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Teaching Hospital and Physican Provisions in the Balanced Budget Act of 1997

On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997 (BBA), which contained numerous spending reductions and changes in the Medicare law. Medicare spending reductions in the BBA were estimated to total approximately $116 billion.

The legislation include changes related to:

• indirect medical education payments;
• limitation on the number of residents and the rolling average FTE count;
• payments to hospitals for the direct costs of graduate medial education; and
• payments to hospitals of indirect medical education costs for Medicare+Choice enrollees;
• special reimbursement rules for primary care combined residency programs.

IME and DGME Payments to Hospitals for Medicare+Choice Enrollees. Beginning January 1, 1998, the Secretary will make an IME payment to each PPS hospital with an approved medical residency training program for each discharge under a risk-sharing contract with an eligible organization or under a Medicare+Choice organization. The IME payment amount will be equal to the applicable percentage (e.g., 20 percent in 1998) of the "estimated average per discharge amount" that would have been paid under the prospective payment diagnosis-related group (DRG) system. The Secretary will establish rules for paying hospitals in a state with a rate setting system.

Beginning January 1, 1998, the Secretary will make a DGME payment to teaching hospitals that serve inpatients under a risk-sharing contract with an eligible organization or under a Medicare+Choice organization. The DGME payment amount will be the applicable percentage (e.g., 20 percent in 1998) of Medicare managed care enrollees' share, based on inpatient days, of the aggregate DGME payment amount.

Indirect Medical Education Payments.

IME payments to teaching hospitals will be reduced from 7.7 percent for every 10 percent increment in a hospital's resident-to-bed ratio to 7.0 percent beginning October 1, 1997 (FY 1998); 6.5 percent in FY 1999; 6.0 percent in FY 2000; and 5.5 percent in FY 2001 and subsequent years.

Counting FTE Residents

Starting in FY 1998, the number of full-time equivalent (FTE) residents in allopathic and osteopathic medicine in either a hospital or non-hospital setting may not exceed the number of FTE residents counted during the hospital's most recent cost reporting period ending on or before December 31, 1996. Additionally, the ratio of residents-to-beds may not exceed the ratio of FTE residents (subject to the limit above) to the hospital's available beds (as defined by the Secretary) in the same cost reporting period. For cost reporting periods beginning on or after October 1, 1997, subject to the limits described above, the total number of FTE residents for payment purposes will be the average of the actual FTE resident count for the current cost reporting period and the preceding two periods (i.e., a three-year "rolling" average). However, for the first cost reporting period beginning on or after October 1, 1997, the number of FTE residents will be the average of the current period and the preceding cost reporting period (a two-year average). The Secretary will make adjustments for cost reporting periods after October 1, 1997 that are not equal to twelve months.

Counting FTE Residents in Non-Hospital Settings

For discharges occurring on or after October 1, 1997, all the time spent by an intern or resident in patient care activities under an approved training program at an entity in a non-hospital setting can be counted for IME payment purposes if the hospital incurs all, or substantially all, of the costs for the training program in that setting. This provision also is subject to the limits on residents and the ratios of residents-to-beds.

Direct Graduate Medical Education Payments. For cost reporting periods beginning on or after October 1, 1997, the total number of FTE residents before application of weighting factors with respect to approved training programs in the fields of allopathic and osteopathic medicine may not exceed the number of FTE residents reported on the hospital's most recent cost reporting period ending on or before December 31, 1996.

For cost reporting periods beginning on or after October 1, 1997, subject to the limit described above, the total number of FTE residents will equal the average of the actual FTE resident count for the cost reporting period and the preceding two periods (i.e., a three-year "rolling" average). However, for the first cost reporting period beginning on or after October 1, 1997, the number of FTE residents will be the average of the current period and the preceding cost reporting period (a two-year average). The Secretary will make adjustments for cost reporting periods after October 1, 1997 that are not equal to twelve months. The Secretary may require entities that operate programs to submit data necessary to apply the resident counting provisions.

The Secretary is directed to write special rules to apply the limits and "rolling average" methodology in the case of medical residency training programs established on or after January 1, 1995. In promulgating rules to apply the limit on residents, the Secretary shall "give special consideration to facilities that meet the needs of underserved rural areas."

The Secretary "may prescribe rules which allow institutions which are members of the same affiliated group (as defined by the Secretary) to elect to apply the limitation [on the number of residents] on an aggregate basis."

Permitting Payment for DGME Costs to Non-Hospital Providers. For cost reporting periods beginning on or after October 1, 1997, the Secretary may establish rules to make payments to "qualified non-hospital providers" for their direct costs of graduate medical education if those costs are incurred in operating an approved medical residency training program. Qualified non-hospital providers are: federally qualified health centers, rural health clinics, Medicare+Choice organizations, and other non-hospital providers as the Secretary deems appropriate. The Secretary's rules shall specify the amounts, form and manner in which payments will be made and the portions that will come from Medicare Part A and Part B. The Secretary will reduce DGME payments to hospitals if the residents are counted for payment purposes by qualified non-hospital providers.

Removal of Medical Education from the Calculation of the Adjusted Average Per Capita Cost (AAPCC). As part of a new rate calculation methodology, direct graduate medical education (DGME) and indirect medical education (IME) payments currently embedded in the managed care rates that Medicare pays to health plans will be carved out over five-years. Disproportionate share (DSH) payments will not be carved out, and will remain in the managed care rates. The new rates, called Medicare+Choice capitation rates, will be calculated annually for a calendar year. Beginning with the CY 1998 rates, 20 percent of the DGME and IME amounts embedded in the 1997 AAPCC rates (as estimated by the Secretary) will be carved out of the new Medicare+Choice rates. In CY 1999, 40 percent will be carved out; 60 percent in CY 2000; and 80 percent in CY 2001. For CY 2002 and succeeding years, 100 percent of both medical education payments will be carved out. For hospitals reimbursed under state rate setting systems, the Secretary will estimate a payment adjustment that is comparable to the adjustment the hospitals would have received if they had not been paid under a state system.

Incentive Payments Under Plans for Voluntary Reduction in Number of Residents. A hospital that is part of a "qualifying entity" that submits an application and receives approval to undertake a voluntary residency reduction plan shall receive incentive payments. A "qualifying entity" may be:

• individual hospitals operating one or more approved medical residency programs;
• two or more hospitals that operate such programs and apply for treatment as a single qualifying entity (joint applicants); or
• a qualifying consortium (as described in Section 4628 of the Balanced Budget Act of 1997) [Note: see bullet on the consortia demonstration project].

The Secretary may not approve the application of a qualifying entity unless:

• the application is submitted in a form and manner specified by the Secretary and not later than November 1, 1999;
• the application provides a plan for reducing the number of FTE residents and specifies the period of training years (not greater than five) over which the reduction will occur;
• the entity will not reduce the proportion of its residents in primary care to total number of residents below the proportion in effect during the period of the plan; and
• the Secretary determines that the application, entity, and plan meet the requirements set forth in regulation.

Applicants must reduce the number of residents in relation to a "base number of residents." The base number is defined as the number of FTE residents in the entity's approved medical residency training programs (before application of weighting factors) as of the most recent residency training year ending before June 30, 1997, or if less, for any subsequent training year that ends before the date the entity applies to enter the program.

Residency Reduction Requirements

Individual hospital applicants must reduce the number of residents in all the approved programs operated by or through the entity by:

• at least 20 percent of the base number of residents, if the base number exceeds 750 residents;
• 150 residents if the base number of residents exceeds 600 but is less than 750;
• at least 25 percent of the base number if the base does not exceed 600 residents.

Joint applicants must reduce the aggregate number of FTE residents in all approved programs operated by or through the entity by at least 25 percent of the base number.

Individual hospitals and joint applicants may reduce the number of residents by at least 20 percent of the base number if:

• the entity's base number of residents is less than 750; and
• the entity states in its application that it will increase the number of FTE residents in primary care by at least 20 percent (from the base number of residents) no later than the fifth residency training year in which the application is effective.

If the entity fails to increase the number of primary care residents in the time period above, the entity will have to repay all amounts paid as a result in accordance with noncompliance procedures.

A consortium will be required to reduce its aggregate number of residents by at least 20 percent of the base number. The reductions for a qualifying entity will be fully effective not later than the fifth residency training year in which the application is effective.

Payments to Qualifying Entities

Qualifying entities will receive incentive payments according to a schedule of "hold harmless" percentages. For approved reduction plans, each hospital that is part of a qualifying entity will receive the "hold harmless percentage" (defined below) applied to the difference between the DGME payment that would have been made to the entity if it had reduced its base number of residents (as of June 30, 1997) by 5 percent and the amount of the DGME payment had it been made based on the actual number of residents in training.

Each hospital will receive IME incentive payments equal to the "hold harmless percentage" (defined below) applied to the difference between the IME payment that would have been made to the hospital if it had reduced its base number of residents (as of June 30, 1997) by 5 percent, and the amount of the IME payment attributable to the reduction in the number of residents under the plan. Thus, for both DGME and IME payments, the qualifying entity will only be "held harmless" for reductions exceeding five percent.

For a five-year reduction plan the "hold harmless percentages" will be:

• 100 percent for the first and second residency training years of the reduction plan;
• 75 percent for the third-year;
• 50 percent for the fourth-year; and
• 25 percent for the fifth-year.

The amounts determined for any year will be made based on the provisions in effect on the application deadline date for the first calendar year to which the reduction plan applies.

Penalties for Noncompliance. No payment will be made to a hospital for a residency training year if the hospital fails to reduce the number of FTE residents to the number agreed to by the Secretary and the qualifying entity. If payments are made and if the hospital increases the number of residents as of completion of the plan, then, as specified by the Secretary, the entity will be liable for repayment to the Secretary the total amounts paid through the program to the entity. The Secretary will establish rules regarding the counting of residents who are assigned to institutions that are not participating in the plan.

Relation to Demonstration Projects and Authority. Incentive payments for the initial five percent reduction of FTE residents would not apply to a demonstration project that has been approved as of May 27, 1997. As of May 27, 1997, the Secretary is not authorized to approve any demonstration project that provides for additional payments in connection with reductions in the number of residents for any residency training year beginning before July 1, 2006. To implement this voluntary reduction plan, the Secretary may first promulgate regulations that take effect on an interim basis, after notice and pending opportunity for public comment, by not later than six months after enactment.

Special Reimbursement Rule for Primary Care Combined Residency Programs. For residency years beginning on or after July 1, 1997, a resident enrolled in a combined medical residency training program in which all of the (combined) individual programs are for training a primary care resident, the period of board eligibility shall be the minimum number of years of formal training required to satisfy the requirements for initial board eligibility in the longest of the individual programs plus one additional year. A resident in a combined program that includes an obstetrics/gynecology program shall qualify if the other programs with which it is combined are for training a primary care resident. [Note: a primary care training program is defined as a program in family medicine, general internal medicine, general pediatrics, preventive medicine, geriatric medicine, or osteopathic general practice.]

Demonstration Project on the Use of Consortia. The Secretary shall establish a demonstration project under which DGME payments would be made to "qualifying consortia." A qualifying consortium is defined as a teaching hospital with one or more approved medical residency training programs and one or more of the following entities:

• a school of allopathic or osteopathic medicine;
• another teaching hospital, which may be a children's hospital;
• a federally qualified health center;
• a medical group practice;
• a managed care entity;
• an entity furnishing outpatient services; or
• another entity deemed appropriate by the Secretary.

The members of the consortium must agree to participate in the training programs that are operated by the entities in the consortium, and must agree on a method for allocating the payment among the members. The members also must agree to any additional conditions established by the Secretary. The total payment to a qualifying consortium for a fiscal year cannot exceed the amount that would have been paid to the teaching hospital(s) in the consortium. Payments will be made in proportion from each of the Medicare trust funds as the Secretary specifies.

Study of Hospital Overhead and Supervisory Physician Components of Direct Medical Education Costs. The Secretary shall study the variation among hospitals in the overhead and supervisory physician components of their DGME costs and the reasons for the variation. Not later than one year after enactment, the Secretary shall report the results of the study to the appropriate Congressional committees, including recommendations for legislation to reduce "inappropriate" variation.

Recommendations on Long-Term Policies Regarding Teaching Hospitals and Graduate Medical Education (GME). The Medicare Payment Advisory Commission (MedPAC), which replaces the Prospective Payment Assessment and Physician Payment Review Commissions, shall examine and develop recommendations on whether and to what extent Medicare payment policies and other Federal policies regarding teaching hospitals and GME should be changed. Recommendations shall include:

• possible methodologies for making payments for GME and the selection of entities to receive such payments, including issues regarding children's hospitals and approved medical residency programs in pediatrics, and whether and to what extent payments are being made (or should be made) for nursing and other allied health professions training;
• federal policies regarding international medical graduates;
• the dependence of schools of medicine on service-generated income;
• whether and to what extent the needs of the U.S. regarding physician supply in the aggregate and in different specialties will change during the ten-year period beginning on October 1, 1997, and whether and to what extent any such changes will have significant financial effects on teaching hospitals; and
• methods for promoting an appropriate number, mix, and geographic distribution of health professionals.

In conducting the study, the commission shall consult with the Council on Graduate Medical Education (COGME), and individuals with expertise in GME including:

• deans from allopathic and osteopathic schools of medicine;
• chief executive officers from academic health centers, integrated delivery systems, approved medical residency training programs, and teaching hospitals that sponsor approved training programs;
• chairs of departments or divisions from allopathic and osteopathic schools of medicine, schools of dentistry, and approved medical residency training programs in oral surgery;
• individuals with leadership experience from representative fields of non-physician health professionals;
• individuals with substantial experience in U.S. health care workforce issues; and individuals with experience in health care payment policies.

Within two years after enactment, the commission will submit a report to Congress with its recommendations, including the reasons and justification for the recommendations.

Recommendations on Broad-Based GME Financing. The National Bipartisan Commission on the Future of Medicare, a new commission charged with reviewing and analyzing the long-term financial condition of the Medicare program, will "make recommendations regarding the financing of GME, including consideration of alternative broad-based sources of funding for such education and funding for institutions, not currently eligible for such GME support, that conduct approved graduate medical residency programs, such as children's hospitals." The first meeting of the commission will occur before December 1, 1997. The members will be appointed by the President, the Senate Majority Leader and the Speaker of the House, with input from the minority leadership. The commission will submit its report on GME financing and many other issues before March 1, 1999 and then disband.

Medicare Provisions Relating to Physicians

Establishment of a Single Conversion Factor. For services furnished on or after January 1, 1998, physician payments will be based on the 1997 primary care services conversion factor, increased by the weighted average of the three separate updates that would have occurred in the absence of legislation. [The 1997 conversion factors are $40.96 for surgical services, $35.77 for primary care services, and $33.85 for other services.] In subsequent years, the conversion factor will be the conversion factor established for the previous year, updated by an adjusted Medicare Economic Index (MEI).

Establishment of an Update to the Conversion Factor to Match Spending Under a Sustainable Growth Rate. The update to the single conversion factor for a year will equal the Medicare Economic Index (MEI) subject to an "update adjustment factor" to match spending under a "sustainable growth rate" [Note: see the next bullet for the definition of "sustainable growth rate."] The update is limited based on its variation from the MEI. The update may not be more than three percentage points above the MEI, or seven percentage points below the MEI.

Beginning in 1999, the update to the single conversion factor will be the product of:

• one plus the Secretary's estimate of the percentage increase in the MEI for the year (divided by 100) and
• one plus the Secretary's estimate of the update adjustment factor for the year (divided by 100).

One will then be subtracted from this product and then it will be multiplied by 100

The "update adjustment factor" for a year will equal:

• the difference between (1) the sum of the "allowed expenditures for physicians' services" for the period beginning April 1, 1997, and ending on March 31 of the year involved, and (2) the amount of actual expenditures for physicians' services furnished during the period beginning April 1, 1997 and ending on March 31 of the preceding year, divided by

• the actual expenditures for physicians' services for the twelve-month period ending on March 31 of the preceding year, increased by the sustainable growth rate for the fiscal year that begins during the twelve-month period.

• The "allowed expenditures for physicians' services"for the twelve-month period ending with March 31 of:

• 1997 is equal to actual expenditures, as estimated by the Secretary, during the twelve-month period, or

• a subsequent year is equal to the allowed expenditures for the previous year, increased by the"sustainable growth rate" for the fiscal year that begins during the twelve-month period

Replacement of Volume Performance Standard with a Sustainable Growth Rate. The Medicare Volume Performance Standard (MVPS), used to calculate the update in the conversion factor, will be replaced with a sustainable growth rate based on real gross domestic product (GDP) growth. The current MVPS is based on historical growth in volume and intensity of physician services. For FY 1998 and subsequent years, the "sustainable growth rate" for "all physicians' services" (defined below) will be the product of four measures:

• one plus the weighted average percentage increase (estimated by the Secretary and divided by 100) in the fees for all physicians' services in the fiscal year involved;
• one plus the percentage change (estimated by the Secretary and divided by 100) in the average number of individuals enrolled in Part B (other than Medicare+Choice plan enrollees) from the previous fiscal year to the fiscal year involved;
• one plus the Secretary's estimate of the projected percentage growth in real GDP per capita (divided by 100) from the previous fiscal year to the fiscal year involved; and
• one plus the Secretary's estimate of the percentage change (divided by 100) in expenditures for all physicians' services in the fiscal year (compared with the previous fiscal year) which will result from changes in law and regulations, excluding changes in volume and intensity resulting from changes in the conversion factor update.

The result will be reduced by one and multiplied by 100 to obtain a percentage growth rate.

"Physicians' services" include "other items and services (such as clinical diagnostic laboratory tests and radiology services), specified by the Secretary, that are commonly performed or furnished by a physician or in a physician's office." This definition excludes services furnished to Medicare+Choice plan enrollees or to individuals who are receiving benefits through enrollment with an organization with a risk-sharing contract.

The Secretary must publish before August 1 of each fiscal year the sustainable growth rate for each fiscal year beginning with FY 1998. For FY 1998, however, the rate shall be published no later than November 1, 1997.

Payment Rules for Anesthesia Services. Effective for services furnished on or after January 1, 1998, the separate conversion factor for anesthesia services for a year will be 46 percent of the single conversion factor established for other physicians' services, except as adjusted for changes in work, practice expense, or malpractice relative value units.

Implementation of Resource-Based Methodologies. Implementation of the resource-based practice expense methodology will be delayed one-year until January 1, 1999. The new methodology will be phased in over four years. In 1999, 25 percent of the practice payment will be based on the relative practice expense resources used to furnish the service. The percentage will increase to 50 percent in 2000, and 75 percent in 2001. In 2002, the payment will be based solely on the new methodology.

Beginning January 1, 2000, the malpractice expense component will be based on the malpractice expense resources involved in furnishing the service. The adjustments will be budget neutral.

Adjustments in Relative Value Units for 1998. For 1998, a special adjustment will be made. For specified services, the practice expense relative value units will be reduced to 110 percent of the number of work relative value units. The specified services are those for which:

• there are work relative value units; and
• the number of practice expense relative value units (determined for 1998) exceeds 110 percent of the number of work relative value units determined for the year.

Services which the Secretary determines are provided at least 75 percent of the time in an office setting and those services provided in an office or out-of-office setting that are proposed to have increases in practice expense values under the June 18, 1997 Notice of Proposed Rule Making (NPRM) will be excluded from the above reduction.

The Secretary will increase the practice expense relative value units for office visit procedure codes during 1998 by a budget neutral uniform percentage. If the Secretary determines that the aggregate amount of reductions will exceed $390 million, the Secretary will apply a percentage higher than 110 percent so that the estimated reallocation does not exceed $390 million.

Review and Report to Congress. The Comptroller General of the United States will review and evaluate the Secretary's June 18, 1997 NPRM on resource-based methodology. The Comptroller General must consult with representatives of physicians' organizations with respect to data and methodology. Within six months of enactment, the Comptroller General will report to congressional committees on:

• the adequacy of the data used in preparing the rule;
• categories of allowable costs;
• methods for allocating direct and indirect expenses;
• the potential impact of the rule on beneficiary access to services; and
• any other matters related to the appropriateness of resource-based methodology for practice expenses.

The Secretary is required to develop new resource-based practice expense relative value units. The Secretary must utilize, to the maximum extent possible, generally accepted accounting principles which recognize all staff, equipment, supplies and expenses, not just those that can be tied to specific procedures, and use actual data on equipment utilization and other key assumptions. The Secretary shall consult with physicians' organizations regarding methodology and data, and must develop a refinement process to be used during each of the four-years of the transition period.

The Secretary must transmit a report to the House Ways and Means and Commerce Committees and to the Senate Finance Committee by March 1, 1998. The report will include a presentation of data to be used in developing the value units with an explanation of the methodology. The Secretary shall publish a Notice of Proposed Rule Making (NPRM) with the new resource-based relative value units on or before May 1, 1998, and shall allow for a ninety-day public comment period. The proposed rule must include:

• impact projections which compare new proposed payment amounts on data on actual physician practice expenses; and
• impact projections for hospital-based and other specialties, geographic payment localities, and urban versus rural localities.

Dissemination of Hospital-Specific Information on High Per Discharge Relative Values for In-Hospital Physicians' Services. For 1999 and 2001, the Secretary shall determine for each hospital the "hospital-specific per discharge relative value" (defined below) and whether its relative value is projected to be "excessive" based on a percentage of the median of hospital-specific relative values. The Secretary will notify the medical executive committees of a subset of hospitals identified with "excessive hospital-specific relative values," and will "evaluate the responses of the hospitals so notified with the responses of other hospitals so identified that were not so notified." [Note: there is no "withhold" of physician payments as had been proposed in legislation in previous years.]

Teaching hospitals' relative values will be determined separately from non-teaching hospitals and will include the per discharge relative values of interns and residents in addition to the relative values of the hospital's medical staff. The hospital-specific per discharge relative value for teaching hospitals will be the sum of:

• the average per discharge relative value for inpatient physicians' services furnished by the hospital's medical staff, excluding interns and residents, during the second year preceding the calendar year in question, and
• the equivalent per discharge relative value for inpatient physicians' services furnished by interns and residents during the second year preceding the calendar year in question, adjusted for variations in case-mix among hospitals, and in disproportionate share (DSH) and teaching status.

The Secretary will determine the equivalent relative value unit per discharge for interns and residents based on the best available data and may make the adjustment in the aggregate. The Secretary will adjust the allowable per discharge relative values "to take into account the needs of teaching hospitals and hospitals receiving additional payments" under the prospective payment system, or on the basis of classification as Medicare-dependent small rural hospitals. The adjustment for teaching or DSH status cannot be less than zero. A "teaching hospital" is defined as a hospital which has an approved teaching program. An individual furnishing physicians' services is considered to be on the medical staff of the hospital if (in accordance with requirements established by the Joint Commission on Accreditation of Health Organizations):

• the individual is subject to the bylaws, rules and regulations established by the hospital to provide a framework for the self-governance of medical staff activities;
• the individual has clinical privileges granted by the hospital's governing body;
• under the clinical privileges, the individual provides physicians' services independently within the scope of the individual's clinical privileges; or
• the physician provides at least one service to a Medicare inpatient in that hospital.

Use of Private Contracts by Medicare Beneficiaries. Effective January 1, 1998, physicians and other health care practitioners may contract privately with Medicare beneficiaries for health services for which no claim is filed. Certain conditions must be met. The physician or practitioner must not receive Medicare payment for any item or service either directly or on a capitated (e.g., Medicare+Choice) basis. The physician or practitioner must not receive any payment from an organization which receives Medicare reimbursement for any item or service, either directly or on a capitated basis.

A written affidavit, signed by the physician or practitioner, must be in effect at the time services are provided. It must state that the physician or practitioner "will not submit any [Medicare] claim for any item or service provided to any Medicare beneficiary (and will not receive any reimbursement for any such item or service) during the two-year period beginning on the date the affidavit is signed." A copy of the affidavit must be filed with the Secretary within ten days after the first contract is entered into. If a physician or practitioner knowingly and willfully submits a Medicare claim (or receives Medicare reimbursement for) an item or service during the two-year period, the ability to provide services under the private contract provision will not apply for the remainder of the period. Additionally, the physician or practitioner cannot receive Medicare payments during the period.

The private contract must provide specified beneficiary protections. It must be in writing and signed by the Medicare beneficiary before any item or service is provided. It cannot be entered into at a time when the beneficiary is facing an emergency or urgent health care situation. The contract must indicate to the beneficiary that by signing the contract he/she:

• agrees not to submit a claim for services even if he/she is otherwise covered under Medicare;
• agrees to be responsible, whether through insurance or otherwise, for payments of items and services and understands that no Medicare reimbursement will be provided;
• acknowledges that no Medicare limits apply to amounts that may be charged for items or services;
• acknowledges that Medigap plans do not, and other supplemental insurance plans may elect not to, make payments for items and services; and
• acknowledges that the Medicare beneficiary has the right to have items and services provided by other physicians and practitioners for whom Medicare payment would be made.

The contract also must indicate whether the physician or practitioner is excluded from participation in Medicare. The Secretary shall submit a report to Congress by October 1, 2001 on the effect of the private contracting provision on the Medicare program.

Temporary Coverage Restoration for Portable Electrocardiogram Transportation. The separate payment for the transportation of EKG equipment to beneficiaries in their homes or in skilled nursing facilities will be restored and will be based on methods in effect in 1996. The Secretary will make recommendations to Congress by July 1, 1998 as to whether portable X-ray transportation should be covered.

Increased Medicare Reimbursement for Nurse Practitioners and Clinical Nurse Specialists. Effective January 1, 1998, the restriction on settings for payments to nurse practitioners (NPs) and clinical nurse specialists (CNSs) will be removed. [Currently, separate payments are provided for NP services furnished in a nursing facility in collaboration with a physician. NPs and CNSs are now paid directly for services provided in a rural area in collaboration with a physician.]

Direct payment for NP and CNS services will only be made if no facility or other provider charges are paid in connection with the service. Payment will equal 80 percent of the lesser of either: (1) the actual charge, or (2) 85 percent of the fee schedule amount for the same service if provided by a physician. For assistant-at-surgery services, payment will equal 80 percent of the lesser of either: (1) the actual charge, or (2) 85 percent of the amount that would be recognized for a physician serving as an assistant-at-surgery.

A "clinical nurse specialist" is defined as an individual who:

• is a registered nurse and is licensed to practice nursing in the state in which the CNS services are performed, and
• holds a master's degree in a defined clinical area of nursing from an accredited educational institution.

Increased Medicare Reimbursement for Physician Assistants. Effective January 1, 1998, the restriction on settings for payments for services provided by physician assistants (PAs) will be removed. [Currently, separate payments are made for PA services when provided under the supervision of a physician in a hospital, skilled nursing or nursing facility; as an assistant-at-surgery; or in a rural area designated as a health professional shortage area.]

Payment for PA services will be made only if no facility or other provider charges are paid in connection with the service. Payments will be made in the same manner as NP and CNS payments described above. The PA may be in an independent contractor relationship with a physician. Employer status will be determined in accordance with the state laws where the services are performed.

Other Part B Medicare Provisions

Elimination of Formula-Driven Overpayments (FDO) for Certain Outpatient Services. Effective FY 1998, the formula-driven overpayment for ambulatory surgery, radiology and diagnostic procedures will be eliminated. [Currently, beneficiary coinsurance is based on 20 percent of the hospital's submitted charges for the outpatient service, whereas Medicare usually pays based on a blend of the hospital's costs and the amounts paid in other settings for the same service. Because of an anomaly in the current formula, Medicare payments are not reduced by the full amount of the beneficiary copayment.]

Under this provision, beneficiary coinsurance amounts will be deducted later in the calculation for hospital outpatient ambulatory surgery, radiology, and other diagnostic services so that Medicare payments for covered services will be lower and will reflect the full amount of beneficiary coinsurance. Medicare's payment will equal the blended amount less any amount the hospital charges the beneficiary as coinsurance for services furnished during portions of cost reporting periods occurring on or after October 1, 1997.

Extension of Reductions in Payments for Costs of Hospital Outpatient Services. The current 10 percent reduction in payments for outpatient capital-related costs will be extended until January 1, 2000, and will be folded into the new outpatient prospective payment system.

The current 5.8 percent reduction for those outpatient services paid on a reasonable cost basis will be extended until January 1, 2000, and will be folded into the new outpatient prospective payment system.

Prospective Payment System for Hospital Outpatient Services. A prospective payment system for covered hospital outpatient department (OPD) services will be implemented effective January 1, 1999. The Secretary will develop a classification system for covered OPD services and may establish groups of covered OPD services within the classification system, so that services classified within each group are comparable clinically and use similar amounts of resources. The Secretary will establish relative payment weights based on median hospital costs, using 1996 claims data and the most recent available cost reports. The Secretary also will project the frequency of utilization of each service (or group of services) in 1999.

The Secretary shall determine a budget-neutral wage adjustment to adjust the labor-related portion of the payment and coinsurance for relative differences in labor and labor-related costs across geographic areas. The Secretary will "establish other adjustments, in a budget neutral manner, as determined to be necessary to ensure equitable payments, such as outlier adjustments or adjustments for certain classes of hospitals." The Secretary is also required to develop a method for controlling unnecessary increases in the volume of covered OPD services.

Calculation of Base Amounts. Hospital OPD coinsurance payments will be limited to 20 percent of the national median of charges for the service (or group of services) furnished in 1996, updated to 1999 using the Secretary's estimate of charge growth during the period. The Secretary will establish rules for setting a coinsurance payment for a service not furnished during 1996.

For 1999, the Secretary will establish a conversion factor for determining the Medicare pre-deductible OPD fee payment amounts for each service so that the sum of the products of the Medicare OPD payment amounts and utilization projections for each service will equal the total amounts estimated by the Secretary that would be paid for outpatient services in 1999. In subsequent years, the Secretary will establish a conversion factor in an amount equal to the conversion factor for 1999 and applicable to services furnished in the previous year, increased by the OPD payment increase factor.

The OPD payment increase factor will be the market basket increase minus one percentage point for 2000 through 2002, and market basket in subsequent years. It will be used to update the entire fee schedule amount (Medicare program payments plus beneficiary coinsurance payments).

Beneficiary coinsurance payments will be subtracted from the fee schedule amount to determine Medicare program payments. Hospitals may elect to reduce the coinsurance payment for some or all covered OPD services to an amount that is not less than 20 percent of the total Medicare OPD fee schedule amount. A reduced coinsurance payment cannot be further reduced or increased during the year involved, and hospitals may disseminate information on the reduction of coinsurance amounts.

Periodic Review. The Secretary may review and revise periodically the groups, relative payment weights, and the wage and other adjustments to account for changes in medical practice, medical technology, the addition of new services, new cost data, and other relevant information and factors. If the Secretary determines that the volume of services has increased beyond amounts established through the system's methodologies, the Secretary shall adjust the update to the conversion factor in a subsequent year.

The outpatient PPS will not be implemented for cancer hospitals until January 1, 2000, and the Secretary is authorized to establish a separate conversion factor for these hospitals that takes into account the unique costs they incur due to their patient population and service intensity. The conference report notes that the Secretary has discretion in determining the adjustment factors that will be applied to the outpatient PPS. The Conferees ask the Secretary to examine whether an adjustment is warranted for eye and ear hospitals that received payments under a different blend formula for cost reporting periods beginning on or after October 1, 1988 and before January 1, 1995.

Updates for Ambulatory Surgical Services. In each of fiscal years 1998 through 2002, the update for ambulatory surgical center (ASC) services will be the increase in CPI-U minus 2.0 percentage points, but not below zero. The provision does not include updates for succeeding years.

Medicare Provisions Relating to Part A

PPS Hospital Payment Update. The update to hospital Medicare prospective payment rates will be zero percent in FY 1998; market basket percentage increase minus 1.9 percentage points in FY 1999; market basket percentage increase minus 1.8 percentage points in FY 2000; market basket percentage increase minus 1.1 percentage points in FY 2001 and FY 2002; and the market basket percentage increase in FY 2003 and subsequent years. [Note: the market basket percentage increase is projected to be 2.8 percent in FY 1998; 3.5 percent in FY 1999 through FY 2001 and 3.4 percent thereafter.]

Temporary Relief for Certain Non-Teaching, Non-DSH Hospitals. A different update will be set in FY 1998 and FY 1999 for certain hospitals that receive no IME or DSH payments or are not Medicare-dependent hospitals. A hospital can qualify for the higher update if it is located in a state where the 1995 aggregate PPS costs for all such hospitals exceeded the aggregate PPS payments, and the hospital has higher PPS costs than payments in the cost reporting year beginning on or after October 1, 1997 or October 1, 1998. In FY 1998 these hospitals will receive an update to their payment amounts of 0.5 percentage points (other hospitals receive no update). In FY 1999, these hospitals will receive an additional 0.3 percentage points to the update stated above. These additional amounts are not permanently included in the prospective payment system. The Secretary will make estimated interim payments to these hospitals and then reconcile the amounts when their respective cost reports are settled.

Disproportionate Share (DSH) Payments. DSH payments will be reduced by 1 percent in FY 1998; 2 percent in FY 1999; 3 percent in FY 2000; 4 percent in FY 2001; 5 percent in FY 2002; and 0 percent in FY 2003 and thereafter. One year after enactment, the Secretary must submit a report to the Ways and Means and the Senate Finance Committees on a new formula for making DSH payments. In determining the formula the Secretary shall:

• establish a single threshold for costs incurred by hospitals in serving low-income patients; and
• consider the costs incurred by hospitals in serving individuals entitled to Medicare Part A and Supplemental Security Income (SSI) benefits, and the costs incurred in serving individuals who are receiving Medicaid but are not entitled to Medicare Part A benefits, including individuals enrolled in managed care organizations or any other managed care plan under Medicaid and individuals who receive medical assistance in a state with an 1115 Medicaid waiver.

The Secretary may require hospitals receiving DSH payments to submit information to develop the formula.

Elimination of IME and DSH Payments Attributable to Outlier Payments. For discharges occurring after September 30, 1997, the IME and DSH adjustments will be made only to the base payment amount for a case, not to the outlier portion of a hospital's payment. [Note: this change, combined with promised appropriate regulatory action by the Secretary, will make it easier for extraordinarily costly cases in teaching and DSH hospitals to qualify as outlier cases. At the same time this legislative provision is implemented, the Secretary will issue rules to eliminate standardizing costs by IME and DSH. This change in the standardization process is a companion regulatory adjustment to the above legislative change. In general, teaching hospitals will benefit from these two changes.]

Certain Hospital Discharges to Post Acute Care. Beginning on or after October 1, 1998, payments to PPS hospitals that discharge patients to a skilled nursing facility, PPS-exempt facility, or to home health care (provided after a discharge within an appropriate period defined by the Secretary) will be reduced for a specified group of ten diagnosis-related groups (DRGs). The Secretary will determine the DRGs based on those with a high volume of discharges and a disproportionate use of post acute care services.

The PPS hospital that transfers the patient will be paid based on a per diem rate. If the Secretary determines that a substantial portion of the costs of care are incurred early in the hospital stay, the PPS hospital will receive a more generous payment: a blend of 50 percent of the DRG payment and 50 percent of the transfer per diem payment. The receiving facility's payment is not affected. The provision excludes discharges from hospitals that transfer patients to swing beds.

For the proposed and final rules for FY 2001, the Secretary is authorized to include an impact analysis of this provision and the Secretary may propose to include additional post discharge settings and DRGs to the transfer policy.

Maintaining Savings from Temporary Reduction in Capital Payments for PPS Hospitals. Savings from the temporary reduction in capital payments will be maintained by applying the budget neutrality adjustment factor used to determine the federal capital payment rate on September 30, 1995 to the unadjusted standard federal capital rate in effect on September 30, 1997 and to the unadjusted hospital-specific rate in effect on September 30, 1997, and reducing both rates by an additional 2.1 percent. This provision will reduce PPS inpatient capital-related payments by 17.8 percent in FY 1998. A 15.7 percent reduction is permanently built into the rates. The additional 2.1 percent reduction expires at the end of FY 2002.

The exceptions process for certain capital projects under the PPS will not be revised.

Reductions in Payments for Enrollee Bad Debt. Payments to hospitals for their bad debt related to Medicare will be reduced by 25 percent in FY 1998; 40 percent in FY 1999; and by 45 percent in FY 2000 and subsequent years.

Permanent Extension of Hemophilia Pass-Through. Effective October 1, 1997, the payment is made permanent for the costs of administering blood clotting factor to Medicare beneficiaries with hemophilia admitted for hospital stays where the clotting factor was furnished between June 19, 1990 and September 30, 1994.

Geographic Reclassification for Certain Disproportionately Large Hospitals. The Secretary is required to use alternative reclassification guidelines beginning in FY 1998 for certain hospitals that submitted reclassification applications in each of fiscal years 1992 through 1997. A hospital must demonstrate that:

• its average hourly wages are 108 percent or more than the average hourly wage paid by all other hospitals in the Metropolitan Statistical Area (MSA) where the hospital is located, and
• it pays not less than 40 percent of the adjusted uninflated wages paid by all hospitals in the MSA.

Other Medicare Provisions of Interest

Provider Sponsored Organizations (PSOs). Hospitals and physicians will be able to form cooperative arrangements called Provider Sponsored Organizations (PSOs). In order to provide services as a Medicare+Choice plan, PSOs will have to be licensed by the states and also be certified by the federal government as a Medicare+Choice plan. PSOs will be able to enroll Medicare beneficiaries beginning in January 1, 1999. Federal solvency standards will be established through abridged rulemaking. The Secretary is directed to publish a proposed rule on solvency standards 45 days after enactment with a 15 day public comment period. The final rule will be published one year after enactment. The Secretary will waive the state licensure requirement for 36 months if the following conditions are not met: (1) the state fails to complete action on the application within 90 days after receipt of the application; (2) the state denies the application based on solvency standards other than those established by the Secretary; (3) the state denies the application based on standards applicable to other organizations involved in a similar business; and (4) the state requires that the PSO offer a plan other than a Medicare+Choice plan. Waiver applications will be accepted until November 1, 2002, and federal waivers cannot be renewed.

Medicare Prepaid Competitive Pricing Demonstration Project. The Secretary is required beginning January 1, 1999, to conduct up to seven demonstration projects that apply a competitive pricing methodology to payments to Medicare+Choice organizations. The Secretary shall appoint the Competitive Pricing Advisory Committee to make recommendations concerning the designation of areas for inclusion in the project and appropriate research design. The Secretary, with assistance from the Competitive Pricing Advisory Committee, will establish for each area the benefit design among plans offered in the area, structure the method for selecting plans, establish methods for setting the price to be paid to plans, and provide for the collection of plan information, dissemination of information and methods of evaluating the project. The Secretary also shall appoint, upon designation of an area for inclusion in the project, an Area Advisory Committee to advise the Secretary on how the project will be implemented.

By December 31, 2002 the Secretary shall submit a report to Congress on the progress under the project, including any legislative recommendations for extending the project to the entire Medicare population.

Informatics, Telemedicine, and Education Demonstration Project. Nine months after enactment, the Secretary shall provide for a four-year demonstration project to use "eligible health care provider telemedicine networks" to apply high-capacity computing and advanced networks to improve primary care and prevent health care complications to Medicare beneficiaries with diabetes mellitus who are residents of medically underserved rural areas or residents of medically underserved inner-city areas.

An eligible health care provider telemedicine network is defined as a consortium that includes at lest one tertiary care hospital (but no more than two such hospitals), at least one medical school, no more than four facilities in rural or urban areas, and at least one regional telecommunications provider that meets specified requirements. The consortium must be located in an area with a high concentration of medical schools and tertiary care facilities and must have appropriate arrangements with such schools and facilities to carry out the project.

The provision defines those services to be covered under Part B for the project. Medicare payment will be made at the rate of 50 percent of the reasonable costs of providing such services. The total amount of Medicare payments permitted under the project will be $30 million. Limits on beneficiary cost sharing are set at 20 percent of the costs of the project attributable to these services. The Secretary is required to submit interim and final reports to the House Ways and Means, House Commerce, and Senate Finance Committees.

Medicare Reimbursement for Telehealth Services. The Secretary is required to make Part B payments for telehealth services by no later than January 1, 1999 for professional consultation via telecommunications systems with a physician or a practitioner for services to beneficiaries residing in a county designated as a health professional shortage area, or a rural county not adjacent to a MSA. The Secretary shall establish a methodology for determining the amount of payment. The payments will be subject to Medicare coinsurance and deductible requirements, and balanced billing limits will apply to services furnished by non-participating physicians. Payments will be increased annually by the update factor for physician services under the fee schedule.

Centers of Excellence. This provision, which would have created a new program to use a competitive process to contract with specific hospitals or other entities for furnishing inpatient services to Medicare beneficiaries, was dropped from the legislation.

Medicare Payment Advisory Commission (MedPAC). This commission will replace the Prospective Payment Assessment and Physician Payment Review Commissions. The new 15-member MedPAC will make recommendations to Congress annually on Medicare fee-for-service and managed care payment policies and will monitor their effect on access and quality. MedPAC also will review risk selection and enrollment policies of Medicare+Choice plans. The commission will make recommendations on GME (Note: see earlier discussion).

National Bipartisan Commission on the Future of Medicare. A new 17-member commission, the National Bipartisan Commission on the Future of Medicare, will be created to address issues related to the program's long-term solvency, resulting from the retirement of the baby boom generation. It also will make recommendations on the financing of GME (Note: see earlier discussion). The commission will report to Congress by March 1, 1999 and will terminate 30 days after the report is submitted.

Changes in Annual Rule Publication Dates. To comply with congressional review of agency rulemaking, the publication date for the final rule implementing the PPS update and other changes to the prospective payment system will be changed from September 1 to August 1 beginning with FY 1999. The proposed rule publication date will be moved from May 1 to April 1. For the physician fee schedule, the date is changed to November beginning with 1998.