258
ment, but excluding class III devices under the 
Federal Food, Drug, and Cosmetic Act. 
‘‘(B) 
OFF-THE-SHELF
ORTHOTICS.—
Orthotics (described in section 1861(s)(9)) for 
which payment is otherwise made under section 
1834(h) which require minimal self-adjustment 
for appropriate use and does not require exper-
tise in trimming, bending, molding, assembling, 
or customizing to fit to the patient. 
‘‘(3) EXCEPTION AUTHORITY.—In carrying out 
the programs under this section, the Secretary may 
exempt—
‘‘(A) rural areas and areas with low popu-
lation density within urban areas that are not 
competitive, unless there is a significant national 
market through mail order for a particular item 
or service; and 
‘‘(B) items and services for which the appli-
cation of competitive acquisition is not likely to 
result in significant savings. 
‘‘(4) SPECIAL RULE FOR CERTAIN RENTED ITEMS 
OF DURABLE MEDICAL EQUIPMENT.—In the case of a 
covered item for which payment is made on a rental 
basis under section 1834(a), the Secretary shall estab-
lish a process by which rental agreements for the cov-
259
ered items entered into before the application of the 
competitive acquisition program under this section 
for the item may be continued notwithstanding this 
section. In the case of any such continuation, the sup-
plier involved shall provide for appropriate servicing 
and replacement, as required under section 1834(a). 
‘‘(5) PHYSICIAN
AUTHORIZATION.—The Sec-
retary may establish a process under which a physi-
cian may prescribe a particular brand or mode of de-
livery of an item or service if the item or service in-
volved is clinically more appropriate than other simi-
lar items or services. 
‘‘(6) APPLICATION.—For each competitive acqui-
sition area in which the program is implemented 
under this subsection with respect to items and serv-
ices, the payment basis determined under the competi-
tion conducted under subsection (b) shall be sub-
stituted for the payment basis otherwise applied 
under section 1834(a). 
‘‘(b) PROGRAM REQUIREMENTS.—
‘‘(1) IN GENERAL.—The Secretary shall conduct 
a competition among entities supplying items and 
services described in subsection (a)(2) for each com-
petitive acquisition area in which the program is im-
260
plemented under subsection (a) with respect to such 
items and services. 
‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—
‘‘(A) IN GENERAL.—The Secretary may not 
award a contract to any entity under the com-
petition conducted in an competitive acquisition 
area pursuant to paragraph (1) to furnish such 
items or services unless the Secretary finds all of 
the following: 
‘‘(i) The entity meets quality and fi-
nancial standards specified by the Secretary 
or developed by the Program Advisory and 
Oversight Committee established under sub-
section (c). 
‘‘(ii) The total amounts to be paid 
under the contract (including costs associ-
ated with the administration of the con-
tract) are expected to be less than the total 
amounts that would otherwise be paid. 
‘‘(iii) Beneficiary access to a choice of 
multiple suppliers in the area is main-
tained. 
‘‘(iv) Beneficiary liability is limited to 
20 percent of the applicable contract award 
price, except in such cases where a supplier
261
has furnished an upgraded item and has ex-
ecuted an advanced beneficiary notice. 
‘‘(B) DEVELOPMENT
OF
QUALITY
STAND-
ARDS FOR DME PRODUCTS.—
‘‘(i) IN GENERAL.—The quality stand-
ards specified under subparagraph (A)(i) 
shall not be less than the quality standards 
that would otherwise apply if this section 
did not apply and shall include consumer 
services standards. Not later than July 1, 
2004, the Secretary shall establish new 
quality standards for products subject to 
competitive acquisition under this section. 
Such standards shall be applied prospec-
tively and shall be published on the website 
of the Department of Health and Human 
Services. 
‘‘(ii) CONSULTATION
WITH
PROGRAM 
ADVISORY
AND
OVERSIGHT
COMMITTEE.—
The Secretary shall consult with the Pro-
gram Advisory and Oversight Committee 
(established under subsection (c)) to review 
(and advise the Secretary concerning) the 
quality standards referred to in clause (i). 
‘‘(3) CONTENTS OF CONTRACT.—
262
‘‘(A) IN GENERAL.—A contract entered into 
with an entity under the competition conducted 
pursuant to paragraph (1) is subject to terms 
and conditions that the Secretary may specify. 
‘‘(B) TERM OF CONTRACTS.—The Secretary 
shall recompete contracts under this section not 
less often than once every 3 years. 
‘‘(4) LIMIT ON NUMBER OF CONTRACTORS.—
‘‘(A) IN
GENERAL.—The Secretary may 
limit the number of contractors in a competitive 
acquisition area to the number needed to meet 
projected demand for items and services covered 
under the contracts. In awarding contracts, the 
Secretary shall take into account the ability of 
bidding entities to furnish items or services in 
sufficient quantities to meet the anticipated 
needs of beneficiaries for such items or services 
in the geographic area covered under the contract 
on a timely basis. 
‘‘(B) MULTIPLE WINNERS.—The Secretary 
shall award contracts to multiple entities sub-
mitting bids in each area for an item or service. 
‘‘(5) PAYMENT.—Payment under this part for 
competitively priced items and services described in 
subsection (a)(2) shall be based on the bids submitted
263
and accepted under this section for such items and 
services. 
‘‘(6) PARTICIPATING
CONTRACTORS.—Payment 
shall not be made for items and services described in 
subsection (a)(2) furnished by a contractor and for 
which competition is conducted under this section un-
less—
‘‘(A) the contractor has submitted a bid for 
such items and services under this section; and 
‘‘(B) the Secretary has awarded a contract 
to the contractor for such items and services 
under this section. 
In this section, the term ‘bid’ means a request for a 
proposal for an item or service that includes the cost 
of the item or service, and where appropriate, any 
services that are attendant to the provision of the 
item or service. 
‘‘(7) CONSIDERATION
IN
DETERMINING
CAT-
EGORIES FOR BIDS.—The Secretary shall consider the 
similarity of the clinical efficiency and value of spe-
cific codes and products, including products that may 
provide a therapeutic advantage to beneficiaries, be-
fore delineating the categories and products that will 
be subject to bidding.
264
‘‘(8) AUTHORITY TO CONTRACT FOR EDUCATION, 
MONITORING, 
OUTREACH
AND
COMPLAINT
SERV-
ICES.—The Secretary may enter into a contract with 
an appropriate entity to address complaints from 
beneficiaries who receive items and services from an 
entity with a contract under this section and to con-
duct appropriate education of and outreach to such 
beneficiaries and monitoring quality of services with 
respect to the program. 
‘‘(c) PROGRAM
ADVISORY
AND
OVERSIGHT
COM-
MITTEE.—
‘‘(1) ESTABLISHMENT.—There is established a 
Program Advisory and Oversight Committee (herein-
after in this section referred to as the ‘Committee’). 
‘‘(2) MEMBERSHIP; 
TERMS.—The Committee 
shall consist of such members as the Secretary may 
appoint who shall serve for such term as the Secretary 
may specify. 
‘‘(3) DUTIES.—
‘‘(A) TECHNICAL
ASSISTANCE.—The Com-
mittee shall provide advice and technical assist-
ance to the Secretary with respect to the fol-
lowing functions: 
‘‘(i) The implementation of the pro-
gram under this section.
265
‘‘(ii) The establishment of requirements 
for collection of data. 
‘‘(iii) The development of proposals for 
efficient interaction among manufacturers 
and distributors of the items and services 
and providers and beneficiaries. 
‘‘(B) ADDITIONAL DUTIES.—The Committee 
shall perform such additional functions to assist 
the Secretary in carrying out this section as the 
Secretary may specify. 
‘‘(4) INAPPLICABILITY OF FACA.—The provisions 
of the Federal Advisory Committee Act (5 U.S.C. 
App.) shall not apply. 
‘‘(d) ANNUAL REPORTS.—The Secretary shall submit 
to Congress an annual management report on the programs 
under this section. Each such report shall include informa-
tion on savings, reductions in beneficiary cost-sharing, ac-
cess to and quality of items and services, and beneficiary 
satisfaction. 
‘‘(e) DEMONSTRATION PROJECT FOR CLINICAL LAB-
ORATORY SERVICES.—
‘‘(1) IN GENERAL.—The Secretary shall conduct 
a demonstration project on the application of com-
petitive acquisition under this section to clinical di-
agnostic laboratory tests—
266
‘‘(A) for which payment is otherwise made 
under section 1833(h) or 1834(d)(1) (relating to 
colorectal cancer screening tests); and 
‘‘(B) which are furnished by entities that 
did not have a face-to-face encounter with the in-
dividual. 
‘‘(2) TERMS
AND
CONDITIONS.—Such project 
shall be under the same conditions as are applicable 
to items and services described in subsection (a)(2). 
‘‘(3) REPORT.—The Secretary shall submit to 
Congress—
‘‘(A) an initial report on the project not 
later than December 31, 2005; and 
‘‘(B) such progress and final reports on the 
project after such date as the Secretary deter-
mines appropriate.’’. 
(b) CONFORMING AMENDMENTS.—
(1) DURABLE
MEDICAL
EQUIPMENT; 
ELIMI-
NATION
OF
INHERENT
REASONABLENESS
AUTHOR-
ITY.—Section 1834(a) (42 U.S.C. 1395m(a)) is 
amended—
(A) in paragraph (1)(B), by striking ‘‘The 
payment basis’’ and inserting ‘‘Subject to sub-
paragraph (E)(i), the payment basis’’;
267
(B) in paragraph (1)(C), by striking ‘‘This 
subsection’’ and inserting ‘‘Subject to subpara-
graph (E)(ii), this subsection’’; 
(C) by adding at the end of paragraph (1) 
the following new subparagraph: 
‘‘(E) APPLICATION OF COMPETITIVE ACQUI-
SITION; ELIMINATION
OF
INHERENT
REASON-
ABLENESS AUTHORITY.—In the case of covered 
items and services that are included in a com-
petitive acquisition program in a competitive ac-
quisition area under section 1847(a)—
‘‘(i) the payment basis under this sub-
section for such items and services furnished 
in such area shall be the payment basis de-
termined under such competitive acquisition 
program; and 
‘‘(ii) the Secretary may use informa-
tion on the payment determined under such 
competitive acquisition programs to adjust 
the payment amount otherwise recognized 
under subparagraph (B)(ii) for an area 
that is not a competitive acquisition area 
under section 1847 and in the case of such 
adjustment, paragraph (10)(B) shall not be 
applied.’’; and
268
(D) in paragraph (10)(B), by inserting ‘‘in 
an area and with respect to covered items and 
services for which the Secretary does not make a 
payment amount adjustment under paragraph 
(1)(E)’’ after ‘‘under this subsection’’. 
(2) OFF-THE-SHELF
ORTHOTICS; ELIMINATION 
OF
INHERENT
REASONABLENESS
AUTHORITY.—Sec-
tion 1834(h) (42 U.S.C. 1395m(h)) is amended—
(A) in paragraph (1)(B), by striking ‘‘and 
(E)’’ and inserting ‘‘, (E) , and (H)(i)’’; 
(B) in paragraph (1)(D), by striking ‘‘This 
subsection’’ and inserting ‘‘Subject to subpara-
graph (H)(ii), this subsection’’; 
(C) by adding at the end of paragraph (1) 
the following new subparagraph: 
‘‘(H) APPLICATION OF COMPETITIVE ACQUI-
SITION TO ORTHOTICS; ELIMINATION OF INHER-
ENT REASONABLENESS AUTHORITY.—In the case 
of orthotics described in paragraph (2)(B) of sec-
tion 1847(a) that are included in a competitive 
acquisition program in a competitive acquisition 
area under such section—
‘‘(i) the payment basis under this sub-
section for such orthotics furnished in such 
area shall be the payment basis determined
269
under such competitive acquisition pro-
gram; and 
‘‘(ii) the Secretary may use informa-
tion on the payment determined under such 
competitive acquisition programs to adjust 
the payment amount otherwise recognized 
under subparagraph (B)(ii) for an area 
that is not a competitive acquisition area 
under section 1847, and in the case of such 
adjustment, paragraphs (8) and (9) of sec-
tion 1842(b) shall not be applied.’’. 
(c) REPORT ON ACTIVITIES OF SUPPLIERS.—The Sec-
retary shall conduct a study to determine the extent to 
which (if any) suppliers of covered items of durable medical 
equipment that are subject to the competitive acquisition 
program under section 1847 of the Social Security Act, as 
amended by subsection (a), are soliciting physicians to pre-
scribe certain brands or modes of delivery of covered items 
based on profitability.
(d) GAO STUDY ON SAFE AND EFFECTIVE HOME IN-
FUSION AND INHALATION THERAPY; STANDARDS.—
(1) STUDY.—The Comptroller General of the 
United States shall conduct a study of the standards, 
professional services, and related functions necessary
270
for the provision of safe and effective home infusion 
therapy and home inhalation therapy. 
(2) REPORT.—Not later than May 1, 2004, the 
Comptroller General shall submit to Congress a report 
on the study conducted under paragraph (1). 
(3) USE OF FINDINGS IN DEVELOPING STAND-
ARDS.—In promulgating regulations to carry out sec-
tion 1847 of the Social Security Act, as amended by 
subsection (a), the Secretary shall ensure that quality 
standards developed under subsection (b)(2)(B) of 
such section reflect the findings of the Comptroller 
General set forth in the report under paragraph (2).
SEC. 303. COMPETITIVE ACQUISITION OF COVERED OUT-
PATIENT DRUGS AND BIOLOGICALS.
(a) ADJUSTMENT TO PHYSICIAN FEE SCHEDULE.—
(1) ADJUSTMENT
IN
PRACTICE
EXPENSE
REL-
ATIVE VALUE UNITS.—Section 1848(c)(2) (42 U.S.C. 
1395w–4(c)(2)) is amended—
(A) in subparagraph (B)—
(i) in clause (ii)(II), by striking ‘‘The 
adjustments’’ and inserting ‘‘Subject to 
clause (iv), the adjustments’’; and 
(ii) by adding at the end of subpara-
graph (B), the following new clause:
271
‘‘(iv) EXCEPTION
TO
BUDGET
NEU-
TRALITY.—The additional expenditures at-
tributable to clause (ii) of subparagraph 
(H) shall not be taken into account in ap-
plying clause (ii)(II) for 2005.’’; and 
(B) by adding at the end the following new 
subparagraph: 
‘‘(H) ADJUSTMENTS IN PRACTICE EXPENSE 
RELATIVE VALUE UNITS FOR 2005.—
‘‘(i) IN GENERAL.—As part of the an-
nual process of establishing the physician 
fee schedule under subsection (b) for 2005, 
the Secretary shall increase the practice ex-
pense relative value units for 2005 con-
sistent with clause (ii). 
‘‘(ii) USE OF SUPPLEMENTAL SURVEY 
DATA.—For 2005 for any specialty that 
submitted survey data that included ex-
penses for the administration of drugs and 
biologicals for which payment is made 
under section 1842(o) (or section 1847A), 
the Secretary shall use such supplemental 
survey data in carrying out this subpara-
graph insofar as they are collected and pro-
vided by entities and organizations con-
272
sistent with the criteria established by the 
Secretary pursuant to section 212(a) of the 
Medicare, Medicaid, and SCHIP Balanced 
Budget Refinement Act of 1999 and insofar 
as such data are submitted to the Secretary 
by December 31, 2004. 
‘‘(iii) SUBSEQUENT, BUDGET NEUTRAL 
ADJUSTMENTS
PERMITTED.—Nothing 
in 
this subparagraph shall be construed as pre-
venting the Secretary from providing for 
adjustments in practice expense relative 
value units under (and consistent with) 
subparagraph (B) for years after 2005. 
‘‘(iv) 
CONSULTATION.—Before 
pub-
lishing the notice of proposed rulemaking to 
carry out this subparagraph, the Secretary 
shall consult with the Comptroller General 
of the United States and with groups rep-
resenting the physician specialties involved. 
‘‘(v) TREATMENT AS CHANGE IN LAW 
AND REGULATION IN SUSTAINABLE GROWTH 
RATE DETERMINATION.—The enactment of 
subparagraph (B)(iv) and this subpara-
graph shall be treated as a change in law
273
for 
purposes 
of 
applying 
subsection 
(f)(2)(D).’’. 
(2) PROHIBITION OF ADMINISTRATIVE AND JUDI-
CIAL REVIEW.—Section 1848(i)(1) (42 U.S.C. 1395w–
4(i)(1)) is amended—
(A) by striking ‘‘and’’ at the end of subpara-
graph (D); 
(B) by striking the period at the end of subpara-
graph (E) and inserting ‘‘, and’’; and 
(C) by adding at the end the following new sub-
paragraph: 
‘‘(F) adjustments in practice expense rel-
ative value units for 2005 under subsection 
(c)(2)(H).’’. 
(3) TREATMENT
OF
OTHER
SERVICES
CUR-
RENTLY
IN
THE
NON-PHYSICIAN
WORK
POOL.—The 
Secretary shall make adjustments to the non-physi-
cian work pool methodology (as such term is used in 
the regulations promulgated by the Secretary in the 
Federal Register as of December 31, 2002) for deter-
mination of practice expense relative value units 
under the physician fee schedule described in section 
1848(c)(2)(C)(ii) of the Social Security Act so that 
the practice expense relative value units for services 
determined under such methodology are not dis-
274
proportionately reduced relative to the practice ex-
pense relative value units of other services not deter-
mined under such non-physician work pool method-
ology, as the result of amendments made by para-
graph (1).
(b) PAYMENT BASED ON COMPETITION.—Title XVIII 
is amended by inserting after section 1847 (42 U.S.C. 
1395w–3), as amended by section 302, the following new 
sections: 
‘‘COMPETITIVE ACQUISITION OF COVERED OUTPATIENT 
DRUGS AND BIOLOGICALS 
‘‘SEC. 1847A. (a) IMPLEMENTATION OF COMPETITIVE 
ACQUISITION.—
‘‘(1) IMPLEMENTATION OF PROGRAM.—
‘‘(A) IN GENERAL.—The Secretary shall es-
tablish and implement a competitive acquisition 
program under which—
‘‘(i) competitive acquisition areas are 
established throughout the United States for 
contract award purposes for acquisition of 
and payment for categories of covered out-
patient drugs and biologicals (as defined in 
paragraph (2)) under this part; 
‘‘(ii) each physician is given the op-
portunity annually to elect to obtain drugs
275
and biologicals under the program or under 
section 1847B; and 
‘‘(iii) each physician who elects to ob-
tain drugs and biologicals under the pro-
gram makes an annual selection under 
paragraph (5) of the contractor through 
which drugs and biologicals within a cat-
egory of drugs and biologicals will be ac-
quired and delivered to the physician under 
this part. 
‘‘(B) 
IMPLEMENTATION.—The 
Secretary 
shall implement the program so that the pro-
gram applies to—
‘‘(i) the oncology category beginning in 
2005; and 
‘‘(ii) the non-oncology category begin-
ning in 2006. 
This section shall not apply in the case of a phy-
sician who elects section 1847B to apply. 
‘‘(C) EXCLUSION
AUTHORITY.—The Sec-
retary may exclude covered outpatient drugs and 
biologicals (including a class of such drugs and 
biologicals) from the competitive bidding system 
under this section if the drugs or biologicals (or 
class) are not appropriate for competitive bid-
276
ding due to low volume of utilization by bene-
ficiaries under this part or a unique mode or 
method of delivery.
‘‘(2) 
COVERED
OUTPATIENT
DRUGS
AND 
BIOLOGICALS, CATEGORIES, PROGRAM DEFINED.—For 
purposes of this section—
‘‘(A) COVERED
OUTPATIENT
DRUGS
AND 
BIOLOGICALS DEFINED.—The term ‘covered out-
patient drugs and biologicals’ means drugs and 
biologicals to which section 1842(o) applies and 
which are not covered under section 1847 (relat-
ing to competitive acquisition for items of dura-
ble medical equipment). Such term does not in-
clude the following: 
‘‘(i) Blood clotting factors. 
‘‘(ii) Drugs and biologicals furnished 
to individuals in connection with the treat-
ment of end stage renal disease. 
‘‘(iii) Radiopharmaceuticals. 
‘‘(B) 2 CATEGORIES.—Each of the following 
shall be a separate category of covered outpatient 
drugs and biologicals, as identified by the Sec-
retary: 
‘‘(i) ONCOLOGY
CATEGORY.—A cat-
egory (in this section referred to as the ‘on-
277
cology category’) consisting of those covered 
outpatient drugs and biologicals that, as de-
termined by the Secretary, are typically 
primarily billed by oncologists or are other-
wise used to treat cancer. 
‘‘(ii) NON-ONCOLOGY
CATEGORIES.—
Such numbers of categories (in this section 
referred to as the ‘non-oncology categories’) 
consisting of covered outpatient drugs and 
biologicals not described in clause (i), and 
appropriate subcategories of such drugs and 
biologicals as the Secretary may specify. 
‘‘(C) 
PROGRAM.—The 
term 
‘program’ 
means the competitive acquisition program 
under this section. 
‘‘(D) 
COMPETITIVE
ACQUISITION
AREA; 
AREA.—The terms ‘competitive acquisition area’ 
and ‘area’ mean an appropriate geographic re-
gion established by the Secretary under the pro-
gram. 
‘‘(E) CONTRACTOR.—The term ‘contractor’ 
means an entity that has entered into a contract 
with the Secretary under this section. 
‘‘(3) APPLICATION OF PROGRAM PAYMENT METH-
ODOLOGY.—With respect to covered outpatient drugs
278
and biologicals which are supplied under the program 
in an area and which are prescribed by a physician 
who has not elected section 1847B to apply—
‘‘(A) the claim for such drugs and 
biologicals shall be submitted by the contractor 
that supplied the drugs and biologicals; 
‘‘(B) collection of amounts of any deductible 
and coinsurance applicable with respect to such 
drugs and biologicals shall be the responsibility 
of such contractor and shall not be collected un-
less the drug or biological is administered to the 
beneficiary involved; and 
‘‘(C) the payment under this section (and 
related coinsurance amounts) for such drugs and 
biologicals—
‘‘(i) shall be made only to such con-
tractor; 
‘‘(ii) shall be conditioned upon the ad-
ministration of such drugs and biologicals; 
and 
‘‘(iii) shall be based on the average of 
the bid prices for such drugs and biologicals 
in the area, as computed under subsection 
(d).
279
The Secretary shall provide a process for 
recoupment in the case in which payment is 
made for drugs and biologicals which were billed 
at the time of dispensing but which were not ac-
tually administered. 
‘‘(4) CONTRACT REQUIRED.—
‘‘(A) IN GENERAL.—Payment may not be 
made under this part for covered outpatient 
drugs and biologicals prescribed by a physician 
who has not elected section 1847B to apply with-
in a category and a competitive acquisition area 
with respect to which the program applies un-
less—
‘‘(i) the drugs or biologicals are sup-
plied by a contractor with a contract under 
this section for such category of drugs and 
biologicals and area; and 
‘‘(ii) the physician has elected such 
contractor under paragraph (5) for such 
category and area. 
‘‘(B) PHYSICIAN
CHOICE.—Subparagraph 
(A) shall not apply for a category of drugs for 
an area if the physician prescribing the covered 
outpatient drug in such category and area has
280
elected to apply section 1847B instead of this 
section.
‘‘(5) CONTRACTOR SELECTION PROCESS.—
‘‘(A) IN
GENERAL.—The Secretary shall 
provide a process for the selection of a con-
tractor, on an annual basis and in such exigent 
circumstances as the Secretary may provide and 
with respect to each category of covered out-
patient drugs and biologicals for an area, by 
physicians 
prescribing 
such 
drugs 
and 
biologicals in the area of the contractor under 
this section that will supply the drugs and 
biologicals within that category and area. Such 
selection shall also include the election described 
in section 1847B(a). 
‘‘(B) INFORMATION ON CONTRACTORS.—The 
Secretary shall make available to physicians on 
an ongoing basis, through a directory posted on 
the Department’s Internet website or otherwise 
and upon request, a list of the contractors under 
this section in the different competitive acquisi-
tion areas. 
‘‘(C) SELECTING PHYSICIAN DEFINED.—For 
purposes of this section, the term ‘selecting phy-
sician’ means, with respect to a contractor and
281
category and competitive acquisition area, a 
physician who has not elected section 1847B to 
apply and has selected to apply under this sec-
tion such contractor for such category and area. 
‘‘(b) PROGRAM REQUIREMENTS.—
‘‘(1) CONTRACT
FOR
COVERED
OUTPATIENT 
DRUGS AND BIOLOGICALS.—The Secretary shall con-
duct a competition among entities for the acquisition 
of a covered outpatient drug or biological within each 
HCPCS code within each category for each competi-
tive acquisition area. 
‘‘(2) CONDITIONS FOR AWARDING CONTRACT.—
‘‘(A) IN GENERAL.—The Secretary may not 
award a contract to any entity under the com-
petition conducted in a competitive acquisition 
area pursuant to paragraph (1) with respect to 
the acquisition of covered outpatient drugs and 
biologicals within a category unless the Secretary 
finds that the entity meets all of the following 
with respect to the contract period involved: 
‘‘(i) CAPACITY
TO
SUPPLY
COVERED 
OUTPATIENT DRUG OR BIOLOGICAL WITHIN 
CATEGORY.—
‘‘(I) IN GENERAL.—The entity has 
sufficient arrangements to acquire and
282
to deliver covered outpatient drugs and 
biologicals within such category in the 
area specified in the contract at the bid 
price specified in the contract for all 
physicians that may elect such entity. 
‘‘(II) 
SHIPMENT
METHOD-
OLOGY.—The entity has arrangements 
in effect for the shipment at least 5 
days each week of covered outpatient 
drugs and biologicals under the con-
tract and for the timely delivery (in-
cluding for emergency situations) of 
such drugs and biologicals in the area 
under the contract. 
‘‘(ii) QUALITY, 
SERVICE, 
FINANCIAL 
PERFORMANCE
AND
SOLVENCY
STAND-
ARDS.—The entity meets quality, service, fi-
nancial performance, and solvency stand-
ards specified by the Secretary, including—
‘‘(I) the establishment of proce-
dures for the prompt response and res-
olution of physician and beneficiary 
complaints and inquiries regarding the 
shipment of covered outpatient drugs 
and biologicals; and
283
‘‘(II) a grievance process for the 
resolution of disputes. 
‘‘(B) ADDITIONAL
CONSIDERATIONS.—The 
Secretary may refuse to award a contract under 
this section, and may terminate such a contract, 
with an entity based upon—
‘‘(i) the suspension or revocation, by 
the Federal Government or a State govern-
ment, of the entity’s license for the distribu-
tion of drugs or biologicals (including con-
trolled substances); or 
‘‘(ii) the exclusion of the entity under 
section 1128 from participation under this 
title. 
‘‘(C) APPLICATION OF MEDICARE PROVIDER 
OMBUDSMAN.—For provision providing for a 
program-wide Medicare Provider Ombudsman to 
review complaints, see section 1868(b), as added 
by section 923 of the Medicare Prescription Drug 
and Modernization Act of 2003. 
‘‘(3) AWARDING
MULTIPLE
CONTRACTS
FOR
A 
CATEGORY AND AREA.—In order to provide a choice 
of at least 2 contractors in each competitive acquisi-
tion area for a category of drugs and biologicals, the 
Secretary may limit (but not below 2) the number of
284
qualified entities that are awarded such contracts for 
any category and area. The Secretary shall select 
among qualified entities based on the following: 
‘‘(A) The bid prices for covered outpatient 
drugs and biologicals within the category and 
area. 
‘‘(B) Bid price for distribution of such 
drugs and biologicals. 
‘‘(C) Ability to ensure product integrity. 
‘‘(D) Customer service. 
‘‘(E) Past experience in the distribution of 
drugs and biologicals, including controlled sub-
stances. 
‘‘(F) Such other factors as the Secretary 
may specify. 
‘‘(4) TERMS OF CONTRACTS.—
‘‘(A) IN GENERAL.—A contract entered into 
with an entity under the competition conducted 
pursuant to paragraph (1) is subject to terms 
and conditions that the Secretary may specify 
consistent with this section. 
‘‘(B) PERIOD OF CONTRACTS.—A contract 
under this section shall be for a term of 2 years, 
but may be terminated by the Secretary or the 
entity with appropriate, advance notice.
285
‘‘(C) INTEGRITY OF DRUG AND BIOLOGICAL 
DISTRIBUTION SYSTEM.—The Secretary—
‘‘(i) shall require that for all drug and 
biological products distributed by a con-
tractor under this section be acquired di-
rectly from the manufacturer or from a dis-
tributor that has acquired the products di-
rectly from the manufacturer; and 
‘‘(ii) may require, in the case of such 
products that are particularly susceptible to 
counterfeit or diversion, that the contractor 
comply with such additional product integ-
rity safeguards as may be determined to be 
necessary. 
‘‘(D) IMPLEMENTATION OF ANTI-COUNTER-
FEITING, QUALITY, SAFETY, AND RECORD KEEP-
ING
REQUIREMENTS.—The Secretary shall re-
quire each contractor to implement (through its 
officers, agents, representatives, and employees) 
requirements relating to the storage and han-
dling of covered outpatient drugs and biologicals 
and for the establishment and maintenance of 
distribution 
records 
for 
such 
drugs 
and 
biologicals. A contract under this section may 
include requirements relating to the following:
286
‘‘(i) Secure facilities. 
‘‘(ii) Safe and appropriate storage of 
drugs and biologicals. 
‘‘(iii) Examination of drugs and 
biologicals received and dispensed. 
‘‘(iv) Disposition of damaged and out-
dated drugs and biologicals. 
‘‘(v) Record keeping and written poli-
cies and procedures. 
‘‘(vi) Compliance personnel. 
‘‘(E) COMPLIANCE WITH CODE OF CONDUCT 
AND FRAUD AND ABUSE RULES.—Under the con-
tract—
‘‘(i) the contractor shall comply with a 
code of conduct, specified or recognized by 
the Secretary, that includes standards relat-
ing to conflicts of interest; and 
‘‘(ii) the contractor shall comply with 
all applicable provisions relating to preven-
tion of fraud and abuse, including compli-
ance with applicable guidelines of the De-
partment of Justice and the Inspector Gen-
eral of the Department of Health and 
Human Services.
287
‘‘(F) DIRECT
DELIVERY
OF
DRUGS
AND 
BIOLOGICALS TO PHYSICIANS.—Under the con-
tract the contractor shall only supply covered 
outpatient drugs and biologicals directly to the 
selecting physicians and not directly to bene-
ficiaries, except under circumstances and settings 
where a beneficiary currently receives a drug or 
biological in the beneficiary’s home or other non-
physician office setting as the Secretary may 
provide. The contractor shall not deliver drugs 
and biologicals to a selecting physician except 
upon receipt of a prescription for such drugs and 
biologicals, and such necessary data as may be 
required by the Secretary to carry out this sec-
tion. This section permits a physician to submit 
a prescription for each individual treatment but 
does not change the physician’s flexibility in 
terms of writing a prescription for drugs for a 
single treatment or a course of treatment. 
‘‘(5) PERMITTING
ACCESS
TO
DRUGS
AND 
BIOLOGICALS.—The Secretary shall provide for the re-
imbursement at the average sales price under section 
1847B for drugs and biologicals if the physician dem-
onstrates all of the following:
288
‘‘(A) The drugs or biologicals are imme-
diately required. 
‘‘(B) The physician could not have reason-
ably anticipated the immediate requirement for 
the drugs or biologicals. 
‘‘(C) The contractor could not deliver to the 
physician the drugs or biologicals in a timely 
manner. 
‘‘(6) CONSTRUCTION.—Nothing in this section 
shall be construed as waiving applicable State re-
quirements relating to licensing of pharmacies.
‘‘(c) BIDDING PROCESS.—
‘‘(1) IN GENERAL.—In awarding a contract for 
a category of drugs and biologicals in an area under 
the program, the Secretary shall consider with respect 
to each entity seeking to be awarded a contract the 
prices bid to acquire and supply the covered out-
patient drugs and biologicals for that category and 
area and the other factors referred to in subsection 
(b)(3). 
‘‘(2) PRICES BID.—The prices bid by an entity 
under paragraph (1) shall be the prices in effect and 
available for the supply of contracted drugs and 
biologicals in the area through the entity for the con-
tract period.
289
‘‘(3) REJECTION OF CONTRACT OFFER.—The Sec-
retary shall reject the contract offer of an entity with 
respect to a category of drugs and biologicals for an 
area if the Secretary estimates that the prices bid, in 
the aggregate on average, would exceed 120 percent of 
the average sales price (as determined under section 
1847B).
‘‘(4) BIDDING
ON
A
NATIONAL
OR
REGIONAL 
BASIS.—Nothing in this section shall be construed as 
precluding a bidder from bidding for contracts in all 
areas of the United States or as requiring a bidder 
to submit a bid for all areas of the United States. 
‘‘(5) UNIFORMITY OF BIDS WITHIN AREA.—The 
amount of the bid submitted under a contract offer for 
any covered outpatient drug or biological for an area 
shall be the same for that drug or biological for all 
portions of that area. 
‘‘(6) CONFIDENTIALITY OF BIDS.—The provisions 
of subparagraph (D) of section 1927(b)(3) shall apply 
to a bid submitted in a contract offer for a covered 
outpatient drug or biological under this section in the 
same manner as it applies to information disclosed 
under such section, except that any reference—
290
‘‘(A) in that subparagraph to a ‘manufac-
turer or wholesaler’ is deemed a reference to a 
‘bidder’ under this section; 
‘‘(B) in that section to ‘prices charged for 
drugs’ is deemed a reference to a ‘bid’ submitted 
under this section; and 
‘‘(C) in clause (i) of that section to ‘this sec-
tion’, is deemed a reference to ‘part B of title 
XVIII’. 
‘‘(7) INCLUSION OF COSTS.—The bid price sub-
mitted in a contract offer for a covered outpatient 
drug or biological shall—
‘‘(A) include all costs related to the delivery 
of the drug or biological to the selecting physi-
cian (or other point of delivery); and 
‘‘(B) include the costs of dispensing (includ-
ing shipping) of such drug or biological and 
management fees, but shall not include any costs 
related to the administration of the drug or bio-
logical, or wastage, spillage, or spoilage. 
‘‘(8) PRICE
ADJUSTMENTS
DURING
CONTRACT 
PERIOD; 
DISCLOSURE
OF
COSTS.—Each contract 
awarded shall provide for—
‘‘(A) disclosure to the Secretary the contrac-
tor’s reasonable, net acquisition costs for periods
291
specified by the Secretary, not more often than 
quarterly, of the contract; and 
‘‘(B) appropriate price adjustments over the 
period of the contract to reflect significant in-
creases or decreases in a contractor’s reasonable, 
net acquisition costs, as so disclosed.
‘‘(d) COMPUTATION OF AVERAGE BID PRICES FOR A 
CATEGORY AND AREA.—
‘‘(1) IN GENERAL.—For each year or other con-
tract period for each covered outpatient drug or bio-
logical and area with respect to which a competition 
is conducted under the program, the Secretary shall 
compute an area average of the bid prices submitted, 
in contract offers accepted for the category and area, 
for that year or other contract period. 
‘‘(2) SPECIAL RULES.—The Secretary shall es-
tablish rules regarding the use under this section of 
the alternative payment amount provided under sec-
tion 1847B to the use of a price for specific covered 
outpatient drugs and biologicals in the following 
cases: 
‘‘(A) NEW
DRUGS
AND
BIOLOGICALS.—A 
covered outpatient drug or biological for which 
an average bid price has not been previously de-
termined.
292
‘‘(B) OTHER
CASES.—Such other excep-
tional cases as the Secretary may specify in reg-
ulations. 
‘‘(C) EXCLUSION
CASES.—A covered out-
patient drug or biological that has been excluded 
under subsection (a)(1)(C). 
Such alternative payment amount shall be based 
upon actual market price information and in no case 
shall it exceed the average sales price (as determined 
under section 1847B). 
‘‘(e) COINSURANCE.—
‘‘(1) IN GENERAL.—Coinsurance under this part 
with respect to a covered outpatient drug or biological 
for which payment is payable under this section shall 
be based on 20 percent of the payment basis under 
this section. 
‘‘(2) COLLECTION.—Such coinsurance shall be 
collected by the contractor that supplies the drug or 
biological 
involved 
and, 
subject 
to 
subsection 
(a)(3)(B), in the same manner as coinsurance is col-
lected for durable medical equipment under this part. 
‘‘(f) SPECIAL PAYMENT RULES.—
‘‘(1) IN GENERAL.—The Secretary may not pro-
vide for an adjustment to reimbursement for covered 
outpatient drugs and biologicals unless adjustments to
293
the practice expense payment adjustment are made on 
the basis of supplemental surveys under section 
1848(c)(2)(H)(ii) of the Social Security Act, as added 
by subsection (a)(1)(B). 
‘‘(B) USE
IN
EXCLUSION
CASES.—If the 
Secretary excludes a drug or biological (or class 
of 
drugs 
or 
biologicals) 
under 
subsection 
(a)(1)(D), the Secretary may provide for reim-
bursement to be made under this part for such 
drugs and biologicals (or class) using the pay-
ment methodology under section 1847B or other 
market based pricing system. 
‘‘(2) COORDINATION RULES.—The provisions of 
section 1842(h)(3) shall apply to a contractor with re-
spect to covered outpatients drugs and biologicals sup-
plied by that contractor in the same manner as they 
apply to a participating supplier. In order to admin-
ister this section, the Secretary may condition pay-
ment under this part to a person for the administra-
tion of a drug or biological supplied under this sec-
tion upon person’s provision of information on such 
administration. 
‘‘(3) APPLICATION
OF
REQUIREMENT
FOR
AS-
SIGNMENT.—For provision requiring assignment of
294
claims for covered outpatient drugs and biologicals, 
see section 1842(o)(3). 
‘‘(4) PROTECTION FOR BENEFICIARY IN CASE OF 
MEDICAL NECESSITY DENIAL.—For protection of bene-
ficiaries against liability in the case of medical neces-
sity determinations, see section 1842(b)(3)(B)(ii)(III). 
‘‘(5) PHYSICIAN ROLE IN APPEALS PROCESS.—
The Secretary shall establish a procedure under which 
a physician who prescribes a drug or biological for 
which payment is made under this section has appeal 
rights that are similar to those provided to a physi-
cian who prescribes durable medical equipment or a 
laboratory test. 
‘‘(g) ADVISORY COMMITTEE.—The Secretary shall es-
tablish an advisory committee that includes representatives 
of parties affected by the program under this section, in-
cluding physicians, specialty pharmacies, distributors, 
manufacturers, and beneficiaries. The committee shall ad-
vise the Secretary on issues relating to the effective imple-
mentation of this section. 
‘‘OPTIONAL USE OF AVERAGE SALES PRICE PAYMENT 
METHODOLOGY 
‘‘SEC. 1847B. (a) ELECTION AND IMPLEMENTATION.—
‘‘(1) ELECTION.—In connection with the annual 
election 
made 
by 
a 
physician 
under 
section 
1847A(a)(5), the physician may elect to apply this
295
section to the payment for covered outpatient drugs 
and biologicals instead of the payment methodology 
under section 1847A. 
‘‘(2) IMPLEMENTATION.—This section shall be 
implemented with respect to categories of covered out-
patient 
‘‘(3) 
COVERED
OUTPATIENT
DRUGS
AND 
BIOLOGICALS DEFINED.—For purposes of this section, 
the term ‘covered outpatient drugs and biologicals’ 
has the meaning given such term in section 
1847A(a)(2)(A). 
‘‘(b) COMPUTATION OF PAYMENT AMOUNT.—
‘‘(1) IN GENERAL.—If this section applies with 
respect to a covered outpatient drug or biological, the 
amount payable for the drug or biological (based on 
a minimum dosage unit) is, subject to applicable de-
ductible and coinsurance—
‘‘(A) in the case of a multiple source drug 
(as defined in subsection (c)(6)(C)), 112 percent 
of the amount determined under paragraph (3); 
or 
‘‘(B) in the case of a single source drug (as 
defined in subsection (c)(6)(D)), 112 percent of 
the amount determined under paragraph (4). 
‘‘(2) SPECIFICATION OF UNIT.—
296
‘‘(A) SPECIFICATION BY MANUFACTURER.—
The manufacturer of a covered outpatient drug 
or biological shall specify the unit associated 
with each National Drug Code as part of the 
submission 
of 
data 
under 
section 
1927(b)(3)(A)(iii). 
‘‘(B) UNIT DEFINED.—In this section, the 
term ‘unit’ means, with respect to a covered out-
patient drug or biological, the lowest identifiable 
quantity (such as a capsule or tablet, milligram 
of molecules, or grams) of the drug or biological 
that is dispensed, exclusive of any diluent with-
out reference to volume measures pertaining to 
liquids. 
‘‘(3) MULTIPLE
SOURCE
DRUG.—For all drug 
products included within the same multiple source 
drug, the amount specified in this paragraph is the 
volume-weighted average of the average sales prices 
reported under section 1927(b)(3)(A)(iii) computed as 
follows: 
‘‘(A) Compute the sum of the products (for 
each national drug code assigned to such drug 
products) of—
‘‘(i) the manufacturer’s average sales 
price (as defined in subsection (c)); and
297
‘‘(ii) the total number of units specified 
under paragraph (2) sold, as reported under 
section 1927(b)(3)(A)(iii). 
‘‘(B) Divide the sum computed under sub-
paragraph (A) by the sum of the total number 
of units under subparagraph (A)(ii) for all na-
tional drug codes assigned to such drug products. 
‘‘(4) SINGLE SOURCE DRUG.—The amount speci-
fied in this paragraph for a single source drug is the 
lesser of the following: 
‘‘(A) MANUFACTURER’S
AVERAGE
SALES 
PRICE.—The manufacturer’s average sales price 
for a national drug code, as computed using the 
methodology applied under paragraph (3). 
‘‘(B) 
WHOLESALE
ACQUISITION
COST 
(WAC).—The wholesale acquisition cost (as de-
fined in subsection (c)(6)(B)) reported for the 
single source drug. 
‘‘(5) BASIS FOR DETERMINATION.—The payment 
amount shall be determined under this subsection 
based on information reported under subsection (e) 
and without regard to any special packaging, label-
ing, or identifiers on the dosage form or product or 
package.
298
‘‘(6) STUDY
AND
AUTHORIZATION.—Not later 
than 2 years after the date of the enactment of this 
section, the Secretary shall conduct and complete a 
study on the adequacy of the payment rates provided 
under this subsection, taking into account the acquisi-
tion costs for the covered outpatient drugs and 
biologicals as well as provider-related costs, in rural 
and urban areas. The Secretary shall submit the re-
sults of such study to Congress. For calendar years 
after the date such results are submitted, the Sec-
retary may adjust the percentage specified in para-
graphs (1)(A) and (1)(B) based upon such results. 
‘‘(c) MANUFACTURER’S AVERAGE SALES PRICE.—
‘‘(1) IN GENERAL.—For purposes of this sub-
section, subject to paragraphs (2) and (3), the manu-
facturer’s ‘average sales price’ means, of a covered 
outpatient drug or biological for a NDC code for a 
calendar quarter for a manufacturer for a unit—
‘‘(A) the manufacturer’s total sales (as de-
fined by the Secretary in regulations for pur-
poses of section 1927(c)(1)) in the United States 
for such drug or biological in the calendar quar-
ter; divided by
299
‘‘(B) the total number of such units of such 
drug or biological sold by the manufacturer in 
such quarter. 
‘‘(2) CERTAIN SALES EXEMPTED FROM COMPUTA-
TION.—In calculating the manufacturer’s average 
sales price under this subsection, the following sales 
shall be excluded: 
‘‘(A) SALES EXEMPT FROM BEST PRICE.—
Sales exempt from the inclusion in the deter-
mination 
of 
‘best 
price’ 
under 
section 
1927(c)(1)(C)(i). 
‘‘(B) SALES
AT
NOMINAL
CHARGE.—Such 
other sales as the Secretary identifies by regula-
tion as sales to an entity that are nominal in 
price or do not reflect a market price paid by an 
entity to which payment is made under this sec-
tion. 
‘‘(3) SALE PRICE NET OF DISCOUNTS.—In calcu-
lating the manufacturer’s average sales price under 
this subsection, such price shall be determined taking 
into account volume discounts, prompt pay discounts, 
cash discounts, the free goods that are contingent on 
any purchase requirement, chargebacks, and rebates 
(other than rebates under section 1927), that result in 
a reduction of the cost to the purchaser. A rebate to
300
a payor or other entity that does not take title to a 
covered outpatient drug or biological shall not be 
taken into account in determining such price unless 
the manufacturer has an agreement with the payor or 
other entity under which the purchaser’s price for the 
drug or biological is reduced as a consequence of such 
rebate. 
‘‘(4) AUTHORITY TO DISREGARD AVERAGE SALES 
PRICE DURING FIRST QUARTER OF SALES.—In the 
case of a covered outpatient drug or biological during 
an initial period (not to exceed a full calendar quar-
ter) in which data on the prices for sales for the drug 
or biological is not available from the manufacturer 
to compute an average sales price for the drug or bio-
logical, the Secretary may determine the amount pay-
able under this section for the drug or biological with-
out considering the manufacturer’s average sales price 
of that manufacturer for that drug or biological. 
‘‘(5) FREQUENCY OF DETERMINATIONS.—
‘‘(A) 
IN
GENERAL
ON
A
QUARTERLY 
BASIS.—The manufacturer’s average sales price, 
for a covered outpatient drug or biological of a 
manufacturer, shall be determined by such man-
ufacturer under this subsection on a quarterly 
basis. In making such determination insofar as
301
there is a lag in the reporting of the information 
on rebates and chargebacks under paragraph (3) 
so that adequate data are not available on a 
timely basis, the manufacturer shall apply a 
methodology established by the Secretary based 
on a 12-month rolling average for the manufac-
turer to estimate costs attributable to rebates and 
chargebacks. 
‘‘(B) UPDATES
IN
RATES.—The payment 
rates under subsection (b)(1) and (b)(2)(A) shall 
be updated by the Secretary on a quarterly basis 
and shall be applied based upon the manufactur-
er’s average sales price determined for the most 
recent calendar quarter. 
‘‘(C) USE OF CONTRACTORS; IMPLEMENTA-
TION.—The Secretary may use a carrier, fiscal 
intermediary, or other contractor to determine 
the payment amount under subsection (b). Not-
withstanding any other provision of law, the 
Secretary may implement, by program memo-
randum or otherwise, any of the provisions of 
this section. 
‘‘(6) DEFINITIONS AND OTHER RULES.—In this 
section:
302
‘‘(A) MANUFACTURER.—The term ‘manufac-
turer’ means, with respect to a covered out-
patient drug or biological, the manufacturer (as 
defined in section 1927(k)(5)) whose national 
drug code appears on such drug or biological. 
‘‘(ii) WHOLESALE ACQUISITION COST.—The 
term ‘wholesale acquisition cost’ means, with re-
spect to a covered outpatient drug or biological, 
the manufacturer’s list price for the drug or bio-
logical to wholesalers or direct purchasers in the 
United States, not including prompt pay or 
other discounts, rebates or reductions in price, 
for the most recent month for which the informa-
tion is available, as reported in wholesale price 
guides or other publications of drug pricing 
data. 
‘‘(C) MULTIPLE SOURCE DRUG.—The term 
‘multiple source drug’ means, for a calendar 
quarter, a covered outpatient drug or biological 
for which there are 2 or more drug products 
which—
‘‘(i) are rated as therapeutically equiv-
alent (under the Food and Drug Adminis-
tration’s most recent publication of ‘Ap-
303
proved Drug Products with Therapeutic 
Equivalence Evaluations’), 
‘‘(ii) except as provided in subpara-
graph (E), are pharmaceutically equivalent 
and bioequivalent, as determined under sub-
paragraph (F) and as determined by the 
Food and Drug Administration, and 
‘‘(iii) are sold or marketed in the 
United States during the quarter. 
‘‘(D) SINGLE
SOURCE
DRUG.—The term 
‘single source drug’ means a covered outpatient 
drug or biological which is not a multiple source 
drug and which is produced or distributed under 
an original new drug application approved by 
the Food and Drug Administration, including a 
drug product marketed by any cross-licensed pro-
ducers or distributors operating under the new 
drug application, or which is a biological. 
‘‘(E) EXCEPTION
FROM
PHARMACEUTICAL 
EQUIVALENCE
AND
BIOEQUIVALENCE
REQUIRE-
MENT.—Subparagraph (C)(ii) shall not apply if 
the Food and Drug Administration changes by 
regulation the requirement that, for purposes of 
the publication described in subparagraph (C)(i), 
in order for drug products to be rated as thera-
304
peutically equivalent, they must be pharmaceuti-
cally equivalent and bioequivalent, as defined in 
subparagraph (F). 
‘‘(F) DETERMINATION OF PHARMACEUTICAL 
EQUIVALENCE AND BIOEQUIVALENCE.—For pur-
poses of this paragraph—
‘‘(i) drug products are pharmaceuti-
cally equivalent if the products contain 
identical amounts of the same active drug 
ingredient in the same dosage form and 
meet compendial or other applicable stand-
ards of strength, quality, purity, and iden-
tity; and 
‘‘(ii) drugs are bioequivalent if they do 
not present a known or potential bioequiva-
lence problem, or, if they do present such a 
problem, they are shown to meet an appro-
priate standard of bioequivalence. 
‘‘(G) INCLUSION OF VACCINES.—In apply-
ing provisions of section 1927 under this section, 
‘other than a vaccine’ is deemed deleted from sec-
tion 1927(k)(2)(B). 
‘‘(d) AUTHORITY TO USE ALTERNATIVE PAYMENT IN 
RESPONSE TO PUBLIC HEALTH EMERGENCY.—In the case 
of a public health emergency under section 319 of the Public
305
Health Service Act in which there is a documented inability 
to access covered outpatient drugs and biologicals, and a 
concomitant increase in the price, of a drug or biological 
which is not reflected in the manufacturer’s average sales 
price for one or more quarters, the Secretary may use the 
wholesale acquisition cost (or other reasonable measure of 
drug price) instead of the manufacturer’s average sales 
price for such quarters and for subsequent quarters until 
the price and availability of the drug or biological has sta-
bilized and is substantially reflected in the applicable man-
ufacturer’s average sales price. 
‘‘(e) REPORTS.—
‘‘(1) QUARTERLY REPORT ON AVERAGE SALES 
PRICE.—For requirements for reporting the manufac-
turer’s average sales price (and, if required to make 
payment, the manufacturer’s wholesale acquisition 
cost) for the covered outpatient drug or biological, see 
section 1927(b)(3). 
‘‘(2) ANNUAL REPORT TO CONGRESS.—The Sec-
retary shall submit to the Committees on Energy and 
Commerce and Ways and Means of the House of Rep-
resentatives and the Committee on Finance of the 
Senate an annual report on the operation of this sec-
tion and section 1847A. Such report shall include in-
formation on the following:
306
‘‘(A) Information on savings, reductions in 
cost-sharing, access to covered outpatient drugs 
and biologicals. 
‘‘(B) In the case of section 1847A, the range 
of choices of contractors available to providers, 
and beneficiary and provider satisfaction. 
‘‘(C) Trends in average sales price under 
subsection (b). 
‘‘(D) Administrative costs associated with 
compliance with this section. 
‘‘(E) Total value of payments made under 
this section. 
‘‘(F) Comparison of the average manufac-
turer price as applied under section 1927 for a 
covered outpatient drug or biological with the 
manufacturer’s average sales price for the drug 
or biological under this section. 
‘‘(f) RESTRICTION ON ADMINISTRATIVE AND JUDICIAL 
REVIEW.—There shall be no administrative or judicial re-
view under section 1869, section 1878, or otherwise, of de-
terminations of manufacturer’s average sales price under 
subsection (c).’’. 
(c) CONTINUATION OF PAYMENT METHODOLOGY FOR 
RADIOPHARMACEUTICALS.—Nothing in the amendments 
made by this section shall be construed as changing the pay-
307
ment methodology under part B of title XVIII of the Social 
Security Act for radiopharmaceuticals, including the use by 
carriers of invoice pricing methodology.
(d) CONFORMING AMENDMENTS.—
(1) IN GENERAL.—Section 1842(o) (42 U.S.C. 
1395u(o)) is amended—
(A) in paragraph (1), by inserting ‘‘, sub-
ject to section 1847A and 1847B,’’ before ‘‘the 
amount payable for the drug or biological’’; and 
(B) by adding at the end of paragraph (2) 
the following: ‘‘This paragraph shall not apply 
in the case of payment under section 1847A or 
1847B.’’. 
(2) NO CHANGE IN COVERAGE BASIS.—Section 
1861(s)(2)(A) (42 U.S.C. 1395x(s)(2)(A)) is amended 
by inserting ‘‘(or would have been so included but for 
the application of section 1847A or 1847B)’’ after 
‘‘included in the physicians’ bills’’. 
(3) 
PAYMENT.—Section 
1833(a)(1)(S) 
(42 
U.S.C. 1395l(a)(1)(S)) is amended by inserting ‘‘(or, 
if applicable, under section 1847A or 1847B)’’ after 
‘‘1842(o)’’. 
(4) CONSOLIDATED REPORTING OF PRICING IN-
FORMATION.—Section 1927 (42 U.S.C. 1396r–8) is 
amended—
308
(A) in subsection (a)(1), by inserting ‘‘or 
under part B of title XVIII’’ after ‘‘section 
1903(a)’’; 
(B) in subsection (b)(3)(A)—
(i) in clause (i), by striking ‘‘and’’ at 
the end; 
(ii) in clause (ii), by striking the pe-
riod and inserting ‘‘; and’’; and 
(iii) by adding at the end the following 
new clause: 
‘‘(iii) for calendar quarters beginning 
on or after April 1, 2004, in conjunction 
with reporting required under clause (i) 
and by national drug code (NDC)—
‘‘(I) the manufacturer’s average 
sales price (as defined in section 
1847B(c)) and the total number of 
units 
specified 
under 
section 
1847B(b)(2)(A); 
‘‘(II) if required to make payment 
under section 1847B, the manufactur-
er’s wholesale acquisition cost, as de-
fined in subsection (c)(6) of such sec-
tion; and
309
‘‘(III) information on those sales 
that were made at a nominal price or 
otherwise 
described 
in 
section 
1847B(c)(2)(B), which information is 
subject to audit by the Inspector Gen-
eral of the Department of Health and 
Human Services; 
for a covered outpatient drug or biological 
for which payment is made under section 
1847B.’’; 
(C) in subsection (b)(3)(B)—
(i) in the heading, by inserting ‘‘AND 
MANUFACTURER’S AVERAGE SALES PRICE’’ 
after ‘‘PRICE’’; and 
(ii) by inserting ‘‘and manufacturer’s 
average sales prices (including wholesale ac-
quisition cost) if required to make pay-
ment’’ after ‘‘manufacturer prices’’; and 
(D) in subsection (b)(3)(D)(i), by inserting 
‘‘and section 1847B’’ after ‘‘this section’’. 
(e) GAO STUDY.—
(1) STUDY.—The Comptroller General of the 
United States shall conduct a study to assess the im-
pact of the amendments made by this section on the 
delivery of services, including their impact on—
310
(A) 
beneficiary 
access 
to 
drugs 
and 
biologicals for which payment is made under 
part B of title XVIII of the Social Security Act; 
and 
(B) the site of delivery of such services. 
(2) REPORT.—Not later than 2 years after the 
year in which the amendment made by subsection 
(a)(1) first takes effect, the Comptroller General shall 
submit to Congress a report on the study conducted 
under paragraph (1). 
(f) MEDPAC RECOMMENDATIONS ON BLOOD CLOT-
TING FACTORS.—The Medicare Payment Advisory Commis-
sion shall submit to Congress, in its annual report in 2004, 
specific recommendations regarding a payment amount (or 
amounts) for blood clotting factors and its administration 
under the medicare program. 
(g) ESTABLISHMENT OF PHARMACEUTICAL MANAGE-
MENT FEE WHERE DRUGS PROVIDED THROUGH A CON-
TRACTOR.—Section 1848(a) (42 U.S.C. 1395w–4(a)) is 
amended by adding at the end the following new paragraph: 
‘‘(5) RECOGNITION
OF
PHARMACEUTICAL
MAN-
AGEMENT FEE IN CERTAIN CASES.—In establishing 
the fee schedule under this section, the Secretary shall 
provide for a separate payment with respect to physi-
cians’ services consisting of the unique administrative
311
and management costs associated with covered drugs 
and biologicals which are furnished to physicians 
through a contractor under section 1847A (compared 
with such costs if such drugs and biologicals were ac-
quired directly by such physicians).’’. 
(h) STUDY ON CODES FOR NON-ONCOLOGY CODES.—
(1) STUDY.—The Secretary shall conduct a study 
to determine the appropriateness of establishing and 
implementing separate CPT codes for non-oncology 
infusions that are based on the level of complexity of 
the administration and resource consumption. 
(2) REPORT.—Not later than 1 year after the 
date of the enactment of this Act, the Secretary shall 
submit a report to Congress on the study. To the ex-
tent the Secretary determines it to be appropriate, the 
Secretary may implement appropriate changes in the 
payment methodology for such codes. 
SEC. 304. DEMONSTRATION PROJECT FOR USE OF RECOV-
ERY AUDIT CONTRACTORS. 
(a) IN GENERAL.—The Secretary of Health and 
Human Services shall conduct a demonstration project 
under this section (in this section referred to as the 
‘‘project’’) to demonstrate the use of recovery audit contrac-
tors under the Medicare Integrity Program in identifying 
underpayments and overpayments and recouping overpay-
312
ments under the medicare program for services for which 
payment is made under part A or part B of title XVIII 
of the Social Security Act. Under the project—
(1) payment may be made to such a contractor 
on a contingent basis; 
(2) a percentage of the amount recovered may be 
retained by the Secretary and shall be available to the 
program management account of the Centers for 
Medicare & Medicaid Services; and 
(3) the Secretary shall examine the efficacy of 
such use with respect to duplicative payments, accu-
racy of coding, and other payment policies in which 
inaccurate payments arise. 
(b) SCOPE AND DURATION.—
(1) SCOPE.—The project shall cover at least 2 
States that are among the States with—
(A) the highest per capita utilization rates 
of medicare services, and 
(B) at least 3 contractors. 
(2) DURATION.—The project shall last for not 
longer than 3 years. 
(c) WAIVER.—The Secretary of Health and Human 
Services shall waive such provisions of title XVIII of the 
Social Security Act as may be necessary to provide for pay-
313
ment for services under the project in accordance with sub-
section (a). 
(d) QUALIFICATIONS OF CONTRACTORS.—
(1) IN GENERAL.—The Secretary shall enter into 
a recovery audit contract under this section with an 
entity only if the entity has staff that has the appro-
priate clinical knowledge of and experience with the 
payment rules and regulations under the medicare 
program or the entity has or will contract with an-
other entity that has such knowledgeable and experi-
enced staff. 
(2) INELIGIBILITY OF CERTAIN CONTRACTORS.—
The Secretary may not enter into a recovery audit 
contract under this section with an entity to the ex-
tent that the entity is a fiscal intermediary under sec-
tion 1816 of the Social Security Act (42 U.S.C. 
1395h), a carrier under section 1842 of such Act (42 
U.S.C. 1395u), or a Medicare Administrative Con-
tractor under section 1874A of such Act. 
(3) PREFERENCE
FOR
ENTITIES
WITH
DEM-
ONSTRATED PROFICIENCY WITH PRIVATE INSURERS.—
In awarding contracts to recovery audit contractors 
under this section, the Secretary shall give preference 
to those risk entities that the Secretary determines 
have demonstrated more than 3 years direct manage-
314
ment experience and a proficiency in recovery audits 
with private insurers or under the medicaid program 
under title XIX of such Act. 
(e) CONSTRUCTION RELATING TO CONDUCT OF INVES-
TIGATION OF FRAUD.—A recovery of an overpayment to a 
provider by a recovery audit contractor shall not be con-
strued to prohibit the Secretary or the Attorney General 
from investigating and prosecuting, if appropriate, allega-
tions of fraud or abuse arising from such overpayment. 
(f) REPORT.—The Secretary of Health and Human 
Services shall submit to Congress a report on the project 
not later than 6 months after the date of its completion. 
Such reports shall include information on the impact of the 
project on savings to the medicare program and rec-
ommendations on the cost-effectiveness of extending or ex-
panding the project.
TITLE IV—RURAL HEALTH CARE 
IMPROVEMENTS 
SEC. 401. ENHANCED DISPROPORTIONATE SHARE HOS-
PITAL (DSH) TREATMENT FOR RURAL HOS-
PITALS AND URBAN HOSPITALS WITH FEWER 
THAN 100 BEDS. 
(a) DOUBLING THE CAP.—
315
(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 be-
ginning on or after October 1, 2003, subject to subclause 
(II), there shall be substituted for the disproportionate share 
adjustment percentage otherwise determined under clause 
(iv) (other than subclause (I)) or under clause (viii), (x), 
(xi), (xii), or (xiii), the disproportionate share adjustment 
percentage determined under clause (vii) (relating to large, 
urban hospitals). 
‘‘(II) Under subclause (I), the disproportionate share 
adjustment percentage shall not exceed 10 percent for a hos-
pital that is not classified as a rural referral center under 
subparagraph (C).’’. 
(2) 
CONFORMING
AMENDMENTS.—Section 
1886(d)(5)(F) 
(42 
U.S.C. 
1395ww(d)(5)(F)) 
is 
amended—
(A) in each of subclauses (II), (III), (IV), 
(V), and (VI) of clause (iv), by inserting ‘‘subject 
to clause (xiv) and’’ before ‘‘for discharges occur-
ring’’; 
(B) in clause (viii), by striking ‘‘The for-
mula’’ and inserting ‘‘Subject to clause (xiv), the 
formula’’; and
316
(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 occurring on 
or after October 1, 2003.
SEC. 
402. 
IMMEDIATE 
ESTABLISHMENT 
OF 
UNIFORM 
STANDARDIZED 
AMOUNT 
IN 
RURAL 
AND 
SMALL URBAN AREAS. 
(a) IN GENERAL.—Section 1886(d)(3)(A) (42 U.S.C. 
1395ww(d)(3)(A)) is amended—
(1) in clause (iv), by inserting ‘‘and ending on 
or before September 30, 2003,’’ after ‘‘October 1, 
1995,’’; and 
(2) by redesignating clauses (v) and (vi) as 
clauses (vii) and (viii), respectively, and inserting 
after clause (iv) the following new clauses: 
‘‘(v) For discharges occurring in the fiscal year 
beginning on October 1, 2003, the average standard-
ized amount for hospitals located in areas other than 
a large urban area shall be equal to the average 
standardized amount for hospitals located in a large 
urban area.’’. 
(b) CONFORMING AMENDMENTS.—
317
(1) COMPUTING DRG-SPECIFIC RATES.—Section 
1886(d)(3)(D) 
(42 
U.S.C. 
1395ww(d)(3)(D)) 
is 
amended—
(A) in the heading, by striking ‘‘IN DIF-
FERENT AREAS’’; 
(B) in the matter preceding clause (i), by 
striking ‘‘, each of’’; 
(C) in clause (i)—
(i) in the matter preceding subclause 
(I), by inserting ‘‘for fiscal years before fis-
cal year 2004,’’ before ‘‘for hospitals’’; and 
(ii) in subclause (II), by striking 
‘‘and’’ after the semicolon at the end; 
(D) in clause (ii)—
(i) in the matter preceding subclause 
(I), by inserting ‘‘for fiscal years before fis-
cal year 2004,’’ before ‘‘for hospitals’’; and 
(ii) in subclause (II), by striking the 
period at the end and inserting ‘‘; and’’; 
and 
(E) by adding at the end the following new 
clause: 
‘‘(iii) for a fiscal year beginning after fiscal 
year 2003, for hospitals located in all areas, to 
the product of—
318
‘‘(I) 
the 
applicable 
standardized 
amount (computed under subparagraph 
(A)), reduced under subparagraph (B), and 
adjusted or reduced under subparagraph (C) 
for the fiscal year; and 
‘‘(II) the weighting factor (determined 
under paragraph (4)(B)) for that diagnosis-
related group.’’. 
(2) TECHNICAL CONFORMING SUNSET.—Section 
1886(d)(3) (42 U.S.C. 1395ww(d)(3)) is amended—
(A) in the matter preceding subparagraph 
(A), by inserting ‘‘, for fiscal years before fiscal 
year 1997,’’ before ‘‘a regional adjusted DRG 
prospective payment rate’’; and 
(B) in subparagraph (D), in the matter 
preceding clause (i), by inserting ‘‘, for fiscal 
years before fiscal year 1997,’’ before ‘‘a regional 
DRG prospective payment rate for each region,’’.
SEC. 403. ESTABLISHMENT OF ESSENTIAL RURAL HOSPITAL 
CLASSIFICATION. 
(a) CLASSIFICATION.—Section 1861(mm) (42 U.S.C. 
1395x(mm)) is amended—
(1) in the heading by adding ‘‘ESSENTIAL 
RURAL HOSPITALS’’ at the end; and
319
(2) by adding at the end the following new para-
graphs: 
‘‘(4)(A) The term ‘essential rural hospital’ means a 
subsection (d) hospital (as defined in section 1886(d)(1)(B)) 
that is located in a rural area (as defined for purposes of 
section 1886(d)), has more than 25 licensed acute care inpa-
tient beds, has applied to the Secretary for classification 
as such a hospital, and with respect to which the Secretary 
has determined that the closure of the hospital would sig-
nificantly diminish the ability of medicare beneficiaries to 
obtain essential health care services. 
‘‘(B) The determination under subparagraph (A) shall 
be based on the following criteria: 
‘‘(i) HIGH
PROPORTION
OF
MEDICARE
BENE-
FICIARIES RECEIVING CARE FROM HOSPITAL.—(I) A 
high percentage of such beneficiaries residing in the 
area of the hospital who are hospitalized (during the 
most recent year for which complete data are avail-
able) receive basic inpatient medical care at the hos-
pital. 
‘‘(II) For a hospital with more than 200 licensed 
beds, a high percentage of such beneficiaries residing 
in such area who are hospitalized (during such recent 
year) receive specialized surgical inpatient care at the 
hospital.
320
‘‘(III) Almost all physicians described in section 
1861(r)(1) in such area have privileges at the hospital 
and provide their inpatient services primarily at the 
hospital. 
‘‘(ii) SIGNIFICANT ADVERSE IMPACT IN ABSENCE 
OF HOSPITAL.—If the hospital were to close—
‘‘(I) there would be a significant amount of 
time needed for residents to reach emergency 
treatment, resulting in a potential significant 
harm to beneficiaries with critical illnesses or 
injuries; 
‘‘(II) there would be an inability in the 
community to stablize emergency cases for trans-
fers to another acute care setting, resulting in a 
potential for significant harm to medicare bene-
ficiaries; and 
‘‘(III) any other nearby hospital lacks the 
physical and clinical capacity to take over the 
hospital’s typical admissions. 
‘‘(C) In making such determination, the Secretary 
may also consider the following: 
‘‘(i) Free-standing ambulatory surgery centers, 
office-based oncology care, and imaging center services 
are insufficient in the hospital’s area to handle the 
outpatient care of the hospital.
321
‘‘(ii) Beneficiaries in nearby areas would be ad-
versely affected if the hospital were to close as the hos-
pital provides specialized knowledge and services to a 
network of smaller hospitals and critical access hos-
pitals. 
‘‘(iii) Medicare beneficiaries would have dif-
ficulty in accessing care if the hospital were to close 
as the hospital provides significant subsidies to sup-
port ambulatory care in local clinics, including men-
tal health clinics and to support post acute care. 
‘‘(iv) The hospital has a committment to provide 
graduate medical education in a rural area. 
‘‘(C) QUALITY
CARE.—The hospital inpatient 
score for quality of care is not less than the median 
hospital score for qualify of care for hospitals in the 
State, as established under standards of the utiliza-
tion and quality control peer review organization 
under part B of title XI or other quality standards 
recognized by the Secretary. 
A hospital classified as an essential rural hospital may not 
change such classification and a hospital so classified shall 
not be treated as a sole community hospital, medicare de-
pendent hospital, or rural referral center for purposes of 
section 1886.’’.
322
(b) PAYMENT BASED ON 102 PERCENT OF ALLOWED 
COSTS.—
(1) INPATIENT
HOSPITAL
SERVICES.—Section 
1886(d) (42 U.S.C. 1395ww(d)) is amended by add-
ing at the end the following: 
‘‘(11) In the case of a hospital classified as an essential 
rural hospital under section 1861(mm)(4) for a cost report-
ing period, the payment under this subsection for inpatient 
hospital services for discharges occurring during the period 
shall be based on 102 percent of the reasonable costs for such 
services. Nothing in this paragraph shall be construed as 
affecting the application or amount of deductibles or copay-
ments otherwise applicable to such services under part A 
or as waiving any requirement for billing for such serv-
ices.’’. 
(2) HOSPITAL OUTPATIENT SERVICES.—Section 
1833(t)(13) (42 U.S.C. 1395l(t)(13)) is amended by 
adding at the end the following new subparagraph: 
‘‘(B) SPECIAL RULE FOR ESSENTIAL RURAL 
HOSPITALS.—In the case of a hospital classified 
as an essential rural hospital under section 
1861(mm)(4) for a cost reporting period, the 
payment under this subsection for covered OPD 
services during the period shall be based on 102 
percent of the reasonable costs for such services.
323
Nothing in this subparagraph shall be construed 
as affecting the application or amount of 
deductibles or copayments otherwise applicable 
to such services under this part or as waiving 
any requirement for billing for such services.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to cost reporting periods beginning on 
or after October 1, 2004. 
SEC. 404. MORE FREQUENT UPDATE IN WEIGHTS USED IN 
HOSPITAL MARKET BASKET. 
(a) MORE FREQUENT UPDATES IN WEIGHTS.—After 
revising the weights used in the hospital market basket 
under section 1886(b)(3)(B)(iii) of the Social Security Act 
(42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the most current 
data available, the Secretary shall establish a frequency for 
revising such weights, including the labor share, in such 
market basket to reflect the most current data available 
more frequently than once every 5 years. 
(b) REPORT.—Not later than October 1, 2004, the Sec-
retary shall submit a report to Congress on the frequency 
established under subsection (a), including an explanation 
of the reasons for, and options considered, in determining 
such frequency.
324
SEC. 405. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL 
PROGRAM. 
(a) INCREASE IN PAYMENT AMOUNTS.—
(1) IN GENERAL.—Sections 1814(l), 1834(g)(1), 
and 1883(a)(3) (42 U.S.C. 1395f(l); 1395m(g)(1); 42 
U.S.C. 1395tt(a)(3)) are each amended by inserting 
‘‘equal to 102 percent of’’ before ‘‘the reasonable 
costs’’. 
(2) EFFECTIVE DATE.—The amendments made 
by paragraph (1) shall apply to payments for services 
furnished during cost reporting periods beginning on 
or after October 1, 2003. 
(b) COVERAGE OF COSTS FOR CERTAIN EMERGENCY 
ROOM ON-CALL PROVIDERS.—
(1) IN GENERAL.—Section 1834(g)(5) (42 U.S.C. 
1395m(g)(5)) is amended—
(A) in the heading—
(i) by inserting ‘‘CERTAIN’’ before 
‘‘EMERGENCY’’; and 
(ii) by striking ‘‘PHYSICIANS’’ and in-
serting ‘‘PROVIDERS’’; 
(B) by striking ‘‘emergency room physicians 
who are on-call (as defined by the Secretary)’’ 
and inserting ‘‘physicians, physician assistants, 
nurse practitioners, and clinical nurse specialists
325
who are on-call (as defined by the Secretary) to 
provide emergency services’’; and 
(C) by striking ‘‘physicians’ services’’ and 
inserting ‘‘services covered under this title’’. 
(2) EFFECTIVE DATE.—The amendment made by 
paragraph (1) shall apply with respect to costs in-
curred for services provided on or after January 1, 
2004. 
(c) MODIFICATION
OF
THE ISOLATION TEST
FOR 
COST-BASED CAH AMBULANCE SERVICES.—
(1) IN GENERAL.—Section 1834(l)(8) (42 U.S.C. 
1395m(l)), as added by section 205(a) of BIPA (114 
Stat. 2763A–482), is amended by adding at the end 
the following: ‘‘The limitation described in the matter 
following subparagraph (B) in the previous sentence 
shall not apply if the ambulance services are fur-
nished by such a provider or supplier of ambulance 
services who is a first responder to emergencies (as de-
termined by the Secretary).’’. 
(2) EFFECTIVE DATE.—The amendment made by 
paragraph (1) shall apply to ambulances services fur-
nished on or after the first cost reporting period that 
begins after the date of the enactment of this Act. 
(d) REINSTATEMENT OF PERIODIC INTERIM PAYMENT 
(PIP).—
326
(1) IN GENERAL.—Section 1815(e)(2) (42 U.S.C. 
1395g(e)(2)) is amended—
(A) in the matter before subparagraph (A), 
by inserting ‘‘, in the cases described in subpara-
graphs (A) through (D)’’ after ‘‘1986’’; and 
(B) by striking ‘‘and’’ at the end of sub-
paragraph (C); 
(C) by adding ‘‘and’’ at the end of subpara-
graph (D); and 
(D) by inserting after subparagraph (D) the 
following new subparagraph: 
‘‘(E) inpatient critical access hospital services;’’. 
(2) DEVELOPMENT OF ALTERNATIVE METHODS 
OF PERIODIC INTERIM PAYMENTS.—With respect to 
periodic interim payments to critical access hospitals 
for inpatient critical access hospital services under 
section 1815(e)(2)(E) of the Social Security Act, as 
added by paragraph (1), the Secretary shall develop 
alternative methods for such payments that are based 
on expenditures of the hospital. 
(3) REINSTATEMENT OF PIP.—The amendments 
made by paragraph (1) shall apply to payments 
made on or after January 1, 2004. 
(e) CONDITION FOR APPLICATION OF SPECIAL PHYSI-
CIAN PAYMENT ADJUSTMENT.—
327
(1) IN GENERAL.—Section 1834(g)(2) (42 U.S.C. 
1395m(g)(2)) is amended by adding after and below 
subparagraph (B) the following: 
‘‘The Secretary may not require, as a condition for 
applying subparagraph (B) with respect to a critical 
access hospital, that each physician providing profes-
sional services in the hospital must assign billing 
rights with respect to such services, except that such 
subparagraph shall not apply to those physicians who 
have not assigned such billing rights.’’. 
(2) EFFECTIVE DATE.—The amendment made by 
paragraph (1) shall be effective as if included in the 
enactment of section 403(d) of the Medicare, Med-
icaid, and SCHIP Balanced Budget Refinement Act 
of 1999 (113 Stat. 1501A–371). 
(f) FLEXIBILITY
IN
BED
LIMITATION
FOR
HOS-
PITALS.—Section 1820 (42 U.S.C. 1395i–4) is amended—
(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 fol-
lowing new paragraph: 
‘‘(3) INCREASE IN MAXIMUM NUMBER OF BEDS 
FOR
HOSPITALS
WITH
STRONG
SEASONAL
CENSUS 
FLUCTUATIONS.—
328
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (C), in the case of a hospital that dem-
onstrates that it meets the standards established 
under subparagraph (B) and has not made the 
election described in subsection (f)(2)(A), the bed 
limitations otherwise applicable under para-
graph (2)(B)(iii) and subsection (f) shall be in-
creased by 5 beds. 
‘‘(B) STANDARDS.—The Secretary shall 
specify standards for determining whether a crit-
ical access hospital has sufficiently strong sea-
sonal variations in patient admissions to justify 
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 provided 
under subsection (c)(3)(A).
329
‘‘(B) The limitations in numbers of beds under the first 
sentence of paragraph (1) are subject to adjustment under 
subsection (c)(3).’’. 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to designations made 
before, on, or after January 1, 2004. 
(g) ADDITIONAL 5-YEAR PERIOD OF FUNDING FOR 
GRANT PROGRAM.—
(1) IN GENERAL.—Section 1820(g) (42 U.S.C. 
1395i–4(g)) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(4) FUNDING.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), payment for grants made under this 
subsection during fiscal years 2004 through 2008 
shall be made from the Federal Hospital Insur-
ance Trust Fund. 
‘‘(B) ANNUAL AGGREGATE LIMITATION.—In 
no case may the amount of payment provided for 
under subparagraph (A) for a fiscal year exceed 
$25,000,000.’’. 
(2) CONFORMING
AMENDMENT.—Section 1820 
(42 U.S.C. 1395i–4) is amended by striking sub-
section (j).
330
SEC. 406. REDISTRIBUTION OF UNUSED RESIDENT POSI-
TIONS. 
(a) IN GENERAL.—Section 1886(h)(4) (42 U.S.C. 
1395ww(h)(4)) is amended—
(1) in subparagraph (F)(i), by inserting ‘‘subject 
to subparagraph (I),’’ after ‘‘October 1, 1997,’’; 
(2) in subparagraph (H)(i), by inserting ‘‘subject 
to subparagraph (I),’’ after ‘‘subparagraphs (F) and 
(G),’’; and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(I) REDISTRIBUTION
OF
UNUSED
RESI-
DENT POSITIONS.—
‘‘(i) REDUCTION IN LIMIT BASED ON 
UNUSED POSITIONS.—
‘‘(I) IN GENERAL.—If a hospital’s 
resident level (as defined in clause 
(iii)(I)) is less than the otherwise ap-
plicable resident limit (as defined in 
clause (iii)(II)) for each of the ref-
erence periods (as defined in subclause 
(II)), effective for cost reporting peri-
ods beginning on or after January 1, 
2004, the otherwise applicable resident 
limit shall be reduced by 75 percent of 
the difference between such limit and
331
the reference resident level specified in 
subclause (III) (or subclause (IV) if 
applicable). 
‘‘(II) REFERENCE
PERIODS
DE-
FINED.—In this clause, the term ‘ref-
erence periods’ means, for a hospital, 
the 3 most recent consecutive cost re-
porting periods of the hospital for 
which cost reports have been settled (or, 
if not, submitted) on or before Sep-
tember 30, 2002. 
‘‘(III) 
REFERENCE
RESIDENT 
LEVEL.—Subject to subclause (IV), the 
reference resident level specified in this 
subclause for a hospital is the highest 
resident level for the hospital during 
any of the reference periods. 
‘‘(IV) ADJUSTMENT
PROCESS.—
Upon the timely request of a hospital, 
the Secretary may adjust the reference 
resident level for a hospital to be the 
resident level for the hospital for the 
cost reporting period that includes 
July 1, 2003.
332
‘‘(V) AFFILIATION.—With respect 
to hospitals which are members of the 
same affiliated group (as defined by 
the 
Secretary 
under 
subparagraph 
(H)(ii)), the provisions of this section 
shall be applied with respect to such an 
affiliated group by deeming the affili-
ated group to be a single hospital. 
‘‘(ii) REDISTRIBUTION.—
‘‘(I) IN GENERAL.—The Secretary 
is authorized to increase the otherwise 
applicable resident limits for hospitals 
by an aggregate number estimated by 
the Secretary that does not exceed the 
aggregate reduction in such limits at-
tributable to clause (i) (without taking 
into account any adjustment under 
subclause (IV) of such clause). 
‘‘(II) EFFECTIVE
DATE.—No in-
crease under subclause (I) shall be per-
mitted or taken into account for a hos-
pital for any portion of a cost report-
ing period that occurs before July 1, 
2004, or before the date of the hos-
pital’s application for an increase
333
under this clause. No such increase 
shall be permitted for a hospital unless 
the hospital has applied to the Sec-
retary for such increase by December 
31, 2005. 
‘‘(III) CONSIDERATIONS IN REDIS-
TRIBUTION.—In determining for which 
hospitals the increase in the otherwise 
applicable resident limit is provided 
under subclause (I), the Secretary shall 
take into account the need for such an 
increase by specialty and location in-
volved, consistent with subclause (IV). 
‘‘(IV) PRIORITY FOR RURAL AND 
SMALL URBAN AREAS.—In determining 
for which hospitals and residency 
training programs an increase in the 
otherwise applicable resident limit is 
provided under subclause (I), the Sec-
retary shall first distribute the increase 
to programs of hospitals located in 
rural areas or in urban areas that are 
not large urban areas (as defined for 
purposes of subsection (d)) and to pro-
grams that have no other program of
334
the same specialty in the same state, 
on a first-come-first-served basis (as 
determined by the Secretary) based on 
a demonstration that the hospital will 
fill the positions made available under 
this clause and not to exceed an in-
crease of 25 full-time equivalent posi-
tions with respect to any hospital. 
‘‘(V) APPLICATION
OF
LOCALITY 
ADJUSTED
NATIONAL
AVERAGE
PER 
RESIDENT
AMOUNT.—With respect to 
additional residency positions in a 
hospital attributable to the increase 
provided under this clause, notwith-
standing any other provision of this 
subsection, the approved FTE resident 
amount is deemed to be equal to the lo-
cality adjusted national average per 
resident amount computed under sub-
paragraph (E) for that hospital. 
‘‘(VI) 
CONSTRUCTION.—Nothing 
in this clause shall be construed as per-
mitting the redistribution of reductions 
in residency positions attributable to 
voluntary reduction programs under
335
paragraph (6) or as affecting the abil-
ity of a hospital to establish new med-
ical 
residency 
training 
programs 
under subparagraph (H). 
‘‘(iii) RESIDENT LEVEL AND LIMIT DE-
FINED.—In this subparagraph: 
‘‘(I) RESIDENT LEVEL.—The term 
‘resident level’ means, with respect to a 
hospital, the total number of full-time 
equivalent residents, before the applica-
tion of weighting factors (as deter-
mined under this paragraph), in the 
fields of allopathic and osteopathic 
medicine for the hospital. 
‘‘(II) 
OTHERWISE
APPLICABLE 
RESIDENT LIMIT.—The term ‘otherwise 
applicable resident limit’ means, with 
respect to a hospital, the limit other-
wise applicable under subparagraphs 
(F)(i) and (H) on the resident level for 
the hospital determined without regard 
to this subparagraph.’’. 
(b) CONFORMING
AMENDMENT
TO
IME.—Section 
1886(d)(5)(B)(v) (42 U.S.C. 1395ww(d)(5)(B)(v)) is 
amended by adding at the end the following: ‘‘The provi-
336
sions of subparagraph (I) of subsection (h)(4) shall apply 
with respect to the first sentece of this clause in the same 
manner as it applies with respect to subparagraph (F) of 
such subsection.’’. 
(c) REPORT ON EXTENSION OF APPLICATIONS UNDER 
REDISTRIBUTION PROGRAM.—Not later than July 1, 2005, 
the Secretary shall submit to Congress a report containing 
recommendations regarding whether to extend the deadline 
for applications for an increase in resident limits under 
section 1886(h)(4)(I)(ii)(II) of the Social Security Act (as 
added by subsection (a)). 
SEC. 407. TWO-YEAR EXTENSION OF HOLD HARMLESS PRO-
VISIONS FOR SMALL RURAL HOSPITALS AND 
SOLE COMMUNITY HOSPITALS UNDER PRO-
SPECTIVE PAYMENT SYSTEM FOR HOSPITAL 
OUTPATIENT DEPARTMENT SERVICES. 
(a) HOLD HARMLESS PROVISIONS.—
(1) IN GENERAL.—Section 1833(t)(7)(D)(i) (42 
U.S.C. 1395l(t)(7)(D)(i)) is amended—
(A) in the heading, by striking ‘‘SMALL’’ 
and inserting ‘‘CERTAIN’’; 
(B) by inserting ‘‘or a sole community hos-
pital (as defined in section 1886(d)(5)(D)(iii)) 
located in a rural area’’ after ‘‘100 beds’’; and
337
(C) by striking ‘‘2004’’ and inserting 
‘‘2006’’. 
(2) EFFECTIVE DATE.—The amendment made by 
subsection (a)(2) shall apply with respect to payment 
for OPD services furnished on and after January 1, 
2004. 
(b) STUDY; ADJUSTMENT.—
(1) STUDY.—The Secretary shall conduct a study 
to determine if, under the prospective payment system 
for hospital outpatient department services under sec-
tion 1833(t) of the Social Security Act (42 U.S.C. 
1395l(t)), costs incurred by rural providers of services 
by ambulatory payment classification groups (APCs) 
exceed those costs incurred by urban providers of serv-
ices. 
(2) ADJUSTMENT.—Insofar as the Secretary de-
termines under paragraph (1) that costs incurred by 
rural providers exceed those costs incurred by urban 
providers of services, the Secretary shall provide for 
an appropriate adjustment under such section 1833(t) 
to reflect those higher costs by January 1, 2005.
338
SEC. 408. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC 
AND FEDERALLY QUALIFIED HEALTH CENTER 
SERVICES FROM THE PROSPECTIVE PAYMENT 
SYSTEM FOR SKILLED NURSING FACILITIES. 
(a) IN GENERAL.—Section 1888(e)(2)(A) (42 U.S.C. 
1395yy(e)(2)(A)) is amended—
(1) in clause (i)(II), by striking ‘‘clauses (ii) and 
(iii)’’ and inserting ‘‘clauses (ii), (iii), and (iv)’’; and 
(2) by adding at the end the following new 
clause: 
‘‘(iv) EXCLUSION OF CERTAIN RURAL 
HEALTH CLINIC AND FEDERALLY QUALIFIED 
HEALTH
CENTER
SERVICES.—Services de-
scribed in this clause are—
‘‘(I) rural health clinic services 
(as defined in paragraph (1) of section 
1861(aa)); and 
‘‘(II) Federally qualified health 
center services (as defined in para-
graph (3) of such section); 
that would be described in clause (ii) if such 
services were not furnished by an individual 
affiliated with a rural health clinic or a 
Federally qualified health center.’’.
339
(b) EFFECTIVE DATE.—The amendments made by sub-
section (a) shall apply to services furnished on or after Jan-
uary 1, 2004. 
SEC. 409. RECOGNITION OF ATTENDING NURSE PRACTI-
TIONERS AS ATTENDING PHYSICIANS TO 
SERVE HOSPICE PATIENTS. 
(a) IN GENERAL.—Section 1861(dd)(3)(B) (42 U.S.C. 
1395x(dd)(3)(B)) is amended by inserting ‘‘or nurse practi-
tioner (as defined in subsection (aa)(5))’’ after ‘‘the physi-
cian (as defined in subsection (r)(1))’’. 
(b) PROHIBITION ON NURSE PRACTITIONER CERTI-
FYING NEED FOR HOSPICE.—Section 1814(a)(7)(A)(i)(I) 
(42 U.S.C. 1395f(a)(7)(A)(i)(I)) is amended by inserting 
‘‘(which for purposes of this subparagraph does not include 
a nurse practitioner)’’ after ‘‘attending physician (as de-
fined in section 1861(dd)(3)(B))’’. 
SEC. 410. IMPROVEMENT IN PAYMENTS TO RETAIN EMER-
GENCY CAPACITY FOR AMBULANCE SERVICES 
IN RURAL AREAS. 
Section 1834(l) (42 U.S.C. 1395m(l)) is amended—
(1) by redesignating paragraph (8), as added by 
section 221(a) of BIPA (114 Stat. 2763A–486), as 
paragraph (9); and 
(2) by adding at the end the following new para-
graph:
340
‘‘(10) ASSISTANCE FOR RURAL PROVIDERS FUR-
NISHING SERVICES IN LOW MEDICARE POPULATION 
DENSITY AREAS.—
‘‘(A) IN GENERAL.—In the case of ground 
ambulance services furnished on or after Janu-
ary 1, 2004, for which the transportation origi-
nates in a qualified rural area (as defined in 
subparagraph (B)), the Secretary shall provide 
for an increase in the base rate of the fee sched-
ule for mileage for a trip established under this 
subsection. In establishing such increase, the Sec-
retary shall, based on the relationship of cost 
and volume, estimate the average increase in cost 
per trip for such services as compared with the 
cost per trip for the average ambulance service. 
‘‘(B) QUALIFIED RURAL AREA DEFINED.—
For purposes of subparagraph (A), the term 
‘qualified rural area’ is a rural area (as defined 
in section 1886(d)(2)(D)) with a population den-
sity of medicare beneficiaries residing in the 
area that is in the lowest quartile of all rural 
county populations.’’.
341
SEC. 411. 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 amend-
ed—
(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 described 
under clause (i) or (ii) of section 1905(l)(2)(B) 
and any individual or entity providing goods, 
items, services, donations or loans, or a combina-
tion thereof, to such health center entity pursu-
ant to a contract, lease, grant, loan, or other 
agreement, if such agreement contributes to the 
ability of the health center entity to maintain or 
increase the availability, or enhance the quality, 
of services provided to a medically underserved 
population served by the health center entity.’’. 
(b) RULEMAKING FOR EXCEPTION FOR HEALTH CEN-
TER ENTITY ARRANGEMENTS.—
342
(1) ESTABLISHMENT.—
(A) IN GENERAL.—The Secretary of Health 
and Human Services (in this subsection referred 
to as the ‘‘Secretary’’) shall establish, on an ex-
pedited basis, standards relating to the exception 
described in section 1128B(b)(3)(H) of the Social 
Security Act, as added by subsection (a), for 
health 
center 
entity 
arrangements 
to 
the 
antikickback penalties. 
(B) FACTORS TO CONSIDER.—The Secretary 
shall consider the following factors, among oth-
ers, in establishing standards relating to the ex-
ception for health center entity arrangements 
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 enti-
ty. 
(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 between 
the health center entity and the other party
343
protects a health care professional’s inde-
pendent medical judgment regarding medi-
cally appropriate treatment. 
The Secretary may also include other standards 
and criteria that are consistent with the intent 
of Congress in enacting the exception established 
under this section. 
(2) INTERIM FINAL EFFECT.—No later than 180 
days after the date of enactment of this Act, the Sec-
retary shall publish a rule in the Federal Register 
consistent with the factors under paragraph (1)(B). 
Such rule shall be effective and final immediately 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 comment, as is 
consistent with this subsection. 
SEC. 412. 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—
344
(1) an assessment of the validity of the geo-
graphic adjustment factors used for each component of 
the fee schedule; 
(2) an evaluation of the measures used for such 
adjustment, including the frequency of revisions; and 
(3) an evaluation of the methods used to deter-
mine professional liability insurance costs used in 
computing the malpractice component, including a 
review of increases in professional liability insurance 
premiums and variation in such increases by State 
and physician specialty and methods used to update 
the geographic cost of practice index and relative 
weights for the malpractice component. 
(b) REPORT.—Not later than 1 year after the date of 
the enactment of this Act, the Comptroller General shall 
submit to Congress a report on the study conducted under 
subsection (a). The report shall include recommendations 
regarding the use of more current data in computing geo-
graphic cost of practice indices as well as the use of data 
directly representative of physicians’ costs (rather than 
proxy measures of such costs).
345
SEC. 413. TREATMENT OF MISSING COST REPORTING PERI-
ODS FOR SOLE COMMUNITY HOSPITALS. 
(a) IN GENERAL.—Section 1886(b)(3)(I) (42 U.S.C. 
1395ww(b)(3)(I)) is amended by adding at the end the fol-
lowing new clause: 
‘‘(iii) In no case shall a hospital be denied treatment 
as a sole community hospital or payment (on the basis of 
a target rate as such as a hospital) because data are un-
available for any cost reporting period due to changes in 
ownership, changes in fiscal intermediaries, or other ex-
traordinary circumstances, so long as data for at least one 
applicable base cost reporting period is available.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to cost reporting periods beginning 
on or after January 1, 2004. 
SEC. 414. EXTENSION OF TELEMEDICINE DEMONSTRATION 
PROJECT. 
Section 4207 of Balanced Budget Act of 1997 (Public 
Law 105–33) is amended—
(1) in subsection (a)(4), by striking ‘‘4-year’’ 
and inserting ‘‘8-year’’; and 
(2) 
in 
subsection 
(d)(3), 
by 
striking 
‘‘$30,000,000’’ and inserting ‘‘$60,000,000’’.
346
SEC. 415. TWO-YEAR INCREASE FOR HOME HEALTH SERV-
ICES FURNISHED IN A RURAL AREA. 
(a) IN GENERAL.—In the case of home health services 
furnished in a rural area (as defined in section 
1886(d)(2)(D) of the Social Security Act (42 U.S.C. 
1395ww(d)(2)(D))) during 2004 and 2005, the Secretary 
shall increase the payment amount otherwise made under 
section 1895 of such Act (42 U.S.C. 1395fff ) for such serv-
ices by 5 percent. 
(b) WAIVING BUDGET NEUTRALITY.—The Secretary 
shall not reduce the standard prospective payment amount 
(or amounts) under section 1895 of the Social Security Act 
(42 U.S.C. 1395fff ) applicable to home health services fur-
nished during a period to offset the increase in payments 
resulting from the application of subsection (a).
TITLE V—PROVISIONS RELATING 
TO PART A 
Subtitle A—Inpatient Hospital 
Services 
SEC. 501. REVISION OF ACUTE CARE HOSPITAL PAYMENT 
UPDATES. 
Section 
1886(b)(3)(B)(i) 
(42 
U.S.C. 
1395ww(b)(3)(B)(i)) is amended—
(1) by striking ‘‘and’’ at the end of subclause 
(XVIII); 
(2) by striking subclause (XIX); and
347
(3) by inserting after subclause (XVIII) the fol-
lowing new subclauses: 
‘‘(XIX) for each of fiscal years 2004 through 
2006, the market basket percentage increase minus 0.4 
percentage points for hospitals in all areas; and 
‘‘(XX) for fiscal year 2007 and each subsequent 
fiscal year, the market basket percentage increase for 
hospitals in all areas.’’.
SEC. 502. RECOGNITION OF NEW MEDICAL TECHNOLOGIES 
UNDER INPATIENT HOSPITAL PPS. 
(a) IMPROVING TIMELINESS OF DATA COLLECTION.—
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 subparagraph, 
the Secretary shall provide for the addition of new diagnosis 
and procedure codes in April 1 of each year, but the addi-
tion of such codes shall not require the Secretary to adjust 
the payment (or diagnosis-related group classification) 
under this subsection until the fiscal year that begins after 
such date.’’. 
(b) 
ELIGIBILITY
STANDARD
FOR
TECHNOLOGY 
OUTLIERS.—
(1) MINIMUM PERIOD FOR RECOGNITION OF NEW 
TECHNOLOGIES.—Section 
1886(d)(5)(K)(vi) 
(42 
U.S.C. 1395ww(d)(5)(K)(vi)) is amended—
348
(A) by inserting ‘‘(I)’’ after ‘‘(vi)’’; and 
(B) by adding at the end the following new 
subclause: 
‘‘(II) Under such criteria, a service or technology shall 
not be denied treatment as a new service or technology on 
the basis of the period of time in which the service or tech-
nology has been in use if such period ends before the end 
of the 2-to-3-year period that begins on the effective date 
of implementation of a code under ICD–9–CM (or a suc-
cessor coding methodology) that enables the identification 
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 75 percent of one standard deviation for the diag-
nosis-related group involved)’’ after ‘‘is inadequate’’. 
(3) CRITERION
FOR
SUBSTANTIAL
IMPROVE-
MENT.—Section 
1886(d)(5)(K)(vi) 
(42 
U.S.C. 
1395ww(d)(5)(K)(vi)), as amended by paragraph (1), 
is further amended by adding at the end the following 
subclause: 
‘‘(III) The Secretary shall by regulation provide for 
further clarification of the criteria applied to determine
349
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 represents 
an advance in medical technology that substantially im-
proves the diagnosis or treatment of beneficiaries, the Sec-
retary shall deem a service or technology as meeting such 
requirement if the service or technology is a drug or biologi-
cal that is designated under section 506 of the Federal Food, 
Drug, and Cosmetic Act, approved under section 314.510 
or 601.41 of title 21, Code of Federal Regulations, or des-
ignated for priority review when the marketing application 
for such drug or biological was filed or is a medical device 
for which an exemption has been granted under section 
520(m) of such Act, or for which priority review has been 
provided under section 515(d)(5) of such Act. Nothing in 
this subclause shall be construed as effecting the authority 
of the Secretary to determine whether items and services 
are medically necessary and appropriate under section 
1862(a)(1).’’. 
(4) PROCESS
FOR
PUBLIC
INPUT.—Section 
1886(d)(5)(K) (42 U.S.C. 1395ww(d)(5)(K)), as 
amended by paragraph (1), is amended—
350
(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 pro-
posed 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 technology that 
substantially improves the diagnosis or treatment of bene-
ficiaries 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 substan-
tial 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, rec-
ommendations, and data to the clinical staff of the