Medicare Fee-for-Service Modifications and Medicaid Provisions of H.R. 1 as Enacted
Released: 2004-01-16T00:00:00

Summary:
On November 22, the House of Representatives voted 220 to 215 to approve the conference report on H.R. 1 , the Medicare Prescription Drug, Improvement, and Modernization Actof 2003. The Senate, on November 24, voted 54 to 44 to approve the conference report. Earlier, theconferees of the Medicare prescription drug and modernization legislation announced an agreementon November 16 and the legislative text was released November 20. The legislative language canbe downloaded from the House Committee on Ways and Means website at: http://waysandmeans.house.gov . The bill was signed into law by the President on December 8,2003.
As well as establishing a prescription drug benefit for Medicare beneficiaries, the legislation contains provisions that involving significant payment increases, payment reductions, an expansionof covered benefits, new demonstration projects and new beneficiary cost-sharing provisions for thetraditional Medicare fee-for-service (FFS) program. The bill includes a measure that would requirecongressional consideration of legislation if general revenue funding for the entire Medicare programexceeds 45%. Provisions affecting the State Childrens' Health Insurance Program (SCHIP) andMedicaid programs are included in the legislation as well.
Earlier this year, under Congress' FY2004 budget resolution, $400 billion was reserved for Medicare modernization, creation of a prescription drug benefit, and, in the Senate, to promotegeographic equity payment. The Congressional Budget Office (CBO) has estimated that thelegislation for H.R. 1 would increase direct (or mandatory) spending by $394.3 billionfrom FY2004 through FY2013. Prescription drug spending is estimated at $409.8 billion over the10-year period and Medicare Advantage spending at $14.2 billion. Overall, the fee-for-serviceprovisions which change traditional Medicare are estimated to save $21.5 billion over the 10-yearperiod and adjusting the Part B premium to beneficiaries' income is estimated to save $13.3 billionover the period. Some fee-for-service provisions will increase spending over this 10-year periodincluding the provisions affecting hospitals and physician. Other fee-for-service provisions areprojected to save money over the period including those affecting durable medical equipment,clinical laboratories and home health agencies. The CBO estimate is available on the CBO websiteat ftp://ftp.cbo.gov/48xx/doc4808/11-20-MedicareLetter.pdf .

subsections: section_title: Changes to Medicare's Fee for Service Program
paragraphs: The legislation contains extensive changes to Medicare's FFS program, including paymentincreases and, in certain instances, decreases; development of competitive acquisition programs;implementation or refinement of other prospective payment systems (notably, the development ofan end-stage renal disease (ESRD) basic payment system); expansion of covered preventive benefits;establishment of demonstration programs; and required studies. The anticipated financial impactof these changes on any individual provider, physician, or supplier will vary depending on manyfactors, such as the unique characteristics of the individual or entity participating in Medicare as wellas the number and type of services provided to the Medicare beneficiaries they serve. Selectedhighlights of the FFS payment provisions and those establishing preventive care benefits anddemonstration programs will be briefly described.
Selected Rural Provider Provisions.
Generally, Medicare payments to certain rural providers are expected to increase; many of the rural provisions will benefit urban providers as well. CBO estimates that the rural provisions in TitleIV of the bill will increase Medicare's direct spending by $9.3 billion from 2004 through 2008 andby $19.9 billion from 2004 though 2013. It should be noted that other provider payment provisionsin H.R. 1 can impact rural providers, but their effect on Medicare payments to ruralproviders has not been specifically identified. 
Hospitals in rural areas and those in small urban areas will receive a permanent 1.6% increase to Medicare's base rate or per discharge payment; the payment limit for rural andsmall urban hospitals that qualify for disproportionate share hospital (DSH) adjustment will increasefrom 5.25% to 12%; hospitals in low-wage areas (those with wage index values below 1) willreceive additional payments through a decrease from 71% to 62% in the labor-related portion of thebase payment rate; and small rural hospitals with less than 50 beds will receive cost reimbursementfor outpatient clinical laboratory tests. In addition, rural hospitals with less than 100 beds will beprotected from payment declines associated with the hospital outpatient prospective payment system(OPPS) for an additional 2 years; these OPPS hold harmless provisions will be extended to solecommunity hospitals for services from 2004 through 2006. CBO estimates that these provisions willincrease direct Medicare spending by $15.6 billion over the 10-year period.
Critical access hospitals (CAHs) will have their bed limit increased from15to 25; there will be no restriction on the number of these beds that can be used for acute care servicesat any one time. CAHs will be able to establish distinct part rehabilitation and psychiatric units ofup to 10 beds that will not be included in the CAH bed count. Cost reimbursement of CAH serviceswill increase to 101% of reasonable costs, starting January 1, 2004. Periodic interim payments forCAHs will be authorized. State authority to waive the 35-mile requirement for new entities toqualify as a CAH will be eliminated as of January 1, 2006. CBO estimates that these provisions willincrease direct Medicare spending by $900 million over the 10-year period. 
Physicians in newly established scarcity areas will receive a 5% increase inMedicare payments. Physicians in certain low-cost areas with geographic adjustment factors below1 will receive payment increases so as to increase this factor to 1, starting in 2004 through 2006. CBO estimates that these provisions will increase direct Medicare spending by $1.7 billion over the10-year period.
Practitioners in rural health clinics and federally qualified health centers willbe able to bill separately for services provided to beneficiaries in skilled nursing facilities. CBOestimates that these provisions will increase direct Medicare spending by $100 million over the10-year period.
Home health providers in rural areas will receive a 5% increase in Medicarepayments for one year beginning April 1, 2004. CBO estimates that this one-year increase willincrease direct Medicare spending by $100 million over the 10-year period. 
Selected Acute Hospital Provisions.
Generally, Medicare payments to hospitals will increase under the conference report. Specifically, 
Acute hospitals paid under the inpatient prospective payment system (IPPS) will receive the full increase in the market basket (MB) index as an update in 2004. From 2005through 2007, hospitals that submit data on specified quality indicators will receive the MB as anupdate; those hospitals that do not submit such data will receive the MB minus 0.4 percentage pointsfor the year in question. CBO expects that this provision will reduce direct spending 0.2 billion from2004 through 2008. 
Teaching hospitals will receive an increase in their indirect medical educationadjustment from 2004 through 2006 that CBO projects will increase spending by $400 million. 
A one-time, geographic reclassification process to increase hospitals' wageindex values for 3 years that is expected to increase payments by $900 million from 2004 through2008 is established. 
Low volume hospitals with fewer than 800 discharges that are 25 road milesaway from similar hospitals may qualify for up to a 25% increase in Medicare payments for anexpected cost of $100 million from 2004-2013. 
Changes in payment methods for covered prescription drugs provided inoutpatient hospital departments is expected to increase payments by $700 million from FY2004through FY2008.
A redistribution of unused resident positions will increase both direct andindirect graduate medical education spending by an anticipated $200 million from FY2004 thoughtFY2008 and by $600 million from FY2004 through FY2013. 
Certain teaching hospitals with high per resident payments will not receive apayment increase from FY2004 through FY2013; this provision was scored by CBO as a reductionin Medicare spending of $500 million from FY2004 through FY2008 and $1.3 billion from FY2004through FY2013. 
For 18 months from the date of enactment, physicians will not be able to referMedicare patients to specialty hospitals in which they have an investment interest. This provisionwill not apply to hospitals that are in operation or under development before November 18, 2003. Both MedPAC and HHS are to complete required studies on specialty hospitals within 15 monthsof enactment.
Selected Physician Provisions.
The impact of the legislation on Medicare's spending for physician spending is difficult to determine. Although physicians will receive a 1.5% update in 2004 and 2005 which is expected toincrease spending by $2.8 billion from FY2004 through FY2007; subsequently, from FY2008through FY2012, the provision is expected to result in a decline of $2.8 billion in Medicarespending. Over the 10 year period from 2004 through 2013, CBO expects the update provisions toincrease Medicare spending by $200 million.
Medicare's payments for some practice expenses, particularly the administration of covered drugs, will increase starting in 2004. A transitional adjustment to the drug administration paymentsof 32% in 2004 and 3% in 2005 is also established. These payment increases are expected to becounterbalanced by a decrease in Medicare's payments for covered outpatient drugs provided in adoctor's office. 
Medicare's payment for covered outpatient drugs furnished incident to a physician's service will change during 2004 as follows:
Many covered outpatient drugs furnished in 2004 will be reimbursed at 85% of the average wholesale price (AWP). Certain of these drugs may be paid as low as 80% of theAWP (in effect as of April 1, 2003). 
Blood clotting factors and other blood products, drugs or biologicals (drugproducts) that were not available for payment by April 1, 2003, covered vaccinations, drug productsfurnished in during 2004 in connection with renal dialysis services, drugs provided through covereddurable medical equipment will be paid at a higher rate during 2004. 
The decline in payments for covered outpatient drugs in 2004 can only be implemented concurrently with the increased payments for the administration of the drugs. 
Starting in 2005, Medicare's payment for many covered outpatient drugs will be based on average sales price methodology, that uses different pricing and cost data, depending on theprescription drug. Generally, multiple source drugs will be paid 106% of the average sales price;single source drugs will be paid 106% of the lower of the average sales price or the wholesaleacquisition costs, unless the widely available market price or the average manufacturer price forthose drugs exceeds a certain threshold. Starting in 2006, physicians will have the option ofobtaining covered Part B drugs from selected entities awarded contracts for competitively biddabledrug products under a newly established competitive acquisition program. 
Selected Provisions Affecting Other Providers and Practitioners.
The follow provisions affecting other providers and practitioners are included in the legislation: 
Ambulatory Surgical Centers. Payments to ambulatory surgical centers (ASCs) are expected to be lower by $800 million from FY2004 throughFY2008 and by $3.1 billion from FY2004 through FY2013 as a result of the legislation. ASCs willreceive an update of the consumer price index for all urban consumers (CPI-U) minus 3.0 percentagepoints starting April 1, 2004 and will receive a O percent update for services provided startingOctober 1, 2004 through December 31, 2009.
Therapy Caps. Application of the caps on outpatient therapy services provided by non-hospital providers is suspended from the date of enactment and forthe remainder of 2003, in 2004 and 2005. CBO estimates that the therapy cap moratorium willincrease direct Medicare spending by $700 million over the 10-year period.
Durable Medical Equipment (DME). Competitive bidding for DME will be phased-in beginning in 2007 in 10 of the largest metropolitan statisticalareas and may be phased in first for the highest cost and highest volume items and services. Theupdate for most DME items and services and for prosthetics and orthotics is 0 in 2004, 2005, 2006,2007, and 2008. For 2005, payment for certain items, oxygen and oxygen equipment, standardwheelchairs, nebulizers, diabetic lancets and testing strips, hospital beds and air mattresses will bereduced by an amount calculated using 2002 payment amounts and the median price paid by theFederal Employees Health Benefit Program. (2) Beginning January 1, 2009, items and servicesincluded in the competitive acquisition program will be paid as determined under that program andthe Secretary can use this information to adjust the payment amounts for DME, off-the-shelforthotics, and other items and services that are supplied in an area that is not a competitiveacquisition area. Class III items (devices that sustain or support life, are implanted, or presentpotential unreasonable risk, e.g., implantable infusion pumps and heart valve replacements, and aresubject to premarket approval, the most stringent regulatory control) receive the full increase in theconsumer price index for all urban consumers (CPI-U) in 2004, 2005, 2006 , 2008 and subsequentyears. The Secretary will determine the update in 2007. CBO scored the DME provisions of thebill as reducing spending by $6.8 billion over the 10-year period.
Home Health. Home health agency payments are increased by the full market basket percentage for the last quarter of 2003 (October, November, andDecember) and for the first quarter of 2004 (January, February, and March). The update for theremainder of 2004 and for 2005 and 2006 is the home health market basket percentage increaseminus 0.8 percentage points. CBO estimates that this provision will reduce direct Medicarespending by $6.5 billion over the 10-year period. The legislation suspends the requirement thathome health agencies must collect the Outcome and Assessment Information Set (OASIS) data onprivate pay (non-Medicare, non-Medicaid) until the Secretary reports to Congress and publishes finalregulations regarding the collection and use of OASIS.
Selected Fee-for Service Demonstration Projects.
The legislation establishes numerous demonstration projects for the Medicare program. Several demonstrations address aspects of disease management for beneficiaries with chronic conditions.
Chronic Care Improvement under Fee-For-Service. The legislation requires the Secretary to establish and implement chronic care improvementprograms under fee-for-service Medicare to improve clinical quality and beneficiary satisfaction andachieve spending targets specified by the Secretary for Medicare for beneficiaries with certainchronic health conditions. Participation by beneficiaries is voluntary. The contractors are requiredto assume financial risk for performance under the contract. CBO has estimated that thisdemonstration will increase direct Medicare spending by $500 million over the 10-year period.
Chronically Ill Beneficiary Research, Demonstration. The legislation requires the Secretary to develop a plan to improve quality of care and to reduce thecost of care for chronically ill Medicare beneficiaries within 6 months after enactment. The plan isrequired to use existing data and identify data gaps, develop research initiatives, and proposeintervention demonstration programs to provide better health care for chronically ill Medicarebeneficiaries. The Secretary is required to implement the plan no later than 2 years after enactment. 
Coverage of Certain Drugs and Biologicals Demonstration. The Secretary is required to conduct a 2-year demonstrationwhere payment is made for certain drugs and biologicals that are currently provided as "incident to"a physician's services under Part B. The demonstration is required to provide for cost-sharing in thesame manner as applies under Part D of Medicare. The demonstration is required to begin within90 days of enactment and is limited to 50,000 Medicare beneficiaries in sites selected by theSecretary.
Homebound Demonstration. The Secretary is required to conduct a 2-year demonstration project where beneficiaries with chronic conditions would bedeemed to be homebound in order to receive home health services under Medicare. 
Adult Day Care. The Secretary is required to establish a demonstration where beneficiaries could receive adult day care services as a substitute for a portion of home health services otherwise provided in a beneficiary's home. 
Expansion of Covered Benefits.
The legislation contains a number of provisions that expand coverage beginning January 1, 2005, including the following:
Initial Physical Examination. Medicare coverage of an initial preventive physical examination is authorized for those individuals whose Medicarecoverage begins on or after January 1, 2005. CBO estimates that this provision will increase directMedicare spending by $1.7 billion over the 10-year period.
Cardiovascular Screening Blood Tests. Medicare coverage of cardiovascular screening blood tests is authorized. CBO estimates that this provisionwill increase direct Medicare spending by $300 million over the 10-year period.
Diabetes Screening Tests. Diabetes screening tests furnished to an individual at risk for diabetes for the purpose of early detection of diabetes areincluded as a covered medical service. In this instance, diabetes screening tests include fastingplasma glucose tests as well as other tests and modifications to those tests deemed appropriate bythe Secretary. CBO estimates that this provision will increase direct Medicare spending less than$50 million over the 10-year period.
Screening and Diagnostic Mammography. Screening mammography and diagnostic mammography will be excluded from OPPS and paid separately. CBO estimates that this provision will increase direct Medicare spending by $200 million over the10-year period.
Intravenous Immune Globulin. The bill includes intravenous immune globulin for the treatment in the home of primary immune deficiency diseasesas a covered medical service under Medicare. CBO estimates that this provision will increase directMedicare spending by $100 million over the 10-year period.
section_title: Beneficiary Payments
paragraphs: The bill contains two provisions which change the beneficiary premiums and deductibles.
Income-Relating the Part B Premium.
The legislation increases the monthly Part B premiums for higher income enrollees beginning in 2007. Beneficiaries whose modified adjusted gross income exceed $80,000 and couples filingjoint returns whose modified adjusted gross income exceeds $160,000 will be subject to higherpremium amounts. The increase will be calculated on a sliding scale basis and will be phased-inover a five-year period. The highest category on the sliding scale is for beneficiaries whose modifiedadjusted gross income is more than $200,000 ($400,000 for a couple filing jointly). Those amountsare increased beginning in 2007 by the percentage change in the consumer price index. CBOestimates that direct Medicare spending will be reduced by $13.3 billion over the 10-year period2004 through 2013.
Indexing the Part B Deductible.
The Medicare Part B deductible will remain $100 through 2004, increase to $110 for 2005, and in subsequent years the deductible will be increased by the same percentage as the Part B premiumincrease. Specifically, the annual percentage increase in the monthly actuarial value of benefitspayable from the Federal Supplementary Medical Insurance Trust Fund will be used as the index. 
section_title: Medicaid and Miscellaneous Provisions
paragraphs: Title X of the legislation makes some changes to Medicaid and other programs. Omitted fromthe agreement were two provisions contained in S. 1 , including a provision to amendthe Age Discrimination in Employment Act of 1967 to allow an employee benefit plan to offerdifferent benefits to their Medicare eligible employees than to their non-Medicare eligibleemployees, and a provision to allow states to cover certain lawfully residing aliens under theMedicaid program. 
CBO estimates the Medicaid and other provisions included in the bill to increase direct spending by $5.7 billion between FY2004 and FY2013. The following general points can be madeabout the Medicaid and Miscellaneous provisions included in Title X of the bill:
The legislation temporarily increases states' disproportionate share hospital (DSH) allotments to erase the decline in these Medicaid amounts that occurred after a special rulefor their calculation expired. 
The legislation includes several other Medicaid provisions, including raisingthe floor on DSH allotments for "extremely low DSH states," providing DSH allotment adjustmentsimpacting Hawaii and/or Tennessee, increasing reporting requirements for DSH hospitals, andexempting prices of drugs provided to certain safety net hospitals from Medicaid's best price drugprogram.
Miscellaneous provisions in Title X of the legislation include funding federalreimbursement of emergency health services furnished to undocumented aliens, and fundingadministrative start-up costs for Medicare reform, various research projects, work groups andinfrastructure improvement programs for the health care system. 
This report contains a detailed side-by-side comparison of the relevant provisions of the legislation, S. 1 , as passed the Senate, and H.R. 1 , as passed the House. Certain of the provisions can be found in one or more of the sections. For example, the home healthhomebound demonstration (section 702) is listed in the home health section and the demonstrationprojects section. Also included in this side-by-side, are provision that were included in the Houseand/or Senate bill which were dropped in conference.
section_title: Modifications to Fee-for-Service Medicare
subsections: section_title: Provisions Relating to Part A
paragraphs: Hospital Services. 
Allied Health and Graduate Medical Education Payments.
Skilled Nursing Facility (SNF) and Hospice Services.
Other Part A Provisions. 
section_title: Provisions Relating to Part B
paragraphs: Physician and Practitioner Services. 
Hospital Outpatient Department (HOPD), Ambulatory Surgery Center (ASC), and Clinic Services.
Covered Part B Outpatient Drugs (Not Provided by a HOPD).
Covered Drugs and Services at a Dialysis Facility. 
Durable Medical Equipment (DME) and Related Outpatient Drugs.
Ambulance Services. 
Other Part B Services and Provisions. 
section_title: Provisions Relating to Parts A and B
paragraphs: Home Health Services. 
Chronic Care Improvement.
Medicare Secondary Payor (MSP).
Other Medicare A and B Provisions. 
Medicare Demonstration Projects and Studies. 
section_title: Beneficiary Issues: Cost-Sharing Amounts and Provision of Information
section_title: Other Health-Related Studies, Commissions or Committees
section_title: Medicaid and State Children's Health Insurance Program (SCHIP) Provisions
section_title: Cost Containment and Miscellaneous Financial Provisions