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
‘‘Medicare Modernization and Prescription Drug Act of
2002’’.
(b) AMENDMENTS TO SOCIAL SECURITY ACT.—Ex-
cept as otherwise specifically provided, whenever in this
Act an amendment is expressed in terms of an amendment
to or repeal of a section or other provision, 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—MEDICARE PRESCRIPTION DRUG BENEFIT
Sec. 101. Establishment of a medicare prescription drug benefit.
Sec. 102. Offering of qualified prescription drug coverage under the
Medicare+Choice program.
Sec. 103. Medicaid amendments.
Sec. 104. Medigap transition.
Sec. 105. Medicare prescription drug discount card endorsement program.
Sec. 106. GAO study of the effectiveness of the new prescription drug program.
TITLE II—MEDICARE+CHOICE REVITALIZATION AND
MEDICARE+CHOICE COMPETITION PROGRAM
Subtitle A—Medicare+Choice Revitalization
Sec. 201. Medicare+Choice improvements.
Sec. 202. Making permanent change in Medicare+Choice reporting deadlines
and annual, coordinated election period.
Sec. 203. Avoiding duplicative State regulation.
Sec. 204. Specialized Medicare+Choice plans for special needs beneficiaries.
Sec. 205. Medicare MSAs.
Sec. 206. Extension of reasonable cost and SHMO contracts.
Subtitle B—Medicare+Choice Competition Program
Sec. 211. Medicare+Choice competition program.
Sec. 212. Demonstration program for competitive-demonstration areas.
Sec. 213. Conforming amendments.
TITLE III—RURAL HEALTH CARE IMPROVEMENTS
Sec. 301. Reference to full market basket increase for sole community hos-
pitals.
Sec. 302. Enhanced disproportionate share hospital (DSH) treatment for rural
hospitals and urban hospitals with fewer than 100 beds.
Sec. 303. 2-year phased-in increase in the standardized amount in rural and
small urban areas to achieve a single, uniform standardized
amount.
Sec. 304. More frequent update in weights used in hospital market basket.
Sec. 305. Improvements to critical access hospital program.
Sec. 306. Extension of temporary increase for home health services furnished
in a rural area.
Sec. 307. Reference to 10 percent increase in payment for hospice care fur-
nished in a frontier area and rural hospice demonstration
project.
Sec. 308. Reference to priority for hospitals located in rural or small urban
areas in redistribution of unused graduate medical education
residencies.
Sec. 309. GAO study of geographic differences in payments for physicians’
services.
Sec. 310. Providing safe harbor for certain collaborative efforts that benefit
medically underserved populations.
Sec. 311. Relief for certain non-teaching hospitals.
TITLE IV—PROVISIONS RELATING TO PART A
Subtitle A—Inpatient Hospital Services
Sec. 401. Revision of acute care hospital payment updates.
Sec. 402. 2-year increase in level of adjustment for indirect costs of medical
education (IME).
Sec. 403. Recognition of new medical technologies under inpatient hospital
PPS.
Sec. 404. Phase-in of Federal rate for hospitals in Puerto Rico.
Sec. 405. Reference to provision relating to enhanced disproportionate share
hospital (DSH) payments for rural hospitals and urban hos-
pitals with fewer than 100 beds.
Sec. 406. Reference to provision relating to 2-year phased-in increase in the
standardized amount in rural and small urban areas to achieve
a single, uniform standardized amount.
Sec. 407. Reference to provision for more frequent updates in the weights used
in hospital market basket.
Sec. 408. Reference to provision making improvements to critical access hos-
pital program.
Sec. 409. GAO study on improving the hospital wage index.
Subtitle B—Skilled Nursing Facility Services
Sec. 411. Payment for covered skilled nursing facility services.
Subtitle C—Hospice
Sec. 421. Coverage of hospice consultation services.
Sec. 422. 10 percent increase in payment for hospice care furnished in a fron-
tier area.
Sec. 423. Rural hospice demonstration project.
Subtitle D—Other Provisions
Sec. 431. Demonstration project for use of recovery audit contractors for part
A services.
TITLE V—PROVISIONS RELATING TO PART B
Subtitle A—Physicians’ Services
Sec. 501. Revision of updates for physicians’ services.
Sec. 502. Studies on access to physicians’ services.
Sec. 503. MedPAC report on payment for physicians’ services.
Sec. 504. 1-year extension of treatment of certain physician pathology services
under medicare.
Sec. 505. Physician fee schedule wage index revision.
Subtitle B—Other Services
Sec. 511. Competitive acquisition of certain items and services.
Sec. 512. Payment for ambulance services.
Sec. 513. 2-year extension of moratorium on therapy caps; provisions relating
to reports.
Sec. 514. Coverage of an initial preventive physical examination.
Sec. 515. Renal dialysis services.
Sec. 516. Improved payment for certain mammography services.
Sec. 517. Waiver of part B late enrollment penalty for certain military retirees;
special enrollment period.
Sec. 518. Coverage of cholesterol and blood lipid screening.
TITLE VI—PROVISIONS RELATING TO PARTS A AND B
Subtitle A—Home Health Services
Sec. 601. Elimination of 15 percent reduction in payment rates under the pro-
spective payment system.
Sec. 602. Update in home health services.
Sec. 603. OASIS Task Force; suspension of certain OASIS data collection re-
quirements pending Task Force submittal of report.
Sec. 604. MedPAC study on medicare margins of home health agencies.
Sec. 605. Clarification of treatment of occasional absences in determining
whether an individual is confined to the home.
Subtitle B—Direct Graduate Medical Education
Sec. 611. Extension of update limitation on high cost programs.
Sec. 612. Redistribution of unused resident positions.
Subtitle C—Other Provisions
Sec. 621. Modifications to Medicare Payment Advisory Commission (MedPAC).
Sec. 622. Demonstration project for disease management for certain medicare
beneficiaries with diabetes.
Sec. 623. Demonstration project for medical adult day care services.
Sec. 624. Publication on final written guidance concerning prohibitions against
discrimination by national origin with respect to health care
services.
TITLE VII—MEDICARE BENEFITS ADMINISTRATION
Sec. 701. Establishment of Medicare Benefits Administration.
TITLE VIII—REGULATORY REDUCTION AND CONTRACTING
REFORM
Subtitle A—Regulatory Reform
Sec. 801. Construction; definition of supplier.
Sec. 802. Issuance of regulations.
Sec. 803. Compliance with changes in regulations and policies.
Sec. 804. Reports and studies relating to regulatory reform.
Subtitle B—Contracting Reform
Sec. 811. Increased flexibility in medicare administration.
Sec. 812. Requirements for information security for medicare administrative
contractors.
Subtitle C—Education and Outreach
Sec. 821. Provider education and technical assistance.
Sec. 822. Small provider technical assistance demonstration program.
Sec. 823. Medicare provider ombudsman; medicare beneficiary ombudsman.
Sec. 824. Beneficiary outreach demonstration program.
Subtitle D—Appeals and Recovery
Sec. 831. Transfer of responsibility for medicare appeals.
Sec. 832. Process for expedited access to review.
Sec. 833. Revisions to medicare appeals process.
Sec. 834. Prepayment review.
Sec. 835. Recovery of overpayments.
Sec. 836. Provider enrollment process; right of appeal.
Sec. 837. Process for correction of minor errors and omissions on claims with-
out pursuing appeals process.
Sec. 838. Prior determination process for certain items and services; advance
beneficiary notices.
Subtitle E—Miscellaneous Provisions
Sec. 841. Policy development regarding evaluation and management (E & M)
documentation guidelines.
Sec. 842. Improvement in oversight of technology and coverage.
Sec. 843. Treatment of hospitals for certain services under medicare secondary
payor (MSP) provisions.
Sec. 844. EMTALA improvements.
Sec. 845. Emergency Medical Treatment and Labor Act (EMTALA) Technical
Advisory Group.
Sec. 846. Authorizing use of arrangements with other hospice programs to pro-
vide core hospice services in certain circumstances.
Sec. 847. Application of OSHA bloodborne pathogens standard to certain hos-
pitals.
Sec. 848. BIPA-related technical amendments and corrections.
Sec. 849. Conforming authority to waive a program exclusion.
Sec. 850. Treatment of certain dental claims.
Sec. 851. Annual publication of list of national coverage determinations.
TITLE IX—MEDICAID PROVISIONS
Sec. 901. National Bipartisan Commission on the Future of Medicaid.
Sec. 902. Disproportionate share hospital (DSH) payments.
Sec. 903. Medicaid pharmacy assistance program.
TITLE I—MEDICARE
PRESCRIPTION DRUG BENEFIT
SEC. 101. ESTABLISHMENT OF A MEDICARE PRESCRIPTION
DRUG BENEFIT.
(a) IN GENERAL.—Title XVIII is amended—
(1) by redesignating part D as part E; and
(2) by inserting after part C the following new
part:
‘‘PART D—VOLUNTARY PRESCRIPTION DRUG BENEFIT
PROGRAM
‘‘SEC. 1860A. BENEFITS; ELIGIBILITY; ENROLLMENT; AND
COVERAGE PERIOD.
‘‘(a) PROVISION OF QUALIFIED PRESCRIPTION DRUG
COVERAGE THROUGH ENROLLMENT IN PLANS.—Subject
to the succeeding provisions of this part, each individual
who is entitled to benefits under part A or is enrolled
under part B is entitled to obtain qualified prescription
drug coverage (described in section 1860B(a)) as follows:
‘‘(1) MEDICARE+CHOICE
PLAN.—If the indi-
vidual is eligible to enroll in a Medicare+Choice plan
that provides qualified prescription drug coverage
under section 1851(j), the individual may enroll in
the plan and obtain coverage through such plan.
‘‘(2) PRESCRIPTION DRUG PLAN.—If the indi-
vidual is not enrolled in a Medicare+Choice plan
that provides qualified prescription drug coverage,
the individual may enroll under this part in a pre-
scription 
drug 
plan 
(as 
defined 
in 
section
1860J(a)(5)).
Such individuals shall have a choice of such plans under
section 1860E(d).
‘‘(b) GENERAL ELECTION PROCEDURES.—
‘‘(1) IN
GENERAL.—An individual eligible to
make an election under subsection (a) may elect to
enroll in a prescription drug plan under this part, or
elect the option of qualified prescription drug cov-
erage under a Medicare+Choice plan under part C,
and to change such election only in such manner
and form as may be prescribed by regulations of the
Administrator of the Medicare Benefits Administra-
tion (appointed under section 1808(b)) (in this part
referred to as the ‘Medicare Benefits Administrator’)
and only during an election period prescribed in or
under this subsection.
‘‘(2) ELECTION PERIODS.—
‘‘(A) IN GENERAL.—Except as provided in
this paragraph, the election periods under this
subsection shall be the same as the coverage
election periods under the Medicare+Choice
program under section 1851(e), including—
‘‘(i) annual coordinated election peri-
ods; and
‘‘(ii) special election periods.
In applying the last sentence of section
1851(e)(4) (relating to discontinuance of a
Medicare+Choice election during the first year
of eligibility) under this subparagraph, in the
case of an election described in such section in
which the individual had elected or is provided
qualified prescription drug coverage at the time
of such first enrollment, the individual shall be
permitted to enroll in a prescription drug plan
under this part at the time of the election of
coverage under the original fee-for-service plan.
‘‘(B) INITIAL ELECTION PERIODS.—
‘‘(i) INDIVIDUALS
CURRENTLY
COV-
ERED.—In the case of an individual who is
entitled to benefits under part A or en-
rolled under part B as of November 1,
2004, there shall be an initial election pe-
riod of 6 months beginning on that date.
‘‘(ii) INDIVIDUAL
COVERED
IN
FU-
TURE.—In the case of an individual who is
first entitled to benefits under part A or
enrolled under part B after such date,
there shall be an initial election period
which is the same as the initial enrollment
period under section 1837(d).
‘‘(C) ADDITIONAL SPECIAL ELECTION PE-
RIODS.—The Administrator shall establish spe-
cial election periods—
‘‘(i) in cases of individuals who have
and involuntarily lose prescription drug
coverage described in subsection (c)(2)(C);
‘‘(ii) in cases described in section
1837(h) (relating to errors in enrollment),
in the same manner as such section applies
to part B;
‘‘(iii) in the case of an individual who
meets such exceptional conditions (includ-
ing conditions provided under section
1851(e)(4)(D)) as the Administrator may
provide; and
‘‘(iv) in cases of individuals (as deter-
mined by the Administrator) who become
eligible for prescription drug assistance
under title XIX under section 1935(d).
‘‘(3) INFORMATION
ON
PLANS.—Information
described in section 1860C(b)(1) on prescription
drug plans shall be made available during open en-
rollment periods.
‘‘(c) GUARANTEED ISSUE; COMMUNITY RATING; AND
NONDISCRIMINATION.—
‘‘(1) GUARANTEED ISSUE.—
‘‘(A) IN GENERAL.—An eligible individual
who is eligible to elect qualified prescription
drug coverage under a prescription drug plan or
Medicare+Choice plan at a time during which
elections are accepted under this part with re-
spect to the plan shall not be denied enrollment
based on any health status-related factor (de-
scribed in section 2702(a)(1) of the Public
Health Service Act) or any other factor.
‘‘(B) 
MEDICARE+CHOICE
LIMITATIONS
PERMITTED.—The provisions of paragraphs (2)
and (3) (other than subparagraph (C)(i), relat-
ing to default enrollment) of section 1851(g)
(relating to priority and limitation on termi-
nation of election) shall apply to PDP sponsors
under this subsection.
‘‘(2) COMMUNITY-RATED PREMIUM.—
‘‘(A) IN GENERAL.—In the case of an indi-
vidual who maintains (as determined under sub-
paragraph (C)) continuous prescription drug
coverage since the date the individual first
qualifies to elect prescription drug coverage
under 
this 
part, 
a 
PDP 
sponsor 
or
Medicare+Choice organization offering a pre-
scription drug plan or Medicare+Choice plan
that provides qualified prescription drug cov-
erage and in which the individual is enrolled
may not deny, limit, or condition the coverage
or provision of covered prescription drug bene-
fits or vary or increase the premium under the
plan based on any health status-related factor
described in section 2702(a)(1) of the Public
Health Service Act or any other factor.
‘‘(B) LATE
ENROLLMENT
PENALTY.—In
the case of an individual who does not maintain
such continuous prescription drug coverage (as
described in subparagraph (C)), a PDP sponsor
or Medicare+Choice organization may (notwith-
standing any provision in this title) adjust the
premium otherwise applicable or impose a pre-
existing condition exclusion with respect to
qualified prescription drug coverage in a man-
ner that reflects additional actuarial risk in-
volved. Such a risk shall be established through
an appropriate actuarial opinion of the type de-
scribed in subparagraphs (A) through (C) of
section 2103(c)(4).
‘‘(C) CONTINUOUS
PRESCRIPTION
DRUG
COVERAGE.—An individual is considered for
purposes of this part to be maintaining contin-
uous prescription drug coverage on and after
the date the individual first qualifies to elect
prescription drug coverage under this part if
the individual establishes that as of such date
the individual is covered under any of the fol-
lowing prescription drug coverage and before
the date that is the last day of the 63-day pe-
riod that begins on the date of termination of
the particular prescription drug coverage in-
volved (regardless of whether the individual
subsequently obtains any of the following pre-
scription drug coverage):
‘‘(i) COVERAGE UNDER PRESCRIPTION
DRUG
PLAN
OR
MEDICARE+CHOICE
PLAN.—Qualified prescription drug cov-
erage under a prescription drug plan or
under a Medicare+Choice plan.
‘‘(ii) MEDICAID PRESCRIPTION DRUG
COVERAGE.—Prescription drug coverage
under a medicaid plan under title XIX, in-
cluding through the Program of All-inclu-
sive Care for the Elderly (PACE) under
section 1934, through a social health main-
tenance organization (referred to in section
4104(c) of the Balanced Budget Act of
1997), or through a Medicare+Choice
project that demonstrates the application
of capitation payment rates for frail elderly
medicare beneficiaries through the use of a
interdisciplinary team and through the
provision of primary care services to such
beneficiaries by means of such a team at
the nursing facility involved.
‘‘(iii) PRESCRIPTION DRUG COVERAGE
UNDER GROUP HEALTH PLAN.—Any out-
patient prescription drug coverage under a
group health plan, including a health bene-
fits plan under the Federal Employees
Health Benefit Plan under chapter 89 of
title 5, United States Code, and a qualified
retiree prescription drug plan as defined in
section 1860H(f)(1), but only if (subject to
subparagraph (E)(ii)) the coverage pro-
vides benefits at least equivalent to the
benefits under a qualified prescription drug
plan.
‘‘(iv) PRESCRIPTION DRUG COVERAGE
UNDER
CERTAIN
MEDIGAP
POLICIES.—
Coverage under a medicare supplemental
policy under section 1882 that provides
benefits for prescription drugs (whether or
not such coverage conforms to the stand-
ards for packages of benefits under section
1882(p)(1)), but only if the policy was in
effect on January 1, 2005, and if (subject
to subparagraph (E)(ii)) the coverage pro-
vides benefits at least equivalent to the
benefits under a qualified prescription drug
plan.
‘‘(v) STATE PHARMACEUTICAL ASSIST-
ANCE PROGRAM.—Coverage of prescription
drugs under a State pharmaceutical assist-
ance program, but only if (subject to sub-
paragraph (E)(ii)) the coverage provides
benefits at least equivalent to the benefits
under a qualified prescription drug plan.
‘‘(vi) VETERANS’ COVERAGE OF PRE-
SCRIPTION DRUGS.—Coverage of prescrip-
tion drugs for veterans under chapter 17
of title 38, United States Code, but only if
(subject to subparagraph (E)(ii)) the cov-
erage provides benefits at least equivalent
to the benefits under a qualified prescrip-
tion drug plan.
‘‘(D) CERTIFICATION.—For purposes of
carrying out this paragraph, the certifications
of the type described in sections 2701(e) of the
Public Health Service Act and in section
9801(e) of the Internal Revenue Code shall also
include a statement for the period of coverage
of whether the individual involved had prescrip-
tion drug coverage described in subparagraph
(C).
‘‘(E) DISCLOSURE.—
‘‘(i) IN GENERAL.—Each entity that
offers coverage of the type described in
clause (iii), (iv), (v), or (vi) of subpara-
graph (C) shall provide for disclosure, con-
sistent with standards established by the
Administrator, of whether such coverage
provides benefits at least equivalent to the
benefits under a qualified prescription drug
plan.
‘‘(ii) WAIVER
OF
LIMITATIONS.—An
individual may apply to the Administrator
to waive the requirement that coverage of
such type provide benefits at least equiva-
lent to the benefits under a qualified pre-
scription drug plan, if the individual estab-
lishes that the individual was not ade-
quately informed that such coverage did
not provide such level of benefits.
‘‘(F) CONSTRUCTION.—Nothing in this
section shall be construed as preventing the
disenrollment of an individual from a prescrip-
tion drug plan or a Medicare+Choice plan
based on the termination of an election de-
scribed in section 1851(g)(3), including for non-
payment of premiums or for other reasons spec-
ified in subsection (d)(3), which takes into ac-
count a grace period described in section
1851(g)(3)(B)(i).
‘‘(3) NONDISCRIMINATION.—A PDP sponsor of-
fering a prescription drug plan shall not establish a
service area in a manner that would discriminate
based on health or economic status of potential en-
rollees.
‘‘(d) EFFECTIVE DATE OF ELECTIONS.—
‘‘(1) IN GENERAL.—Except as provided in this
section, the Administrator shall provide that elec-
tions under subsection (b) take effect at the same
time as the Administrator provides that similar elec-
tions under section 1851(e) take effect under section
1851(f).
‘‘(2) NO ELECTION EFFECTIVE BEFORE 2005.—
In no case shall any election take effect before Janu-
ary 1, 2005.
‘‘(3) TERMINATION.—The Administrator shall
provide for the termination of an election in the case
of—
‘‘(A) termination of coverage under both
part A and part B; and
‘‘(B) termination of elections described in
section 1851(g)(3) (including failure to pay re-
quired premiums).
‘‘SEC. 1860B. REQUIREMENTS FOR QUALIFIED PRESCRIP-
TION DRUG COVERAGE.
‘‘(a) REQUIREMENTS.—
‘‘(1) IN GENERAL.—For purposes of this part
and part C, the term ‘qualified prescription drug
coverage’ means either of the following:
‘‘(A) STANDARD COVERAGE WITH ACCESS
TO
NEGOTIATED
PRICES.—Standard coverage
(as defined in subsection (b)) and access to ne-
gotiated prices under subsection (d).
‘‘(B) ACTUARIALLY
EQUIVALENT
COV-
ERAGE
WITH
ACCESS
TO
NEGOTIATED
PRICES.—Coverage of covered outpatient drugs
which meets the alternative coverage require-
ments of subsection (c) and access to negotiated
prices under subsection (d), but only if it is ap-
proved by the Administrator, as provided under
subsection (c).
‘‘(2) PERMITTING
ADDITIONAL
OUTPATIENT
PRESCRIPTION DRUG COVERAGE.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), nothing in this part shall be con-
strued as preventing qualified prescription drug
coverage from including coverage of covered
outpatient drugs that exceeds the coverage re-
quired under paragraph (1), but any such addi-
tional coverage shall be limited to coverage of
covered outpatient drugs.
‘‘(B) DISAPPROVAL AUTHORITY.—The Ad-
ministrator shall review the offering of qualified
prescription drug coverage under this part or
part C. If the Administrator finds that, in the
case of a qualified prescription drug coverage
under 
a 
prescription 
drug 
plan 
or 
a
Medicare+Choice plan, that the organization or
sponsor offering the coverage is engaged in ac-
tivities intended to discourage enrollment of
classes of eligible medicare beneficiaries obtain-
ing coverage through the plan on the basis of
their higher likelihood of utilizing prescription
drug coverage, the Administrator may termi-
nate the contract with the sponsor or organiza-
tion under this part or part C.
‘‘(3) APPLICATION OF SECONDARY PAYOR PRO-
VISIONS.—The provisions of section 1852(a)(4) shall
apply under this part in the same manner as they
apply under part C.
‘‘(b) STANDARD COVERAGE.—For purposes of this
part, the ‘standard coverage’ is coverage of covered out-
patient drugs (as defined in subsection (f)) that meets the
following requirements:
‘‘(1) DEDUCTIBLE.—The coverage has an an-
nual deductible—
‘‘(A) for 2005, that is equal to $250; or
‘‘(B) for a subsequent year, that is equal
to the amount specified under this paragraph
for the previous year increased by the percent-
age specified in paragraph (5) for the year in-
volved.
Any amount determined under subparagraph (B)
that is not a multiple of $10 shall be rounded to the
nearest multiple of $10.
‘‘(2) LIMITS ON COST-SHARING.—
‘‘(A) IN
GENERAL.—The coverage has
cost-sharing (for costs above the annual deduct-
ible specified in paragraph (1) and up to the
initial coverage limit under paragraph (3)) as
follows:
‘‘(i) FIRST COPAYMENT RANGE.—For
costs above the annual deductible specified
in paragraph (1) and up to amount speci-
fied in subparagraph (C), the cost-
sharing—
‘‘(I) is equal to 20 percent; or
‘‘(II) is actuarially equivalent
(using processes established under
subsection (e)) to an average expected
payment of 20 percent of such costs.
‘‘(ii) 
SECONDARY
COPAYMENT
RANGE.—For costs above the amount spec-
ified in subparagraph (C) and up to the
initial coverage limit, the cost-sharing—
‘‘(I) is equal to 50 percent; or
‘‘(II) is actuarially consistent
(using processes established under
subsection (e)) with an average ex-
pected payment of 50 percent of such
costs.
‘‘(B) USE
OF
TIERED
COPAYMENTS.—
Nothing in this part shall be construed as pre-
venting a PDP sponsor from applying tiered co-
payments, so long as such tiered copayments
are consistent with subparagraph (A).
‘‘(C) INITIAL COPAYMENT THRESHOLD.—
The amount specified in this subparagraph—
‘‘(i) for 2005, is equal to $1,000; or
‘‘(ii) for a subsequent year, is equal to
the amount specified in this subparagraph
for the previous year, increased by the an-
nual percentage increase described in para-
graph (5) for the year involved.
Any amount determined under clause (ii) that
is not a multiple of $10 shall be rounded to the
nearest multiple of $10.
‘‘(3) INITIAL
COVERAGE
LIMIT.—Subject to
paragraph (4), the coverage has an initial coverage
limit on the maximum costs that may be recognized
for payment purposes—
‘‘(A) for 2005, that is equal to $2,000; or
‘‘(B) for a subsequent year, that is equal
to the amount specified in this paragraph for
the previous year, increased by the annual per-
centage increase described in paragraph (5) for
the year involved.
Any amount determined under subparagraph (B)
that is not a multiple of $25 shall be rounded to the
nearest multiple of $25.
‘‘(4) CATASTROPHIC PROTECTION.—
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (3), the coverage provides benefits with
no cost-sharing after the individual has in-
curred costs (as described in subparagraph (C))
for covered outpatient drugs in a year equal to
the annual out-of-pocket threshold specified in
subparagraph (B).
‘‘(B) ANNUAL
OUT-OF-POCKET
THRESH-
OLD.—For purposes of this part, the ‘annual
out-of-pocket 
threshold’ 
specified 
in 
this
subparagraph—
‘‘(i) for 2005, is equal to $3,700; or
‘‘(ii) for a subsequent year, is equal to
the amount specified in this subparagraph
for the previous year, increased by the an-
nual percentage increase described in para-
graph (5) for the year involved.
Any amount determined under clause (ii) that
is not a multiple of $100 shall be rounded to
the nearest multiple of $100.
‘‘(C) APPLICATION.—In applying subpara-
graph (A)—
‘‘(i) incurred costs shall only include
costs incurred for the annual deductible
(described in paragraph (1)), cost-sharing
(described in paragraph (2)), and amounts
for which benefits are not provided because
of the application of the initial coverage
limit described in paragraph (3); and
‘‘(ii) such costs shall be treated as in-
curred only if they are paid by the indi-
vidual (or by another individual, such as a
family member, on behalf of the indi-
vidual), under section 1860G, or under
title XIX and the individual (or other indi-
vidual) is not reimbursed through insur-
ance or otherwise, a group health plan, or
other third-party payment arrangement for
such costs.
‘‘(5) ANNUAL
PERCENTAGE
INCREASE.—For
purposes of this part, the annual percentage increase
specified in this paragraph for a year is equal to the
annual percentage increase in average per capita ag-
gregate expenditures for covered outpatient drugs in
the United States for medicare beneficiaries, as de-
termined by the Administrator for the 12-month pe-
riod ending in July of the previous year.
‘‘(c) ALTERNATIVE COVERAGE REQUIREMENTS.—A
prescription drug plan or Medicare+Choice plan may pro-
vide a different prescription drug benefit design from the
standard coverage described in subsection (b) so long as
the Administrator determines (based on an actuarial anal-
ysis by the Administrator) that the following requirements
are met and the plan applies for, and receives, the ap-
proval of the Administrator for such benefit design:
‘‘(1) ASSURING AT LEAST ACTUARIALLY EQUIV-
ALENT COVERAGE.—
‘‘(A) ASSURING
EQUIVALENT
VALUE
OF
TOTAL COVERAGE.—The actuarial value of the
total coverage (as determined under subsection
(e)) is at least equal to the actuarial value (as
so determined) of standard coverage.
‘‘(B) 
ASSURING
EQUIVALENT
UNSUB-
SIDIZED
VALUE
OF
COVERAGE.—The unsub-
sidized value of the coverage is at least equal to
the unsubsidized value of standard coverage.
For purposes of this subparagraph, the unsub-
sidized value of coverage is the amount by
which the actuarial value of the coverage (as
determined under subsection (e)) exceeds the
actuarial value of the subsidy payments under
section 1860H with respect to such coverage.
‘‘(C) ASSURING STANDARD PAYMENT FOR
COSTS AT INITIAL COVERAGE LIMIT.—The cov-
erage is designed, based upon an actuarially
representative pattern of utilization (as deter-
mined under subsection (e)), to provide for the
payment, with respect to costs incurred that are
equal to the initial coverage limit under sub-
section (b)(3), of an amount equal to at least
the sum of the following products:
‘‘(i) FIRST COPAYMENT RANGE.—The
product of—
‘‘(I) the amount by which the ini-
tial copayment threshold described in
subsection (b)(2)(C) exceeds the de-
ductible 
described 
in 
subsection
(b)(1); and
‘‘(II) 100 percent minus the cost-
sharing percentage specified in sub-
section (b)(2)(A)(i)(I).
‘‘(ii) 
SECONDARY
COPAYMENT
RANGE.—The product of—
‘‘(I) the amount by which the ini-
tial coverage limit described in sub-
section (b)(3) exceeds the initial co-
payment threshold described in sub-
section (b)(2)(C); and
‘‘(II) 100 percent minus the cost-
sharing percentage specified in sub-
section (b)(2)(A)(ii)(I).
‘‘(2) CATASTROPHIC
PROTECTION.—The cov-
erage provides for beneficiaries the catastrophic pro-
tection described in subsection (b)(4).
‘‘(d) ACCESS TO NEGOTIATED PRICES.—
‘‘(1) IN GENERAL.—Under qualified prescrip-
tion drug coverage offered by a PDP sponsor or a
Medicare+Choice organization, the sponsor or orga-
nization shall provide beneficiaries with access to ne-
gotiated prices (including applicable discounts) used
for payment for covered outpatient drugs, regardless
of the fact that no benefits may be payable under
the coverage with respect to such drugs because of
the application of cost-sharing or an initial coverage
limit (described in subsection (b)(3)). Insofar as a
State elects to provide medical assistance under title
XIX for a drug based on the prices negotiated by a
prescription drug plan under this part, the require-
ments of section 1927 shall not apply to such drugs.
The prices negotiated by a prescription drug plan
under this part, by a Medicare+Choice plan with re-
spect to covered outpatient drugs, or by a qualified
retiree prescription drug plan (as defined in section
1860H(f)(1)) with respect to such drugs on behalf
of individuals entitled to benefits under part A or
enrolled under part B, shall (notwithstanding any
other provision of law) not be taken into account for
the purposes of establishing the best price under sec-
tion 1927(c)(1)(C).
‘‘(2) DISCLOSURE.—The PDP sponsor or
Medicare+Choice organization shall disclose to the
Administrator (in a manner specified by the Admin-
istrator) the extent to which discounts or rebates
made available to the sponsor or organization by a
manufacturer are passed through to enrollees
through pharmacies and other dispensers or other-
wise. The provisions of section 1927(b)(3)(D) shall
apply to information disclosed to the Administrator
under this paragraph in the same manner as such
provisions apply to information disclosed under such
section.
‘‘(e) ACTUARIAL VALUATION; DETERMINATION OF
ANNUAL PERCENTAGE INCREASES.—
‘‘(1) PROCESSES.—For purposes of this section,
the Administrator shall establish processes and
methods—
‘‘(A) for determining the actuarial valu-
ation of prescription drug coverage, including—
‘‘(i) an actuarial valuation of standard
coverage and of the reinsurance subsidy
payments under section 1860H;
‘‘(ii) the use of generally accepted ac-
tuarial principles and methodologies; and
‘‘(iii) applying the same methodology
for determinations of alternative coverage
under subsection (c) as is used with re-
spect to determinations of standard cov-
erage under subsection (b); and
‘‘(B) for determining annual percentage in-
creases described in subsection (b)(5).
‘‘(2) USE OF OUTSIDE ACTUARIES.—Under the
processes under paragraph (1)(A), PDP sponsors
and Medicare+Choice organizations may use actu-
arial opinions certified by independent, qualified ac-
tuaries to establish actuarial values, but the Admin-
istrator shall determine whether such actuarial val-
ues meet the requirements under subsection (c)(1).
‘‘(f) COVERED OUTPATIENT DRUGS DEFINED.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, for purposes of this part, the term ‘cov-
ered outpatient drug’ means—
‘‘(A) a drug that may be dispensed only
upon a prescription and that is described in
subparagraph (A)(i) or (A)(ii) of section
1927(k)(2); or
‘‘(B) a biological product described in
clauses (i) through (iii) of subparagraph (B) of
such section or insulin described in subpara-
graph (C) of such section,
and such term includes a vaccine licensed under sec-
tion 351 of the Public Health Service Act and any
use of a covered outpatient drug for a medically ac-
cepted indication (as defined in section 1927(k)(6)).
‘‘(2) EXCLUSIONS.—
‘‘(A) IN GENERAL.—Such term does not
include drugs or classes of drugs, or their med-
ical uses, which may be excluded from coverage
or 
otherwise 
restricted 
under 
section
1927(d)(2), other than subparagraph (E) there-
of (relating to smoking cessation agents), or
under section 1927(d)(3).
‘‘(B) AVOIDANCE
OF
DUPLICATE
COV-
ERAGE.—A drug prescribed for an individual
that would otherwise be a covered outpatient
drug under this part shall not be so considered
if payment for such drug is available under part
A or B for an individual entitled to benefits
under part A and enrolled under part B.
‘‘(3) APPLICATION
OF
FORMULARY
RESTRIC-
TIONS.—A drug prescribed for an individual that
would otherwise be a covered outpatient drug under
this part shall not be so considered under a plan if
the plan excludes the drug under a formulary and
such exclusion is not successfully appealed under
section 1860C(f)(2).
‘‘(4) APPLICATION
OF
GENERAL
EXCLUSION
PROVISIONS.—A 
prescription 
drug 
plan 
or
Medicare+Choice plan may exclude from qualified
prescription drug coverage any covered outpatient
drug—
‘‘(A) for which payment would not be
made if section 1862(a) applied to part D; or
‘‘(B) which are not prescribed in accord-
ance with the plan or this part.
Such exclusions are determinations subject to recon-
sideration and appeal pursuant to section 1860C(f).
‘‘SEC. 1860C. BENEFICIARY PROTECTIONS FOR QUALIFIED
PRESCRIPTION DRUG COVERAGE.
‘‘(a) GUARANTEED ISSUE, COMMUNITY-RATED PRE-
MIUMS, ACCESS
TO NEGOTIATED PRICES, AND NON-
DISCRIMINATION.—For provisions requiring guaranteed
issue, community-rated premiums, access to negotiated
prices, and nondiscrimination, see sections 1860A(c)(1),
1860A(c)(2), 1860B(d), and 1860F(b), respectively.
‘‘(b) DISSEMINATION OF INFORMATION.—
‘‘(1) GENERAL INFORMATION.—A PDP sponsor
shall disclose, in a clear, accurate, and standardized
form to each enrollee with a prescription drug plan
offered by the sponsor under this part at the time
of enrollment and at least annually thereafter, the
information described in section 1852(c)(1) relating
to such plan. Such information includes the fol-
lowing:
‘‘(A) Access to covered outpatient drugs,
including access through pharmacy networks.
‘‘(B) How any formulary used by the spon-
sor functions, including the drugs included in
the formulary.
‘‘(C) Co-payments and deductible require-
ments, including the identification of the tiered
or other co-payment level applicable to each
drug (or class of drugs).
‘‘(D) Grievance and appeals procedures.
Such information shall also be made available on re-
quest to prospective enrollees during annual open
enrollment periods.
‘‘(2) DISCLOSURE UPON REQUEST OF GENERAL
COVERAGE, UTILIZATION, AND GRIEVANCE INFORMA-
TION.—Upon request of an individual eligible to en-
roll under a prescription drug plan, the PDP spon-
sor shall provide the information described in section
1852(c)(2) (other than subparagraph (D)) to such
individual.
‘‘(3) RESPONSE TO BENEFICIARY QUESTIONS.—
Each PDP sponsor offering a prescription drug plan
shall have a mechanism for providing specific infor-
mation to enrollees upon request. The sponsor shall
make available on a timely basis, through an Inter-
net website and in writing upon request, information
on specific changes in its formulary.
‘‘(4) CLAIMS INFORMATION.—Each PDP spon-
sor offering a prescription drug plan must furnish to
enrolled individuals in a form easily understandable
to such individuals an explanation of benefits (in ac-
cordance with section 1806(a) or in a comparable
manner) and a notice of the benefits in relation to
initial coverage limit and annual out-of-pocket
threshold for the current year, whenever prescription
drug benefits are provided under this part (except
that such notice need not be provided more often
than monthly).
‘‘(c) ACCESS TO COVERED BENEFITS.—
‘‘(1) ASSURING PHARMACY ACCESS.—
‘‘(A) IN GENERAL.—The PDP sponsor of
the prescription drug plan shall secure the par-
ticipation in its network of a sufficient number
of pharmacies that dispense (other than by mail
order) drugs directly to patients to ensure con-
venient access (as determined by the Adminis-
trator and including adequate emergency ac-
cess) for enrolled beneficiaries, in accordance
with 
standards 
established 
under 
section
1860D(e) that ensure such convenient access.
‘‘(B) USE
OF
POINT-OF-SERVICE
SYS-
TEM.—A PDP sponsor shall establish an op-
tional point-of-service method of operation
under which—
‘‘(i) the plan provides access to any or
all pharmacies that are not participating
pharmacies in its network; and
‘‘(ii) the plan may charge beneficiaries
through adjustments in premiums and co-
payments any additional costs associated
with the point-of-service option.
The additional copayments so charged shall not
count 
toward 
the 
application 
of 
section
1860B(b).
‘‘(2) USE OF STANDARDIZED TECHNOLOGY.—
‘‘(A) IN GENERAL.—The PDP sponsor of
a prescription drug plan shall issue (and re-
issue, as appropriate) such a card (or other
technology) that may be used by an enrolled
beneficiary to assure access to negotiated prices
under section 1860B(d) for the purchase of
prescription drugs for which coverage is not
otherwise provided under the prescription drug
plan.
‘‘(B) STANDARDS.—
‘‘(i) DEVELOPMENT.—The Adminis-
trator shall provide for the development of
national standards relating to a standard-
ized format for the card or other tech-
nology referred to in subparagraph (A).
Such standards shall be compatible with
standards established under part C of title
XI.
‘‘(ii) APPLICATION OF ADVISORY TASK
FORCE.—The advisory task force estab-
lished under subsection (d)(3)(B)(ii) shall
provide recommendations to the Adminis-
trator under such subsection regarding the
standards developed under clause (i).
‘‘(3) REQUIREMENTS
ON
DEVELOPMENT
AND
APPLICATION OF FORMULARIES.—If a PDP sponsor
of a prescription drug plan uses a formulary, the fol-
lowing requirements must be met:
‘‘(A) PHARMACY AND THERAPEUTIC (P&T)
COMMITTEE.—The sponsor must establish a
pharmacy and therapeutic committee that de-
velops and reviews the formulary. Such com-
mittee shall include at least one practicing phy-
sician and at least one practicing pharmacist
both with expertise in the care of elderly or dis-
abled persons and a majority of its members
shall consist of individuals who are a practicing
physician or a practicing pharmacist (or both).
‘‘(B) FORMULARY DEVELOPMENT.—In de-
veloping and reviewing the formulary, the com-
mittee shall base clinical decisions on the
strength of scientific evidence and standards of
practice, including assessing peer-reviewed med-
ical literature, such as randomized clinical
trials, pharmacoeconomic studies, outcomes re-
search data, and such other information as the
committee determines to be appropriate.
‘‘(C) INCLUSION OF DRUGS IN ALL THERA-
PEUTIC CATEGORIES.—The formulary must in-
clude drugs within each therapeutic category
and class of covered outpatient drugs (although
not necessarily for all drugs within such cat-
egories and classes).
‘‘(D) PROVIDER
EDUCATION.—The com-
mittee shall establish policies and procedures to
educate and inform health care providers con-
cerning the formulary.
‘‘(E) NOTICE BEFORE REMOVING DRUGS
FROM
FORMULARY.—Any removal of a drug
from a formulary shall take effect only after ap-
propriate notice is made available to bene-
ficiaries and physicians.
‘‘(F) GRIEVANCES AND APPEALS RELAT-
ING TO APPLICATION OF FORMULARIES.—For
provisions relating to grievances and appeals of
coverage, see subsections (e) and (f).
‘‘(d) COST AND UTILIZATION MANAGEMENT; QUAL-
ITY ASSURANCE; MEDICATION THERAPY MANAGEMENT
PROGRAM.—
‘‘(1) IN
GENERAL.—The PDP sponsor shall
have in place with respect to covered outpatient
drugs—
‘‘(A) an effective cost and drug utilization
management program, including medically ap-
propriate incentives to use generic drugs and
therapeutic interchange, when appropriate;
‘‘(B) quality assurance measures and sys-
tems to reduce medical errors and adverse drug
interactions, including a medication therapy
management program described in paragraph
(2) and for years beginning with 2006, an elec-
tronic prescription program described in para-
graph (3); and
‘‘(C) a program to control fraud, abuse,
and waste.
Nothing in this section shall be construed as impair-
ing a PDP sponsor from applying cost management
tools (including differential payments) under all
methods of operation.
‘‘(2) MEDICATION THERAPY MANAGEMENT PRO-
GRAM.—
‘‘(A) IN GENERAL.—A medication therapy
management program described in this para-
graph is a program of drug therapy manage-
ment and medication administration that is de-
signed to assure, with respect to beneficiaries
with chronic diseases (such as diabetes, asthma,
hypertension, and congestive heart failure) or
multiple prescriptions, that covered outpatient
drugs under the prescription drug plan are ap-
propriately used to achieve therapeutic goals
and reduce the risk of adverse events, including
adverse drug interactions.
‘‘(B) ELEMENTS.—Such program may
include—
‘‘(i) 
enhanced 
beneficiary 
under-
standing of such appropriate use through
beneficiary 
education, 
counseling, 
and
other appropriate means;
‘‘(ii) increased beneficiary adherence
with 
prescription 
medication 
regimens
through medication refill reminders, special
packaging, and other appropriate means;
and
‘‘(iii) detection of patterns of overuse
and underuse of prescription drugs.
‘‘(C) DEVELOPMENT OF PROGRAM IN CO-
OPERATION
WITH
LICENSED
PHARMACISTS.—
The program shall be developed in cooperation
with licensed and practicing pharmacists and
physicians.
‘‘(D) 
CONSIDERATIONS
IN
PHARMACY
FEES.—The PDP sponsor of a prescription
drug program shall take into account, in estab-
lishing fees for pharmacists and others pro-
viding services under the medication therapy
management program, the resources and time
used in implementing the program.
‘‘(3) ELECTRONIC PRESCRIPTION PROGRAM.—
‘‘(A) IN GENERAL.—An electronic prescrip-
tion drug program described in this paragraph
is a program that includes at least the following
components, consistent with national standards
established under subparagraph (B):
‘‘(i) ELECTRONIC
TRANSMITTAL
OF
PRESCRIPTIONS.—Prescriptions are only
received electronically, except in emergency
cases and other exceptional circumstances
recognized by the Administrator.
‘‘(ii) PROVISION OF INFORMATION TO
PRESCRIBING
HEALTH
CARE
PROFES-
SIONAL.—The program provides, upon
transmittal of a prescription by a pre-
scribing health care professional, for trans-
mittal by the pharmacist to the profes-
sional of information that includes—
‘‘(I) information (to the extent
available and feasible) on the drugs
being prescribed for that patient and
other information relating to the med-
ical history or condition of the patient
that may be relevant to the appro-
priate prescription for that patient;
‘‘(II) cost-effective alternatives (if
any) for the use of the drug pre-
scribed; and
‘‘(III) information on the drugs
included in the applicable formulary.
To the extent feasible, such program shall
permit the prescribing health care profes-
sional to provide (and be provided) related
information on an interactive, real-time
basis.
‘‘(B) STANDARDS.—
‘‘(i) DEVELOPMENT.—The Adminis-
trator shall provide for the development of
national standards relating to the elec-
tronic prescription drug program described
in subparagraph (A). Such standards shall
be compatible with standards established
under part C of title XI.
‘‘(ii) ADVISORY TASK FORCE.—In de-
veloping such standards and the standards
described in subsection (c)(2)(B)(i) the Ad-
ministrator shall establish a task force that
includes representatives of physicians, hos-
pitals, pharmacists, and technology experts
and representatives of the Departments of
Veterans Affairs and Defense and other
appropriate Federal agencies to provide
recommendations to the Administrator on
such standards, including recommenda-
tions relating to the following:
‘‘(I) The range of available com-
puterized prescribing software and
hardware and their costs to develop
and implement.
‘‘(II) The extent to which such
systems reduce medication errors and
can be readily implemented by physi-
cians and hospitals.
‘‘(III) Efforts to develop a com-
mon software platform for computer-
ized prescribing.
‘‘(IV) The cost of implementing
such systems in the range of hospital
and physician office settings, includ-
ing hardware, software, and training
costs.
‘‘(V) Implementation issues as
they relate to part C of title XI, and
current Federal and State prescribing
laws and regulations and their impact
on implementation of computerized
prescribing.
‘‘(iii) DEADLINES.—
‘‘(I) The Administrator shall con-
stitute the task force under clause (ii)
by not later than April 1, 2003.
‘‘(II) Such task force shall sub-
mit recommendations to Adminis-
trator by not later than January 1,
2004.
‘‘(III) The Administrator shall
develop and promulgate the national
standards referred to in clause (ii) by
not later than January 1, 2005.
‘‘(C) REFERENCE
TO
AVAILABILITY
OF
GRANT
FUNDS.—Grant funds are authorized
under section 399O of the Public Health Serv-
ice Act to provide assistance to health care pro-
viders in implementing electronic prescription
drug programs.
‘‘(4) TREATMENT OF ACCREDITATION.—Section
1852(e)(4) (relating to treatment of accreditation)
shall apply to prescription drug plans under this
part with respect to the following requirements, in
the same manner as they apply to Medicare+Choice
plans under part C with respect to the requirements
described in a clause of section 1852(e)(4)(B):
‘‘(A) Paragraph (1) (including quality as-
surance), including medication therapy manage-
ment program under paragraph (2).
‘‘(B) Subsection (c)(1) (relating to access
to covered benefits).
‘‘(C) Subsection (g) (relating to confiden-
tiality and accuracy of enrollee records).
‘‘(5) PUBLIC DISCLOSURE OF PHARMACEUTICAL
PRICES FOR EQUIVALENT DRUGS.—Each PDP spon-
sor shall provide that each pharmacy or other dis-
penser that arranges for the dispensing of a covered
outpatient drug shall inform the beneficiary at the
time of purchase of the drug of any differential be-
tween the price of the prescribed drug to the enrollee
and the price of the lowest cost generic drug covered
under the plan that is therapeutically equivalent and
bioequivalent.
‘‘(e) GRIEVANCE MECHANISM, COVERAGE DETER-
MINATIONS, AND RECONSIDERATIONS.—
‘‘(1) IN GENERAL.—Each PDP sponsor shall
provide meaningful procedures for hearing and re-
solving grievances between the organization (includ-
ing any entity or individual through which the spon-
sor provides covered benefits) and enrollees with pre-
scription drug plans of the sponsor under this part
in accordance with section 1852(f).
‘‘(2) APPLICATION OF COVERAGE DETERMINA-
TION AND RECONSIDERATION PROVISIONS.—A PDP
sponsor shall meet the requirements of paragraphs
(1) through (3) of section 1852(g) with respect to
covered benefits under the prescription drug plan it
offers under this part in the same manner as such
requirements apply to a Medicare+Choice organiza-
tion with respect to benefits it offers under a
Medicare+Choice plan under part C.
‘‘(3) REQUEST FOR REVIEW OF TIERED FOR-
MULARY DETERMINATIONS.—In the case of a pre-
scription drug plan offered by a PDP sponsor that
provides for tiered cost-sharing for drugs included
within a formulary and provides lower cost-sharing
for preferred drugs included within the formulary,
an individual who is enrolled in the plan may re-
quest coverage of a nonpreferred drug under the
terms applicable for preferred drugs if the pre-
scribing physician determines that the preferred
drug for treatment of the same condition is not as
effective for the individual or has adverse effects for
the individual.
‘‘(f) APPEALS.—
‘‘(1) IN GENERAL.—Subject to paragraph (2), a
PDP sponsor shall meet the requirements of para-
graphs (4) and (5) of section 1852(g) with respect
to drugs not included on any formulary in the same
manner 
as 
such 
requirements 
apply 
to 
a
Medicare+Choice organization with respect to bene-
fits it offers under a Medicare+Choice plan under
part C.
‘‘(2) FORMULARY DETERMINATIONS.—An indi-
vidual who is enrolled in a prescription drug plan of-
fered by a PDP sponsor may appeal to obtain cov-
erage for a covered outpatient drug that is not on
a formulary of the sponsor if the prescribing physi-
cian determines that the formulary drug for treat-
ment of the same condition is not as effective for the
individual or has adverse effects for the individual.
‘‘(g) CONFIDENTIALITY
AND ACCURACY
OF EN-
ROLLEE RECORDS.—A PDP sponsor shall meet the re-
quirements of section 1852(h) with respect to enrollees
under this part in the same manner as such requirements
apply to a Medicare+Choice organization with respect to
enrollees under part C.
‘‘SEC. 1860D. REQUIREMENTS FOR PRESCRIPTION DRUG
PLAN (PDP) SPONSORS; CONTRACTS; ESTAB-
LISHMENT OF STANDARDS.
‘‘(a) GENERAL REQUIREMENTS.—Each PDP sponsor
of a prescription drug plan shall meet the following re-
quirements:
‘‘(1) LICENSURE.—Subject to subsection (c),
the sponsor is organized and licensed under State
law as a risk-bearing entity eligible to offer health
insurance or health benefits coverage in each State
in which it offers a prescription drug plan.
‘‘(2) ASSUMPTION OF FINANCIAL RISK FOR UN-
SUBSIDIZED COVERAGE.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B) and section 1860E(d)(2), the entity
assumes full financial risk on a prospective
basis for qualified prescription drug coverage
that it offers under a prescription drug plan
and that is not covered under section 1860H.
‘‘(B) REINSURANCE PERMITTED.—The en-
tity may obtain insurance or make other ar-
rangements for the cost of coverage provided to
any enrolled member under this part.
‘‘(3) SOLVENCY FOR UNLICENSED SPONSORS.—
In the case of a sponsor that is not described in
paragraph (1), the sponsor shall meet solvency
standards established by the Administrator under
subsection (d).
‘‘(b) CONTRACT REQUIREMENTS.—
‘‘(1) IN
GENERAL.—The Administrator shall
not permit the election under section 1860A of a
prescription drug plan offered by a PDP sponsor
under this part, and the sponsor shall not be eligible
for payments under section 1860G or 1860H, unless
the Administrator has entered into a contract under
this subsection with the sponsor with respect to the
offering of such plan. Such a contract with a spon-
sor may cover more than one prescription drug plan.
Such contract shall provide that the sponsor agrees
to comply with the applicable requirements and
standards of this part and the terms and conditions
of payment as provided for in this part.
‘‘(2) NEGOTIATION
REGARDING
TERMS
AND
CONDITIONS.—The Administrator shall have the
same authority to negotiate the terms and conditions
of prescription drug plans under this part as the Di-
rector of the Office of Personnel Management has
with respect to health benefits plans under chapter
89 of title 5, United States Code. In negotiating the
terms and conditions regarding premiums for which
information is submitted under section 1860F(a)(2),
the Administrator shall take into account the sub-
sidy payments under section 1860H and the ad-
justed community rate (as defined in section
1854(f)(3)) for the benefits covered.
‘‘(3) 
INCORPORATION
OF
CERTAIN
MEDICARE+CHOICE
CONTRACT
REQUIREMENTS.—
The following provisions of section 1857 shall apply,
subject to subsection (c)(5), to contracts under this
section in the same manner as they apply to con-
tracts under section 1857(a):
‘‘(A) 
MINIMUM
ENROLLMENT.—Para-
graphs (1) and (3) of section 1857(b).
‘‘(B) CONTRACT PERIOD AND EFFECTIVE-
NESS.—Paragraphs (1) through (3) and (5) of
section 1857(c).
‘‘(C) PROTECTIONS AGAINST FRAUD AND
BENEFICIARY PROTECTIONS.—Section 1857(d).
‘‘(D) ADDITIONAL
CONTRACT
TERMS.—
Section 1857(e); except that in applying section
1857(e)(2) under this part—
‘‘(i) such section shall be applied sepa-
rately to costs relating to this part (from
costs under part C);
‘‘(ii) in no case shall the amount of
the fee established under this subpara-
graph for a plan exceed 20 percent of the
maximum amount of the fee that may be
established under subparagraph (B) of
such section; and
‘‘(iii) no fees shall be applied under
this 
subparagraph 
with 
respect 
to
Medicare+Choice plans.
‘‘(E) INTERMEDIATE SANCTIONS.—Section
1857(g).
‘‘(F) PROCEDURES
FOR
TERMINATION.—
Section 1857(h).
‘‘(4) RULES
OF
APPLICATION
FOR
INTER-
MEDIATE
SANCTIONS.—In 
applying 
paragraph
(3)(E)—
‘‘(A) 
the 
reference 
in 
section
1857(g)(1)(B) to section 1854 is deemed a ref-
erence to this part; and
‘‘(B) 
the 
reference 
in 
section
1857(g)(1)(F) to section 1852(k)(2)(A)(ii) shall
not be applied.
‘‘(c) WAIVER OF CERTAIN REQUIREMENTS TO EX-
PAND CHOICE.—
‘‘(1) IN GENERAL.—In the case of an entity
that seeks to offer a prescription drug plan in a
State, the Administrator shall waive the requirement
of subsection (a)(1) that the entity be licensed in
that State if the Administrator determines, based on
the application and other evidence presented to the
Administrator, that any of the grounds for approval
of the application described in paragraph (2) has
been met.
‘‘(2) GROUNDS FOR APPROVAL.—The grounds
for approval under this paragraph are the grounds
for approval described in subparagraph (B), (C),
and (D) of section 1855(a)(2), and also include the
application by a State of any grounds other than
those required under Federal law.
‘‘(3) APPLICATION OF WAIVER PROCEDURES.—
With respect to an application for a waiver (or a
waiver granted) under this subsection, the provisions
of subparagraphs (E), (F), and (G) of section
1855(a)(2) shall apply.
‘‘(4) LICENSURE DOES NOT SUBSTITUTE FOR
OR CONSTITUTE CERTIFICATION.—The fact that an
entity is licensed in accordance with subsection
(a)(1) does not deem the entity to meet other re-
quirements imposed under this part for a PDP spon-
sor.
‘‘(5) REFERENCES TO CERTAIN PROVISIONS.—
For purposes of this subsection, in applying provi-
sions of section 1855(a)(2) under this subsection to
prescription drug plans and PDP sponsors—
‘‘(A) any reference to a waiver application
under section 1855 shall be treated as a ref-
erence to a waiver application under paragraph
(1); and
‘‘(B) any reference to solvency standards
shall be treated as a reference to solvency
standards established under subsection (d).
‘‘(d) SOLVENCY STANDARDS
FOR NON-LICENSED
SPONSORS.—
‘‘(1) 
ESTABLISHMENT.—The 
Administrator
shall establish, by not later than October 1, 2003,
financial solvency and capital adequacy standards
that an entity that does not meet the requirements
of subsection (a)(1) must meet to qualify as a PDP
sponsor under this part.
‘‘(2) COMPLIANCE
WITH
STANDARDS.—Each
PDP sponsor that is not licensed by a State under
subsection (a)(1) and for which a waiver application
has been approved under subsection (c) shall meet
solvency and capital adequacy standards established
under paragraph (1). The Administrator shall estab-
lish certification procedures for such PDP sponsors
with respect to such solvency standards in the man-
ner described in section 1855(c)(2).
‘‘(e) OTHER STANDARDS.—The Administrator shall
establish by regulation other standards (not described in
subsection (d)) for PDP sponsors and plans consistent
with, and to carry out, this part. The Administrator shall
publish such regulations by October 1, 2003.
‘‘(f) RELATION TO STATE LAWS.—
‘‘(1) IN GENERAL.—The standards established
under this part shall supersede any State law or reg-
ulation (other than State licensing laws or State
laws relating to plan solvency, except as provided in
subsection (d)) with respect to prescription drug
plans which are offered by PDP sponsors under this
part.
‘‘(2) PROHIBITION OF STATE IMPOSITION OF
PREMIUM TAXES.—No State may impose a premium
tax or similar tax with respect to premiums paid to
PDP sponsors for prescription drug plans under this
part, or with respect to any payments made to such
a sponsor by the Administrator under this part.
‘‘SEC. 1860E. PROCESS FOR BENEFICIARIES TO SELECT
QUALIFIED PRESCRIPTION DRUG COVERAGE.
‘‘(a) IN GENERAL.—The Administrator shall estab-
lish a process for the selection of the prescription drug
plan or Medicare+Choice plan which offer qualified pre-
scription drug coverage through which eligible individuals
elect qualified prescription drug coverage under this part.
‘‘(b) ELEMENTS.—Such process shall include the fol-
lowing:
‘‘(1) Annual, coordinated election periods, in
which such individuals can change the qualifying
plans through which they obtain coverage, in accord-
ance with section 1860A(b)(2).
‘‘(2) Active dissemination of information to pro-
mote an informed selection among qualifying plans
based upon price, quality, and other features, in the
manner described in (and in coordination with) sec-
tion 1851(d), including the provision of annual com-
parative information, maintenance of a toll-free hot-
line, and the use of non-Federal entities.
‘‘(3) Coordination of elections through filing
with a Medicare+Choice organization or a PDP
sponsor, in the manner described in (and in coordi-
nation with) section 1851(c)(2).
‘‘(c) MEDICARE+CHOICE ENROLLEE IN PLAN OF-
FERING PRESCRIPTION DRUG COVERAGE MAY ONLY OB-
TAIN BENEFITS THROUGH
THE PLAN.—An individual
who is enrolled under a Medicare+Choice plan that offers
qualified prescription drug coverage may only elect to re-
ceive qualified prescription drug coverage under this part
through such plan.
‘‘(d) ASSURING ACCESS TO A CHOICE OF QUALIFIED
PRESCRIPTION DRUG COVERAGE.—
‘‘(1) CHOICE OF AT LEAST TWO PLANS IN EACH
AREA.—
‘‘(A) IN
GENERAL.—The Administrator
shall assure that each individual who is entitled
to benefits under part A or enrolled under part
B and who is residing in an area in the United
States has available, consistent with subpara-
graph (B), a choice of enrollment in at least
two qualifying plans (as defined in paragraph
(5)) in the area in which the individual resides,
at least one of which is a prescription drug
plan.
‘‘(B) 
REQUIREMENT
FOR
DIFFERENT
PLAN SPONSORS.—The requirement in subpara-
graph (A) is not satisfied with respect to an
area 
if 
only 
one 
PDP 
sponsor 
or
Medicare+Choice organization offers all the
qualifying plans in the area.
‘‘(2) GUARANTEEING ACCESS TO COVERAGE.—
In order to assure access under paragraph (1) and
consistent with paragraph (3), the Administrator
may provide financial incentives (including partial
underwriting of risk) for a PDP sponsor to expand
the service area under an existing prescription drug
plan to adjoining or additional areas or to establish
such a plan (including offering such a plan on a re-
gional or nationwide basis), but only so long as (and
to the extent) necessary to assure the access guaran-
teed under paragraph (1).
‘‘(3) LIMITATION
ON
AUTHORITY.—In exer-
cising 
authority 
under 
this 
subsection, 
the
Administrator—
‘‘(A) shall not provide for the full under-
writing of financial risk for any PDP sponsor;
‘‘(B) shall not provide for any under-
writing of financial risk for a public PDP spon-
sor with respect to the offering of a nationwide
prescription drug plan; and
‘‘(C) shall seek to maximize the assump-
tion of financial risk by PDP sponsors or
Medicare+Choice organizations.
‘‘(4) REPORTS.—The Administrator shall, in
each annual report to Congress under section
1808(f), include information on the exercise of au-
thority under this subsection. The Administrator
also shall include such recommendations as may be
appropriate to minimize the exercise of such author-
ity, including minimizing the assumption of financial
risk.
‘‘(5) QUALIFYING
PLAN
DEFINED.—For pur-
poses of this subsection, the term ‘qualifying plan’
means 
a 
prescription 
drug 
plan 
or 
a
Medicare+Choice plan that includes qualified pre-
scription drug coverage.
‘‘SEC. 1860F. SUBMISSION OF BIDS AND PREMIUMS.
‘‘(a) SUBMISSION
OF BIDS, PREMIUMS, AND RE-
LATED INFORMATION.—
‘‘(1) IN GENERAL.—Each PDP sponsor shall
submit to the Administrator the information de-
scribed in paragraph (2) in the same manner as in-
formation is submitted by a Medicare+Choice orga-
nization under section 1854(a)(1).
‘‘(2) INFORMATION SUBMITTED.—The informa-
tion described in this paragraph is the following:
‘‘(A) COVERAGE
PROVIDED.—Information
on the qualified prescription drug coverage to
be provided.
‘‘(B) ACTUARIAL VALUE.—Information on
the actuarial value of the coverage.
‘‘(C) BID AND PREMIUM.—Information on
the bid and the premium for the coverage, in-
cluding an actuarial certification of—
‘‘(i) the actuarial basis for such bid
and premium;
‘‘(ii) the portion of such bid and pre-
mium attributable to benefits in excess of
standard coverage; and
‘‘(iii) the reduction in such bid and
premium resulting from the subsidy pay-
ments provided under section 1860H.
‘‘(D) ADDITIONAL
INFORMATION.—Such
other information as the Administrator may re-
quire to carry out this part.
‘‘(3) REVIEW OF INFORMATION AND APPROVAL
OF PREMIUMS.—The Administrator shall review the
information filed under paragraph (2) for the pur-
pose of conducting negotiations under section
1860D(b)(2). The Administrator, using the informa-
tion provided (including the actuarial certification
under paragraph (2)(C)) shall approve the premium
submitted under this subsection only if the premium
accurately reflects both (A) the actuarial value of
the benefits provided, and (B) the 67 percent sub-
sidy provided under section 1860H for the standard
benefit. The Administrator shall apply actuarial
principles to approval of a premium under this part
in a manner similar to the manner in which those
principles are applied in establishing the monthly
part B premium under section 1839.
‘‘(b) UNIFORM BID AND PREMIUM.—
‘‘(1) IN GENERAL.—The bid and premium for
a prescription drug plan under this section may not
vary among individuals enrolled in the plan in the
same service area.
‘‘(2) CONSTRUCTION.—Nothing in paragraph
(1) shall be construed as preventing the imposition
of 
a 
late 
enrollment 
penalty 
under 
section
1860A(c)(2)(B).
‘‘(c) COLLECTION.—
‘‘(1) BENEFICIARY’S
OPTION
OF
PAYMENT
THROUGH
WITHHOLDING
FROM
SOCIAL
SECURITY
PAYMENT OR USE OF ELECTRONIC FUNDS TRANS-
FER MECHANISM.—In accordance with regulations, a
PDP sponsor shall permit each enrollee, at the en-
rollee’s option, to make payment of premiums under
this part through withholding from benefit payments
in the manner provided under section 1840 with re-
spect to monthly premiums under section 1839 or
through an electronic funds transfer mechanism
(such as automatic charges of an account at a finan-
cial institution or a credit or debit card account) or
otherwise. All such amounts shall be credited to the
Medicare Prescription Drug Trust Fund.
‘‘(2) OFFSETTING.—Reductions in premiums
for coverage under parts A and B as a result of a
selection of a Medicare+Choice plan may be used to
reduce the premium otherwise imposed under para-
graph (1).
‘‘(3) PAYMENT OF PLANS.—PDP plans shall re-
ceive payment based on bid amounts in the same
manner as Medicare+Choice organizations receive
payment based on bid amounts under section
1853(a)(1)(A)(ii) except that such payment shall be
made from the Medicare Prescription Drug Trust
Fund.
‘‘(d) ACCEPTANCE
OF BENCHMARK AMOUNT
AS
FULL PREMIUM FOR SUBSIDIZED LOW-INCOME INDIVID-
UALS IF NO STANDARD (OR EQUIVALENT) COVERAGE IN
AN AREA.—
‘‘(1) IN GENERAL.—If there is no standard pre-
scription drug coverage (as defined in paragraph
(2)) offered in an area, in the case of an individual
who is eligible for a premium subsidy under section
1860G and resides in the area, the PDP sponsor of
any prescription drug plan offered in the area (and
any Medicare+Choice organization that offers quali-
fied prescription drug coverage in the area) shall ac-
cept the benchmark bid amount (under section
1860G(b)(2)) as payment in full for the premium
charge for qualified prescription drug coverage.
‘‘(2) STANDARD
PRESCRIPTION
DRUG
COV-
ERAGE DEFINED.—For purposes of this subsection,
the term ‘standard prescription drug coverage’
means qualified prescription drug coverage that is
standard coverage or that has an actuarial value
equivalent to the actuarial value for standard cov-
erage.
‘‘SEC. 1860G. PREMIUM AND COST-SHARING SUBSIDIES FOR
LOW-INCOME INDIVIDUALS.
‘‘(a) INCOME-RELATED SUBSIDIES FOR INDIVIDUALS
WITH INCOME BELOW 175 PERCENT OF FEDERAL POV-
ERTY LEVEL.—
‘‘(1) FULL PREMIUM SUBSIDY AND REDUCTION
OF COST-SHARING FOR INDIVIDUALS WITH INCOME
BELOW
150
PERCENT
OF
FEDERAL
POVERTY
LEVEL.—In the case of a subsidy eligible individual
(as defined in paragraph (4)) who is determined to
have income that does not exceed 150 percent of the
Federal poverty level, the individual is entitled under
this section—
‘‘(A) to an income-related premium subsidy
equal to 100 percent of the amount described in
subsection (b)(1); and
‘‘(B) subject to subsection (c), to the sub-
stitution for the beneficiary cost-sharing de-
scribed in paragraphs (1) and (2) of section
1860B(b) (up to the initial coverage limit speci-
fied in paragraph (3) of such section) of
amounts that do not exceed $2 for a multiple
source or generic drug (as described in section
1927(k)(7)(A)) and $5 for a non-preferred
drug.
‘‘(2) SLIDING SCALE PREMIUM SUBSIDY AND
REDUCTION
OF
COST-SHARING
FOR
INDIVIDUALS
WITH INCOME ABOVE 150, BUT BELOW 175 PERCENT,
OF FEDERAL POVERTY LEVEL.—In the case of a
subsidy eligible individual who is determined to have
income that exceeds 150 percent, but does not ex-
ceed 175 percent, of the Federal poverty level, the
individual is entitled under this section to—
‘‘(A) an income-related premium subsidy
determined on a linear sliding scale ranging
from 100 percent of the amount described in
subsection (b)(1) for individuals with incomes
at 150 percent of such level to 0 percent of
such amount for individuals with incomes at
175 percent of such level; and
‘‘(B) subject to subsection (c), to the sub-
stitution for the beneficiary cost-sharing de-
scribed in paragraphs (1) and (2) of section
1860B(b) (up to the initial coverage limit speci-
fied in paragraph (3) of such section) of
amounts that do not exceed $2 for a multiple
source or generic drug (as described in section
1927(k)(7)(A)) and $5 for a non-preferred
drug.
‘‘(3) CONSTRUCTION.—Nothing in this section
shall be construed as preventing a PDP sponsor
from reducing to 0 the cost-sharing otherwise appli-
cable to generic drugs.
‘‘(4) DETERMINATION OF ELIGIBILITY.—
‘‘(A) SUBSIDY ELIGIBLE INDIVIDUAL DE-
FINED.—For purposes of this section, subject
to subparagraph (D), the term ‘subsidy eligible
individual’ means an individual who—
‘‘(i) is eligible to elect, and has elect-
ed, to obtain qualified prescription drug
coverage under this part;
‘‘(ii) has income below 175 percent of
the Federal poverty line; and
‘‘(iii) meets the resources requirement
described in section 1905(p)(1)(C).
‘‘(B) DETERMINATIONS.—The determina-
tion of whether an individual residing in a State
is a subsidy eligible individual and the amount
of such individual’s income shall be determined
under the State medicaid plan for the State
under section 1935(a) or by the Social Security
Administration. In the case of a State that does
not operate such a medicaid plan (either under
title XIX or under a statewide waiver granted
under section 1115), such determination shall
be made under arrangements made by the Ad-
ministrator. There are authorized to be appro-
priated to the Social Security Administration
such sums as may be necessary for the deter-
mination of eligibility under this subparagraph.
‘‘(C) INCOME DETERMINATIONS.—For pur-
poses of applying this section—
‘‘(i) income shall be determined in the
manner 
described 
in 
section
1905(p)(1)(B); and
‘‘(ii) the term ‘Federal poverty line’
means the official poverty line (as defined
by the Office of Management and Budget,
and revised annually in accordance with
section 673(2) of the Omnibus Budget
Reconciliation Act of 1981) applicable to a
family of the size involved.
‘‘(D) TREATMENT OF TERRITORIAL RESI-
DENTS.—In the case of an individual who is not
a resident of the 50 States or the District of
Columbia, the individual is not eligible to be a
subsidy eligible individual but may be eligible
for financial assistance with prescription drug
expenses under section 1935(e).
‘‘(E) 
TREATMENT
OF
CONFORMING
MEDIGAP POLICIES.—For purposes of this sec-
tion, the term ‘qualified prescription drug cov-
erage’ includes a medicare supplemental policy
described in section 1860H(b)(4).
‘‘(5) INDEXING DOLLAR AMOUNTS.—
‘‘(A) FOR 2006.—The dollar amounts ap-
plied under paragraphs (1)(B) and (2)(B) for
2006 shall be the dollar amounts specified in
such paragraph increased by the annual per-
centage 
increase 
described 
in 
section
1860B(b)(5) for 2006.
‘‘(B) FOR SUBSEQUENT YEARS.—The dol-
lar amounts applied under paragraphs (1)(B)
and (2)(B) for a year after 2006 shall be the
amounts (under this paragraph) applied under
paragraph (1)(B) or (2)(B) for the preceding
year increased by the annual percentage in-
crease described in section 1860B(b)(5) (relat-
ing to growth in medicare prescription drug
costs per beneficiary) for the year involved.
‘‘(b) PREMIUM SUBSIDY AMOUNT.—
value of standard coverage, to (II) the ac-
tuarial value of the alternative coverage; or
‘‘(B) a Medicare+Choice plan, the portion
of the bid amount that is attributable to statu-
tory 
drug 
benefits 
(described 
in 
section
1853(a)(1)(A)(ii)(II)).
‘‘(c) RULES
IN
APPLYING
COST-SHARING
SUB-
SIDIES.—
‘‘(1) IN
GENERAL.—In applying subsections
(a)(1)(B) and (a)(2)(B), nothing in this part shall
be construed as preventing a plan or provider from
waiving or reducing the amount of cost-sharing oth-
erwise applicable.
‘‘(2) LIMITATION ON CHARGES.—In the case of
an individual receiving cost-sharing subsidies under
subsection (a)(1)(B) or (a)(2)(B), the PDP sponsor
may not charge more than $5 per prescription.
‘‘(3) APPLICATION OF INDEXING RULES.—The
provisions of subsection (a)(4) shall apply to the dol-
lar amount specified in paragraph (2) in the same
manner as they apply to the dollar amounts specified
in subsections (a)(1)(B) and (a)(2)(B).
‘‘(d) ADMINISTRATION OF SUBSIDY PROGRAM.—The
Administrator shall provide a process whereby, in the case
of an individual who is determined to be a subsidy eligible
individual and who is enrolled in prescription drug plan
or is enrolled in a Medicare+Choice plan under which
qualified prescription drug coverage is provided—
‘‘(1) the Administrator provides for a notifica-
tion of the PDP sponsor or Medicare+Choice orga-
nization involved that the individual is eligible for a
subsidy and the amount of the subsidy under sub-
section (a);
‘‘(2) the sponsor or organization involved re-
duces the premiums or cost-sharing otherwise im-
posed by the amount of the applicable subsidy and
submits to the Administrator information on the
amount of such reduction; and
‘‘(3) the Administrator periodically and on a
timely basis reimburses the sponsor or organization
for the amount of such reductions.
The reimbursement under paragraph (3) with respect to
cost-sharing subsidies may be computed on a capitated
basis, taking into account the actuarial value of the sub-
sidies and with appropriate adjustments to reflect dif-
ferences in the risks actually involved.
‘‘(e) RELATION TO MEDICAID PROGRAM.—
‘‘(1) IN
GENERAL.—For provisions providing
for eligibility determinations, and additional financ-
ing, under the medicaid program, see section 1935.
‘‘(2) MEDICAID PROVIDING WRAP AROUND BEN-
EFITS.—The coverage provided under this part is
primary payor to benefits for prescribed drugs pro-
vided under the medicaid program under title XIX.
‘‘(3) COORDINATION.—The Administrator shall
develop and implement a plan for the coordination
of prescription drug benefits under this part with
the benefits provided under the medicaid program
under title XIX, with particular attention to insur-
ing coordination of payments and prevention of
fraud and abuse. In developing and implementing
such plan, the Administrator shall involve the Sec-
retary, the States, the data processing industry,
pharmacists, and pharmaceutical manufacturers,
and other experts.
‘‘SEC. 
1860H. 
SUBSIDIES 
FOR 
ALL 
MEDICARE 
BENE-
FICIARIES FOR QUALIFIED PRESCRIPTION
DRUG COVERAGE.
‘‘(a) SUBSIDY PAYMENT.—In order to reduce pre-
mium levels applicable to qualified prescription drug cov-
erage for all medicare beneficiaries consistent with an
overall subsidy level of 67 percent, to reduce adverse selec-
tion among prescription drug plans and Medicare+Choice
plans that provide qualified prescription drug coverage,
and to promote the participation of PDP sponsors under
this part, the Administrator shall provide in accordance
with this section for payment to a qualifying entity (as
defined in subsection (b)) of the following subsidies:
‘‘(1) DIRECT SUBSIDY.—In the case of an indi-
vidual enrolled in a prescription drug plan,
Medicare+Choice plan that provides qualified pre-
scription drug coverage, or qualified retiree prescrip-
tion drug plan, a direct subsidy equal to 37 percent
of the total payments made by a qualifying entity
for standard coverage under the respective plan.
‘‘(2) SUBSIDY
THROUGH
REINSURANCE.—The
reinsurance payment amount (as defined in sub-
section (c)), which in the aggregate is 30 percent of
such total payments, for excess costs incurred in
providing qualified prescription drug coverage—
‘‘(A) for individuals enrolled with a pre-
scription drug plan under this part;
‘‘(B) for individuals enrolled with a
Medicare+Choice plan that provides qualified
prescription drug coverage; and
‘‘(C) for individuals who are enrolled in a
qualified retiree prescription drug plan.
This section constitutes budget authority in advance of ap-
propriations Acts and represents the obligation of the Ad-
ministrator to provide for the payment of amounts pro-
vided under this section.
‘‘(b) QUALIFYING ENTITY DEFINED.—For purposes
of this section, the term ‘qualifying entity’ means any of
the following that has entered into an agreement with the
Administrator to provide the Administrator with such in-
formation as may be required to carry out this section:
‘‘(1) A PDP sponsor offering a prescription
drug plan under this part.
‘‘(2) A Medicare+Choice organization that pro-
vides qualified prescription drug coverage under a
Medicare+Choice plan under part C.
‘‘(3) The sponsor of a qualified retiree prescrip-
tion drug plan (as defined in subsection (f)).
‘‘(c) REINSURANCE PAYMENT AMOUNT.—
‘‘(1) IN
GENERAL.—Subject to subsection
(d)(1)(B) and paragraph (4), the reinsurance pay-
ment amount under this subsection for a qualifying
covered individual (as defined in subsection (g)(1))
for a coverage year (as defined in subsection (g)(2))
is equal to the sum of the following:
‘‘(A) For the portion of the individual’s
gross covered prescription drug costs (as de-
fined in paragraph (3)) for the year that ex-
ceeds the initial copayment threshold specified
in section 1860B(b)(2)(C), but does not exceed
the initial coverage limit specified in section
1860B(b)(3), an amount equal to 30 percent of
the allowable costs (as defined in paragraph
(2)) attributable to such gross covered prescrip-
tion drug costs.
‘‘(B) For the portion of the individual’s
gross covered prescription drug costs for the
year that exceeds the annual out-of-pocket
threshold specified in 1860B(b)(4)(B), an
amount equal to 80 percent of the allowable
costs attributable to such gross covered pre-
scription drug costs.
‘‘(2) ALLOWABLE COSTS.—For purposes of this
section, the term ‘allowable costs’ means, with re-
spect to gross covered prescription drug costs under
a plan described in subsection (b) offered by a quali-
fying entity, the part of such costs that are actually
paid (net of average percentage rebates) under the
plan, but in no case more than the part of such
costs that would have been paid under the plan if
the prescription drug coverage under the plan were
standard coverage.
‘‘(3) GROSS
COVERED
PRESCRIPTION
DRUG
COSTS.—For purposes of this section, the term
‘gross covered prescription drug costs’ means, with
respect to an enrollee with a qualifying entity under
a plan described in subsection (b) during a coverage
year, the costs incurred under the plan (including
costs attributable to administrative costs) for cov-
ered prescription drugs dispensed during the year,
including costs relating to the deductible, whether
paid by the enrollee or under the plan, regardless of
whether the coverage under the plan exceeds stand-
ard coverage and regardless of when the payment
for such drugs is made.
‘‘(4) INDEXING DOLLAR AMOUNTS.—
‘‘(A) AMOUNTS
FOR
2005.—The dollar
amounts applied under paragraph (1) for 2005
shall be the dollar amounts specified in such
paragraph.
‘‘(B) FOR 2006.—The dollar amounts ap-
plied under paragraph (1) for 2006 shall be the
dollar amounts specified in such paragraph in-
creased by the annual percentage increase de-
scribed in section 1860B(b)(5) for 2006.
‘‘(C) FOR SUBSEQUENT YEARS.—The dol-
lar amounts applied under paragraph (1) for a
year after 2006 shall be the amounts (under
this paragraph) applied under paragraph (1)
for the preceding year increased by the annual
percentage 
increase 
described 
in 
section
1860B(b)(5) (relating to growth in medicare
prescription drug costs per beneficiary) for the
year involved.
‘‘(D) ROUNDING.—Any amount, deter-
mined under the preceding provisions of this
paragraph for a year, which is not a multiple of
$10 shall be rounded to the nearest multiple of
$10.
‘‘(d) ADJUSTMENT OF PAYMENTS.—
‘‘(1) ADJUSTMENT
OF
REINSURANCE
PAY-
MENTS TO ASSURE 30 PERCENT LEVEL OF SUBSIDY
THROUGH REINSURANCE.—
‘‘(A) ESTIMATION
OF
PAYMENTS.—The
Administrator shall estimate—
‘‘(i) the total payments to be made
(without regard to this subsection) during
a year under subsections (a)(2) and (c);
and
‘‘(ii) the total payments to be made by
qualifying entities for standard coverage
under plans described in subsection (b)
during the year.
‘‘(B) ADJUSTMENT.—The Administrator
shall proportionally adjust the payments made
under subsections (a)(2) and (c) for a coverage
year in such manner so that the total of the
payments made under such subsections for the
year is equal to 30 percent of the total pay-
ments described in subparagraph (A)(ii).
‘‘(2) RISK
ADJUSTMENT
FOR
DIRECT
SUB-
SIDIES.—To the extent the Administrator deter-
mines it appropriate to avoid risk selection, the pay-
ments made for direct subsidies under subsection
(a)(1) are subject to adjustment based upon risk
factors specified by the Administrator. Any such risk
adjustment shall be designed in a manner as to not
result in a change in the aggregate payments made
under such subsection.
‘‘(e) PAYMENT METHODS.—
‘‘(1) IN GENERAL.—Payments under this sec-
tion shall be based on such a method as the Admin-
istrator determines. The Administrator may estab-
lish a payment method by which interim payments
of amounts under this section are made during a
year based on the Administrator’s best estimate of
amounts that will be payable after obtaining all of
the information.
‘‘(2) SOURCE OF PAYMENTS.—Payments under
this section shall be made from the Medicare Pre-
scription Drug Trust Fund.
‘‘(f) QUALIFIED
RETIREE
PRESCRIPTION
DRUG
PLAN DEFINED.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified retiree prescription drug
plan’ means employment-based retiree health cov-
erage (as defined in paragraph (3)(A)) if, with re-
spect to an individual enrolled (or eligible to be en-
rolled) under this part who is covered under the
plan, the following requirements are met:
‘‘(A) ASSURANCE.—The sponsor of the
plan shall annually attest, and provide such as-
surances as the Administrator may require,
that the coverage meets or exceeds the require-
ments for qualified prescription drug coverage.
‘‘(B) AUDITS.—The sponsor (and the plan)
shall maintain, and afford the Administrator
access to, such records as the Administrator
may require for purposes of audits and other
oversight activities necessary to ensure the ade-
quacy of prescription drug coverage, and the ac-
curacy of payments made.
‘‘(C) PROVISION
OF
CERTIFICATION
OF
PRESCRIPTION DRUG COVERAGE.—The sponsor
of the plan shall provide for issuance of certifi-
cations of the type described in section
1860A(c)(2)(D).
‘‘(2) LIMITATION ON BENEFIT ELIGIBILITY.—
No payment shall be provided under this section
with respect to an individual who is enrolled under
a qualified retiree prescription drug plan unless the
individual is—
‘‘(A) enrolled under this part;
‘‘(B) is covered under the plan; and
‘‘(C) is eligible to obtain qualified prescrip-
tion drug coverage under section 1860A but did
not elect such coverage under this part (either
through a prescription drug plan or through a
Medicare+Choice plan).
‘‘(3) DEFINITIONS.—As used in this section:
‘‘(A) 
EMPLOYMENT-BASED
RETIREE
HEALTH
COVERAGE.—The term ‘employment-
based retiree health coverage’ means health in-
surance or other coverage of health care costs
for individuals enrolled under this part (or for
such individuals and their spouses and depend-
ents) based on their status as former employees
or labor union members.
‘‘(B) 
SPONSOR.—The 
term 
‘sponsor’
means a plan sponsor, as defined in section
3(16)(B) of the Employee Retirement Income
Security Act of 1974.
‘‘(g) GENERAL DEFINITIONS.—For purposes of this
section:
‘‘(1) QUALIFYING COVERED INDIVIDUAL.—The
term ‘qualifying covered individual’ means an indi-
vidual who—
‘‘(A) is enrolled with a prescription drug
plan under this part;
‘‘(B) is enrolled with a Medicare+Choice
plan that provides qualified prescription drug
coverage under part C; or
‘‘(C) is enrolled for benefits under this title
and is covered under a qualified retiree pre-
scription drug plan.
‘‘(2) COVERAGE
YEAR.—The term ‘coverage
year’ means a calendar year in which covered out-
patient drugs are dispensed if a claim for payment
is made under the plan for such drugs, regardless of
when the claim is paid.
‘‘SEC. 1860I. MEDICARE PRESCRIPTION DRUG TRUST FUND.
‘‘(a) IN GENERAL.—There is created on the books
of the Treasury of the United States a trust fund to be
known as the ‘Medicare Prescription Drug Trust Fund’
(in this section referred to as the ‘Trust Fund’). The
Trust Fund shall consist of such gifts and bequests as
may be made as provided in section 201(i)(1), and such
amounts as may be deposited in, or appropriated to, such
fund as provided in this part. Except as otherwise pro-
vided in this section, the provisions of subsections (b)
through (i) of section 1841 shall apply to the Trust Fund
in the same manner as they apply to the Federal Supple-
mentary Medical Insurance Trust Fund under such sec-
tion.
‘‘(b) PAYMENTS FROM TRUST FUND.—
‘‘(1) IN
GENERAL.—The Managing Trustee
shall pay from time to time from the Trust Fund
such amounts as the Administrator certifies are nec-
essary to make—
‘‘(A) payments under section 1860G (relat-
ing to low-income subsidy payments);
‘‘(B) payments under section 1860H (re-
lating to subsidy payments); and
‘‘(C) payments with respect to administra-
tive expenses under this part in accordance with
section 201(g).
‘‘(2) TRANSFERS TO MEDICAID ACCOUNT FOR
INCREASED
ADMINISTRATIVE
COSTS.—The Man-
aging Trustee shall transfer from time to time from
the Trust Fund to the Grants to States for Medicaid
account amounts the Administrator certifies are at-
tributable to increases in payment resulting from the
application of a higher Federal matching percentage
under section 1935(b).
‘‘(c) DEPOSITS INTO TRUST FUND.—
‘‘(1) LOW-INCOME TRANSFER.—There is hereby
transferred to the Trust Fund, from amounts appro-
priated for Grants to States for Medicaid, amounts
equivalent to the aggregate amount of the reductions
in payments under section 1903(a)(1) attributable to
the application of section 1935(c).
‘‘(2) APPROPRIATIONS TO COVER GOVERNMENT
CONTRIBUTIONS.—There are authorized to be appro-
priated from time to time, out of any moneys in the
Treasury not otherwise appropriated, to the Trust
Fund, an amount equivalent to the amount of pay-
ments made from the Trust Fund under subsection
(b), reduced by the amount transferred to the Trust
Fund under paragraph (1).
‘‘(d) RELATION
TO SOLVENCY REQUIREMENTS.—
Any provision of law that relates to the solvency of the
Trust Fund under this part shall take into account the
Trust Fund and amounts receivable by, or payable from,
the Trust Fund.
‘‘SEC. 1860J. DEFINITIONS; TREATMENT OF REFERENCES
TO PROVISIONS IN PART C.
‘‘(a) DEFINITIONS.—For purposes of this part:
‘‘(1) COVERED OUTPATIENT DRUGS.—The term
‘covered outpatient drugs’ is defined in section
1860B(f).
‘‘(2) INITIAL COVERAGE LIMIT.—The term ‘ini-
tial coverage limit’ means such limit as established
under section 1860B(b)(3), or, in the case of cov-
erage that is not standard coverage, the comparable
limit (if any) established under the coverage.
‘‘(3) MEDICARE
PRESCRIPTION
DRUG
TRUST
FUND.—The term ‘Medicare Prescription Drug
Trust Fund’ means the Trust Fund created under
section 1860I(a).
‘‘(4) PDP SPONSOR.—The term ‘PDP sponsor’
means an entity that is certified under this part as
meeting the requirements and standards of this part
for such a sponsor.
‘‘(5) PRESCRIPTION
DRUG
PLAN.—The term
‘prescription drug plan’ means health benefits cov-
erage that—
‘‘(A) is offered under a policy, contract, or
plan by a PDP sponsor pursuant to, and in ac-
cordance with, a contract between the Adminis-
trator and the sponsor under section 1860D(b);
‘‘(B) provides qualified prescription drug
coverage; and
‘‘(C) meets the applicable requirements of
the section 1860C for a prescription drug plan.
‘‘(6) QUALIFIED
PRESCRIPTION
DRUG
COV-
ERAGE.—The term ‘qualified prescription drug cov-
erage’ is defined in section 1860B(a).
‘‘(7) STANDARD COVERAGE.—The term ‘stand-
ard coverage’ is defined in section 1860B(b).
‘‘(b) APPLICATION OF MEDICARE+CHOICE PROVI-
SIONS UNDER THIS PART.—For purposes of applying pro-
visions of part C under this part with respect to a pre-
scription drug plan and a PDP sponsor, unless otherwise
provided in this part such provisions shall be applied as
if—
‘‘(1) any reference to a Medicare+Choice plan
included a reference to a prescription drug plan;
‘‘(2) any reference to a provider-sponsored or-
ganization included a reference to a PDP sponsor;
‘‘(3) any reference to a contract under section
1857 included a reference to a contract under sec-
tion 1860D(b); and
‘‘(4) any reference to part C included a ref-
erence to this part.’’.
(b) ADDITIONAL CONFORMING CHANGES.—
(1) CONFORMING
REFERENCES
TO
PREVIOUS
PART D.—Any reference in law (in effect before the
date of the enactment of this Act) to part D of title
XVIII of the Social Security Act is deemed a ref-
erence to part E of such title (as in effect after such
date).
(2) CONFORMING
AMENDMENT
PERMITTING
WAIVER
OF
COST-SHARING.—Section 1128B(b)(3)
(42 U.S.C. 1320a–7b(b)(3)) is amended—
(A) by striking ‘‘and’’ at the end of sub-
paragraph (E);
(B) by striking the period at the end of
subparagraph (F) and inserting ‘‘; and’’; and
(C) by adding at the end the following new
subparagraph:
‘‘(G) the waiver or reduction of any cost-shar-
ing imposed under part D of title XVIII.’’.
(3) SUBMISSION OF LEGISLATIVE PROPOSAL.—
Not later than 6 months after the date of the enact-
ment of this Act, the Secretary of Health and
Human Services shall submit to the appropriate
committees of Congress a legislative proposal pro-
viding for such technical and conforming amend-
ments in the law as are required by the provisions
of this subtitle.
(c) STUDY ON TRANSITIONING PART B PRESCRIP-
TION DRUG COVERAGE.—Not later than January 1, 2004,
the Medicare Benefits Administrator shall submit a report
to Congress that makes recommendations regarding meth-
ods for providing benefits under part D of title XVIII of
the Social Security Act for outpatient prescription drugs
for which benefits are provided under part B of such title.
SEC. 102. OFFERING OF QUALIFIED PRESCRIPTION DRUG
COVERAGE UNDER THE MEDICARE+CHOICE
PROGRAM.
(a) IN GENERAL.—Section 1851 (42 U.S.C. 1395w–
21) is amended by adding at the end the following new
subsection:
‘‘(j) AVAILABILITY OF PRESCRIPTION DRUG BENE-
FITS.—
‘‘(1) OFFER
OF
QUALIFIED
PRESCRIPTION
DRUG COVERAGE.—
‘‘(A) IN
GENERAL.—A Medicare+Choice
organization may not offer prescription drug
coverage (other than that required under parts
A 
and 
B) 
to 
an 
enrollee 
under 
a
Medicare+Choice plan unless such drug cov-
erage is at least qualified prescription drug cov-
erage and unless the requirements of this sub-
section with respect to such coverage are met.
‘‘(B) CONSTRUCTION.—Nothing in this
subsection shall be construed as—
‘‘(i) requiring a Medicare+Choice
plan to include coverage of qualified pre-
scription drug coverage; or
‘‘(ii) permitting a Medicare+Choice
organization from providing such coverage
to an individual who has not elected such
coverage under section 1860A(b).
For purposes of this part, an individual who
has not elected qualified prescription drug cov-
erage under section 1860A(b) shall be treated
as 
being 
ineligible 
to 
enroll 
in 
a
Medicare+Choice plan under this part that of-
fers such coverage.
‘‘(2) COMPLIANCE
WITH
ADDITIONAL
BENE-
FICIARY PROTECTIONS.—With respect to the offer-
ing of qualified prescription drug coverage by a
Medicare+Choice 
organization 
under 
a
Medicare+Choice plan, the organization and plan
shall meet the requirements of section 1860C, in-
cluding requirements relating to information dis-
semination and grievance and appeals, in the same
manner as they apply to a PDP sponsor and a pre-
scription drug plan under part D and shall submit
to the Administrator the information described in
section 1860F(a)(2). The Administrator shall waive
such requirements to the extent the Administrator
determines that such requirements duplicate require-
ments otherwise applicable to the organization or
plan under this part.
‘‘(3) AVAILABILITY
OF
PREMIUM
AND
COST-
SHARING SUBSIDIES FOR LOW-INCOME ENROLLEES
AND DIRECT AND REINSURANCE SUBSIDY PAYMENTS
FOR ORGANIZATIONS.—For provisions—
‘‘(A) providing premium and cost-sharing
subsidies to low-income individuals receiving
qualified prescription drug coverage through a
Medicare+Choice plan, see section 1860G; and
‘‘(B) providing a Medicare+Choice organi-
zation with direct and insurance subsidy pay-
ments for providing qualified prescription drug
coverage under this part, see section 1860H.
‘‘(4) TRANSITION IN INITIAL ENROLLMENT PE-
RIOD.—Notwithstanding any other provision of this
part, the annual, coordinated election period under
subsection (e)(3)(B) for 2005 shall be the 6-month
period beginning with November 2004.
‘‘(5) QUALIFIED
PRESCRIPTION
DRUG
COV-
ERAGE; STANDARD
COVERAGE.—For purposes of
this part, the terms ‘qualified prescription drug cov-
erage’ and ‘standard coverage’ have the meanings
given such terms in section 1860B.’’.
(b) CONFORMING AMENDMENTS.—Section 1851 (42
U.S.C. 1395w–21) is amended—
(1) in subsection (a)(1)—
(A) by inserting ‘‘(other than qualified pre-
scription drug benefits)’’ after ‘‘benefits’’;
(B) by striking the period at the end of
subparagraph (B) and inserting a comma; and
(C) by adding after and below subpara-
graph (B) the following:
‘‘and may elect qualified prescription drug coverage
in accordance with section 1860A.’’; and
(2) in subsection (g)(1), by inserting ‘‘and sec-
tion 1860A(c)(2)(B)’’ after ‘‘in this subsection’’.
(c) EFFECTIVE DATE.—The amendments made by
this section apply to coverage provided on or after January
1, 2005.
SEC. 103. MEDICAID AMENDMENTS.
(a) DETERMINATIONS OF ELIGIBILITY FOR LOW-IN-
COME SUBSIDIES.—
(1) 
REQUIREMENT.—Section 
1902(a) 
(42
U.S.C. 1396a(a)) is amended—
(A) by striking ‘‘and’’ at the end of para-
graph (64);
(B) by striking the period at the end of
paragraph (65) and inserting ‘‘; and’’; and
(C) by inserting after paragraph (65) the
following new paragraph:
‘‘(66) provide for making eligibility determina-
tions under section 1935(a).’’.
(2) NEW
SECTION.—Title XIX is further
amended—
(A) by redesignating section 1935 as sec-
tion 1936; and
(B) by inserting after section 1934 the fol-
lowing new section:
‘‘SPECIAL PROVISIONS RELATING TO MEDICARE
PRESCRIPTION DRUG BENEFIT
‘‘SEC. 1935. (a) REQUIREMENT FOR MAKING ELIGI-
BILITY
DETERMINATIONS
FOR
LOW-INCOME
SUB-
SIDIES.—As a condition of its State plan under this title
under section 1902(a)(66) and receipt of any Federal fi-
nancial assistance under section 1903(a), a State shall—
‘‘(1) make determinations of eligibility for pre-
mium and cost-sharing subsidies under (and in ac-
cordance with) section 1860G;
‘‘(2) inform the Administrator of the Medicare
Benefits Administration of such determinations in
cases in which such eligibility is established; and
‘‘(3) otherwise provide such Administrator with
such information as may be required to carry out
part D of title XVIII (including section 1860G).
‘‘(b) PAYMENTS FOR ADDITIONAL ADMINISTRATIVE
COSTS.—
‘‘(1) IN GENERAL.—The amounts expended by
a State in carrying out subsection (a) are, subject to
paragraph (2), expenditures reimbursable under the
appropriate paragraph of section 1903(a); except
that, notwithstanding any other provision of such
section, the applicable Federal matching rates with
respect to such expenditures under such section shall
be increased as follows (but in no case shall the rate
as so increased exceed 100 percent):
‘‘(A) For expenditures attributable to costs
incurred during 2005, the otherwise applicable
Federal matching rate shall be increased by 10
percent of the percentage otherwise payable
(but for this subsection) by the State.
‘‘(B)(i) For expenditures attributable to
costs incurred during 2006 and each subse-
quent year through 2013, the otherwise applica-
ble Federal matching rate shall be increased by
the applicable percent (as defined in clause (ii))
of the percentage otherwise payable (but for
this subsection) by the State.
‘‘(ii) For purposes of clause (i), the ‘appli-
cable percent’ for—
‘‘(I) 2006 is 20 percent; or
‘‘(II) a subsequent year is the applica-
ble percent under this clause for the pre-
vious year increased by 10 percentage
points.
‘‘(C) For expenditures attributable to costs
incurred after 2013, the otherwise applicable
Federal matching rate shall be increased to 100
percent.
‘‘(2) COORDINATION.—The State shall provide
the Administrator with such information as may be
necessary to properly allocate administrative expend-
itures described in paragraph (1) that may otherwise
be made for similar eligibility determinations.’’.
(b) PHASED-IN FEDERAL ASSUMPTION OF MEDICAID
RESPONSIBILITY FOR PREMIUM AND COST-SHARING SUB-
SIDIES FOR DUALLY ELIGIBLE INDIVIDUALS.—
(1) IN
GENERAL.—Section 1903(a)(1) (42
U.S.C. 1396b(a)(1)) is amended by inserting before
the semicolon the following: ‘‘, reduced by the
amount computed under section 1935(c)(1) for the
State and the quarter’’.
(2) AMOUNT DESCRIBED.—Section 1935, as in-
serted by subsection (a)(2), is amended by adding at
the end the following new subsection:
‘‘(c) FEDERAL ASSUMPTION
OF MEDICAID PRE-
SCRIPTION DRUG COSTS FOR DUALLY-ELIGIBLE BENE-
FICIARIES.—
‘‘(1) IN
GENERAL.—For purposes of section
1903(a)(1), for a State that is one of the 50 States
or the District of Columbia for a calendar quarter
in a year (beginning with 2005) the amount com-
puted under this subsection is equal to the product
of the following:
‘‘(A) MEDICARE
SUBSIDIES.—The total
amount of payments made in the quarter under
section 1860G (relating to premium and cost-
sharing prescription drug subsidies for low-in-
come medicare beneficiaries) that are attrib-
utable to individuals who are residents of the
State and are entitled to benefits with respect
to prescribed drugs under the State plan under
this title (including such a plan operating under
a waiver under section 1115).
‘‘(B) STATE MATCHING RATE.—A propor-
tion computed by subtracting from 100 percent
the Federal medical assistance percentage (as
defined in section 1905(b)) applicable to the
State and the quarter.
‘‘(C) 
PHASE-OUT
PROPORTION.—The
phase-out proportion (as defined in paragraph
(2)) for the quarter.
‘‘(2) PHASE-OUT PROPORTION.—For purposes
of paragraph (1)(C), the ‘phase-out proportion’ for
a calendar quarter in—
‘‘(A) 2005 is 90 percent;
‘‘(B) a subsequent year before 2014, is the
phase-out proportion for calendar quarters in
the previous year decreased by 10 percentage
points; or
‘‘(C) a year after 2013 is 0 percent.’’.
(c) MEDICAID PROVIDING WRAP-AROUND BENE-
FITS.—Section 1935, as so inserted and amended, is fur-
ther amended by adding at the end the following new sub-
section:
‘‘(d) ADDITIONAL PROVISIONS.—
‘‘(1) MEDICAID AS SECONDARY PAYOR.—In the
case of an individual who is entitled to qualified pre-
scription drug coverage under a prescription drug
plan under part D of title XVIII (or under a
Medicare+Choice plan under part C of such title)
and medical assistance for prescribed drugs under
this title, medical assistance shall continue to be pro-
vided under this title for prescribed drugs to the ex-
tent payment is not made under the prescription
drug plan or the Medicare+Choice plan selected by
the individual.
‘‘(2) CONDITION.—A State may require, as a
condition for the receipt of medical assistance under
this title with respect to prescription drug benefits
for an individual eligible to obtain qualified prescrip-
tion drug coverage described in paragraph (1), that
the individual elect qualified prescription drug cov-
erage under section 1860A.’’.
(d) TREATMENT OF TERRITORIES.—
(1) IN GENERAL.—Section 1935, as so inserted
and amended, is further amended—
(A) in subsection (a) in the matter pre-
ceding paragraph (1), by inserting ‘‘subject to
subsection (e)’’ after ‘‘section 1903(a)’’;
(B) in subsection (c)(1), by inserting ‘‘sub-
ject to subsection (e)’’ after ‘‘1903(a)(1)’’; and
(C) by adding at the end the following new
subsection:
‘‘(e) TREATMENT OF TERRITORIES.—
‘‘(1) IN
GENERAL.—In the case of a State,
other than the 50 States and the District of
Columbia—
‘‘(A) the previous provisions of this section
shall not apply to residents of such State; and
‘‘(B) if the State establishes a plan de-
scribed in paragraph (2) (for providing medical
assistance with respect to the provision of pre-
scription drugs to medicare beneficiaries), the
amount otherwise determined under section
1108(f) (as increased under section 1108(g))
for the State shall be increased by the amount
specified in paragraph (3).
‘‘(2) PLAN.—The plan described in this para-
graph is a plan that—
‘‘(A) provides medical assistance with re-
spect to the provision of covered outpatient
drugs (as defined in section 1860B(f)) to low-
income medicare beneficiaries; and
‘‘(B) assures that additional amounts re-
ceived by the State that are attributable to the
operation of this subsection are used only for
such assistance.
‘‘(3) INCREASED AMOUNT.—
‘‘(A) IN GENERAL.—The amount specified
in this paragraph for a State for a year is equal
to the product of—
‘‘(i) the aggregate amount specified in
subparagraph (B); and
‘‘(ii) the amount specified in section
1108(g)(1) for that State, divided by the
sum of the amounts specified in such sec-
tion for all such States.
‘‘(B) AGGREGATE
AMOUNT.—The aggre-
gate amount specified in this subparagraph
for—
‘‘(i) 2005, is equal to $20,000,000; or
‘‘(ii) a subsequent year, is equal to the
aggregate amount specified in this sub-
paragraph for the previous year increased
by annual percentage increase specified in
section 1860B(b)(5) for the year involved.
‘‘(4) REPORT.—The Administrator shall submit
to Congress a report on the application of this sub-
section and may include in the report such rec-
ommendations as the Administrator deems appro-
priate.’’.
(2) 
CONFORMING
AMENDMENT.—Section
1108(f) (42 U.S.C. 1308(f)) is amended by inserting
‘‘and section 1935(e)(1)(B)’’ after ‘‘Subject to sub-
section (g)’’.
(e) 
AMENDMENT
TO
BEST
PRICE.—Section
1927(c)(1)(C)(i) (42 U.S.C. 1396r–8(c)(1)(C)(i)) is
amended—
(1) by striking ‘‘and’’ at the end of subclause
(III);
(2) by striking the period at the end of sub-
clause (IV) and inserting ‘‘; and’’; and
(3) by adding at the end the following new sub-
clause:
‘‘(V) any prices charged which
are negotiated by a prescription drug
plan under part D of title XVIII, by
a Medicare+Choice plan under part C
of such title with respect to covered
outpatient drugs, or by a qualified re-
tiree prescription drug plan (as de-
fined in section 1860H(f)(1)) with re-
spect to such drugs on behalf of indi-
viduals entitled to benefits under part
A or enrolled under part B of such
title.’’.
SEC. 104. MEDIGAP TRANSITION.
(a) IN GENERAL.—Section 1882 (42 U.S.C. 1395ss)
is amended by adding at the end the following new sub-
section:
‘‘(v) COVERAGE OF PRESCRIPTION DRUGS.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of law, except as provided in paragraph (3)
no new medicare supplemental policy that provides
coverage of expenses for prescription drugs may be
issued under this section on or after January 1,
2005, to an individual unless it replaces a medicare
supplemental policy that was issued to that indi-
vidual and that provided some coverage of expenses
for prescription drugs.
‘‘(2) ISSUANCE
OF
SUBSTITUTE
POLICIES
IF
OBTAIN
PRESCRIPTION
DRUG
COVERAGE
UNDER
PART D.—
‘‘(A) IN GENERAL.—The issuer of a medi-
care supplemental policy—
‘‘(i) may not deny or condition the
issuance or effectiveness of a medicare
supplemental policy that has a benefit
package classified as ‘A’, ‘B’, ‘C’, ‘D’, ‘E’,
‘F’, or ‘G’ (under the standards estab-
lished under subsection (p)(2)) and that is
offered and is available for issuance to new
enrollees by such issuer;
‘‘(ii) may not discriminate in the pric-
ing of such policy, because of health sta-
tus, claims experience, receipt of health
care, or medical condition; and
‘‘(iii) may not impose an exclusion of
benefits based on a pre-existing condition
under such policy,
in the case of an individual described in sub-
paragraph (B) who seeks to enroll under the
policy not later than 63 days after the date of
the termination of enrollment described in such
paragraph and who submits evidence of the
date of termination or disenrollment along with
the application for such medicare supplemental
policy.
100
‘‘(B) INDIVIDUAL
COVERED.—An indi-
vidual described in this subparagraph is an in-
dividual who—
‘‘(i) enrolls in a prescription drug plan
under part D; and
‘‘(ii) at the time of such enrollment
was enrolled and terminates enrollment in
a medicare supplemental policy which has
a benefit package classified as ‘H’, ‘I’, or
‘J’ under the standards referred to in sub-
paragraph (A)(i) or terminates enrollment
in a policy to which such standards do not
apply but which provides benefits for pre-
scription drugs.
‘‘(C) ENFORCEMENT.—The provisions of
paragraph (4) of subsection (s) shall apply with
respect to the requirements of this paragraph in
the same manner as they apply to the require-
ments of such subsection.
‘‘(3) NEW STANDARDS.—In applying subsection
(p)(1)(E) (including permitting the NAIC to revise
its model regulations in response to changes in law)
with respect to the change in benefits resulting from
title I of the Medicare Modernization and Prescrip-
tion Drug Act of 2002, with respect to policies
101
issued to individuals who are enrolled under part D,
the changes in standards shall only provide for sub-
stituting for the benefit packages that included cov-
erage for prescription drugs two benefit packages
that may provide for coverage of cost-sharing with
respect to qualified prescription drug coverage under
such part, except that such coverage may not cover
the prescription drug deductible under such part.
The two benefit packages shall be consistent with
the following:
‘‘(A) FIRST NEW POLICY.—The policy de-
scribed in this subparagraph has the following
benefits, notwithstanding any other provision of
this section relating to a core benefit package:
‘‘(i) Coverage of 50 percent of the
cost-sharing otherwise applicable, except
coverage of 100 percent of any cost-shar-
ing otherwise applicable for preventive ben-
efits.
‘‘(ii) No coverage of the part B de-
ductible.
‘‘(iii) Coverage for all hospital coin-
surance for long stays (as in the current
core benefit package).
102
‘‘(iv) A limitation on annual out-of-
pocket expenditures to $4,000 in 2005 (or,
in a subsequent year, to such limitation for
the previous year increased by an appro-
priate inflation adjustment specified by the
Secretary).
‘‘(B) SECOND
NEW
POLICY.—The policy
described in this subparagraph has the same
benefits as the policy described in subparagraph
(A), except as follows:
‘‘(i) Substitute ‘75 percent’ for ‘50
percent’ in clause (i) of such subpara-
graph.
‘‘(ii) Substitute ‘$2,000’ for ‘$4,000’
in clause (iv) of such subparagraph.
‘‘(4) CONSTRUCTION.—Any provision in this
section or in a medicare supplemental policy relating
to guaranteed renewability of coverage shall be
deemed to have been met through the offering of
other coverage under this subsection.’’.
SEC. 105. MEDICARE PRESCRIPTION DRUG DISCOUNT
CARD ENDORSEMENT PROGRAM.
(a) IN GENERAL.—Title XVIII is amended by insert-
ing after section 1806 the following new sections:
103
‘‘MEDICARE PRESCRIPTION DRUG DISCOUNT CARD
ENDORSEMENT PROGRAM
‘‘SEC. 1807. (a) IN GENERAL.—The Secretary (or
the Medicare Benefits Administrator pursuant to section
1808(c)(3)(C)) shall establish a program—
‘‘(1) to endorse prescription drug discount card
programs that meet the requirements of this section;
and
‘‘(2) to make available to medicare beneficiaries
information regarding such endorsed programs.
‘‘(b) REQUIREMENTS
FOR
ENDORSEMENT.—The
Secretary may not endorse a prescription drug discount
card program under this section unless the program meets
the following requirements:
‘‘(1) SAVINGS TO MEDICARE BENEFICIARIES.—
The program passes on to medicare beneficiaries
who enroll in the program discounts on prescription
drugs, including discounts negotiated with manufac-
turers.
‘‘(2) PROHIBITION ON APPLICATION ONLY TO
MAIL ORDER.—The program applies to drugs that
are available other than solely through mail order.
‘‘(3) BENEFICIARY
SERVICES.—The program
provides pharmaceutical support services, such as
104
education and counseling, and services to prevent
adverse drug interactions.
‘‘(4) 
INFORMATION.—The 
program 
makes
available to medicare beneficiaries through the Inter-
net and otherwise information, including information
on enrollment fees, prices charged to beneficiaries,
and services offered under the program, that the
Secretary identifies as being necessary to provide for
informed choice by beneficiaries among endorsed
programs.
‘‘(5) DEMONSTRATED EXPERIENCE.—The enti-
ty operating the program has demonstrated experi-
ence and expertise in operating such a program or
a similar program.
‘‘(6) QUALITY ASSURANCE.—The entity has in
place adequate procedures for assuring quality serv-
ice under the program.
‘‘(7) OPERATION OF ASSISTANCE PROGRAM.—
The entity meets such requirements relating to sol-
vency, compliance with financial reporting require-
ments, audit compliance, and contractual guarantees
as the Secretary finds necessary for the participation
of the sponsor in the low-income assistance program
under section 1807A.
105
‘‘(8) ENROLLMENT FEES.—The program may
charge an annual enrollment fee, but the amount of
such annual fee may not exceed $25.
‘‘(9) 
ADDITIONAL
BENEFICIARY
PROTEC-
TIONS.—The program meets such additional require-
ments as the Secretary identifies to protect and pro-
mote the interest of medicare beneficiaries, including
requirements that ensure that beneficiaries are not
charged more than the lower of the negotiated retail
price or the usual and customary price.
The prices negotiated by a prescription drug discount card
program endorsed under this section shall (notwith-
standing any other provision of law) not be taken into ac-
count for the purposes of establishing the best price under
section 1927(c)(1)(C).
‘‘(c) PROGRAM OPERATION.—The Secretary shall op-
erate the program under this section consistent with the
following:
‘‘(1) PROMOTION
OF
INFORMED
CHOICE.—In
order to promote informed choice among endorsed
prescription drug discount card programs, the Sec-
retary shall provide for the dissemination of infor-
mation which compares the prices and services of
such programs in a manner coordinated with the
106
dissemination 
of 
educational 
information 
on
Medicare+Choice plans under part C.
‘‘(2) OVERSIGHT.—The Secretary shall provide
appropriate oversight to ensure compliance of en-
dorsed programs with the requirements of this sec-
tion, including verification of the discounts and serv-
ices provided.
‘‘(3) USE OF MEDICARE TOLL-FREE NUMBER.—
The Secretary shall provide through the 1-800-medi-
care toll free telephone number for the receipt and
response to inquiries and complaints concerning the
program and programs endorsed under this section.
‘‘(4) SANCTIONS
FOR
ABUSIVE
PRACTICES.—
The Secretary may implement intermediate sanc-
tions or may revoke the endorsement of a program
in the case of a program that the Secretary deter-
mines no longer meets the requirements of this sec-
tion or that has engaged in false or misleading mar-
keting practices.
‘‘(5) ENROLLMENT
PRACTICES.—A medicare
beneficiary may not be enrolled in more than one en-
dorsed program at any time. A medicare beneficiary
may change the endorsed program in which the ben-
eficiary is enrolled, but may not make such change
until the beneficiary has been enrolled in a program
107
for a minimum period of time specified by the Sec-
retary.
‘‘(d) TRANSITION.—The Secretary shall provide for
an appropriate transition and discontinuation of the pro-
gram under this section at the time prescription drug ben-
efits first become available under part D.
‘‘(e) ENDORSEMENT
CONDITION.—The Secretary
shall require, as condition of endorsement under of a pre-
scription drug discount card program under this section
that the program implement policies and procedures to
safeguard the use and disclosure of program beneficiaries’
individually identifiable health information in a manner
consistent with the Federal regulations (concerning the
privacy of individually identifiable health information) pro-
mulgated under section 264(c) of the Health Insurance
Portability and Accountability Act of 1996.
‘‘(f) AUTHORIZATION OF APPROPRIATIONS.—There
are authorized to be appropriated such sums as may be
necessary to carry out the program under this section and
section 1807A.
‘‘TRANSITIONAL PRESCRIPTION DRUG ASSISTANCE
PROGRAM FOR LOW-INCOME BENEFICIARIES
‘‘SEC. 1807A. (a) PURPOSE.—The purpose of this
section is to provide low-income medicare beneficiaries
with immediate assistance in the purchase of covered out-
108
patient prescription drugs during the period before the
program under part D becomes effective.
‘‘(b) FUNDS AVAILABLE; ALLOTMENTS.—
‘‘(1) APPROPRIATIONS; TOTAL ALLOTMENTS.—
‘‘(A) APPROPRIATIONS.—For the purpose
of carrying out this section, there is appro-
priated, out of any money in the Treasury not
otherwise appropriated—
‘‘(i) 
for 
fiscal 
year 
2003,
$300,000,000;
‘‘(ii) 
for 
fiscal 
year 
2004,
$2,100,000,000; and
‘‘(iii) 
for 
fiscal 
year 
2005,
$500,000,000.
‘‘(2) ALLOTMENTS.—
‘‘(A) AMONG
RESIDENTS
OF
STATES
AND THE DISTRICT OF COLUMBIA.—Subject to
subparagraph (B), the amount appropriated
under subparagraph (A) for each fiscal year
shall be allotted among the 50 States and the
District of Columbia based upon the Secretary’s
estimate of each State’s or District’s proportion
of the total number of medicare beneficiaries
with income below 175 percent of the Federal
poverty line residing in all such States and the
109
District. The Secretary shall determine the
amount of the allotment for each such State
and District not later than July 1, 2003.
‘‘(B) 
AMONG
RESIDENTS
OF
TERRI-
TORIES.—Of the amount appropriated under
subparagraph (A) for a fiscal year, the Sec-
retary shall allot a percentage (determined con-
sistent with the allotment provided to territories
under the State children’s health insurance pro-
gram under section 2104(c)) among the com-
monwealths and territories described in section
2104(c)(3) in the same proportion as the allot-
ment proportion under such program is allowed
among such commonwealths and territories.
‘‘(3) AVAILABILITY OF AMOUNTS ALLOTTED.—
Amounts allotted with respect to a State pursuant to
this subsection for a fiscal year shall remain avail-
able for expenditure through the end of the fiscal
year in which benefits are first available under part
D. Any funds allotted to States that are not obli-
gated revert to the General Fund of the Treasury.
‘‘(4) LIMITATION.—In no case shall the total
amount of payments for assistance to eligible indi-
viduals (and administrative costs) in a State for a
fiscal year (and previous fiscal years) under this sec-
110
tion exceed the amount of the allotments with re-
spect to that State in that year (and previous fiscal
years). Nothing in this section shall be construed as
preventing a State from providing, with its own
funds, pharmaceutical assistance that is in addition
to the assistance funded under this section.
‘‘(c) ELIGIBILITY.—
‘‘(1) IN
GENERAL.—Taking into account the
amounts allotted with respect to each State under
subsection (b) and the minimum dollar value on as-
sistance per eligible individual specified by the Sec-
retary under subsection (d)(3), the Secretary shall
establish guidelines for the establishment by each
State of eligibility standards consistent with para-
graph (2).
‘‘(2) ELIGIBILITY RESTRICTIONS.—In no case
shall an individual residing in a State be eligible for
assistance under this section unless the individual—
‘‘(A) is entitled to benefits under part A or
enrolled under part B;
‘‘(B) has income that is at or below a per-
centage (specified under the State eligibility
plan under paragraph (1), but not to exceed
175 percent) of the Federal poverty line; and
111
‘‘(C) meets the resources requirement de-
scribed in section 1905(p)(1)(C);
‘‘(D) is enrolled under a prescription drug
discount card program (or under an alternative
program 
authorized 
under 
subsection
(d)(1)(B)); and
‘‘(E) is not eligible for coverage of, or as-
sistance for, outpatient prescription drugs
under any of the following:
‘‘(i) A medicaid plan under title XIX
(including under any waiver approved
under section 1115).
‘‘(ii) Enrollment under a group health
plan or health insurance coverage.
‘‘(iii) Enrollment under a medicare
supplemental insurance policy.
‘‘(iv) Chapter 55 of title 10, United
States Code (relating to medical and den-
tal care for members of the uniformed
services).
‘‘(v) Chapter 17 of title 38, United
States Code (relating to Veterans’ medical
care).
‘‘(vi) Enrollment under a plan under
chapter 89 of title 5, United States Code
112
(relating to the Federal employees’ health
benefits program).
‘‘(vii) The Indian Health Care Im-
provement Act (25 U.S.C. 1601 et seq.).
‘‘(3) INCOME
DETERMINATIONS.—The provi-
sions of section 1860G(4)(C) shall apply for pur-
poses of applying this subsection.
‘‘(d) FORM OF ASSISTANCE AND AMOUNT OF BENE-
FITS.—
‘‘(1) IN GENERAL.—
‘‘(A) THROUGH PROGRAM SPONSOR.—Sub-
ject to subparagraph (B), the assistance under
this section to an eligible individual shall be in
the form of a discount (as identified by the
sponsor to the Secretary) provided by the spon-
sor of a prescription drug discount card pro-
gram to eligible individuals who are enrolled in
such program.
‘‘(B) THROUGH ALTERNATIVE STATE PRO-
GRAM.—A State may apply to the Secretary for
authorization to provide the assistance under
this section to an eligible individual through a
State pharmaceutical assistance program or pri-
vate program of pharmaceutical assistance. The
Secretary shall not authorize the use of such a
113
program unless the Secretary finds that the
program—
‘‘(i) was in existence before the date
of the enactment of this section; and
‘‘(ii) is reasonably designed to provide
for pharmaceutical assistance for a number
of individuals, and in a scope, that is not
less than the number of individuals, and
minimum required amount, that would
occur if the provisions of this subpara-
graph had not applied in the State.
‘‘(2) GUIDANCE; MINIMUM LEVEL OF ASSIST-
ANCE.—The Secretary shall establish guidelines for
how the program under this section will operate.
Based upon the aggregate amount appropriated in
each fiscal year and other relevant factors, the Sec-
retary shall establish a minimum amount of assist-
ance that is available, subject to paragraph (4)(B),
to each eligible individual for each calendar quarter
(or other period specified by the Secretary) and pro-
vide guidance to sponsors regarding how assistance
funds may be provided to eligible individuals con-
sistent with such amount and funding limitations.
‘‘(3) RELATIONSHIP TO DISCOUNTS.—The as-
sistance provided under this section is in addition to
114
the discount otherwise available to individuals en-
rolled in prescription drug discount card programs
who are not eligible individuals.
‘‘(4) LIMITATION ON ASSISTANCE.—
‘‘(A) IN GENERAL.—The assistance under
this section for an eligible individual shall be
limited to assistance—
‘‘(i) for covered outpatient drugs (as
defined in section 1860B(f)) and for en-
rollment fees imposed under prescription
drug discount card programs; and
‘‘(ii) for expenses incurred—
‘‘(I) on and after the date the in-
dividual is both enrolled in the pre-
scription drug discount card program
and determined to be an eligible indi-
vidual under this section; and
‘‘(II) before the date benefits are
first available under the program
under part D.
‘‘(B) AUTHORITY.—The Secretary shall
take such steps as may be necessary to assure
compliance with the expenditure limitations de-
scribed in subsection (b)(4).
115
‘‘(e) PAYMENT
OF FEDERAL SUBSIDY
TO SPON-
SORS.—
‘‘(1) IN GENERAL.—The Secretary shall make
payment (within the allotments for each State, less
the administrative payments made subsection (f)(2)
to each State) to the sponsor of the prescription
drug discount card program (or to a State or other
entity operating a program under subsection
(d)(1)(B)) in which an eligible individual is enrolled
of the amount of the assistance provided by the
sponsor pursuant to this section.
‘‘(2) PERIODIC
PAYMENTS.—Payments under
this subsection (and subsection (f)(2)) shall be made
on a monthly or other periodic installment basis,
based upon estimates of the Secretary and shall be
reduced or increased to the extent of any overpay-
ment or underpayment which the Secretary deter-
mines was made under this section for any prior pe-
riod and with respect to which adjustment has not
already been made under this paragraph.
‘‘(f) STATE RESPONSIBILITIES.—
‘‘(1) ELIGIBILITY
DETERMINATIONS.—As a
condition for the payment of Federal financial par-
ticipation to a State under section 1903(a) for peri-
ods during which assistance is available under this
116
section, the State must submit to the Secretary an
eligibility plan under which the State—
‘‘(A) establishes eligibility standards con-
sistent with the provisions of this section;
‘‘(B) conducts determinations of eligibility
and income in the same manner as the State is
required to make eligibility and income deter-
minations described in section 1860G(a)(4);
and
‘‘(C) communicates to the Secretary (or
the Secretary’s designee) determinations of eli-
gibility or discontinuation of eligibility under
this section.
The Secretary shall provide a method for commu-
nicating with sponsors concerning the identity of eli-
gible individuals.
‘‘(2) COVERAGE OF ADMINISTRATIVE COSTS.—
Of the amount allotted with respect to a State under
subsection (b), the Secretary shall pay to the State
the amount of its administrative costs in carrying
out this subsection, but not to exceed 10 percent of
the amount of such allotment to the State. The pro-
visions of subsection (e)(2) shall apply to such pay-
ments.
‘‘(g) DEFINITIONS.—For purposes of this section:
117
‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible
individual’ means an individual who is determined by
a State to be eligible for assistance under this sec-
tion.
‘‘(2) PRESCRIPTION
DRUG
DISCOUNT
CARD
PROGRAM.—The term ‘prescription drug discount
card program’ means such a program that is en-
dorsed under section 1807.
‘‘(3) SPONSOR.—The term ‘sponsor’ means the
sponsor of a prescription drug discount card pro-
gram, or, in the case of a program authorized under
subsection (d)(1)(B), the State or other entity oper-
ating the program.
‘‘(4) STATE.—The term ‘State’ has the mean-
ing given such term for purposes of title XIX.’’.
(b) 
CONFORMING
AMENDMENT.—Section
1927(c)(1)(C)(i)(V) (42 U.S.C. 1396r–8(c)(1)(C)(i)(V)),
as added by section 103(e), is amended by striking ‘‘or
by a qualified retiree prescription drug plan (as defined
in section 1860H(f)(1))’’ and inserting ‘‘by a qualified re-
tiree prescription drug plan (as defined in section
1860H(f)(1)), or by a prescription drug discount card pro-
gram endorsed under section 1807’’.
118
SEC. 106. GAO STUDY OF THE EFFECTIVENESS OF THE NEW
PRESCRIPTION DRUG PROGRAM.
(a) STUDY.—The Comptroller General of the United
States shall conduct a study on the effectiveness of the
prescription drug program provided under part D of title
XVIII of the Social Security Act. Such study shall—
(1) report—
(A) the percentage of eligible individuals
who enrolled in the program;
(B) the demographic characteristics (in-
cluding health status) of such enrollees;
(C) the number and type of qualified pre-
scription drug coverage available to such indi-
viduals; and
(D) the premiums imposed for enrollment
in different areas;
(2) evaluate the processes and methods devel-
oped by the Administrator and the decisions reached
by outside actuaries to determine the actuarial valu-
ation of prescription drug coverage; and
(3) assess whether the subsidy payments under
such part accomplished its stated goals of reducing
premium levels for all beneficiaries, reducing adverse
selection, and promoting participation of PDP spon-
sors.
119
(b) REPORT.—Not later January 1, 2006, the Comp-
troller General shall submit a report to Congress on the
study conducted under subsection (a).
TITLE 
II—MEDICARE+CHOICE
REVITALIZATION 
AND
MEDICARE+CHOICE 
COM-
PETITION PROGRAM
Subtitle A—Medicare+Choice
Revitalization
SEC. 201. MEDICARE+CHOICE IMPROVEMENTS.
(a) EQUALIZING PAYMENTS BETWEEN FEE-FOR-
SERVICE AND MEDICARE+CHOICE.—
(1) IN
GENERAL.—Section 1853(c)(1) (42
U.S.C. 1395w–23(c)(1)) is amended by adding at
the end the following:
‘‘(D) BASED
ON
100
PERCENT
OF
FEE-
FOR-SERVICE COSTS.—
‘‘(i) IN
GENERAL.—For 2003 and
2004, the adjusted average per capita cost
for the year involved, determined under
section 
1876(a)(4) 
for 
the
Medicare+Choice payment area for serv-
ices covered under parts A and B for indi-
viduals entitled to benefits under part A
and enrolled under part B who are not en-
120
rolled in a Medicare+Choice plan under
this part for the year, but adjusted to ex-
clude costs attributable to payments under
section 1886(h).
‘‘(ii) INCLUSION OF COSTS OF VA AND
DOD
MILITARY
FACILITY
SERVICES
TO
MEDICARE-ELIGIBLE
BENEFICIARIES.—In
determining the adjusted average per cap-
ita cost under clause (i) for a year, such
cost shall be adjusted to include the Sec-
retary’s estimate, on a per capita basis, of
the amount of additional payments that
would have been made in the area involved
under this title if individuals entitled to
benefits under this title had not received
services from facilities of the Department
of Veterans Affairs or the Department of
Defense.’’.
(2) CONFORMING AMENDMENT.—Such section
is further amended, in the matter before subpara-
graph (A), by striking ‘‘or (C)’’ and inserting ‘‘(C),
or (D)’’.
(b) REVISION OF BLEND.—
(1) REVISION OF NATIONAL AVERAGE USED IN
CALCULATION
OF
BLEND.—Section
121
1853(c)(4)(B)(i)(II) 
(42 
U.S.C. 
1395w–
23(c)(4)(B)(i)(II)) is amended by inserting ‘‘who
(with respect to determinations for 2003 and for
2004) are enrolled in a Medicare+Choice plan’’
after ‘‘the average number of medicare bene-
ficiaries’’.
(2) CHANGE IN BUDGET NEUTRALITY.—Section
1853(c) (42 U.S.C. 1395w–23(c)) is amended—
(A) in paragraph (1)(A), by inserting ‘‘(for
a year before 2003)’’ after ‘‘multiplied’’; and
(B) in paragraph (5), by inserting ‘‘(before
2003)’’ after ‘‘for each year’’.
(c) REVISION IN MINIMUM PERCENTAGE INCREASE
FOR 2003 AND 2004.—Section 1853(c)(1)(C) (42 U.S.C.
1395w–23(c)(1)(C)) is amended by striking clause (iv)
and inserting the following:
‘‘(iv) For 2002, 102 percent of the
annual Medicare+Choice capitation rate
under this paragraph for the area for
2001.
‘‘(v) For 2003 and 2004, 103 percent
of the annual Medicare+Choice capitation
rate under this paragraph for the area for
the previous year.
122
‘‘(vi) For 2005 and each succeeding
year, 
102 
percent 
of 
the 
annual
Medicare+Choice capitation rate under
this paragraph for the area for the pre-
vious year.’’.
(d) INCLUSION OF COSTS OF DOD AND VA MILI-
TARY FACILITY SERVICES TO MEDICARE-ELIGIBLE BENE-
FICIARIES IN CALCULATION OF MEDICARE+CHOICE PAY-
MENT RATES.—Section 1853(c)(3) (42 U.S.C. 1395w–
23(c)(3)) is amended—
(1) in subparagraph (A), by striking ‘‘subpara-
graph (B)’’ and inserting ‘‘subparagraphs (B) and
(E)’’, and
(2) by adding at the end the following new sub-
paragraph:
‘‘(E) INCLUSION OF COSTS OF DOD AND
VA MILITARY FACILITY SERVICES TO MEDICARE-
ELIGIBLE BENEFICIARIES.—In determining the
area-specific Medicare+Choice capitation rate
under subparagraph (A) for a year (beginning
with 2003), the annual per capita rate of pay-
ment for 1997 determined under section
1876(a)(1)(C) shall be adjusted to include in
the rate the Secretary’s estimate, on a per cap-
ita basis, of the amount of additional payments
123
that would have been made in the area involved
under this title if individuals entitled to benefits
under this title had not received services from
facilities of the Department of Defense or the
Department of Veterans Affairs.’’.
(e) 
ANNOUNCEMENT
OF
REVISED
MEDICARE+CHOICE PAYMENT RATES.—Within 4 weeks
after the date of the enactment of this Act, the Secretary
shall determine, and shall announce (in a manner intended
to provide notice to interested parties) Medicare+Choice
capitation rates under section 1853 of the Social Security
Act (42 U.S.C. 1395w–23) for 2003, revised in accordance
with the provisions of this section.
(f) MEDPAC STUDY OF AAPCC.—
(1) STUDY.—The Medicare Payment Advisory
Commission shall conduct a study that assesses the
method used for determining the adjusted average
per capita cost (AAPCC) under section 1876(a)(4)
of 
the 
Social 
Security 
Act 
(42 
U.S.C.
1395mm(a)(4)). Such study shall examine—
(A) the bases for variation in such costs
between different areas, including differences in
input prices, utilization, and practice patterns;
124
(B) the appropriate geographic area for
payment under the Medicare+Choice program
under part C of title XVIII of such Act; and
(C) the accuracy of risk adjustment meth-
ods in reflecting differences in costs of pro-
viding care to different groups of beneficiaries
served under such program.
(2) REPORT.—Not later than 9 months after
the date of the enactment of this Act, the Commis-
sion shall submit to Congress a report on the study
conducted under paragraph (1). Such report shall
include recommendations regarding changes in the
methods for computing the adjusted average per
capita cost among different areas.
(g) REPORT ON IMPACT OF INCREASED FINANCIAL
ASSISTANCE TO MEDICARE+CHOICE PLANS.—Not later
than July 1, 2003, the Secretary of Health and Human
Services shall submit to Congress a report that describes
the impact of additional financing provided under this Act
and other Acts (including the Medicare, Medicaid, and
SCHIP Balanced Budget Refinement Act of 1999 and
BIPA) on the availability of Medicare+Choice plans in
different areas and its impact on lowering premiums and
increasing benefits under such plans.
125
SEC. 
202. 
MAKING 
PERMANENT 
CHANGE 
IN
MEDICARE+CHOICE REPORTING DEADLINES
AND ANNUAL, COORDINATED ELECTION PE-
RIOD.
(a) CHANGE
IN REPORTING DEADLINE.—Section
1854(a)(1) (42 U.S.C. 1395w–24(a)(1)), as amended by
section 532(b)(1) of the Public Health Security and Bio-
terrorism Preparedness and Response Act of 2002, is
amended by striking ‘‘2002, 2003, and 2004 (or July 1
of each other year)’’ and inserting ‘‘2002 and each subse-
quent year (or July 1 of each year before 2002)’’.
(b) DELAY IN ANNUAL, COORDINATED ELECTION
PERIOD.—Section 1851(e)(3)(B) (42 U.S.C. 1395w–
21(e)(3)(B)), as amended by section 532(c)(1)(A) of the
Public Health Security and Bioterrorism Preparedness
and Response Act of 2002, is amended by striking ‘‘and
after 2005, the month of November before such year and
with respect to 2003, 2004, and 2005’’ and inserting ‘‘,
the month of November before such year and with respect
to 2003 and any subsequent year’’.
(c) 
ANNUAL
ANNOUNCEMENT
OF
PAYMENT
RATES.—Section 
1853(b)(1) 
(42 
U.S.C. 
1395w–
23(b)(1)), as amended by section 532(d)(1) of the Public
Health Security and Bioterrorism Preparedness and Re-
sponse Act of 2002, is amended by striking ‘‘and after
2005 not later than March 1 before the calendar year con-
126
cerned and for 2004 and 2005’’ and inserting ‘‘not later
than March 1 before the calendar year concerned and for
2004 and each subsequent year’’.
(d) REQUIRING PROVISION OF AVAILABLE INFORMA-
TION COMPARING PLAN OPTIONS.—The first sentence of
section 
1851(d)(2)(A)(ii) 
(42 
U.S.C. 
1395w–
21(d)(2)(A)(ii)) is amended by inserting before the period
the following: ‘‘to the extent such information is available
at the time of preparation of materials for the mailing’’.
SEC. 203. AVOIDING DUPLICATIVE STATE REGULATION.
(a) IN GENERAL.—Section 1856(b)(3) (42 U.S.C.
1395w–26(b)(3)) is amended to read as follows:
‘‘(3) RELATION TO STATE LAWS.—The stand-
ards established under this subsection shall super-
sede any State law or regulation (other than State
licensing laws or State laws relating to plan sol-
vency) with respect to Medicare+Choice plans which
are offered by Medicare+Choice organizations under
this part.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
127
SEC. 204. SPECIALIZED MEDICARE+CHOICE PLANS FOR
SPECIAL NEEDS BENEFICIARIES.
(a) TREATMENT AS COORDINATED CARE PLAN.—
Section 1851(a)(2)(A) (42 U.S.C. 1395w–21(a)(2)(A)) is
amended by adding at the end the following new sentence:
‘‘Specialized Medicare+Choice plans for special needs
beneficiaries (as defined in section 1859(b)(4)) may be
any type of coordinated care plan.’’.
(b) SPECIALIZED MEDICARE+CHOICE PLAN
FOR
SPECIAL
NEEDS
BENEFICIARIES
DEFINED.—Section
1859(b) (42 U.S.C. 1395w–29(b)) is amended by adding
at the end the following new paragraph:
‘‘(4) SPECIALIZED
MEDICARE+CHOICE
PLANS
FOR SPECIAL NEEDS BENEFICIARIES.—
‘‘(A) IN GENERAL.—The term ‘specialized
Medicare+Choice plan for special needs bene-
ficiaries’ means a Medicare+Choice plan that
exclusively serves special needs beneficiaries (as
defined in subparagraph (B)).
‘‘(B) SPECIAL NEEDS BENEFICIARY.—The
term ‘special needs beneficiary’ means a
Medicare+Choice eligible individual who—
‘‘(i) is institutionalized (as defined by
the Secretary);
‘‘(ii) is entitled to medical assistance
under a State plan under title XIX; or
128
‘‘(iii) meets such requirements as the
Secretary may determine would benefit
from enrollment in such a specialized
Medicare+Choice plan described in sub-
paragraph (A) for individuals with severe
or disabling chronic conditions.’’.
(c) RESTRICTION ON ENROLLMENT PERMITTED.—
Section 1859 (42 U.S.C. 1395w–29) is amended by add-
ing at the end the following new subsection:
‘‘(f) RESTRICTION ON ENROLLMENT FOR SPECIAL-
IZED MEDICARE+CHOICE PLANS FOR SPECIAL NEEDS
BENEFICIARIES.—In 
the 
case 
of 
a 
specialized
Medicare+Choice plan (as defined in subsection (b)(4)),
notwithstanding any other provision of this part and in
accordance with regulations of the Secretary and for peri-
ods before January 1, 2007, the plan may restrict the en-
rollment of individuals under the plan to individuals who
are within one or more classes of special needs bene-
ficiaries.’’.
(d) REPORT TO CONGRESS.—Not later than Decem-
ber 31, 2005, the Medicare Benefits Administrator shall
submit to Congress a report that assesses the impact of
specialized Medicare+Choice plans for special needs bene-
ficiaries on the cost and quality of services provided to
enrollees. Such report shall include an assessment of the
129
costs and savings to the medicare program as a result of
amendments made by subsections (a), (b), and (c).
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a), (b), and (c) shall take effect upon
the date of the enactment of this Act.
(2) DEADLINE
FOR
ISSUANCE
OF
REQUIRE-
MENTS FOR SPECIAL NEEDS BENEFICIARIES; TRAN-
SITION.—No later than 6 months after the date of
the enactment of this Act, the Secretary of Health
and Human Services shall issue final regulations to
establish requirements for special needs beneficiaries
under section 1859(b)(4)(B)(iii) of the Social Secu-
rity Act, as added by subsection (b).
SEC. 205. MEDICARE MSAS.
(a) EXEMPTION FROM REPORTING ENROLLEE EN-
COUNTER DATA.—
(1) IN
GENERAL.—Section 1852(e)(1) (42
U.S.C. 1395w–22(e)(1)) is amended by inserting
‘‘(other than MSA plans)’’ after ‘‘Medicare+Choice
plans’’.
(2) CONFORMING AMENDMENTS.—Section 1852
(42 U.S.C. 1395w–22) is amended—
130
(A) in subsection (c)(1)(I), by inserting be-
fore the period at the end the following: ‘‘if re-
quired under such section’’; and
(B) in subparagraphs (A) and (B) of sub-
section (e)(2), by striking ‘‘, a non-network
MSA 
plan,’’ 
and 
‘‘, 
NON-NETWORK
MSA
PLANS,’’ each place it appears.
(b) MAKING PROGRAM PERMANENT
AND ELIMI-
NATING CAP.—Section 1851(b)(4) (42 U.S.C. 1395w–
21(b)(4)) is amended—
(1) in the heading, by striking ‘‘ON A DEM-
ONSTRATION BASIS’’;
(2) by striking the first sentence of subpara-
graph (A); and
(3) by striking the second sentence of subpara-
graph (C).
(c) APPLYING LIMITATIONS
ON BALANCE BILL-
ING.—Section 1852(k)(1) (42 U.S.C. 1395w–22(k)(1)) is
amended by inserting ‘‘or with an organization offering
a MSA plan’’ after ‘‘section 1851(a)(2)(A)’’.
(d) 
ADDITIONAL
AMENDMENT.—Section
1851(e)(5)(A) 
(42 
U.S.C. 
1395w–21(e)(5)(A)) 
is
amended—
(1) by adding ‘‘or’’ at the end of clause (i);
131
(2) by striking ‘‘, or’’ at the end of clause (ii)
and inserting a semicolon; and
(3) by striking clause (iii).
SEC. 206. EXTENSION OF REASONABLE COST AND SHMO
CONTRACTS.
(a) REASONABLE COST CONTRACTS.—
(1) IN GENERAL.—Section 1876(h)(5)(C) (42
U.S.C. 1395mm(h)(5)(C)) is amended—
(A) by inserting ‘‘(i)’’ after ‘‘(C)’’;
(B) by inserting before the period the fol-
lowing: ‘‘, except (subject to clause (ii)) in the
case of a contract for an area which is not cov-
ered in the service area of 1 or more coordi-
nated care Medicare+Choice plans under part
C’’; and
(C) by adding at the end the following new
clause:
‘‘(ii) In the case in which—
‘‘(I) a reasonable cost reimbursement contract
includes an area in its service area as of a date that
is after December 31, 2003;
‘‘(II) such area is no longer included in such
service area after such date by reason of the oper-
ation of clause (i) because of the inclusion of such
132
area within the service area of a Medicare+Choice
plan; and
‘‘(III) all Medicare+Choice plans subsequently
terminate coverage in such area;
such reasonable cost reimbursement contract may be ex-
tended and renewed to cover such area (so long as it is
not included in the service area of any Medicare+Choice
plan).’’.
(2) STUDY.—The Medicare Benefits Adminis-
trator shall conduct a study of an appropriate tran-
sition for plans offered under reasonable cost con-
tracts under section 1876 of the Social Security Act
on and after January 1, 2005. Such a transition
may take into account whether there are one or
more coordinated care Medicare+Choice plans being
offered in the areas involved. Not later than Feb-
ruary 1, 2004, the Administrator shall submit to
Congress a report on such study and shall include
recommendations regarding any changes in the
amendment made by paragraph (1) as the Adminis-
trator determines to be appropriate.
(b) EXTENSION OF SOCIAL HEALTH MAINTENANCE
ORGANIZATION (SHMO) DEMONSTRATION PROJECT.—
(1) IN GENERAL.—Section 4018(b)(1) of the
Omnibus Budget Reconciliation Act of 1987 is
133
amended by striking ‘‘the date that is 30 months
after the date that the Secretary submits to Con-
gress the report described in section 4014(c) of the
Balanced Budget Act of 1997’’ and inserting ‘‘De-
cember 31, 2004’’.
(2) SHMOS
OFFERING
MEDICARE+CHOICE
PLANS.—Nothing in such section 4018 shall be con-
strued as preventing a social health maintenance or-
ganization from offering a Medicare+Choice plan
under part C of title XVIII of the Social Security
Act.
Subtitle B—Medicare+Choice
Competition Program
SEC. 211. MEDICARE+CHOICE COMPETITION PROGRAM.
(a) SUBMISSION OF BID AMOUNTS.—Section 1854
(42 U.S.C. 1395w–24) is amended—
(1) in the heading by inserting ‘‘AND
BID
AMOUNTS’’ after ‘‘PREMIUMS’’;
(2) in subsection (a)(1)(A)—
(A) by striking ‘‘(A)’’ and inserting ‘‘(A)(i)
if the following year is before 2005,’’; and
(B) by inserting before the semicolon at
the end the following: ‘‘or (ii) if the following
year is 2005 or later, the information described
in paragraph (6)(A)’’; and
134
(3) by adding at the end of subsection (a) the
following:
‘‘(6) 
SUBMISSION
OF
BID
AMOUNTS
BY
MEDICARE+CHOICE ORGANIZATIONS.—
‘‘(A) INFORMATION TO BE SUBMITTED.—
The information described in this subparagraph
is as follows:
‘‘(i) 
The 
monthly 
aggregate 
bid
amount for provision of all items and serv-
ices under this part and the actuarial basis
for determining such amount.
‘‘(ii) The proportions of such bid
amount that are attributable to—
‘‘(I) the provision of statutory
non-drug benefits (such portion re-
ferred 
to 
in 
this 
part 
as 
the
‘unadjusted non-drug monthly bid
amount’);
‘‘(II) the provision of statutory
prescription drug benefits; and
‘‘(III) the provision of non-statu-
tory benefits;
and the actuarial basis for determining
such proportions.
135
‘‘(iii) Such additional information as
the Administrator may require to verify
the actuarial bases described in clauses (i)
and (ii).
‘‘(B) STATUTORY
BENEFITS
DEFINED.—
For purposes of this part:
‘‘(i) The term ‘statutory non-drug
benefits’ means benefits under parts A and
B.
‘‘(ii) The term ‘statutory prescription
drug benefits’ means benefits under part
D.
‘‘(iii) The term ‘statutory benefits’
means statutory prescription drug benefits
and statutory non-drug benefits.
‘‘(C) ACCEPTANCE AND NEGOTIATION OF
BID AMOUNTS.—The Administrator has the au-
thority to negotiate regarding monthly bid
amounts submitted under subparagraph (A)
(and the proportion described in subparagraph
(A)(ii)). The Administrator may reject such a
bid amount or proportion if the Administrator
determines that such amount or proportion is
not supported by the actuarial bases provided
under subparagraph (A).’’.
136
(b) PROVIDING
FOR BENEFICIARY SAVINGS
FOR
CERTAIN PLANS.—
(1) IN GENERAL.—Section 1854(b) (42 U.S.C.
1395w–24(b)) is amended—
(A) by adding at the end of paragraph (1)
the following new subparagraph:
‘‘(C) BENEFICIARY REBATE RULE.—
‘‘(i) 
REQUIREMENT.—The
Medicare+Choice plan shall provide to the
enrollee a monthly rebate equal to 75 per-
cent of the average per capita savings (if
any) described in paragraph (3) applicable
to the plan and year involved.
‘‘(iii) FORM
OF
REBATE.—A rebate
required under this subparagraph shall be
provided—
‘‘(I) through the crediting of the
amount of the rebate towards the
Medicare+Choice 
monthly 
supple-
mentary beneficiary premium or the
premium imposed for prescription
drug coverage under part D;
‘‘(II) through a direct monthly
payment (through electronic funds
transfer or otherwise); or
137
‘‘(III) through other means ap-
proved by the Medicare Benefits Ad-
ministrator,
or any combination thereof.’’; and
(B) by adding at the end the following new
paragraph:
‘‘(3) COMPUTATION OF AVERAGE PER CAPITA
MONTHLY
SAVINGS.—For purposes of paragraph
(1)(C)(i), the average per capita monthly savings re-
ferred to in such paragraph for a Medicare+Choice
plan and year is computed as follows:
‘‘(A) DETERMINATION OF STATE-WIDE AV-
ERAGE RISK ADJUSTMENT.—
‘‘(i) IN
GENERAL.—The Medicare
Benefits Administrator shall determine, at
the same time rates are promulgated under
section 1853(b)(1) (beginning with 2005),
for each State the average of the risk ad-
justment factors to be applied to enrollees
under section 1853(a)(1)(A) in that State.
In the case of a State in which a
Medicare+Choice plan was offered in the
previous year, the Administrator may com-
pute such average based upon risk adjust-
138
ment factors applied in that State in a pre-
vious year.
‘‘(ii) TREATMENT OF NEW STATES.—
In the case of a State in which no
Medicare+Choice plan was offered in the
previous year, the Administrator shall esti-
mate such average. In making such esti-
mate, the Administrator may use average
risk adjustment factors applied to com-
parable States or applied on a national
basis.
‘‘(B) DETERMINATION OF RISK ADJUSTED
BENCHMARK
AND
RISK-ADJUSTED
BID.—For
each Medicare+Choice plan offered in a State,
the Administrator shall—
‘‘(i) adjust the fee-for-service area-
specific non-drug benchmark amount by
the applicable average risk adjustment fac-
tor computed under subparagraph (A); and
‘‘(ii) adjust the unadjusted non-drug
monthly bid amount by such applicable av-
erage risk adjustment factor.
‘‘(C) DETERMINATION
OF
AVERAGE
PER
CAPITA MONTHLY SAVINGS.—The average per
capita monthly savings described in this sub-
139
paragraph is equal to the amount (if any) by
which—
‘‘(i) 
the 
risk-adjusted 
benchmark
amount computed under subparagraph
(B)(i), exceeds
‘‘(ii) the risk-adjusted bid computed
under subparagraph (B)(ii).
‘‘(D) AUTHORITY TO DETERMINE RISK AD-
JUSTMENT FOR AREAS OTHER THAN STATES.—
The Administrator may provide for the deter-
mination and application of risk adjustment
factors under this paragraph on the basis of
areas other than States.’’.
(2) COMPUTATION OF FEE-FOR-SERVICE AREA-
SPECIFIC
NON-DRUG
BENCHMARK.—Section 1853
(42 U.S.C. 1395w–23) is amended by adding at the
end the following new subsection:
‘‘(j) COMPUTATION OF FEE-FOR-SERVICE AREA-SPE-
CIFIC NON-DRUG BENCHMARK AMOUNT.—For purposes
of this part, the term ‘fee-for-service area-specific non-
drug benchmark amount’ means, with respect to a
Medicare+Choice payment area for a month in a year,
an amount equal to the greater of the following (but in
no case less than 1⁄12 of the rate computed under sub-
140
section (c)(1), without regard to subparagraph (A), for the
year):
‘‘(1) BASED
ON
100
PERCENT
OF
FEE-FOR-
SERVICE COSTS IN THE AREA.—An amount equal to
1⁄12 of 100 percent (for 2005 through 2007, or 95
percent for 2008 and years thereafter) of the ad-
justed average per capita cost for the year involved,
determined under section 1876(a)(4) for the
Medicare+Choice payment area, for the area and
the year involved, for services covered under parts A
and B for individuals entitled to benefits under part
A and enrolled under part B who are not enrolled
in a Medicare+Choice plan under this part for the
year, and adjusted to exclude from such cost the
amount the Medicare Benefits Administrator esti-
mates is payable for costs described in subclauses (I)
and (II) of subsection (c)(3)(C)(i) for the year in-
volved and also adjusted in the manner described in
subsection (c)(1)(D)(ii) (relating to inclusion of
costs of VA and DOD military facility services to
medicare-eligible beneficiaries).
‘‘(2) MINIMUM MONTHLY AMOUNT.—The min-
imum amount specified in this paragraph is the
amount specified in subsection (c)(1)(B)(iv) for the
year involved.’’.
141
(c) PAYMENT OF PLANS BASED ON BID AMOUNTS.—
(1) IN GENERAL.—Section 1853(a)(1)(A) (42
U.S.C. 1395w–23) is amended by striking ‘‘in an
amount’’ and all that follows and inserting the fol-
lowing: ‘‘in an amount determined as follows:
‘‘(i) PAYMENT
BEFORE
2005.—For
years before 2005, the payment amount
shall be equal to 
1⁄12
of the annual
Medicare+Choice capitation rate (as cal-
culated under subsection (c)) with respect
to that individual for that area, reduced by
the amount of any reduction elected under
section 1854(f )(1)(E) and adjusted under
clause (iii).
‘‘(ii) PAYMENT FOR STATUTORY NON-
DRUG BENEFITS BEGINNING WITH 2005.—
For years beginning with 2005—
‘‘(I) PLANS
WITH
BIDS
BELOW
BENCHMARK.—In the case of a plan
for which there are average per capita
monthly savings described in section
1854(b)(3)(C), the payment under
this 
subsection 
is 
equal 
to 
the
unadjusted non-drug monthly bid
amount, adjusted under clause (iii),
142
plus the amount of the monthly rebate
computed 
under 
section
1854(b)(1)(C)(i) for that plan and
year.
‘‘(II) PLANS WITH BIDS AT OR
ABOVE BENCHMARK.—In the case of a
plan for which there are no average
per capita monthly savings described
in section 1854(b)(3)(C), the payment
amount under this subsection is equal
to the fee-for-service area-specific non-
drug benchmark amount, adjusted
under clause (iii).
‘‘(iii) DEMOGRAPHIC
ADJUSTMENT,
INCLUDING
ADJUSTMENT
FOR
HEALTH
STATUS.—The Administrator shall adjust
the payment amount under clause (i), the
unadjusted non-drug monthly bid amount
under clause (ii)(I), and the fee-for-service
area-specific non-drug benchmark amount
under clause (ii)(II) for such risk factors
as age, disability status, gender, institu-
tional status, and such other factors as the
Administrator determines to be appro-
priate, including adjustment for health sta-
143
tus under paragraph (3), so as to ensure
actuarial equivalence. The Administrator
may add to, modify, or substitute for such
adjustment factors if such changes will im-
prove 
the 
determination 
of 
actuarial
equivalence.
‘‘(iv) REFERENCE TO SUBSIDY PAY-
MENT FOR STATUTORY DRUG BENEFITS.—
In the case in which an enrollee is enrolled
under part D, the Medicare+Choice orga-
nization also is entitled to a subsidy pay-
ment amount under section 1860H.’’.
(d) CONFORMING AMENDMENTS.—
(1) PROTECTION AGAINST BENEFICIARY SELEC-
TION.—Section 1852(b)(1)(A) (42 U.S.C. 1395w–
22(b)(1)(A)) is amended by adding at the end the
following: ‘‘The Administrator shall not approve a
plan of an organization if the Administrator deter-
mines that the benefits are designed to substantially
discourage enrollment by certain Medicare+Choice
eligible individuals with the organization.’’.
(2) CONFORMING
AMENDMENT
TO
PREMIUM
TERMINOLOGY.—Subparagraphs (A) and (B) of sec-
tion 1854(b)(2) (42 U.S.C. 1395w–24(b)(2)) are
amended to read as follows:
144
‘‘(A) MEDICARE+CHOICE MONTHLY BASIC
BENEFICIARY
PREMIUM.—The 
term
‘Medicare+Choice monthly basic beneficiary
premium’ 
means, 
with 
respect 
to 
a
Medicare+Choice plan—
‘‘(i) 
described 
in 
section
1853(a)(1)(A)(ii)(I) (relating to plans pro-
viding rebates), zero; or
‘‘(ii) 
described 
in 
section
1853(a)(1)(A)(ii)(II), the amount (if any)
by which the unadjusted non-drug monthly
bid amount exceeds the fee-for-service
area-specific non-drug benchmark amount.
‘‘(B) MEDICARE+CHOICE MONTHLY SUP-
PLEMENTAL
BENEFICIARY
PREMIUM.—The
term ‘Medicare+Choice monthly supplemental
beneficiary premium’ means, with respect to a
Medicare+Choice plan, the portion of the ag-
gregate monthly bid amount submitted under
clause (i) of subsection (a)(6)(A) for the year
that is attributable under such section to the
provision of nonstatutory benefits.’’.
(3) 
REQUIREMENT
FOR
UNIFORM
BID
AMOUNTS.—Section 1854(c) (42 U.S.C. 1395w–
24(c)) is amended to read as follows:
145
‘‘(c) 
UNIFORM
BID
AMOUNTS.—The
Medicare+Choice monthly bid amount submitted under
subsection (a)(6) of a Medicare+Choice organization
under this part may not vary among individuals enrolled
in the plan.’’.
(4) PERMITTING BENEFICIARY REBATES.—
(A) Section 1851(h)(4)(A) (42 U.S.C.
1395w–21(h)(4)(A)) is amended by inserting
‘‘except 
as 
provided 
under 
section
1854(b)(1)(C)’’ after ‘‘or otherwise’’.
(B) Section 1854(d) (42 U.S.C. 1395w–
24(d)) is amended by inserting ‘‘, except as pro-
vided under subsection (b)(1)(C),’’ after ‘‘and
may not provide’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments and premiums for
months beginning with January 2005.
SEC. 212. DEMONSTRATION PROGRAM FOR COMPETITIVE-
DEMONSTRATION AREAS.
(a) IDENTIFICATION OF COMPETITIVE-DEMONSTRA-
TION AREAS FOR DEMONSTRATION PROGRAM; COMPUTA-
TION
OF CHOICE NON-DRUG BENCHMARKS.—Section
1853, as amended by section 211(b)(2), is amended by
adding at the end the following new subsection:
146
‘‘(k) ESTABLISHMENT
OF
COMPETITIVE
DEM-
ONSTRATION PROGRAM.—
‘‘(1) 
DESIGNATION
OF
COMPETITIVE-DEM-
ONSTRATION AREAS AS PART OF PROGRAM.—
‘‘(A) IN GENERAL.—For purposes of this
part, the Administrator shall establish a dem-
onstration program under which the Adminis-
trator designates Medicare+Choice areas as
competitive-demonstration areas consistent with
the following limitations:
‘‘(i) LIMITATION
ON
NUMBER
OF
AREAS THAT MAY BE DESIGNATED.—The
Administrator may not designate more
than 4 areas as competitive-demonstration
areas.
‘‘(ii) LIMITATION ON PERIOD OF DES-
IGNATION
OF
ANY
AREA.—The Adminis-
trator may not designate any area as a
competitive-demonstration area for a pe-
riod of more than 2 years.
The Administrator has the discretion to decide
whether or not to designate as a competitive-
demonstration area an area that qualifies for
such designation.
147
‘‘(B) 
QUALIFICATIONS
FOR
DESIGNA-
TION.—For 
purposes 
of 
this 
title, 
a
Medicare+Choice area (which is a metropolitan
statistical area or other area with a substantial
number of Medicare+Choice enrollees) may not
be designated as a ‘competitive-demonstration
area’ for a 2-year period beginning with a year
unless the Administrator determines, by such
date before the beginning of the year as the Ad-
ministrator determines appropriate, that—
‘‘(i) there will be offered during the
open enrollment period under this part be-
fore the beginning of the year at least 2
Medicare+Choice plans (in addition to the
fee-for-service program under parts A and
B), 
each 
offered 
by 
a 
different
Medicare+Choice organization; and
‘‘(ii) during March of the previous
year at least 50 percent of the number of
Medicare+Choice eligible individuals who
reside in the area were enrolled in a
Medicare+Choice plan.
‘‘(2) 
CHOICE
NON-DRUG
BENCHMARK
AMOUNT.—For purposes of this part, the term
‘choice non-drug benchmark amount’ means, with
148
respect to a Medicare+Choice payment area for a
month in a year, the sum of the 2 components de-
scribed in paragraph (3) for the area and year. The
Administrator 
shall 
compute 
such 
benchmark
amount for each competitive-demonstration area be-
fore the beginning of each annual, coordinated elec-
tion period under section 1851(e)(3)(B) for each
year (beginning with 2005) in which it is designated
as such an area.
‘‘(3) 2 COMPONENTS.—For purposes of para-
graph (2), the 2 components described in this para-
graph for an area and a year are the following:
‘‘(A) 
FEE-FOR-SERVICE
COMPONENT
WEIGHTED
BY
NATIONAL
FEE-FOR-SERVICE
MARKET SHARE.—The product of the following:
‘‘(i) 
NATIONAL
FEE-FOR-SERVICE
MARKET
SHARE.—The national fee-for-
service market share percentage (deter-
mined under paragraph (5)) for the year.
‘‘(ii) 
FEE-FOR-SERVICE
AREA-SPE-
CIFIC NON-DRUG BID.—The fee-for-service
area-specific non-drug bid (as defined in
paragraph (6)) for the area and year.
149
‘‘(B) M+C COMPONENT WEIGHTED BY NA-
TIONAL MEDICARE+CHOICE MARKET SHARE.—
The product of the following:
‘‘(i) NATIONAL
MEDICARE+CHOICE
MARKET
SHARE.—1 minus the national
fee-for-service market share percentage for
the year.
‘‘(ii) WEIGHTED
AVERAGE
OF
PLAN
BIDS IN AREA.—The weighted average of
the plan bids for the area and year (as de-
termined under paragraph (4)(A)).
‘‘(4) DETERMINATION OF WEIGHTED AVERAGE
BIDS FOR AN AREA.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (3)(B)(ii), the weighted average of plan
bids for an area and a year is the sum of the
following products for Medicare+Choice plans
described in subparagraph (C) in the area and
year:
‘‘(i) PROPORTION
OF
EACH
PLAN’S
ENROLLEES IN THE AREA.—The number
of individuals described in subparagraph
(B), divided by the total number of such
individuals for all Medicare+Choice plans
150
described in subparagraph (C) for that
area and year.
‘‘(ii) 
MONTHLY
NON-DRUG
BID
AMOUNT.—The 
unadjusted 
non-drug
monthly bid amount.
‘‘(B) COUNTING
OF
INDIVIDUALS.—The
Administrator 
shall 
count, 
for 
each
Medicare+Choice plan described in subpara-
graph (C) for an area and year, the number of
individuals who reside in the area and who were
enrolled under such plan under this part during
March of the previous year.
‘‘(C) EXCLUSION OF PLANS NOT OFFERED
IN PREVIOUS YEAR.—For an area and year, the
Medicare+Choice plans described in this sub-
paragraph are plans that are offered in the area
and year and were offered in the area in March
of the previous year.
‘‘(5) COMPUTATION
OF
NATIONAL
FEE-FOR-
SERVICE
MARKET
SHARE
PERCENTAGE.—The Ad-
ministrator shall determine, for a year, the propor-
tion (in this subsection referred to as the ‘national
fee-for-service 
market 
share 
percentage’) 
of
Medicare+Choice eligible individuals who during
151
March of the previous year were not enrolled in a
Medicare+Choice plan.
‘‘(6) FEE-FOR-SERVICE
AREA-SPECIFIC
NON-
DRUG
BID.—For purposes of this part, the term
‘fee-for-service area-specific non-drug bid’ means, for
an area and year, the amount described in section
1853(j)(1) for the area and year, except that any
reference to a percent of less than 100 percent shall
be deemed a reference to 100 percent.’’.
(b) APPLICATION OF CHOICE NON-DRUG BENCH-
MARK IN COMPETITIVE-DEMONSTRATION AREAS.—
(1) IN GENERAL.—Section 1854 is amended—
(A) in subsection (b)(1)(C)(i), as added by
section 211(b)(1)(A), by striking ‘‘(i) REQUIRE-
MENT.—The’’ and inserting ‘‘(i) REQUIREMENT
FOR
NON-COMPETITIVE-DEMONSTRATION
AREAS.—In the case of a Medicare+Choice
payment area that is not a competitive-dem-
onstration 
area 
designated 
under 
section
1853(k)(1), the’’;
(B) in subsection (b)(1)(C), as so added,
by inserting after clause (i) the following new
clause:
‘‘(ii) REQUIREMENT
FOR
COMPETI-
TIVE-DEMONSTRATION
AREAS.—In 
the
152
case of a Medicare+Choice payment area
that is designated as a competitive-dem-
onstration area under section 1853(k)(1),
if there are average per capita monthly
savings described in paragraph (4) for a
Medicare+Choice plan and year, the
Medicare+Choice plan shall provide to the
enrollee a monthly rebate equal to 75 per-
cent of such savings.’’;
(C) by adding at the end of subsection (b),
as amended by section 211(b)(1), the following
new paragraph:
‘‘(4) COMPUTATION OF AVERAGE PER CAPITA
MONTHLY SAVINGS FOR COMPETITIVE-DEMONSTRA-
TION AREAS.—For purposes of paragraph (1)(C)(ii),
the average per capita monthly savings referred to
in such paragraph for a Medicare+Choice plan and
year shall be computed in the same manner as the
average per capita monthly savings is computed
under paragraph (3) except that the reference to the
fee-for-service area-specific non-drug benchmark
amount in paragraph (3)(B)(i) (or to the benchmark
amount as adjusted under paragraph (3)(C)(i)) is
deemed to be a reference to the choice non-drug
153
benchmark amount (or such amount as adjusted in
the manner described in paragraph (3)(B)(i)).’’; and
(D) in subsection (d), as amended by sec-
tion 211(d)(4), by inserting ‘‘and subsection
(b)(1)(D)’’ after ‘‘subsection (b)(1)(C)’’.
(2) CONFORMING AMENDMENTS.—
(A) 
PAYMENT
OF
PLANS.—Section
1853(a)(1)(A)(ii), 
as 
amended 
by 
section
211(c)(1), is amended—
(i) in subclause (I), by inserting ‘‘(or,
in the case of a competitive-demonstration
area, the choice non-drug benchmark
amount)’’ 
after 
‘‘unadjusted 
non-drug
monthly bid amount’’; and
(ii) in subclauses (I) and (II), by in-
serting ‘‘(or, in the case of a competitive-
demonstration area, described in section
1854(b)(4))’’ 
after 
‘‘section
1854(b)(3)(C)’’.
(B) DEFINITION OF MONTHLY BASIC PRE-
MIUM.—Section 1854(b)(2)(A)(ii), as amended
by section 211(d)(2), is amended by inserting
‘‘(or, in the case of a competitive-demonstration
area, the choice non-drug benchmark amount)’’
after ‘‘benchmark amount’’.
154
(c) PREMIUM
ADJUSTMENT.—Section 1839 (42
U.S.C. 1395r) is amended by adding at the end the fol-
lowing new subsection:
‘‘(h)(1) In the case of an individual who resides in
a competitive-demonstration area designated under section
1851(k)(1) and who is not enrolled in a Medicare+Choice
plan under part C, the monthly premium otherwise applied
under this part (determined without regard to subsections
(b) and (f) or any adjustment under this subsection) shall
be adjusted as follows: If the fee-for-service area-specific
non-drug bid (as defined in section 1853(k)(6)) for the
Medicare+Choice area in which the individual resides for
a month—
‘‘(A) does not exceed the choice non-drug
benchmark 
(as 
determined 
under 
section
1853(k)(2)) for such area, the amount of the pre-
mium for the individual for the month shall be re-
duced by an amount equal to 75 percent of the
amount by which such benchmark exceeds such fee-
for-service bid; or
‘‘(B) exceeds such choice non-drug benchmark,
the amount of the premium for the individual for the
month shall be adjusted to ensure that—
155
‘‘(i) the sum of the amount of the adjusted
premium and the choice non-drug benchmark
for the area, is equal to
‘‘(ii) the sum of the unadjusted premium
plus amount of the fee-for-service area-specific
non-drug bid for the area.
‘‘(2) Nothing in this subsection shall be construed as
preventing a reduction under paragraph (1)(A) in the pre-
mium otherwise applicable under this part to zero or from
requiring the provision of a rebate to the extent such pre-
mium would otherwise be required to be less than zero.
‘‘(3) The adjustment in the premium under this sub-
section shall be effected in such manner as the Medicare
Benefits Administrator determines appropriate.
‘‘(4) In order to carry out this subsection (insofar as
it is effected through the manner of collection of premiums
under 1840(a)), the Medicare Benefits Administrator shall
transmit to the Commissioner of Social Security—
‘‘(A) at the beginning of each year, the name,
social security account number, and the amount of
the adjustment (if any) under this subsection for
each individual enrolled under this part for each
month during the year; and
156
‘‘(B) periodically throughout the year, informa-
tion to update the information previously trans-
mitted under this paragraph for the year.’’.
(d) CONFORMING AMENDMENT.—Section 1844(c)
(42 U.S.C. 1395w(c)) is amended by inserting ‘‘and with-
out regard to any premium adjustment effected under sec-
tion 1839(h)’’ before the period at the end.
(e) REPORT ON DEMONSTRATION PROGRAM.—Not
later than 6 months after the date on which the designa-
tion of the 4th competitive-demonstration area under sec-
tion 1851(k)(1) of the Social Security Act ends, the Medi-
care Payment Advisory Commission shall submit to Con-
gress a report on the impact of the demonstration pro-
gram under the amendments made by this section, includ-
ing such impact on premiums of medicare beneficiaries,
savings to the medicare program, and on adverse selection.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments and premiums for pe-
riods beginning on or after January 1, 2005.
SEC. 213. CONFORMING AMENDMENTS.
(a) CONFORMING
AMENDMENTS
RELATING
TO
BIDS.—
(1) Section 1854 (42 U.S.C. 1395w–24) is
amended—
157
(A) in the heading of subsection (a), by in-
serting ‘‘AND
BID
AMOUNTS’’ after ‘‘PRE-
MIUMS’’; and
(B) in subsection (a)(5)(A), by inserting
‘‘paragraphs (2), (3), and (4) of’’ after ‘‘filed
under’’.
(b) ADDITIONAL CONFORMING AMENDMENTS.—
(1) ANNUAL DETERMINATION AND ANNOUNCE-
MENT OF CERTAIN FACTORS.—Section 1853(b) (42
U.S.C. 1395w–23(b)) is amended—
(A) in paragraph (1), by striking ‘‘the re-
spective calendar year’’ and all that follows and
inserting the following: ‘‘the calendar year con-
cerned with respect to each Medicare+Choice
payment area, the following:
‘‘(A) PRE-COMPETITION
INFORMATION.—
For years before 2005, the following:
‘‘(i) MEDICARE+CHOICE
CAPITATION
RATES.—The 
annual 
Medicare+Choice
capitation rate for each Medicare+Choice
payment area for the year.
‘‘(ii) ADJUSTMENT
FACTORS.—The
risk and other factors to be used in adjust-
ing such rates under subsection (a)(1)(A)
for payments for months in that year.
158
‘‘(B) COMPETITION
INFORMATION.—For
years beginning with 2005, the following:
‘‘(i) BENCHMARKS.—The fee-for-serv-
ice 
area-specific 
non-drug 
benchmark
under section 1853(j) and, if applicable,
the choice non-drug benchmark under sec-
tion 1853(k)(2), for the year involved and,
if applicable, the national fee-for-service
market share percentage.
‘‘(ii) ADJUSTMENT
FACTORS.—The
adjustment factors applied under section
1853(a)(1)(A)(iii) (relating to demographic
adjustment), section 1853(a)(1)(B) (relat-
ing to adjustment for end-stage renal dis-
ease), and section 1853(a)(3) (relating to
health status adjustment).
‘‘(iii) PROJECTED
FEE-FOR-SERVICE
BID.—In the case of a competitive area,
the projected fee-for-service area-specific
non-drug bid (as determined under sub-
section (k)(6)) for the area.
‘‘(iv) INDIVIDUALS.—The number of
individuals 
counted 
under 
subsection
(k)(4)(B) 
and 
enrolled 
in 
each
Medicare+Choice plan in the area.’’; and
159
(B) in paragraph (3), by striking ‘‘in suffi-
cient detail’’ and all that follows up to the pe-
riod at the end.
(2) REPEAL OF PROVISIONS RELATING TO AD-
JUSTED COMMUNITY RATE (ACR).—
(A) IN GENERAL.—Subsections (e) and (f)
of section 1854 (42 U.S.C. 1395w–24) are re-
pealed.
(B) CONFORMING
AMENDMENT.—Section
1839(a)(2) (42 U.S.C. 1395r(a)(2)) is amended
by striking ‘‘, and to reflect’’ and all that fol-
lows and inserting a period.
(3) PROSPECTIVE
IMPLEMENTATION
OF
NA-
TIONAL
COVERAGE
DETERMINATIONS.—Section
1852(a)(5) (42 U.S.C. 1395w–22(a)(5)) is amended
to read as follows:
‘‘(5) PROSPECTIVE
IMPLEMENTATION
OF
NA-
TIONAL
COVERAGE
DETERMINATIONS.—The Sec-
retary shall only implement a national coverage de-
termination that will result in a significant change
in the costs to a Medicare+Choice organization in a
prospective manner that applies to announcements
made under section 1853(b) after the date of the
implementation of the determination.’’.
160
(4) PERMITTING GEOGRAPHIC ADJUSTMENT TO
CONSOLIDATE
MULTIPLE
MEDICARE+CHOICE
PAY-
MENT AREAS IN A STATE INTO A SINGLE STATEWIDE
MEDICARE+CHOICE
PAYMENT
AREA.—Section
1853(d)(3) 
(42 
U.S.C. 
1395w–23(e)(3)) 
is
amended—
(A) by amending clause (i) of subpara-
graph (A) to read as follows:
‘‘(i) 
to 
a 
single 
statewide
Medicare+Choice payment area,’’; and
(B) by amending subparagraph (B) to read
as follows:
‘‘(B) 
BUDGET
NEUTRALITY
ADJUST-
MENT.—In the case of a State requesting an
adjustment under this paragraph, the Medicare
Benefits Administrator shall initially (and an-
nually thereafter) adjust the payment rates oth-
erwise established under this section for
Medicare+Choice payment areas in the State in
a manner so that the aggregate of the pay-
ments under this section in the State shall not
exceed the aggregate payments that would have
been 
made 
under 
this 
section 
for
Medicare+Choice payment areas in the State in
161
the absence of the adjustment under this para-
graph.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments and premiums for pe-
riods beginning on or after January 1, 2005.
TITLE III—RURAL HEALTH CARE
IMPROVEMENTS
SEC. 301. REFERENCE TO FULL MARKET BASKET INCREASE
FOR SOLE COMMUNITY HOSPITALS.
For provision eliminating any reduction from full
market basket in the update for inpatient hospital services
for sole community hospitals, see section 401.
SEC. 302. ENHANCED DISPROPORTIONATE SHARE HOS-
PITAL (DSH) TREATMENT FOR RURAL HOS-
PITALS AND URBAN HOSPITALS WITH FEWER
THAN 100 BEDS.
(a) BLENDING OF PAYMENT AMOUNTS.—
(1) IN GENERAL.—Section 1886(d)(5)(F) (42
U.S.C. 1395ww(d)(5)(F)) is amended by adding at
the end the following new clause:
‘‘(xiv)(I) In the case of discharges in a fiscal year
beginning on or after October 1, 2002, subject to sub-
clause (II), there shall be substituted for the dispropor-
tionate share adjustment percentage otherwise determined
under clause (iv) (other than subclause (I)) or under
162
clause (viii), (x), (xi), (xii), or (xiii), the old blend propor-
tion (specified under subclause (III)) of the dispropor-
tionate share adjustment percentage otherwise determined
under the respective clause and 100 percent minus such
old blend proportion of the disproportionate share adjust-
ment percentage determined under clause (vii) (relating
to large, urban hospitals).
‘‘(II) Under subclause (I), the disproportionate share
adjustment percentage shall not exceed 10 percent for a
hospital that is not classified as a rural referral center
under subparagraph (C).
‘‘(III) For purposes of subclause (I), the old blend
proportion for fiscal year 2003 is 80 percent, for each sub-
sequent year (through 2006) is the old blend proportion
under this subclause for the previous year minus 20 per-
centage points, and for each year beginning with 2007 is
0 percent.’’.
(2) 
CONFORMING
AMENDMENTS.—Section
1886(d)(5)(F) (42 U.S.C. 1395ww(d)(5)(F)) is
amended—
(A) in each of subclauses (II), (III), (IV),
(V), and (VI) of clause (iv), by inserting ‘‘sub-
ject to clause (xiv) and’’ before ‘‘for discharges
occurring’’;
163
(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’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply with respect to discharges occur-
ring on or after October 1, 2002.
SEC. 303. 2-YEAR PHASED-IN INCREASE IN THE STANDARD-
IZED AMOUNT IN RURAL AND SMALL URBAN
AREAS TO ACHIEVE A SINGLE, UNIFORM
STANDARDIZED AMOUNT.
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 the succeeding provisions
of this clause, for discharges’’; and
(2) by adding at the end the following new sub-
clauses:
‘‘(II) For discharges occurring during fiscal
year 2003, the average standardized amount for hos-
pitals located other than in a large urban area shall
be increased by 1⁄2 of the difference between the av-
erage standardized amount determined under sub-
164
clause (I) for hospitals located in large urban areas
for such fiscal year and such amount determined
(without regard to this subclause) for other hospitals
for such fiscal year.
‘‘(III) For discharges occurring in a fiscal year
beginning with fiscal year 2004, the Secretary shall
compute an average standardized amount for hos-
pitals located in any area within the United States
and within each region equal to the average stand-
ardized amount computed for the previous fiscal
year under this subparagraph for hospitals located
in a large urban area (or, beginning with fiscal year
2005, for hospitals located in any area) increased by
the applicable percentage increase under subsection
(b)(3)(B)(i).’’.
SEC. 304. 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 in such market basket
to reflect the most current data available more frequently
than once every 5 years.
165
(b) REPORT.—Not later than October 1, 2003, the
Secretary shall submit a report to Congress on the fre-
quency established under subsection (a), including an ex-
planation of the reasons for, and options considered, in
determining such frequency.
SEC. 305. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL
PROGRAM.
(a) REINSTATEMENT OF PERIODIC INTERIM PAY-
MENT
(PIP).—Section 
1815(e)(2) 
(42 
U.S.C.
1395g(e)(2)) is amended—
(1) by striking ‘‘and’’ at the end of subpara-
graph (C);
(2) by adding ‘‘and’’ at the end of subpara-
graph (D); and
(3) by inserting after subparagraph (D) the fol-
lowing new subparagraph:
‘‘(E) inpatient critical access hospital services;’’.
(b) CONDITION FOR APPLICATION OF SPECIAL PHY-
SICIAN PAYMENT ADJUSTMENT.—Section 1834(g)(2) (42
U.S.C. 1395m(g)(2)) is amended by adding after and
below subparagraph (B) the following:
‘‘The Secretary may not require, as a condition for
applying subparagraph (B) with respect to a critical
access hospital, that each physician providing profes-
sional services in the hospital must assign billing
166
rights with respect to such services, except that such
subparagraph shall not apply to those physicians
who have not assigned such billing rights.’’.
(c) FLEXIBILITY
IN BED LIMITATION
FOR HOS-
PITALS.—Section 1820 (42 U.S.C. 1395i–4) is amended—
(1) in subsection (c)(2)(B)(iii), by inserting
‘‘subject to paragraph (3)’’ after ‘‘(iii) provides’’;
(2) by adding at the end of subsection (c) the
following new paragraph:
‘‘(3) INCREASE IN MAXIMUM NUMBER OF BEDS
FOR HOSPITALS WITH STRONG SEASONAL CENSUS
FLUCTUATIONS.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (C), in the case of a hospital that dem-
onstrates that it meets the standards estab-
lished under subparagraph (B) and has not
made the election described in subsection
(f)(2)(A), the bed limitations otherwise applica-
ble under paragraph (2)(B)(iii) and subsection
(f) shall be increased by 5 beds.
‘‘(B) STANDARDS.—The Secretary shall
specify standards for determining whether a
critical access hospital has sufficiently strong
seasonal variations in patient admissions to jus-
167
tify the increase in bed limitation provided
under subparagraph (A).’’; and
(3) in subsection (f)—
(A) by inserting ‘‘(1)’’ after ‘‘(f)’’; and
(B) by adding at the end the following new
paragraph:
‘‘(2)(A) A hospital may elect to treat the reference
in paragraph (1) to ‘15 beds’ as a reference to ‘25 beds’,
but only if no more than 10 beds in the hospital are at
any time used for non-acute care services. A hospital that
makes such an election is not eligible for the increase pro-
vided under subsection (c)(3)(A).
‘‘(B) The limitations in numbers of beds under the
first sentence of paragraph (1) are subject to adjustment
under subsection (c)(3).’’.
(d) 5-YEAR EXTENSION
OF
THE AUTHORIZATION
FOR APPROPRIATIONS FOR GRANT PROGRAM.—Section
1820(j) (42 U.S.C. 1395i–4(j)) is amended by striking
‘‘through 2002’’ and inserting ‘‘through 2007’’.
(e) PROHIBITION OF RETROACTIVE RECOUPMENT.—
The Secretary shall not recoup (or otherwise seek to re-
cover) overpayments made for outpatient critical access
hospital services under part B of title XVIII of the Social
Security Act, for services furnished in cost reporting peri-
ods that began before October 1, 2002, insofar as such
168
overpayments are attributable to payment being based on
80 percent of reasonable costs (instead of 100 percent of
reasonable costs minus 20 percent of charges).
(f) EFFECTIVE DATES.—
(1) REINSTATEMENT
OF
PIP.—The amend-
ments made by subsection (a) shall apply to pay-
ments made on or after January 1, 2003.
(2) PHYSICIAN PAYMENT ADJUSTMENT CONDI-
TION.—The amendment made by subsection (b)
shall be effective as if included in the enactment of
section 403(d) of the Medicare, Medicaid, and
SCHIP Balanced Budget Refinement Act of 1999
(113 Stat. 1501A–371).
(3) FLEXIBILITY
IN
BED
LIMITATION.—The
amendments made by subsection (c) shall apply to
designations made on or after January 1, 2003, but
shall not apply to critical access hospitals that were
designated as of such date.
SEC. 306. EXTENSION OF TEMPORARY INCREASE FOR
HOME HEALTH SERVICES FURNISHED IN A
RURAL AREA.
(a) IN GENERAL.—Section 508(a) BIPA (114 Stat.
2763A–533) is amended—
169
(1) by striking ‘‘24-MONTH INCREASE BEGIN-
NING APRIL 1, 2001’’ and inserting ‘‘IN GENERAL’’;
and
(2) by striking ‘‘April 1, 2003’’ and inserting
‘‘January 1, 2005’’.
(b) CONFORMING AMENDMENT.—Section 547(c)(2)
of BIPA (114 Stat. 2763A–553) is amended by striking
‘‘the period beginning on April 1, 2001, and ending on
September 30, 2002,’’ and inserting ‘‘a period under such
section’’.
SEC. 307. REFERENCE TO 10 PERCENT INCREASE IN PAY-
MENT FOR HOSPICE CARE FURNISHED IN A
FRONTIER AREA AND RURAL HOSPICE DEM-
ONSTRATION PROJECT.
For—
(1) provision of 10 percent increase in payment
for hospice care furnished in a frontier area, see sec-
tion 422; and
(2) provision of a rural hospice demonstration
project, see section 423.
170
SEC. 308. REFERENCE TO PRIORITY FOR HOSPITALS LO-
CATED IN RURAL OR SMALL URBAN AREAS IN
REDISTRIBUTION 
OF 
UNUSED 
GRADUATE
MEDICAL EDUCATION RESIDENCIES.
For provision providing priority for hospitals located
in rural or small urban areas in redistribution of unused
graduate medical education residencies, see section 612.
SEC. 309. GAO STUDY OF GEOGRAPHIC DIFFERENCES IN
PAYMENTS FOR PHYSICIANS’ SERVICES.
(a) STUDY.—The Comptroller General of the United
States shall conduct a study of differences in payment
amounts under the physician fee schedule under section
1848 of the Social Security Act (42 U.S.C. 1395w–4) for
physicians’ services in different geographic areas. Such
study shall include—
(1) an assessment of the validity of the geo-
graphic adjustment factors used for each component
of the fee schedule;
(2) an evaluation of the measures used for such
adjustment, including the frequency of revisions; and
(3) an evaluation of the methods used to deter-
mine professional liability insurance costs used in
computing the malpractice component, including a
review of increases in professional liability insurance
premiums and variation in such increases by State
and physician specialty and methods used to update
171
the geographic cost of practice index and relative
weights for the malpractice component.
(b) REPORT.—Not later than 1 year after the date
of the enactment of this Act, the Comptroller General shall
submit to Congress a report on the study conducted under
subsection (a). The report shall include recommendations
regarding the use of more current data in computing geo-
graphic cost of practice indices as well as the use of data
directly representative of physicians’ costs (rather than
proxy measures of such costs).
SEC. 310. PROVIDING SAFE HARBOR FOR CERTAIN COL-
LABORATIVE EFFORTS THAT BENEFIT MEDI-
CALLY UNDERSERVED POPULATIONS.
(a) IN GENERAL.—Section 1128B(b)(3) (42 U.S.C.
1320a–7(b)(3)), as amended by section 101(b)(2), is
amended—
(1) in subparagraph (F), by striking ‘‘and’’
after the semicolon at the end;
(2) in subparagraph (G), by striking the period
at the end and inserting ‘‘; and’’; and
(3) by adding at the end the following new sub-
paragraph:
‘‘(H) any remuneration between a public
or nonprofit private health center entity de-
scribed under clause (i) or (ii) of section
172
1905(l)(2)(B) and any individual or entity pro-
viding goods, items, services, donations or
loans, or a combination thereof, to such health
center entity pursuant to a contract, lease,
grant, loan, or other agreement, if such agree-
ment contributes to the ability of the health
center entity to maintain or increase the avail-
ability, or enhance the quality, of services pro-
vided to a medically underserved population
served by the health center entity.’’.
(b) RULEMAKING
FOR EXCEPTION
FOR HEALTH
CENTER ENTITY ARRANGEMENTS.—
(1) ESTABLISHMENT.—
(A) 
IN
GENERAL.—The 
Secretary 
of
Health and Human Services (in this subsection
referred to as the ‘‘Secretary’’) shall establish,
on an expedited basis, standards relating to the
exception described in section 1128B(b)(3)(H)
of the Social Security Act, as added by sub-
section (a), for health center entity arrange-
ments to the antikickback penalties.
(B) FACTORS
TO
CONSIDER.—The Sec-
retary shall consider the following factors,
among others, in establishing standards relating
173
to the exception for health center entity ar-
rangements under subparagraph (A):
(i) Whether the arrangement between
the health center entity and the other
party results in savings of Federal grant
funds or increased revenues to the health
center entity.
(ii) Whether the arrangement between
the health center entity and the other
party restricts or limits a patient’s freedom
of choice.
(iii) Whether the arrangement be-
tween the health center entity and the
other party protects a health care profes-
sional’s independent medical judgment re-
garding medically appropriate treatment.
The Secretary may also include other standards
and criteria that are consistent with the intent
of Congress in enacting the exception estab-
lished under this section.
(2) INTERIM
FINAL
EFFECT.—No later than
180 days after the date of enactment of this Act, the
Secretary shall publish a rule in the Federal Reg-
ister consistent with the factors under paragraph
(1)(B). Such rule shall be effective and final imme-
174
diately on an interim basis, subject to such change
and revision, after public notice and opportunity (for
a period of not more than 60 days) for public com-
ment, as is consistent with this subsection.
SEC. 311. RELIEF FOR CERTAIN NON-TEACHING HOS-
PITALS.
(a) IN GENERAL.—In the case of a non-teaching hos-
pital that meets the condition of subsection (b), in each
of fiscal years 2003, 2004, and 2005 the amount of pay-
ment made to the hospital under section 1886(d) of the
Social Security Act for discharges occurring during such
fiscal year only shall be increased as though the applicable
percentage increase (otherwise applicable to discharges oc-
curring 
during 
such 
fiscal 
year 
under 
section
1886(b)(3)(B)(i) of the Social Security Act (42 U.S.C.
1395ww(b)(3)(B)(i)) had been increased by 5 percentage
points. The previous sentence shall be applied for each
such fiscal year separately without regard to its applica-
tion in a previous fiscal year and shall not affect payment
for discharges for any hospital occurring during a fiscal
year after fiscal year 2005.
(b) CONDITION.—A non-teaching hospital meets the
condition of this subsection if—
(1) it is located in a rural area and the amount
of the aggregate payments under subsection (d) of
175
section 1886 of the Social Security Act for hospitals
located in rural areas in the State for their cost re-
porting periods beginning during fiscal year 1999 is
less than the aggregate allowable operating costs of
inpatient hospital services (as defined in subsection
(a)(4) of such section) for all subsection (d) hos-
pitals in such areas in such State with respect to
such cost reporting periods; or
(2) it is located in an urban area and the
amount of the aggregate payments under subsection
(d) of such section for hospitals located in urban
areas in the State for their cost reporting periods
beginning during fiscal year 1999 is less than 103
percent of the aggregate allowable operating costs of
inpatient hospital services (as defined in subsection
(a)(4) of such section) for all subsection (d) hos-
pitals in such areas in such State with respect to
such cost reporting periods.
The amounts under paragraphs (1) and (2) shall be deter-
mined by the Secretary of Health and Human Services
based on data of the Medicare Payment Advisory Commis-
sion.
(c) DEFINITIONS.—For purposes of this section:
(1) 
NON-TEACHING
HOSPITAL.—The 
term
‘‘non-teaching hospital’’ means, for a cost reporting
176
period, a subsection (d) hospital (as defined in sub-
section (d)(1)(B) of section 1886 of the Social Secu-
rity Act, 42 U.S.C. 1395ww)) that is not receiving
any additional payment under subsection (d)(5)(B)
of such section or a payment under subsection (h)
of such section for discharges occurring during the
period. A subsection (d) hospital that receives addi-
tional payments under subsection (d)(5)(B) or (h) of
such section shall, for purposes of this section, also
be treated as a non-teaching hospital unless a chair-
man of a department in the medical school with
which the hospital is affiliated is serving or has been
appointed as a clinical chief of service in the hos-
pital.
(2) RURAL; URBAN.—The terms ‘‘rural’’ and
‘‘urban’’ have the meanings given such terms for
purposes of section 1886(d) of the Social Security
Act (42 U.S.C. 1395ww(d)).
177
TITLE IV—PROVISIONS
RELATING TO PART A
Subtitle A—Inpatient Hospital
Services
SEC. 401. REVISION OF ACUTE CARE HOSPITAL PAYMENT
UPDATES.
Subclause (XVIII) of section 1886(b)(3)(B)(i) (42
U.S.C. 1395ww(b)(3)(B)(i)) is amended to read as fol-
lows:
‘‘(XVIII) for fiscal year 2003, the market bas-
ket percentage increase for sole community hospitals
and such increase minus 0.25 percentage points for
other hospitals, and’’.
SEC. 402. 2-YEAR INCREASE IN LEVEL OF ADJUSTMENT FOR
INDIRECT COSTS OF MEDICAL EDUCATION
(IME).
Section 
1886(d)(5)(B)(ii) 
(42 
U.S.C.
1395ww(d)(5)(B)(ii)) is amended—
(1) in subclause (VI) by striking ‘‘and’’ at the
end;
(2) by redesignating subclause (VII) as sub-
clause (IX);
(3) in subclause (IX) as so redesignated, by
striking ‘‘2002’’ and inserting ‘‘2004’’; and
178
(4) by inserting after subclause (VI) the fol-
lowing new subclause:
‘‘(VII) during fiscal year 2003, ‘c’ is equal
to 1.47;
‘‘(VIII) during fiscal year 2004, ‘c’ is
equal to 1.45; and’’.
SEC. 403. RECOGNITION OF NEW MEDICAL TECHNOLOGIES
UNDER INPATIENT HOSPITAL PPS.
(a) IMPROVING TIMELINESS
OF DATA COLLEC-
TION.—Section 
1886(d)(5)(K) 
(42 
U.S.C.
1395ww(d)(5)(K)) is amended by adding at the end the
following new clause:
‘‘(vii) Under the mechanism under this subpara-
graph, the Secretary shall provide for the addition of new
diagnosis and procedure codes in April 1 of each year, but
the addition of such codes shall not require the Secretary
to adjust the payment (or diagnosis-related group classi-
fication) under this subsection until the fiscal year that
begins after such date.’’.
(b) ELIGIBILITY STANDARD.—
(1) MINIMUM
PERIOD
FOR
RECOGNITION
OF
NEW
TECHNOLOGIES.—Section 
1886(d)(5)(K)(vi)
(42 U.S.C. 1395ww(d)(5)(K)(vi)) is amended—
(A) by inserting ‘‘(I)’’ after ‘‘(vi)’’; and
179
(B) by adding at the end the following new
subclause:
‘‘(II) Under such criteria, a service or technology
shall not be denied treatment as a new service or tech-
nology on the basis of the period of time in which the serv-
ice or technology has been in use if such period ends before
the end of the 2-to-3-year period that begins on the effec-
tive date of implementation of a code under ICD–9–CM
(or a successor coding methodology) that enables the iden-
tification of a significant sample of specific discharges in
which the service or technology has been used.’’.
(2) ADJUSTMENT
OF
THRESHOLD.—Section
1886(d)(5)(K)(ii)(I) 
(42 
U.S.C.
1395ww(d)(5)(K)(ii)(I)) is amended by inserting
‘‘(applying a threshold specified by the Secretary
that is the lesser of 50 percent of the national aver-
age standardized amount for operating costs of inpa-
tient hospital services for all hospitals and all diag-
nosis-related groups or one standard deviation for
the diagnosis-related group involved)’’ after ‘‘is inad-
equate’’.
(3) CRITERION
FOR
SUBSTANTIAL
IMPROVE-
MENT.—Section 
1886(d)(5)(K)(vi) 
(42 
U.S.C.
1395ww(d)(5)(K)(vi)), as amended by paragraph
180
(1), is further amended by adding at the end the fol-
lowing subclause:
‘‘(III) The Secretary shall by regulation provide for
further clarification of the criteria applied to determine
whether a new service or technology represents an advance
in medical technology that substantially improves the diag-
nosis or treatment of beneficiaries. Under such criteria,
in determining whether a new service or technology rep-
resents an advance in medical technology that substan-
tially improves the diagnosis or treatment of beneficiaries,
the Secretary shall deem a service or technology as meet-
ing such requirement if the service or technology is a drug
or biological that is designated under section 506 or 526
of the Federal Food, Drug, and Cosmetic Act, approved
under section 314.510 or 601.41 of title 21, Code of Fed-
eral Regulations, or designated for priority review when
the marketing application for such drug or biological was
filed or is a medical device for which an exemption has
been granted under section 520(m) of such Act, or for
which priority review has been provided under section
515(d)(5) of such Act.’’.
(4) PROCESS
FOR
PUBLIC
INPUT.—Section
1886(d)(5)(K) (42 U.S.C. 1395ww(d)(5)(K)), as
amended by paragraph (1), is amended—
181
(A) in clause (i), by adding at the end the
following: ‘‘Such mechanism shall be modified
to meet the requirements of clause (viii).’’; and
(B) by adding at the end the following new
clause:
‘‘(viii) The mechanism established pursuant to clause
(i) shall be adjusted to provide, before publication of a
proposed rule, for public input regarding whether a new
service or technology not described in the second sentence
of clause (vi)(III) represents an advance in medical tech-
nology that substantially improves the diagnosis or treat-
ment of beneficiaries as follows:
‘‘(I) The Secretary shall make public and peri-
odically update a list of all the services and tech-
nologies for which an application for additional pay-
ment under this subparagraph is pending.
‘‘(II) The Secretary shall accept comments, rec-
ommendations, and data from the public regarding
whether the service or technology represents a sub-
stantial improvement.
‘‘(III) The Secretary shall provide for a meeting
at which organizations representing hospitals, physi-
cians, medicare beneficiaries, manufacturers, and
any other interested party may present comments,
recommendations, and data to the clinical staff of
182
the Centers for Medicare & Medicaid Services before
publication of a notice of proposed rulemaking re-
garding whether service or technology represents a
substantial improvement.’’.
(c) PREFERENCE FOR USE OF DRG ADJUSTMENT.—
Section 1886(d)(5)(K) (42 U.S.C. 1395ww(d)(5)(K)) is
further amended by adding at the end the following new
clause:
‘‘(ix) Before establishing any add-on payment under
this subparagraph with respect to a new technology, the
Secretary shall seek to identify one or more diagnosis-re-
lated groups associated with such technology, based on
similar clinical or anatomical characteristics and the cost
of the technology. Within such groups the Secretary shall
assign an eligible new technology into a diagnosis-related
group where the average costs of care most closely approx-
imate the costs of care of using the new technology. In
such case, no add-on payment under this subparagraph
shall be made with respect to such new technology and
this clause shall not affect the application of paragraph
(4)(C)(iii).’’.
(d) IMPROVEMENT IN PAYMENT FOR NEW TECH-
NOLOGY.—Section 
1886(d)(5)(K)(ii)(III) 
(42 
U.S.C.
1395ww(d)(5)(K)(ii)(III)) is amended by inserting after
‘‘the estimated average cost of such service or technology’’
183
the following: ‘‘(based on the marginal rate applied to
costs under subparagraph (A))’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—The Secretary shall imple-
ment the amendments made by this section so that
they apply to classification for fiscal years beginning
with fiscal year 2004.
(2) RECONSIDERATIONS OF APPLICATIONS FOR
FISCAL YEAR 2003 THAT ARE DENIED.—In the case
of an application for a classification of a medical
service or technology as a new medical service or
technology under section 1886(d)(5)(K) of the Social
Security Act (42 U.S.C. 1395ww(d)(5)(K)) that was
filed for fiscal year 2003 and that is denied—
(A) the Secretary shall automatically re-
consider the application as an application for
fiscal year 2004 under the amendments made
by this section; and
(B) the maximum time period otherwise
permitted for such classification of the service
or technology shall be extended by 12 months.
SEC. 404. PHASE-IN OF FEDERAL RATE FOR HOSPITALS IN
PUERTO RICO.
Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is
amended—
184
(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) between October 1, 1987, and September
30, 1997, the applicable Puerto Rico percentage is
75 percent and the applicable Federal percentage is
25 percent;
‘‘(ii) on or after October 1, 1997, and before
October 1, 2003, the applicable Puerto Rico percent-
185
age is 50 percent and the applicable Federal per-
centage is 50 percent;
‘‘(iii) during fiscal year 2004, the applicable
Puerto Rico percentage is 45 percent and the appli-
cable Federal percentage is 55 percent;
‘‘(iv) during fiscal year 2005, the applicable
Puerto Rico percentage is 40 percent and the appli-
cable Federal percentage is 60 percent;
‘‘(v) during fiscal year 2006, the applicable
Puerto Rico percentage is 35 percent and the appli-
cable Federal percentage is 65 percent;
‘‘(vi) during fiscal year 2007, the applicable
Puerto Rico percentage is 30 percent and the appli-
cable Federal percentage is 70 percent; and
‘‘(vii) on or after October 1, 2007, the applica-
ble Puerto Rico percentage is 25 percent and the ap-
plicable Federal percentage is 75 percent.’’.
SEC. 405. REFERENCE TO PROVISION RELATING TO EN-
HANCED DISPROPORTIONATE SHARE HOS-
PITAL (DSH) PAYMENTS FOR RURAL HOS-
PITALS AND URBAN HOSPITALS WITH FEWER
THAN 100 BEDS.
For provision enhancing disproportionate share hos-
pital (DSH) treatment for rural hospitals and urban hos-
pitals with fewer than 100 beds, see section 302.
186
SEC. 406. REFERENCE TO PROVISION RELATING TO 2-YEAR
PHASED-IN INCREASE IN THE STANDARDIZED
AMOUNT 
IN 
RURAL 
AND 
SMALL 
URBAN
AREAS TO ACHIEVE A SINGLE, UNIFORM
STANDARDIZED AMOUNT.
For provision phasing in over a 2-year period an in-
crease in the standardized amount for rural and small
urban areas to achieve a single, uniform, standardized
amount, see section 303.
SEC. 407. REFERENCE TO PROVISION FOR MORE FRE-
QUENT UPDATES IN THE WEIGHTS USED IN
HOSPITAL MARKET BASKET.
For provision providing for more frequent updates in
the weights used in hospital market basket, see section
304.
SEC. 408. REFERENCE TO PROVISION MAKING IMPROVE-
MENTS TO CRITICAL ACCESS HOSPITAL PRO-
GRAM.
For provision providing making improvements to crit-
ical access hospital program, see section 305.
SEC. 409. GAO STUDY ON IMPROVING THE HOSPITAL WAGE
INDEX.
(a) STUDY.—
(1) IN GENERAL.—The Comptroller General of
the United States shall conduct a study on the im-
provements that can be made in the measurement of
187
regional differences in hospital wages reflected in the
hospital wage index under section 1886(d) of the So-
cial Security Act (42 U.S.C. 1395ww(d)).
(2) EXAMINATION OF USE OF METROPOLITAN
STATISTICAL AREAS (MSAS).—The study shall spe-
cifically examine the use of metropolitan statistical
areas for purposes of computing and applying the
wage index and whether the boundaries of such
areas accurately reflect local labor markets. In addi-
tion, the study shall examine whether regional in-
equities are created as a result of infrequent updates
of such boundaries and policies of the Bureau of the
Census relating to commuting criteria.
(3) WAGE DATA.—The study shall specifically
examine the portions of the hospital cost reports re-
lating to wages, and methods for improving the ac-
curacy of the wage data and for reducing inequities
resulting from differences among hospitals in the re-
porting of wage data.
(b) CONSULTATION WITH OMB.—The Comptroller
General shall consult with the Director of Office of Man-
agement and Budget in conducting the study under sub-
section (a)(2).
(c) REPORT.—Not later than May 1, 2003, the
Comptroller General shall submit to Congress a report on
188
the study conducted under subsection (a) and shall include
in the report such recommendations as may be appropriate
on—
(1) changes in the definition of labor market
areas used for purposes of the area wage index
under section 1886 of the Social Security Act; and
(2) improvements in methods for the collection
of wage data.
Subtitle B—Skilled Nursing
Facility Services
SEC. 411. PAYMENT FOR COVERED SKILLED NURSING FA-
CILITY SERVICES.
(a) TEMPORARY INCREASE IN NURSING COMPONENT
OF PPS FEDERAL RATE.—Section 312(a) of BIPA is
amended by adding at the end the following new sentence:
‘‘The Secretary of Health and Human Services shall in-
crease by 12, 10, and 8 percent the nursing component
of the case-mix adjusted Federal prospective payment rate
specified in Tables 3 and 4 of the final rule published in
the Federal Register by the Health Care Financing Ad-
ministration on July 31, 2000 (65 Fed. Reg. 46770) and
as subsequently updated under section 1888(e)(4)(E)(ii)
of 
the 
Social 
Security 
Act 
(42 
U.S.C.
1395yy(e)(4)(E)(ii)), effective for services furnished dur-
ing fiscal years 2003, 2004, and 2005, respectively.’’.
189
(b) ADJUSTMENT
TO
RUGS
FOR
AIDS RESI-
DENTS.—
(1) IN GENERAL.—Paragraph (12) of section
1888(e) (42 U.S.C. 1395yy(e)) is amended to read
as follows:
‘‘(12) ADJUSTMENT
FOR
RESIDENTS
WITH
AIDS.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), in the case of a resident of a skilled
nursing facility who is afflicted with acquired
immune deficiency syndrome (AIDS), the per
diem amount of payment otherwise applicable
shall be increased by 128 percent to reflect in-
creased costs associated with such residents.
‘‘(B) SUNSET.—Subparagraph (A) shall
not apply on and after such date as the Sec-
retary certifies that there is an appropriate ad-
justment in the case mix under paragraph
(4)(G)(i) to compensate for the increased costs
associated with residents described in such sub-
paragraph.’’.
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to services furnished on
or after October 1, 2003.
190
Subtitle C—Hospice
SEC. 421. COVERAGE OF HOSPICE CONSULTATION SERV-
ICES.
(a) COVERAGE OF HOSPICE CONSULTATION SERV-
ICES.—Section 
1812(a) 
(42 
U.S.C. 
1395d(a)) 
is
amended—
(1) by striking ‘‘and’’ at the end of paragraph
(3);
(2) by striking the period at the end of para-
graph (4) and inserting ‘‘; and’’; and
(3) by inserting after paragraph (4) the fol-
lowing new paragraph:
‘‘(5) for individuals who are terminally ill, have
not made an election under subsection (d)(1), and
have not previously received services under this
paragraph, services that are furnished by a physi-
cian who is either the medical director or an em-
ployee of a hospice program and that consist of—
‘‘(A) an evaluation of the individual’s need
for pain and symptom management;
‘‘(B) counseling the individual with respect
to end-of-life issues and care options; and
‘‘(C) advising the individual regarding ad-
vanced care planning.’’.
191
(b) PAYMENT.—Section 1814(i) (42 U.S.C. l395f(i))
is amended by adding at the end the following new para-
graph:
‘‘(4) The amount paid to a hospice program with re-
spect to the services under section 1812(a)(5) for which
payment may be made under this part shall be equal to
an amount equivalent to the amount established for an
office or other outpatient visit for evaluation and manage-
ment associated with presenting problems of moderate se-
verity under the fee schedule established under section
1848(b), other than the portion of such amount attrib-
utable to the practice expense component.’’.
(c) 
CONFORMING
AMENDMENT.—Section
1861(dd)(2)(A)(i) (42 U.S.C. 1395x(dd)(2)(A)(i)) is
amended by inserting before the comma at the end the
following: ‘‘and services described in section 1812(a)(5)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to services provided by a hospice
program on or after January 1, 2004.
SEC. 422. 10 PERCENT INCREASE IN PAYMENT FOR HOS-
PICE CARE FURNISHED IN A FRONTIER AREA.
(a) IN GENERAL.—Section 1814(i)(1) (42 U.S.C.
1395f(i)(1)) is amended by adding at the end the following
new subparagraph: