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The New Medicare: A detailed guide to the just-enacted prescription drug legislation.

By Robert H. Bradner, Esq., with Holland & Knight, LLP in Washington, D.C.

I. Introduction.

On December 8th, President Bush signed into law H.R. 1, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Pub.L. No. 108-173).

This legislation authorizes a prescription drug discount card program for 2004 and 2005. Beginning in 2006, a prescription drug benefit will be provided for Medicare beneficiaries. In addition, the law makes numerous changes to other aspects of Medicare. The Medicare + Choice program is to be replaced by a new Medicare Advantage program. The new drug benefit and the Medicare Advantage program will both be placed under the jurisdiction of a new Center for Beneficiary Services within the Centers for Medicare and Medicaid Services (CMS).

A variety of other reforms to Medicare are also enacted by the new law, including provisions that update and expand benefits, and provisions that introduce competitive, private-sector oriented procedures to a number of Medicare activities. Numerous other adjustments and modifications to Medicare reimbursement rules are included as well as changes to Medicaid.

This report the new prescription drug discount program, the new outpatient prescription drug benefit, and the new Medicare Advantage program. It also provides an overview of the other reforms and reimbursement changes contained in H.R.1.II. Prescription Drug Discount Card Program.

The basic drug benefit created by the new law will not take effect until January 1, 2006. In the interim, a Medicare Prescription Drug Discount Card and Transitional Assistance Program will provide some assistance. The intent of the program is to allow Medicare beneficiaries to pay an enrollment fee and join a program that will provide them access to reduced price outpatient drugs. The theory is that the card programs will be able to use their market leverage to negotiate discounts from pharmaceutical providers on behalf of individual program participants. In addition, some assistance with drug costs will be provided to low income Medicare beneficiaries.

Under this program, the Secretary of the Department of Health & Human Services (HHS) will expressly endorse prescription drug discount card programs delivered by non-governmental entities (including PBMs, pharmacy delivery systems, insurers or Medicare + Choice organizations) that meet certain requirements. Other organizations may offer card programs in affiliation with these types of entities. Medicare Part A or Part B individuals would be eligible to participate in the program after payment of an enrollment fee but Medicaid eligible persons who receive drug assistance through Medicaid would not be eligible to participate. Eligible participants with incomes below 135% of the federal poverty level (FPL) and generally lacking prescription drug coverage from another source would be eligible for transitional assistance of up to $600 per year toward drug costs.

The Secretary is to ensure the availability of at least two programs to every individual and may limit the number of program sponsors in a state (but not to less than two). Programs must ensure the participation of a sufficient number of "bricks & mortar" pharmacies to provide adequate convenience to beneficiaries -- mail order only prescription programs cannot meet this requirement -- and they must agree to accept any individual in the state that wishes to join (there is an exception to this requirement for Medicare + Choice organizations which are permitted to limit their programs to current enrollees).

The drug card programs are required to provide participants with access to prices that they negotiate from pharmaceutical providers and pharmacies. The programs must provide information about their operations to beneficiaries that includes information about negotiated prices, and they must also provide certain information to the Secretary on an annual basis. However, any information about drug pricing that is disclosed to the Secretary is kept confidential under the same provisions that presently apply to the Medicaid program. In addition, prices negotiated between providers and programs will not be taken into account for purposes of calculating the Medicaid "best price".

III. New Prescription Drug Benefit.

A. In General.

A new Part D will be added to the Medicare program providing a new outpatient prescription drug benefit. The new benefit is effective on January 1st, 2006.

Medicare presently operates largely as an "administered price" program: the Centers for Medicare and Medicaid Services (CMS) makes coverage determinations and establishes prices and reimbursement rules for covered goods and services. Since the mid-1990s, however, Congress has been pushing for a more private sector oriented approach to providing Medicare services. The new law continues and accelerates this trend. The new drug benefit itself is to be delivered by private plans that will provide coverage and bear a portion of the financial risk for the cost. The plans will determine premiums through a bid process and will compete based on premiums and negotiated prices.

B . The New Benefit.

The bill allows Medicare eligible individuals the option to obtain prescription drug coverage from certain private plans. After payment of a premium that is estimated at $35/month ($420/year) and a $250 deductible, 75% of prescription drug costs between $251 and $2,250 would be covered. Coverage would then end until annual drug costs exceeded $3,600 at which point there would be 100% coverage (except for a nominal co-pay for non-low income persons). These amounts would be adjusted annually beginning in 2007 by a measure of the average per capita increase in drug expenditures. Subsidies are provided for persons with incomes below 150% of the federal poverty level.

The drugs that would be covered by the new program are essentially the same as those covered by Medicaid. Generally, this includes drugs and biologicals prescribed by a professional for a medically accepted indication (medically accepted indications include use of the drug for purposes reflected in its FDA labeling, or off label uses that are supported by reference to certain published drug compendia). As under Medicaid, a handful of prescription drugs are excluded (e.g., weight loss drugs).

The plans that provide this coverage must also provide beneficiaries with access to negotiated price discounts on prescription drugs regardless of whether payment for the drugs is covered by the plan or is the responsibility of the individual. It is also possible for a plan to provide drug coverage that differs in some particulars from the aforementioned coverage terms, provided that the Secretary determines that it is "actuarial equivalent" coverage.

Plans may also offer their own beneficiaries the option of obtaining "supplemental" coverage in addition to the required "basic" coverage. This supplemental coverage may include reduced premiums, co-payments, co-insurance or enhanced coverage beyond the limits of the basic benefit. The conferees on the legislation included language strongly encouraging the Secretary to utilize his authority to conduct broad-based national demonstrations that encourage the plans to provide a wide array of supplemental coverage options.

C. Implementation: Bids, Approvals, Negotiations, Subsidies, Risk, Fallbacks.

Although complicated in its particulars, the essential premise behind the new prescription drug program is that the private plans that will provide the prescription drug benefit will competitively bid for the opportunity to do so within defined service areas. Based on those bids and an analysis of the actuarial data submitted in support of them, HHS will calculate a risk-adjusted estimated cost for providing the benefit in each region. A portion of this estimated cost will be covered by beneficiary premiums and the remainder will be covered by a payment from the government. Subject to limits, plans have the opportunity to profit if they hold actual costs below the estimate that their payment is based on. Alternatively, they will have to absorb some losses should their costs exceed the total payments received from premiums and the government. The process of estimating costs and establishing premiums and government payment levels will be repeated on an annual basis.

  1. Plan Sponsors.
    The new outpatient prescription drug benefit will be delivered by Prescription Drug Plan (PDP) Sponsors -- entities licensed under state law as risk bearing entities eligible to offer health benefits or health insurance coverage. The benefit may also be delivered by a Medicare Advantage – Prescription Drug (MA-PD) plan. As discussed more fully in Part IV of this memorandum, Medicare Advantage (MA) plans are private Medicare plans authorized by the new law as replacements for the current Medicare + Choice plans. If necessary to expand consumer choice, the Secretary of HHS may qualify a non-state licensed entity to operate in a state if it meets HHS solvency requirements and assumes prospective risk for benefits that are not covered by a direct subsidy payment from HHS. All PDP Sponsors would enter into a contract with HHS by which they would commit to abide by various program requirements -- including minimum enrollment rules and beneficiary fraud & abuse protections (MA-PD plans must also meet this requirement as part of their approval process).
    Plan sponsors must abide by a number of beneficiary protections, including extensive information disclosure, and they must allow any willing pharmacy that meets the plans terms and conditions to participate. Convenient access to "bricks & mortar" pharmacies must be assured. If the PDP sponsor uses a formulary, it must meet certain requirements including that all formulary decisions be based on scientific evidence and standards of practice, with consideration given to relative therapeutic advantage. Drugs would need to be included in the formulary for every therapeutic class and category. HHS is directed to request that U.S. Pharmacopeia – in consultation with pharmaceutical benefit managers and other interested parties – develop a list of categories and classes.
  2. Regions, Bidding Process
    HHS will establish Prescription Drug Plan Regions within which a plan can propose to provide services. A single plan can propose to provide services in more than one region. The regions will be identical to the regions established for Medicare Advantage (MA) plans unless the Secretary needs to alter them in order to promote access.
    The private plans will then submit to HHS a cost estimate for providing prescription drug coverage in a particular service area (a "bid") together with other actuarial data. Specifically, the plan will provide the actuarial value of coverage for a beneficiary with a "national average risk profile" (HHS is directed to define this term), information about its risk assumptions, and a cost estimate associated with providing basic coverage, any supplemental coverage, reinsurance costs and administrative costs.
    Following a period of negotiation with the plans and an evaluation of the actuarial and cost estimate data, and assuming that the plans meet other qualifications and requirements (e.g., solvency requirements, agreement to abide by fraud & abuse protections, determination that the plan is not likely to discourage enrollment), HHS will approve at least two plans to operate in each region.
    The plans will charge beneficiaries a premium equal to 26% of estimated average monthly per capita plan costs and receive a federal payment (subsidy) equal to the other estimated 74%. But these amounts will be risk adjusted for the proposed service population (via methods to be developed by the Secretary) and the actual government payment may be adjusted as a consequence of the plan's cost estimate exceeding the national average.
  3. Risk Rules.
    The plans are envisioned to operate "at risk" within certain limits. This means that they will have to absorb losses or be permitted to pocket profits within established "risk corridors" subject to limits established for those corridors. Specifically, during 2006 and 2007, the plans will be fully at risk for profits or losses that are within 2.5% of the "target amount" (the total of government and premium payments to the plan reduced by the amount of estimated administrative costs (based on the standardized bid amount, risk adjusted)). Seventy-five percent of losses between 2.5% and 5% of the target amount (the second risk corridor) would be paid by the government. Alternatively, 25% of profits in this range could be retained by the plan. Above or below 5% of the target amount (the third risk corridor), plan risk would drop to 20%. For 2008 – 2011, plans would be at full risk for amounts within 5% of the target, they would be 50% at risk for amounts between 5-10% of the target, and they would be 20% at risk beyond 10% of the target amount.
  4. Limited Risk and "Fallback" Plans.
    In the event that plans are unwilling to propose services in a PDP Region on these terms, they may elect instead to submit to HHS a "limited risk" bid proposal in which they request modification of the terms of their plan. Such modification could include an adjustment in the size of the risk corridor, the percentage of risk within the corridor, or the proposed service area. In the event that at risk or limited risk plans do not materialize to provide benefits within a given service area, HHS will solicit bids from so-called "fallback" entities. These entities – which cannot be PDP sponsors – would essentially charge 26% premiums and be paid by HHS on a cost basis for the balance of their costs. HHS would seek to regulate their administrative costs through certain mechanisms.

D. Impact on Existing Prescription Drug Benefit Programs.

Until now, Medicare has provided only an extremely limited outpatient drug benefit that generally covers drugs that cannot be self administered, certain chemotherapy drugs, and a few other drugs. Given the general lack of Medicare drug coverage, many Medicare eligible individuals have had some portion of these costs covered by acquiring private "Medi-Gap" insurance plans; through retiree drug benefits provided by former employers; or, in the case of low-income beneficiaries, through prescription drug coverage provided by state Medicaid or other State Pharmaceutical Assistance Programs (SPAPs). The new legislation includes provisions to address its impact on these existing programs.

Under current law, Medigap policies may be offered by private insurers provided that they have coverage that conforms to one of ten standardized plans developed by the National Association of Insurance Commissioners (NAIC). Some of these plans provide prescription drug coverage and some do not. The new law directs that no Medigap insurer may sell to any Medicare Beneficiary that enrolls in the new Part D, a Medigap plan that includes prescription drug coverage. The law also directs the Secretary to work with the NAIC to develop a new package of Medigap plans in light of the changes made by this legislation.

With regard to employer-provided retiree drug benefit programs that provide coverage that is at least the equivalent of the coverage to now be offered under Medicare, the government will make a payment to such plans equal to 28% of gross covered retiree plan-related prescription drug costs between $250-$5,000. These payments will be exempt from taxation under the regular corporate tax and the alternative minimum tax (AMT) approaches.

For so-called Medicaid "dual eligibles" – Medicare eligible individuals who are fully eligible for Medicaid drug coverage – the new Medicare prescription drug program will now provide primary drug coverage. This will relieve the state Medicaid programs of a significant current cost. In addition, the federal government will assume the state's current responsibility to pay premiums and cost-sharing for this population on a phased-in basis. However, under the so-called "clawback" provisions of the new law, the States will be forced to pay approximately 90% of the amount saved over to the federal government. The clawback will phase down to 75% by 2014. The states will also be responsible for determining the eligibility of individuals for cost-sharing subsidies under the new benefit.

IV. Revamping Private Medicare Plans: Medicare Advantage.

Title II of the new law makes significant changes to the Medicare + Choice program which it renames "Medicare Advantage".

A. Medicare Advantage.

The changes guarantee that Medicare Advantage plans will be paid on a capitated basis an amount at least equal to the rate for Medicare Fee For Service (FFS) plans, and that the annual growth rate in payments after 2004 will equal the growth rate for FFS Medicare. To accomplish this, a fourth payment calculation method is added to the three methods currently used for calculating payments to Medicare + Choice plans (the minimum payment (floor) rate; the area-national blend rate; and the minimum increase rate (presently 2%)). The new fourth method will measure the increase in costs for fee-for-service beneficiaries within the MA plan's service area. In addition, the minimum percentage increase will be set at the higher of 2% or the national per capita MA Growth percentage.

The law also creates regional Medicare Advantage plans in an effort to combine rural and urban service areas into a single "region" and thereby lure private plans into currently under-served rural areas. Current Medicare + Choice plan "areas" are typically equivalent to counties. HHS is directed to establish no less than 10 and no more than 50 such regions. Plans that wish to provide services throughout a region on a coordinated care basis will submit annual bids to do so. The plans must offer a unified deductible and limit on out-of-pocket expenses. The regional MA program is to commence in 2006.

The new law will put in place by 2006 a comparative bidding approach for Medicare Advantage area plans. Under this system, each area plan will submit to the Secretary a bid for providing Part A and Part B services to its beneficiaries. This bid will be compared to a "benchmark" amount that is established by taking the prior year's capitation rate and updating it by the minimum percentage increase. Plans whose bid falls below the benchmark amount will receive in payment their entire bid amount plus a "rebate" equal to 75% of the amount by which their bid falls below the benchmark. The rebate may be used to reduce premiums, reduce cost sharing or provide additional benefits. Plans with bids above the benchmark will be paid at an amount intended to equate to the fee-for-service rate in the area, and they will be required to pass on the additional cost above the payment level to their beneficiaries in the form of higher premiums.

Medicare Advantage Regional Plans will bid on a competitive basis. The benchmarks will be calculated in a manner that reflects the regional weighted average of bids. Plans bidding below the benchmark will pass 75% of savings back to beneficiaries in the form of a rebate. For plans bidding above the benchmark, enrollee premiums will be increased by the entire amount that the bid exceeds the benchmark. In addition, HHS will share risk with MA Regional Plans if losses or profits exceed established risk corridors (103% and 92%, respectively).

H.R. 1 also creates a $10 billion "stabilization fund" that may grow through the inclusion by HHS of a portion of any per capita savings amounts. The funds are to be used to provide incentives for plans to enter into and remain in the MA program. The Secretary will make payments from the fund according to certain statutory incentives.

B. Comparative Cost Advantage ("Premium Support").

Beginning in 2010, a six year "demonstration of comparative cost adjustment" will be undertaken in six selected locations. Under this demonstration, the bids submitted by Medicare Advantage plans and the cost of the Medicare fee-for-service program would be averaged in order to create a benchmark. MA plans with bids below the benchmark would rebate 75% of the savings to beneficiaries and those with bids above the benchmark would pass 100% of the increase on to beneficiaries in the form of higher premiums. However, the same system would also be applied to fee-for-service beneficiaries within the service area – if the fee-for-service cost in the area is below the benchmark amount, premiums would be reduced by 75% of the difference; if the FFS amount exceeds the benchmark amount, premiums would be increased to cover the additional cost. However, premiums could not be increased more than 5% in a year and the premiums of low-income beneficiaries eligible for subsidies would not be increased. The six areas for the demonstration would be selected by HHS according to certain criteria. They are to be Metropolitan Statistical Areas (MSAs) or other similar areas designated by HHS in which at least 25% of eligible individuals are enrolled in MA plans and there is a choice of two or more such plans offered by different entities. An MA area within such an MSA that did not meet this criteria would be excluded from the demonstration.V. Other Reform Provisions.

Titles III through XII of H.R. 1 make numerous additional changes to existing Medicare law. A number of these provisions constitute noteworthy reforms to the Medicare program.

A. Electronic Prescribing.

The final legislation creates a voluntary program for electronic-prescribing (the House bill had contained a mandatory approach). Grants totaling $50 million to small providers to facilitate their access to "e-prescribing" capabilities are authorized. HHS is directed to develop initial e-prescribing standards by September 1st, 2005 in consultation with interested stakeholders. A one-year pilot project will then be undertaken to test the initial standards. As an incentive to adopt e-prescribing, prescription drug plans are permitted to increase payments to physicians who reduce medical errors, improve formulary compliance or reduce adverse drug interactions.

B. Average Wholesale Price.

For those limited outpatient drugs that are currently covered under Medicare (e.g., certain vaccines, clotting factors, non-self administered drugs, chemotherapeutic agents), a new payment system is created. For 2004, covered drugs would be reimbursed under the current Average Wholesale Price (AWP) system minus 15%. HHS is authorized to further adjust this reimbursement level based on market surveys. After 2004, reimbursement will be linked to "average sale price" (ASP) plus 6%. Under this system, manufacturers will be required to report ASPs and would face potential False Claims Act liability for submitting false information. ASP is based on "average market price" currently reported for Medicaid purposes and takes into account volume, prompt pay and cash discounts as well as free goods provided contingent on purchases, charge backs and non-Medicaid rebates.

Beginning in 2006, physicians would have the option to participate in a competitive bidding program. HHS would divide the country into areas and would divide the covered drugs and biologicals into two categories – an oncology category and non-oncology category. Certain drugs could be excluded from the program if utilized in low volumes. HHS would then conduct a competitive process to select at least two contractors to provide drugs and biologicals for each HCPCS Code within each category. Contractors would be selected based on bid price and a number of other qualifications (e.g., capacity). Participating physicians would select a contractor from whom to acquire needed drugs and biologicals. In all but limited circumstances, the contractors would provide the drugs to the physician for administration to the patient and the contractor would be responsible for collection of the applicable deductible and coinsurance amounts from the beneficiary. HHS would then pay the contractor.

C. Coverage of Preventive Services.

Specific preventive services are added to those services covered by Medicare, subject to ordinary co-payment rules. These services include initial physical examination, cardiovascular screening blood tests, and diabetes screening tests. Coverage is expanded for screening and diagnostic mammography. In addition, the use of intravenous immune globulin for the treatment of primary immune deficiency disease would be covered.

D. Deductible Indexing; Premium "Income Relating".

The Medicare Part B deductible has been only rarely increased since the program's inception. Under the new law, the deductible would be increased to $110 in 2005 (from its present $100) and thereafter indexed for inflation. In addition, the Medicare Part B premium would be increased for higher income beneficiaries. Starting in 2007, beneficiaries with modified adjusted gross income exceeding $80,000 ($160,000 for couples) will be subject to higher premiums calculated on a sliding scale ($200,000/$400,000 would be the top category in the scale). This provision will be phased in over five years.

E. Chronic Care Improvement.

A new authority is added to Medicare whereby HHS will identify beneficiaries with specified chronic conditions (e.g., congestive heart failure, diabetes, chronic obstructive pulmonary disease) and communicate with them regarding their voluntary participation in a chronic care improvement (or disease management) program. The Secretary will contract with chronic care improvement organizations (CCIOs) for the purpose of delivering this service to identified beneficiaries that wish to participate. This program will be implemented in two phases. During the first phase, HHS will enter into three-year contracts with CCIOs to develop, implement and evaluate chronic care programs. If these initiatives prove their cost savings and quality improvement, the program will be expanded. CCIOs must assume full financial risk. A related provision requires PDP sponsors and MA drug plans to undertake medication therapy management programs in concert with pharmacists.

F. Cost Containment

The conference report contains a cost containment provision that was significantly watered down from a more binding approach originally discussed by the conferees. Under the new law, if the Medicare Board of Trustees project that total general revenue funding of Medicare will exceed 45% for two consecutive years, then the President must propose and Congress must consider legislation to address Medicare spending. Currently, 75% of Part B spending is financed by general revenues and the balance by dedicated premiums. Part A is financed by payroll taxes. Approximately three-quarters of the new prescription drug benefit will be financed by general revenues.

G. Regulatory and Contracting Reform

The new law finally enacts a package of broadly-supported changes to Medicare appeals and contracting rules. These changes modify the communication of guidances, the procedures for resolving payment disputes, and they establish new appeals procedures. In addition, new authority is granted to CMS to competitively retain "administrative contractors" who need not be health insurers. These new contractors may be retained by CMS to determine payment amounts, make payments, conduct beneficiary education and assistance activities, provide consultative, communication or education/technical assistance services to Medicare providers and suppliers, or undertake other administrative functions (including Medicare Integrity Program (MIP) functions that are not duplicative of activities undertaken by other MIP contractors).

H. Drug Importation.

The conference agreement declines to make significant changes in the current rules governing drug importation. As has been done in previous legislation, importation from Canada is allowed only if FDA certifies that such importation is safe. In the past, FDA has consistently refused to make such certification.

I. Health Care Savings Accounts.

The new law authorizes Health Care Savings Accounts (HSAs) as replacements for the Medical Savings Accounts authorized by existing law. Under these provisions, individuals and families may obtain high deductible health insurance plans and make tax favored contributions to HSAs to be used to cover health care expenses. In 2004, individuals must obtain a plan with a deductible of at least $1,000 and may make contributions to the account of that amount (or up to the amount of the deductible but not to exceed $2,600). For family policies, the required deductible is $2,000 with allowable contributions of up to $5,150.

J. Hatch-Waxman Reform.

An existing "loophole" in the Hatch-Waxman law is ended by making changes to the 30 month stay and 180 day provisions. New drug applicants will receive only one 30 month stay per product for patents submitted prior to the filing of a generic drug application. And multiple companies may now qualify for 180 day exclusivity if they file their applications on the first day of eligibility. Finally, the use of declaratory judgments is authorized as a technique to limit the ability of brand name manufacturers to extend litigation to bar generic equivalents.

K. Durable Medical Equipment.

The new law creates a competitive bidding program for DME. The program will be phased in beginning in 2007 with the ten largest Metropolitan Statistical Areas (MSAs). In the interim, no payment update is provided for most DME and some reimbursements are reduced.

L. End Stage Renal Disease.

H.R. 1 provides a 1.6% update in the composite rate paid for renal dialysis. The law also directs HHS to develop a new basic case mix-adjusted prospective payment system for dialysis services based on studies to be conducted by the HHS Inspector General. The new payment rate will be based on current services and the spread on separately billed drugs and biologicals. After 2004, drug reimbursement will be at acquisition cost. The new payment methodology is to have a geographic component and budget neutrality.

VI. Reimbursement Changes.

H.R. 1 also enacts a host of changes in provider reimbursements and other provider-specific provisions.

A. Rural Providers.

Title IV of the new legislation enacts a series of reimbursement changes designed to assist rural providers. Rural and small urban hospitals will receive a permanent 1.6% increase to Medicare's base rate. The limit on such hospitals that qualify for disproportionate share (DSH) payments will increase from 5.25% to 11.5%. Hospitals in low wage areas will receive a payment increase by having their reimbursement formula modified to de-emphasize the wage-based portion. Small rural hospital under 50 beds will receive cost-based reimbursement for clinical laboratory services. Rural hospitals with less than 100 beds will be held harmless from payment reductions under the Outpatient Prospective Payment Systems (OPPS) for two more years and this protection will also be provided to sole community hospitals. The bed limit for Critical Access Hospitals (CAHs) will be increased from 15 to 25 and other favorable changes will be made in the CAH bed composition and reimbursement rules. Rural physicians who serve in "scarcity areas" will receive a 5% increase in reimbursement and payment to physicians in areas with a low geographic adjustment factor will also be increased. Practitioners in rural clinics and federally qualified health centers will be able to bill separately for services provided in skilled nursing facilities, and rural home health providers will receive a 5% payment increase.

B. Hospital Reimbursement.

Changes to Medicare Part A include providing hospitals with a full "market basket" reimbursement update for inpatient services for fiscal year 2004. Hospitals will receive a full market basket update for fiscal years 2005 through 2007 only if they submit information to HHS on ten JCAHO/CMS quality indicators originally developed by the National Quality Foundation. The Indirect Medical Education (IME) multiplier is established at 1.47 for the second half of FY04, and at 1.42, 1.37, 1.32 and 1.35 for FYs '05-'08, respectively. As a result, IME payments will increase to 6.0% in the second half of FY04 for each 10% increase in an institution's Intern and Resident to bed (IRB) ratio. This payment will drop to 5.8% in FY05, 5.55% in FY06 and 5.35% in FY07. For direct graduate medical education (DGME), hospitals with per resident amounts at approximately 140% of the geographically adjusted national average would not get an update for fiscal years 2004 – 2013.

An 18-month moratorium is imposed on the exemption from the Stark self-referral rules for new specialty hospitals. A new hospital is one that is neither in existence nor under construction as of November 20th, 2003 and existing specialty hospitals would be allowed to add beds up to the greater of 50% of existing beds of 5 beds. During the moratorium, the MedPAC is to conduct an analysis of the costs of specialty hospitals and whether the payment system should be refined, while HHS will examine referral patterns and quality of care issues.

Some changes are made to the practices by which HHS attempts to reflect the costs of new and emerging technologies in the Diagnosis Related Group (DRG) system. The changes are expected to somewhat increase DRG reimbursement. A new provision allows hospitals in counties that adjoin counties with higher wage indexes to seek enhanced reimbursement, while a one-time process allowing a hospital to appeal its wage index classification is created and several institutions are legislatively re-classified. In addition, the General Accounting Office (GAO) is to conduct a report on the proposed CMS revisions to the criteria governing admission to an Inpatient Rehabilitation Facility (IRF) and a separate report on the appropriateness of current payments under the inpatient prospective payment system (PPS).

Beginning in fiscal year 2005, $250 million per year for four years will be made available to cover the cost of EMTALA-required care provided to undocumented persons. Of this amount, $167 million will be apportioned by state based on the percentage of undocumented aliens residing in that state and the remaining $83 million would be provided to the six states with the highest number of illegal alien apprehensions. However, these funds are to be provided by HHS directly to providers and not through the state.

C. Physician Payment Reforms.

H.R. 1 legislates an increase of not less than 1.5% in physician payments under Medicare for 2004 and 2005 in lieu of the 4.5% payment cut in 2004 and a smaller reduction for 2005 that would occur under the otherwise applicable rules governing physician payment. As a result, the 2004 conversion factor will rise from an anticipated level of $35.13 to $37.34. Also, as discussed above, H.R. 1 raises the geographic practice cost index for the work component of Medicare’s relative value scale to 1. This will bring additional payment increases to physicians in rural and other areas. Another special provision raises physician payments in Alaska by 52%. The GAO is required to conduct a study on beneficiary access to physician services, HHS is to review and consider alternative data sources for calculating the geographic index for the practice expense components, and the MedPAC is to report on the practice expense component. Finally, dentists, podiatrists and doctors of optometry are authorized to utilize private contracting arrangements with Medicare beneficiaries.

D. Other Provisions.

Home health providers would receive a reimbursement of Market Basket minus 0.8% for 2004 through 2006. The current policy of allocating no more than 3% for outliers is retained and a 5% rural bonus payment will be made for one year.

Ambulatory Surgical Centers (ASCs) will receive an inflation update (CPI-U) minus 3% beginning in April of 2004 and will receive no update from October 2004 through the end of 2009. Payments for drugs under the Hospital Outpatient Department (HOPD) prospective payment system would again be reformed. For services furnished after January 1st, 2004, specific covered OPD drugs would be paid based on a percentage of the reference average wholesale price (AWP). The percentage varies depending on whether the drug is sole source, innovator multiple source, or non-innovator multiple source. The reference AWP price would be as of May 1, 2003.

Provisions benefiting community health centers are also included. Rural CHCs are carved out from the SNF PPS, and they would receive a wrap-around payment if MA plans were to pay them less than their FQHC costs. In addition, H.R. 1 includes "safe harbor" language protecting CHCs from anti-kickback laws for entering into agreements with certain other parties that are intended to increase the availability or quality of services provided to the medically underserved.

Among other provisions, the per diem for Skilled Nursing Facilities (SNFs) to care for AIDS patients is increased; Hospice-related physician consultations are reimbursable; ambulance payments are reformed; caps on outpatient therapy by non-hospital providers are suspended for three years; and clinical lab reimbursements are reduced.

E. Medicaid Provisions.

Title X of the legislation contains several Medicaid changes. The state's DSH allotments are temporarily increased in order to compensate for the declines that occurred after the expiration of the special rule for their calculation. H.R. 1 legislates a 16% allotment increase for FY04 and payments are not capped at 12% of total Medical Assistance payments. Future year payments will rise by inflation (CPI-U) if HHS determines that payments would equal or not exceed FY04 levels prior to enactment of H.R. 1. In addition, the DSH "floor" for extremely low DSH states is raised for FY04 through '08 by 16%. Finally, the definition of Medicaid "best price" for pharmaceuticals is modified to exclude the discounted inpatient drug prices charged to certain public safety-net hospitals.