘(5) USE OF FUNDS FOR FEDERAL ADMINIS-
TRATIVE EXPENSES.—Of the total amount appro-
priated for grants under paragraphs (1) and (2) for 
a fiscal year (beginning with fiscal year 2005), up 
to 5 percent of such amount shall be available to the 
Health Resources and Services Administration for 
purposes of administering such grants.’’. 
(g) AUTHORITY TO ESTABLISH PSYCHIATRIC AND 
REHABILITATION DISTINCT PART UNITS.—
(1) IN
GENERAL.—Section 1820(c)(2) (42 
U.S.C. 1395i–4(c)(2)) is amended by adding at the 
end the following:
‘‘(E) AUTHORITY
TO
ESTABLISH
PSY-
CHIATRIC AND REHABILITATION DISTINCT PART 
UNITS.—
‘‘(i) IN
GENERAL.—Subject to the 
succeeding provisions of this subparagraph, 
a critical access hospital may establish—
‘‘(I) a psychiatric unit of the hos-
pital that is a distinct part of the hos-
pital; and
‘‘(II) a rehabilitation unit of the 
hospital that is a distinct part of the 
hospital, 
if the distinct part meets the requirements 
(including conditions of participation) that 
would otherwise apply to the distinct part 
if the distinct part were established by a 
subsection (d) hospital in accordance with 
the matter following clause (v) of section 
1886(d)(1)(B), including any regulations 
adopted by the Secretary under such sec-
tion. 
‘‘(ii) LIMITATION
ON
NUMBER
OF 
BEDS.—The total number of beds that 
may be established under clause (i) for a 
distinct part unit may not exceed 10. 
‘‘(iii) EXCLUSION OF BEDS FROM BED 
COUNT.—In determining the number of 
beds of a critical access hospital for pur-
poses of applying the bed limitations re-
ferred to in subparagraph (B)(iii) and sub-
section (f), the Secretary shall not take 
into account any bed established under 
clause (i).
‘‘(iv) EFFECT OF FAILURE TO MEET 
REQUIREMENTS.—If a psychiatric or reha-
bilitation unit established under clause (i) 
does not meet the requirements described 
in such clause with respect to a cost re-
porting period, no payment may be made 
under this title to the hospital for services 
furnished in such unit during such period. 
Payment to the hospital for services fur-
nished in the unit may resume only after 
the hospital has demonstrated to the Sec-
retary that the unit meets such require-
ments.’’. 
(2) PAYMENT
ON
A
PROSPECTIVE
PAYMENT 
BASIS.—Section 1814(l) (42 U.S.C. 1395f(l)) is 
amended—
(A) by striking ‘‘(l) The amount’’ and in-
serting ‘‘(l)(1) Except as provided in paragraph 
(2), the amount’’; and 
(B) by adding at the end the following new 
paragraph: 
‘‘(2) In the case of a distinct part psychiatric or reha-
bilitation unit of a critical access hospital described in sec-
tion 1820(c)(2)(E), the amount of payment for inpatient 
critical access hospital services of such unit shall be equal