Medicare Prescription Drug Improvement
and Modernization Act of 2003
The President has signed into law the Medicare Prescription Drug Improvement
and Modernization Act of 2003. The Act is a far-reaching recasting of the
Medicare law, most notably in the creation of a new drug benefit. It also makes
major changes to the Medicare coordinated care plan program, now to be called
Medicare Advantage, radically restructures the Medicare intermediary contracting
program, changes provider reimbursement, creates a new form of health savings
account with potentially significant tax advantages, and changes many other
aspects of the almost 40-year old program. We summarize the Act below.
The summary is organized by topic, paralleling the Act.
Title I
Title II
Title III
Title IV
Title V
Title VI
Title VII
Title VIII
Title IX
Title X
Title XI
Title XII
Medicare Prescription Drug Benefit
Medicare Advantage Program
Combating Waste, Fraud and Abuse
Rural Provisions
Changes to Part A
Changes to Part B
Changes to Parts A and B
Cost Containment
Regulatory and Contracting Reform
Medicaid and Miscellaneous Provisions
Access to Affordable Pharmaceuticals
Tax Provisions
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Title I
Medicare Prescription Drug Benefit
The new Medicare drug benefit begins in 2006. Beneficiaries can obtain the benefit
either by joining a private drug plan to go along with their fee-for-service Medicare
enrollment, or joining a Medicare Advantage managed care program offering a drug
benefit. The law also makes notable changes in Medigap law requirements and
incentivizes employee plan sponsors not to drop their retiree drug benefits.
Key portions of the Act affecting drug benefits are:
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Establishment of Voluntary Prescription Drug Plans
Benefit Structure and Coverage
Negotiated Manufacturer Prices
Covered Drugs
Beneficiary Choice of Plans
Plan Approval Process
Beneficiary Protections
Any Willing Provider
Formulary Standards
Electronic Prescriptions
Premiums and Subsidies
Relationship to Other Coverage
Transitional Medicare Discount Card
ESTABLISHMENT OF VOLUNTARY PRESCRIPTION DRUG PLANS
The Act establishes Part D of the Medicare Program to provide a “voluntary” prescription
drug benefit plan for individuals who are entitled to Part A or enrolled in Part B of the
Medicare Program (via newly created sections 1860D-1 through 1860D42 of the Social
Security Act). Eligible individuals will not receive Part D benefits unless they enroll in a
qualified plan. All benefits under Part D are subject to Medicare Secondary Payer
(“MSP”) requirements set forth in 42 U.S.C. § 1395y.
Part D coverage will be available through two different types of plans. First, drug
coverage will be available as an “add-on” to fee-for-service Medicare coverage, through
a stand-alone prescription drug plan (known as “PDP”). In addition, a beneficiary who
enrolls in a Medicare Advantage (MA) plan (successors to Medicare+Choice Part C
plans) that provides Part D qualified prescription drug coverage (which will be called
“MA–PD plans") will obtain coverage through the MA-PD plan. All MA plans must
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provide at least one MA-PD plan in their service area. Private fee-for-service MA plans
are not required to provide drug coverage. Enrollees in these plans may enroll in a PDP
plan, as may enrollees in Medicare medical savings accounts (MSAs). An MA enrollee
who continues enrollment in an MA plan that provides a package of benefits without
prescription drug coverage is assumed to have waived coverage under Part D.
Coverage under Part D begins January 1, 2006. The enrollment process for PDP plans
will be similar to and coordinated with enrollment in MA–PD plans. There will be a sixmonth initial enrollment period, beginning November 15, 2005, for all persons who are
eligible beneficiaries on that date, and an initial six-month enrollment period for all
individuals becoming eligible thereafter. Part D authorizes a separate enrollment process
for so-called “special circumstances,” similar to special enrollment periods permitted
under HIPAA, when an eligible individual loses creditable prescription drug coverage
such as under a group health plan, or experiences a reduction in PDP coverage.
BENEFIT STRUCTURE AND COVERAGE
Section 1860D–2 specifies the benefit design requirements for qualified prescription drug
coverage. Qualified coverage is either “standard prescription drug coverage”
or “alternative prescription drug coverage” with at least actuarially equivalent benefits.
Standard Coverage
For 2006, “standard prescription drug coverage” is defined as having a $250 deductible;
25% coinsurance up to the initial coverage limit ($2,250); and catastrophic coverage after
an individual incurs $3,600 in out of pocket expenses. Beginning in 2007, the annual
dollar amounts would be increased by the annual percentage increase in average per
capita aggregate expenditures for covered outpatient drugs for Medicare beneficiaries for
the 12-month period ending in July of the previous year.
Once the beneficiary reaches the catastrophic limit, the program would pay all costs
except for nominal cost-sharing (equal to the greater of a copayment of $2 for a generic
drug and $5 for any other drug, or five percent coinsurance.) PDP sponsors and MA
plans are permitted to reduce cost-sharing for formulary or generic drugs.
Plans may substitute cost-sharing requirements, for costs up to the initial coverage limit
that were actuarially consistent with an average expected 25% coinsurance for costs up to
the initial coverage limit. They could also apply tiered copayments, provided such
copayments were actuarially consistent with the average 25% cost-sharing requirements.
Incurred costs count toward meeting the catastrophic limit only if they are incurred for
the deductible, cost-sharing, and benefits not paid because of application of the initial
coverage limit. Incurred costs do not include out of pocket payments made because of
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the application of a formulary, but do include subsidies made on behalf of a low
income individual, or payments under a state pharmaceutical assistance program (SPAP).
Incurred costs do not include expenses that are reimbursed by any other insurance.
The Secretary is authorized to establish procedures for alerting a PDP or MA-PD of an
individual’s enrollment in another insurance plan. If an individual materially
misrepresents other coverage or reimbursement by insurance of covered expenses, the
individual could be terminated from Part D enrollment.
Alternative Coverage
PDP and MA-PD plans are permitted to offer alternative coverage that is at least
actuarially equivalent to the standard Part D benefit, provided that the alternative
coverage includes an initial deductible that is no more than the deductible in the standard
plan and provides the same threshold for catastrophic coverage. Within these
requirements plans may change the cost sharing for the drug benefit, implement
different formularies, and the benefit limit can be modified while still
maintaining actuarial equivalence.
Supplemental Coverage
An MA–PD or PDP plan may also provide supplemental prescription drug coverage to its
own enrollees, that provides for a reduction in the annual deductible, reductions
in coinsurance or cost-sharing required, or increases in drug coverage above the benefit
limit. A PDP sponsor may not offer a plan of supplemental benefits unless it also offers a
basic plan in the same service area.
Demonstration Project Authority
To address a concern that reinsurance subsidies may create significant disincentives for
private sector plans to provide supplemental prescription drug coverage, the Secretary’s
current Medicare demonstration authority has been expanded to include Part C and Part
D. The Conference Report singles out several areas in particular that Congress would
like to be the subject of a demonstration project. These include filling in the gap in
coverage by reimbursing participating plans a capitated payment that is actuarially
equivalent to the amount that plans would otherwise receive from the government in the
form of specific reinsurance when an individual plan enrollee reaches the catastrophic
attachment point, and determining whether payments for non-Medicare services would
result in more economical provision and more effective utilization of Medicare services
provided by PDP and MA-PD plans
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NEGOTIATED MANUFACTURER PRICES AND TREATMENT FOR MEDICAID
“BEST PRICE” PURPOSES
Both standard and alternative qualified drug plans must provide beneficiaries with access
to negotiated prices, whether or not benefits are payable by the plan. The beneficiary will
thus get the benefit of negotiated price concessions that the plan has negotiated with a
manufacturer, specifically including discounts, direct or indirect subsidies, rebates, and
direct or indirect remunerations. It is unclear to what extent “indirect” subsidies or
remuneration will be interpreted to include all amounts that are paid by a manufacturer to
a plan, such as payments for services under a separate agreement. In addition, a PDP or
MA-PD plan sponsor is free to negotiate prices without regard to the impact of negotiated
discounts on “best price” determinations under Medicaid.
The PDP sponsor or MA–PD entity is required to disclose to the Secretary of Health and
Human Services (the “Secretary”) the aggregate negotiated price concessions
made available to the sponsor or organization and passed through in the form of lower
subsidies, lower monthly beneficiary premiums, and lower prices through pharmacies and
other dispensers. Manufacturers are also required to disclose pricing information to the
Secretary on a confidential basis.
In order to promote competition, the Secretary is prohibited from interfering with the
negotiations between drug manufacturers and pharmacies and PDP sponsors. Further, the
Secretary may not require a particular formulary or require a particular price structure for
the reimbursement of covered drugs.
COVERED DRUGS
Covered outpatient drugs are defined to include most covered outpatient drugs for a
medically accepted indication, as well as insulin, and medical supplies associated with
the administration of insulin. Drugs excluded from Medicaid coverage are excluded from
the definition, with the exception of smoking cessation drugs. In addition, drugs (or
medical supplies) that can be paid for under Medicare Part B are not covered under Part
D. A drug otherwise eligible for coverage could be excluded by a PDP or MA-PD plan if
its use would not meet Medicare’s definition of medically necessary or if it was not
prescribed in accordance with the plan (e.g., not covered under the formulary) or Part D.
BENEFICIARY CHOICE OF PRESCRIPTION DRUG PLANS
Section 1860D–3 requires the Secretary to assure that each beneficiary has a choice
between at least 2 qualifying plans. At least one plan has to be a PDP plan, with a
different sponsor than that of an MA-PD plan available in the PDP region. Section
1860D–11 provides that if feasible, PDP regions will be the same as MA regions, but
different regions may be established to improve access to drug benefits. The service area
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for a plan must include an entire PDP region, but a plan can be offered in more than one
PDP region, including all PDP regions.
If plan sponsors are unwilling to assume full risk in a given PDP region, the Secretary
must enter into limited risk contracts, and, if these alternatives prove inadequate, the
Secretary may approve offering of a fallback plan that assumes no risk of insurance loss.
APPROVAL PROCESS FOR PDP PLANS
Bids. The “bid” submission process for PDP sponsors will be conducted at the same time
and in a similar manner as is now done for MA organizations. In addition to any other
information required by the Secretary, the PDP plan must designate the service area and
the level of risk assumed including whether the sponsor is seeking a modified risk level
(i.e., less than full assumption of insurance risk). Modification of risk levels must apply
to all PDP plans offered by a PDP sponsor in a region. The PDP plan sponsor may also
include in its bid an increase in the federal percentage assumed in the risk corridor or
decrease in the size of risk corridors.
Plan Approval. The Secretary has the authority to negotiate the contract terms with each
approved plan (which is stated in the Conference Report to be similar to the authority the
Director of the Office of Personnel Management with respect to Federal Employee
Health Benefits plans). The Secretary has the authority to approve any number of full-risk
plans, but may approve only the minimum number of limited risk plans necessary for a
region to meet access requirements. Moreover, the Secretary must give priority to
bidders willing to assume the highest level of risk, which may never be de minimus.
Fallback Plans. If there are no acceptable submissions for full-risk of limited risk PDP
plans, the Secretary must establish a separate process for the solicitation of bids from
eligible fallback entities to offer coverage in fallback service areas. The Secretary may
not enter into a single contract to offer a national fallback plan. Instead, the Secretary
must choose a single fallback plan for each fallback service area, pursuant to a
competitive bidding process with a contract period of three years.
The fallback entity may not submit a bid for a PDP plan for any region for the first year
of a contract period. Fallback prescription drug plans are permitted to offer only standard
prescription drug coverage, must pass on negotiated discounts and need to meet any other
requirements specified by the Secretary. The fallback plan is not permitted to engage in
any marketing or branding of the contract.
Under a fallback contract, the Secretary pays actual costs of Part D covered drugs net of
negotiated price concessions, plus prescription management fees tied to performance
management requirements. Beneficiary premiums under fallback plans would be uniform
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and equal to 26 percent of the Secretary’s estimate of the average monthly per
capita actuarial cost to the entity offering the fallback plan.
BENEFICIARY PROTECTIONS
Section 1860D-4 provides for a variety of beneficiary protections for enrollees in PDP
plans. For the most part, these protections are modeled on those that exist for MA plans,
such as the disclosure of information related to the plan’s benefit structure, a drug
utilization management program, quality assurance measures, a medication
therapy management program; and a program to control fraud, waste, and abuse. and
grievance and appeals procedures.
The PDP plan sponsor must provide an exceptions process so that beneficiaries are not
penalized if their physician determines that the beneficiary requires a non-preferred drug
for valid clinical reasons. In addition, each PDP sponsor must require plan pharmacies to
inform enrolled beneficiaries at the time of purchase or delivery of any price differential
between the price to the enrollee and the price of the lowest cost generic drug covered
under the plan that is therapeutically equivalent and bioequivalent and available at the
pharmacy. The Secretary may waive this requirement.
ANY WILLING PROVIDER; CONFLICT OF INTEREST STUDY OF PBM-OWNED
MAIL SERVICE PHARMACIES
Unlike MA plans, PDP sponsors are subject to an “any willing provider” requirement to
permit participation by any pharmacy that meets the plan’s terms and conditions.
However, notwithstanding that requirement, PDP plans may reduce co-payments and
coinsurance for enrollees who use “in network” pharmacies. The implication of this
phrasing is “in network” pharmacies could be a subset of the universe of pharmacies that
are “participating”. In effect, therefore, plans could have two tiers of participating
pharmacies, and two tiers of benefit levels. The PDP sponsor may not rely only on mail
order pharmacies, but must provide “convenient access” to retail pharmacies. The
“convenient access” rules are modeled on those that currently apply to the TRICARE
Retail Pharmacy program administered by the Department of Defense. Sponsors must
also permit enrollees to receive benefits (which may include a 90-day supply) through a
community pharmacy, rather than through mail order. However, it appears that any
differential in charge can be charged to the enrollee.
In another provision affecting pharmacies, Section 110 of H.R. 1 requires the Federal
Trade Commission to conduct a “conflict of interest” study of differences in payment
amounts for services provided to enrollees that utilize pharmacy benefit managers
(PBMs), in order to assess the differences in costs incurred by such enrollees and plans
for drugs dispensed by mail order pharmacies owned by PBMs compared to mail service
pharmacies that are not owned by PBMs, and community pharmacies.
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The study will apparently focus only on mail service pharmacies, and will not distinguish
between community pharmacies that are owned directly or indirectly by a PBM. The
study (which will be completed within 18 months after enactment of the law) is intended
to assess whether a PBM’s ownership of a dispensing mail service pharmacy has an
impact on the cost of benefits to beneficiaries or to the Part D program, through a variety
of measures, such as whether PBM-owned pharmacies dispense fewer generic drugs
within the same therapeutic class; routinely switch patients from lower to higher priced
drugs (in the absence of a clinical indication); sell a higher proportion of
repackaged drugs; or sell repackaged drugs at prices above the manufacturer’s AWP.
FORMULARY STANDARDS
PDP plans may implement a formulary. However, plans must utilize a
pharmaceutical and therapeutic (P&T) committee in doing so. A majority of the
committee’s members must be pharmacists and physicians, and the committee must
include at least one practicing physician and one practicing pharmacist who are
independent and free of conflicts, both having expertise in the care of elderly or disabled
persons.
The legislation tasks the United States Pharmacopoeia (USP) to develop a list of drug
classes, and any PDP formulary must include drugs within each therapeutic category and
class of drugs. With the exception of newly approved therapies, the plan sponsor may
only make changes to the formulary at the beginning of a plan year, after notice has been
provided to the Secretary, beneficiaries, and physicians, pharmacies, and pharmacists.
ELECTRONIC PRESCRIPTION PROGRAM
New Standards
The Secretary must develop electronic prescription standards that apply to prescriptions
for covered part D drugs and required information that are transmitted electronically
under an electronic prescription drug program conducted by a PDP or MA plan. The
program must provide for the electronic transmittal of information on eligibility and
benefits, information on the drug being prescribed and other drugs listed in the patient’s
medication history (including drug-drug interactions), and information on the availability
of lower-cost, therapeutically appropriate alternative drugs.
The standards must accommodate the messaging of information about appropriate
prescribing of drugs and allow a beneficiary to designate a particular pharmacy to
dispense a prescribed drug. Initial standards must be developed by September 1, 2005,
and must take into account recommendations made by the National Committee on Vital
and Health Statistics, but the standards will not become final until the Secretary has
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completed a pilot project. Final electronic prescriptions standards will supersede any
contrary state laws.
Fraud and Abuse Safe Harbors
The Secretary is directed to promulgate an additional safe harbor from applicable fraud
and abuse statutes, including the Stark self-referral prohibitions, for the provision of
“nonmonetary remuneration” that enables the receipt and transmission of electronic
prescription information (i.e., the provisions of hardware, software, and related services).
The safe harbor applies to the provision of such consideration by a hospital to members
of its medical staff, by a group practice to its prescribing members; and by a PDP sponsor
or MA organization to participating pharmacies and prescribing health professionals.
The Conference Report specifically notes that such software and hardware is not intended
to be used for marketing purposes, or to unduly influence the clinical judgment of health
care professionals.
Grants to Promote Electronic Transactions
The Secretary is authorized to make $50 million of grants for the purpose of assisting
physicians to implement electronic prescription programs in order to comply with the
new electronic prescription standards. Physicians who serve a disproportionate number
of Medicare patients or underserved areas are to receive special consideration for the
award of such grants, which may be used for purchasing, leasing, and installing hardware
and software; making upgrades and other improvements; and providing education and
training to eligible physician staff on the use of technology.
ORGANIZATIONAL AND CONTRACTING REQUIREMENTS
The organizational requirements for PDP sponsors are found in Section 1860D–12. The
new section incorporates, by reference, many of the contract requirements applicable to
MA plans including minimum enrollment, contract periods, protections against fraud and
abuse, intermediate sanctions, and contract terminations. The PDP plan sponsor
contract with the Secretary could cover more than one plan.
In general, a PDP sponsor must be licensed as a risk bearing entity eligible to offer health
benefits coverage in each state in which it offers a prescription drug plan. However, the
Secretary is authorized to promulgate solvency standards for entities not licensed by the
state. These standards will supersede state law in the same manner that such laws are
superseded for MA organizations. States are also prohibited from imposing premium
taxes on premiums for PDP plans.
The Secretary may not contract with a PDP sponsor if the entity submitted a bid for the
year (as the first year of the contract period) to offer a fallback plan in any region or
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offered a fallback plan in the region during the previous year. An entity “submits a bid”
even if acts as a subcontractor to a PDP sponsor offering a plan; however this does not
apply to an MA organization insofar as it is acting as a PDP sponsor.
PREMIUMS AND SUBSIDIES
Beneficiary Premiums
The beneficiary premium amount is determined through a formula established in section
1860D–13. The monthly beneficiary premium is based on the national average monthly
bid amount (a weighted average of standardized bid amounts for each prescription drug
plan and each MA–PD plan). The premium will be adjusted to reflect differences
between it and the geographically-adjusted national average monthly bid amount.
Late enrollment penalties would be applied to beneficiaries who failed to maintain
creditable coverage for a period of 63 days (within a continuous period of eligibility),
beginning on the day after the individual’s initial enrollment period and ending on
the date of enrollment in a prescription drug plan or MA–PD plan. Individuals
could apply to the Secretary to waive the requirement under certain circumstances.
Subsidies to Low-Income Beneficiaries
Section 1860D–14 provides premium and cost-sharing subsidies for low-income subsidyeligible individuals. There are several groups of subsidy eligible individuals, and the
amount of the subsidy for eligible individuals depends on their income and resources. In
some cases (e.g., institutionalized dual eligibles) will have no cost sharing.
Eligibility determinations are to be made under the state Medicaid plan for the state or by
the Commissioner of Social Security. The Secretary is to notify the PDP sponsor or MA
organization that an individual is eligible for a subsidy and the amount of the subsidy.
The sponsor or entity would reduce the premiums or cost-sharing otherwise imposed by
the amount of the subsidy, and would periodically be reimbursed for the subsidy.
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Direct Plan Subsidies. Section 1860D–15 provides for the payment of subsidies to
certain entities that offer PDP plans. The purpose of the subsidy is to reduce adverse
selection among plans, and to promote the participation of PDP sponsors and MA
organizations. Payments would be made as direct subsidies and through insurance. The
direct monthly per capita subsidy amount is equal to the plan’s standardized bid amount
adjusted for health status and risk and reduced by the base beneficiary premium as
adjusted to reflect the difference between the bid and the national average
bid. Reinsurance payments, equal to 80% of allowable costs, would also be provided for
an enrollee whose costs exceeded the annual out-of-pocket threshold ($3,600 in 2006).
Use of Risk Corridors to Adjust Payments to Plans. Section 1860D–15 also provides a
mechanism that can result in adjustments to the amount of payment due to the PDP plan
through the use of risk corridors, which are defined as specified percentages above and
below a target amount. Risk corridors are intended to create incentives for plans to enter
the market. No payment adjustments will be made if adjusted allowable costs for the
plan are at least equal to the first threshold lower limit of the first risk corridor but not
greater than the first threshold upper limit of the risk corridor for the year, i.e. if the plans
are within the first risk corridor. A portion of any plan spending above or below these
levels is subject to risk adjustment. Adjusted allowable costs are reduced by reinsurance
and subsidy payments.
During 2006 and 2007, plans would be at full risk for adjusted allowable risk corridor
costs within 2.5% above or below the target. Plans with adjusted allowable costs above
this level would receive increased payments. If their costs were between 2.5% of the
target (first threshold upper limit) and 5% of the target (second threshold upper limit),
they would be at risk for 25% of the increased amount; that is their payments would equal
75% of adjusted allowable costs for spending in this range. If their costs were above
5% of the target they would be at risk for 25% of the costs between the first and second
threshold upper limits and 20% of the costs above that amount. That is their payments
would equal 80% of the adjusted allowable costs over the second threshold upper limit.
Conversely, if plans fell below the target, they would share the savings with the
government. They would have to refund 75% of the savings if costs fell between 2.5%
and 5% below the target level, and 80% of any amounts below 5% of the target. A higher
risk sharing percentage would apply in 2006 and 2007 if the Secretary determines that 60
percent of prescription drug plans and MA–PD plans, representing at least 60 percent
of beneficiaries enrolled in such plans have adjusted allowable costs that are more than
the first threshold upper limit. In this case, payment to plans would equal 90 percent of
adjusted allowable costs between the first and second upper threshold limits.
The risk corridors will be adjusted for the years 2008–2011, such that PDP plans will be
at a higher degree of risk than they would be initially, and the government will be eligible
for a lower percentage of any savings if utilization falls below the established targets.
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RELATIONSHIP OF PART D TO OTHER PRESCRIPTION DRUG COVERAGE
Employer Sponsored Programs
In an effort to prevent employers from dropping retiree prescription drug coverage,
section 1860D–22 establishes special rules for qualified retiree prescription drug plans
that are employment based group health plans (e.g., ERISA plans, federal and state
governmental plans, and church plans). Under certain conditions, the Secretary is
required to make subsidy payments to sponsors of qualified retiree prescription drug
plans. These payments will be made on behalf of an individual covered under the plan
who is entitled to enroll under a PDP or MA–PD plan but elects not to. Subsidy payments
will equal 28% of gross covered retiree plan-related prescription drug costs greater than
$250 but not greater than $5,000, adjusted annually.
An individual covered by a retiree group health plan is not precluded from enrolling in a
PDP plan or MA–PD plan or from having the employment based plan pay the retiree’s
premium under the PDP or MA-PD plan. Under MSP rules, the PDP or MA-PD
plan would constitute primary coverage, not the employer.
Employment based retiree coverage may provide coverage that is better than standard
coverage to retirees under a qualified retiree prescription drug plan. In addition, unlike
Medigap plans, employment-based retiree health coverage may provide coverage that is
supplemental to benefits provided under a prescription drug plan or MA–PD plan.
In addition, under section 111, the Comptroller General is directed to conduct an initial
study to examine trends in employment-based retiree health coverage prior to the date of
the enactment of the Act, including the opinions of plan sponsors concerning which of
the options available under the Act they are most likely to utilize for the provision of
health coverage to their Medicare-eligible retirees, and what impact Part D may have on
employers in maintaining levels of retiree health benefits after the date of the enactment
of the Act. A final study to follow up the initial study is also planned.
Coordination with State Pharmaceutical Assistance Programs and Other Plans
Section 1860D–23 requires the Secretary, by July 1, 2005, to establish requirements to
ensure effective coordination between a Part D plan (both a prescription drug plan and
MA–PD plan) and a state pharmaceutical assistance program (SPAP). The coordination
requirements relate to payment of premiums and coverage and payment for supplemental
drug benefits, and assistance with cost-sharing. State pharmacy assistance programs are
permitted to act as administrative intermediaries for the purpose of facilitating enrollment
of SPAP members in prescription drug plans and in the discount card program.
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Section 1860D–24 requires the Secretary to apply the coordination requirements
established under the New Section 1860D–23 to other prescription plans including
Medicaid (including 1115 waiver plans), group health plans, federal employee health
benefits plan, and military coverage (including TRICARE). The coordination
requirements include coordination of procedures to establish third-party reimbursement
of out-of-pocket costs.
Medicaid Amendments.
H.R. 1 adds Section 1935 to the Social Security Act, entitled “Special Provisions Relating
to Medicare Prescription Drug Benefit.” In order to receive federal Medicaid assistance,
states are required to provide the Secretary with Medicaid eligibility information
necessary to carry out transitional prescription drug assistance verification. They are
required to make eligibility determinations for low-income premium and costsharing subsidies, inform the Secretary of cases where eligibility has been established,
and otherwise provide the Secretary with information that may be needed to carry out
Part D. Further, as part of the eligibility determination process, states are required to
make determinations for Medicare cost-sharing assistance. Regular federal matching
applies to these activities. The provision also provides for the federal phase-in of the
costs of premiums and cost-sharing subsidies for dual eligibles (i.e., persons eligible for
Medicare and full Medicaid benefits, including drugs), and a phased-down state
contribution.
Medigap Amendments
Effective January 1, 2006, 42 U.S.C. § 1395ss prohibits the selling, issuance, or renewal
of existing Medigap policies with prescription drug coverage for Part D enrollees. The
purpose of this prohibition is not only to avoid the purchase of duplicate coverage, but to
require eligible individuals to bear the cost of prescription drug expenses that are
provided for in the standard PDP plan. The prohibition does not apply to renewal of
Medigap prescription policies for persons who are not Part D enrollees. Persons
enrolling under Part D during the initial enrollment period may also enroll in a Medigap
plan without drug coverage, or continue their previous policy as modified to exclude
drugs. Specific policies identified in the legislation may be offered to new enrollees.
The legislation (section 104) also provides for the creation of several new benefit
packages, and for an assessment of existing benefit packages, to update standards to
reflect other changes in law. Medigap issuers cannot be required to participate as a PDP
sponsor under the new Part D, nor could a State make such a requirement.
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MEDICARE PRESCRIPTION DRUG DISCOUNT CARD AND TRANSITIONAL
ASSISTANCE PROGRAM
Section 1860D–31 requires the Secretary to establish within six months a program
to endorse voluntary prescription drug discount card programs. This provision gives
statutory authorization to the type of discount card program that the Secretary had sought
to implement previously, but which had been struck down in court for lack of legal
authority.
Eligibility and Enrollment. All persons entitled to Part A or enrolled in Part B of the
Medicare program are eligible to participate in the discount card program. Individuals
enrolled in Medicaid who are entitled to any medical assistance for outpatient drugs are
not eligible. A discount eligible individual may only enroll in one card program at a time
and could voluntarily disenroll at any time. Re-enrollment would be limited to the open
enrollment period or under the exceptional circumstances specified by the Secretary. A
Medicare + Choice organization or a reasonable cost contractor may elect to limit
enrollment in its discount card program to eligible enrollees enrolled in the plan. If the
organization elects this option, its enrollees may only enroll in the discount card program
offered by that sponsor.
Fees. Other than an annual enrollment fee of no more than $30, a prescription drug card
sponsor (and any of its participating pharmacies) may not charge enrollees to provide any
service (e.g., access to information or toll-free telephone service) that is required to
be provided under the program.
Negotiated Prices and Access to Services. Each card sponsor must provide enrollees with
access to negotiated prices for covered drugs, with provision for disclosure of negotiated
prices. Enrollees may not be charged more than the lower of the negotiated price or the
usual and customary price. Discount care negotiated prices will not be taken into account
for purposes of the Medicaid “Best Price” rebate program. Discount programs must meet
the same “convenient access” to retail pharmacies as PDP plans.
Transitional Assistance to Low-Income Individuals. Assistance is provided for lowincome persons enrolled in endorsed programs for 2004 and 2005. In addition to being
entitled to payment of any enrollment fee, “transitional assistance eligible individuals”
with incomes below 100% of poverty would be liable for coinsurance charges of 5% of
incurred costs up to $600 per year, and those with incomes between 100% and 135% of
poverty would be liable for coinsurance charges of 10% of incurred costs up to $600 per
year, through December 31, 2005.
Qualifications for Card Sponsors. Card sponsors can be any nongovernmental entity that
the Secretary determines is appropriate to offer an endorsed discount card program,
including a PBM, a wholesale or retail pharmacy delivery system, an insurer, or a
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Medicare+Choice plan. Each sponsor must submit an application to the Secretary, who
will determine whether to endorse the program. An endorsement would be for the
duration of the discount card program. The Secretary is directed to ensure that at least 2
endorsed programs offered by different sponsors are available to each eligible individual.
The Secretary may otherwise limit the number of sponsors that are awarded contracts in a
given state. Card sponsors are required to permit eligible individuals in all parts of
the state to enroll, except for a Medicare + Choice organization that elects to limit
enrollment in its program to enrollees of its Medicare+Choice plan.
Beneficiary Protections. Each card sponsor will be required to provide meaningful
procedures for hearing and resolving grievances between the sponsor and enrollees in a
manner similar to that required for Medicare+Choice. A card sponsor is a covered
entity for purposes of applying the administrative simplification provisions established in
Part C of Title XI of the Social Security Act. However, the Secretary could waive
relevant portions of privacy regulations for a limited period of time in order to promote
participation of sponsors. The sponsor of a card program may not provide or market
services under the program except if the product or service is directly related to a covered
discount card drug or a discount price for a nonprescription drug.
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Title II
Medicare Advantage Program
Title II establishes the new Medicare Advantage program, replacing and expanding on
the prior Medicare + Choice program. The initiative increases payments for participating
plans, creates a new category of “regional” Medicare plans, and makes other important
program changes. All references in the prior law to Medicare + Choice plans are now
changed to Medicare Advantage (“MA”).
Changes are addressed under the following headings:
Immediate Improvements
Establishment of MA Regional Plans
Competitive Bidding Program Starting 2006
Other Changes
IMMEDIATE IMPROVEMENTS

To make the program more attractive, starting in 2004, Medicare Advantage plans
will be paid no less than the cost of providing fee-for-service care to enrollees in
traditional Medicare in their area. Rates will increase with the same growth rate
as fee-for-service (“FFS”) Medicare costs, without the cap from recent years. The
formula will be adjusted to remove direct medical education costs that are built
into FFS provider reimbursements from the MA rate, and to include the additional
payments that would have been incurred in FFS Medicare if beneficiaries had not
obtained services at Department of Veteran Affairs or Department of Defense
facilities. In 2004, rate changes will not be recalculated to achieve budget
neutrality.

Payment rules for enrolling or terminating beneficiaries who are in a short- term
general hospital will be extended to those in rehab hospitals, a rehab unit or a
long-term care hospital.

The Secretary of HHS will calculate the revised 2004 rates within 6 weeks of the
law’s enactment, and then transiting them into effect for 2004. Plans who have
already submitted notices of termination will have time to change their mind.

Payment changes will begin in March 2004, with catch-up rate adjustments made
after the fact for January and February.
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
Plans may submit revised premiums, cost sharing or benefits to HHS, and must
notify beneficiaries within three weeks after approval from the Secretary.
 If a private FFS MA plan has an adequate provider network under contract, it may
charge higher copayments for services of non-contracting providers.
ESTABLISHMENT OF MA REGIONAL PLANS
The Act creates a new “regional” MA plan program starting in 2006, that will
supplement, but not replace the existing Medicare + Choice program under which plans
may continue to serve local service areas. The “regional plan” initiative is intended to
make coordinated care programs more widely available in rural areas, and provides
financial incentives for plans taking on regional plan status.

The Secretary will establish between 10 and 50 regions for the whole country. A
participating plan would have to serve an entire region, but could sign up for more
than one region. The Secretary will seek to avoid dividing states across regions,
to include at least one entire state in each region and not to break up metropolitan
statistical areas.

The existing “local” PPO Medicare + Choice program will be continued but there
will be a two year moratorium during 2006 and 2007 on new PPO plans. PPO
plans in operation prior to December 31, 2005 may continue, but will not be
allowed to expand their service areas until 2008.

A regional plan must have a sufficient provider network to cover the entire region,
but must also provide for reimbursement for covered benefits obtained outside the
network. In effect, therefore, a closed panel HMO benefit design will not be
permitted.

Plans offering the existing Medicare + Choice-type program will now be known
as “local” MA plans to distinguish them from “regional” plans. They would be
able to operate in large regional service areas if they so choose, and would not
have to meet the requirements for “regional” plans, but also would not get the
financial incentives that are targeted at the new “regional” plans.

The regional plans will have a single deductible for both Medicare Parts A and B,
but the deductible could vary for in-network and out-of-network services. The
deductible could be waived for preventive or other items and services. The
regional plans must also have a catastrophic limit on in-network out-of-pocket
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expenditures and a separate limit on all (in-network and out-of-network) out-ofpocket expenditures.

For 2006 and 2007, the government will share risk with regional plans. If the
“allowable” costs for a regional plan are between 97% and 103% of a “target”
amount, no risk sharing payments or transfers will be made. However, if the
allowable costs for the plan are more than 103% but less than 108% of the target
amount for the year, the Secretary will increase payment to the plan to cover 50%
of the difference. If costs exceed 108% of the target, HHS will pick up half the
overage between 103% and 108% of the target, and 80% of the costs exceeding
108% of the target.

The government will get a parallel recovery from the plan if its allowable costs
are 97% or less of the target. The parties will split the savings if costs are between
92% and 97% of the target, with the government’s share of the saving increasing
to 80% for amounts by which costs are less then 92% of target.

The target is calculated from the amount paid to the plan for enrollees’ basic
Medicare benefits, the total Medicare Advantage beneficiary premium collectible,
and the additional benefits or premium deductions required under the bid
benchmark process, outlined below.

To ease regional plan participation, the Act provides that the Secretary may
temporarily exempt a plan from complying with state licensing requirements in
one or more states in its region, as long as it is licensed in at least one state in its
region. To qualify, the plan would have to show that it had filed a licensing
application in the other states. If a plan is licensed in multiple states in a region,
but meets some applicable state requirements in one state, but not from others, the
plan could choose to operate for the entire regional service area under the
requirements of the state whose requirements it has met, until it meets the others,
if done in a manner specified by the Secretary.

An MA Regional Plan Stabilization Fund will provide incentives for entry and
discourage plans from quitting. $10 billion will be available from 2007 through
2013. First, Fund dollars could be awarded to an MA organization that offers a
regional plan in every region in the country, if at least one of the regions did not
have a regional plan in the prior year. By definition, therefore, an organization
could not qualify for this award two years in a row. The bonus could be up to 3%
of benchmark payment rates.
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
To encourage regional entry, if no national bonus is paid, a regional payment
adjustment can be made to each plan offered in an MA region that did not have a
MA regional plan in the prior year.

Plan retention bonus payments can also be made, but not in a year when entry
bonuses are paid in the same region. These payment increases can be made if (i)
one or more plans has informed the Secretary that it will discontinue services in
the succeeding year, (ii) that would leave fewer than two MA regional plans in the
region, (iii) the MA regional plan enrollment is below the national average; and
(iv) funds haven’t been awarded in the region for two consecutive years.

The Secretary will compute a “blended benchmark” amount for each MA region
that will tie into the plan bidding process and premium payment formula. It will
be determined through statutory base lines and an averaging of plan “bids” for the
region.

An MA Regional Plan can choose to have a local coverage determination for its
entire plan based on the local coverage determination applied for any part of the
region, as selected by the plan.
 Extra funds are provided for “essential” hospitals where an MA Regional Plan is
not able to get a contract. Plans would still have to demonstrate network
adequacy requirements. However, if the Plan commits to pay the hospital no less
than the Medicare Part A payment, and the hospital demonstrates that its costs
exceed the Medicare Part A payment, HHS can make funds directly available to
the hospital to cover the amount by which payment to it, if it were a “critical
access” hospital, exceeds the payment the hospital would otherwise receive. To
qualify as an “essential hospital” the hospital must demonstrate to the Secretary
that its costs exceed the Medicare Part A payment and the Secretary determines
the hospital is necessary for the plan to meet network adequacy requirements.
The Act does not make clear what happens if the hospital, for whatever reason,
still refuses to contract with the plan, notwithstanding the additional funding.
COMPETITIVE BIDDING PROGRAM STARTING 2006
For 2006 and future years, plans (both regional and local, but not Medicare Saving
Account (“MSA”) plans), must submit competitive bids to provide services to Medicare
beneficiaries. HHS will not choose a “winning” bid, but the program has been structured
to make plans with lower bids more attractive to beneficiaries.
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 Each bid will include (1) an amount for provision of all required services, based
on average revenues requirement, for both benefits and administration, as applied
under Title XIII of the Public Health Service Act for HMOs, for an enrollee with
a national average risk profile; (2) the proportion of the bid attributable to benefits
under the original Medicare FFS system; (3) the actuarial basis for the bid
components and other required information; (4) deductibles, coinsurance,
copayments and their actuarial value; and (5) specific required information for
qualified prescription drug coverage. Bid amounts will also include supplemental
benefits, so that a single premium will be charged for the entire benefit package.
This bid process will replace the old “adjusted community rate” (“ACR”) process.
 The Secretary is empowered to negotiate the monthly bid amount and proportions,
with authority similar to the Office of Personnel Management’s in its dealings
with health plans participating in the Federal Employees Health Benefits
Program. The Secretary will only accept bids and submitted proportions if they
are actuarially supported and reasonably and equitably reflect the revenue
requirement of benefits provided under the plan. This review authority will not
extend to bids for private FFS plans.

The review process does not empower the Secretary to require a plan to contract
with a particular hospital, physician or other provider. The same section, worded
in a somewhat confusing manner, states that the Secretary may not require a
particular price structure for payment under a provider contract “to the extent
consistent with the Secretary’s authority.” The congressional conference report
does not provide clarification.

Plan bids will be compared to a benchmark amount. For local plans it will be the
MA payment rates. For regional plans it will be the regional blended benchmark,
largely dependent on the average of the different plan bids submitted. Plans that
bid below the benchmark will be paid their bid amount, plus 75% of the
difference between a risk-adjusted benchmark and their bid. The extra amount
must be returned to beneficiaries through additional benefits or reduced
premiums. Plans that bid above the benchmark amount will still collect their full
premium, but amounts above the benchmark will be payable only by the
beneficiary and not the government. Through this mechanism, price competition
will be stimulated, since more expensive plans will be more costly to the
beneficiary.

MA plans, other than private FFS plans, must offer the new drug benefit coverage
in at least one plan in each service area they have. Alternative plans offered by
the same organization would not have to include the drug benefit.
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
Beneficiaries could elect to have their Medicare Advantage premiums deducted
directly from the Social Security benefits. HHS would be responsible for
transmitting those funds to the plan.

In the Spring of each year, the Secretary will announce base rates and other
factors for plan use for the coming year. Bids will then be submitted, and the
Secretary will calculate and announce the benchmark amounts. Plans with belowbenchmark bids can timely determine what supplemental benefits or premium
reductions to make.

Plans cannot vary their bid amounts or premiums among enrollees, except as
permitted to facilitate the offering of MA plans by employers, labor organizations
and similar entities.
OTHER CHANGES
Physician incentive plans. The Act partially relaxes prior limitations on physician
incentive plans. The Act provides that a Medicare Advantage plan may not operate a
physician incentive plan unless it provides assurances satisfactory to the Secretary. Prior
requirements for periodic surveys and for specific stop-loss protection are eliminated.
ESRD enrollees. The Act requires payment rates for ESRD beneficiaries to be
actuarially equivalent to rates that would have been paid with respect to other enrollees in
the same area under the prior law. The Secretary can apply the new competitive bidding
methodology with adjustment for the for the risk methodology applied to ESRD
payments (confusing).
Employer and labor plans. The Secretary may waive or modify requirements that hinder
the design or offering of MA plans by employer or labor organization plans.
Fees charged to PDP sponsors. The Secretary can charge a PDP sponsor under Part D
for it share of fees related to enrollment information dissemination.
Anti-selection policy. The Secretary will disapprove a plan if it or its benefit design is
likely to substantially discourage enrollment by certain classes of MA eligible
individuals.
Specialized plans. Health plans can seek specialized plan designation to target clinical
programs for high risk beneficiaries with multiple chronic conditions or complex medical
problems. Specialized MA plans for Special Needs Beneficiaries would be approved for
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enrollees who are institutionalized, entitled to Medicaid, or have severe and disabling
conditions. The Secretary can also designate other plans as Specialized if they
“disproportionately” serve special needs beneficiaries.
Avoiding duplicative state regulation. The standards of the Act will supersede any state
law or regulation except for state licensing or solvency requirements. The Conference
Report says this provision will apply prospectively, and will not affect previous and
ongoing litigation. The full import of the new expanded preemption clause is not clear.
States may not impose a premium or similar tax on premiums paid to MA organizations.
Medicare Savings Accounts. The Medicare MSA demonstration will be made a
permanent option, the current capacity limit will be removed, and deadlines for
enrollment will be removed. Enrollee encounter reporting will not be required. Noncontract providers will be subject to balanced billing limitations just as providers treating
coordinated care plan enrollees are.
Extension of reasonable cost contracts. The Act ends uncertainty about continuation
of Medicare health plan cost contracts, allowing them to operate indefinitely, unless two
regional or two local plans enter the same service area and meet specified minimum
enrollment requirements.
Municipal Health Service demonstration projects. These demonstration projects are
extended through 2006 for beneficiaries who reside in the project’s city.
PACE services by non-contract providers. Protections against balance billing for
services to PACE beneficiaries will apply in the same manner as for the regular MA
program. For services covered by Medicaid, but not by basic Medicare, the PACE
program is not required to pay a provider more than normally required under the state
Medicaid plan.
Federally Qualified Health Centers. FQHCs will receive a wrap-around payment for the
reasonable cost of care provided to MA beneficiaries. The provision will supplement
payments from MA plans and beneficiary copays, so that 100% of reasonable cost will be
provided. Plans may not pay FQHCs less than they pay a non-FQHC entity providing
similar services. An anti-kickback law safe harbor is also extended to include any
remuneration between a FQHC or entity controlled by an FQHC and an MA organization
Comparative Cost Adjustment Demonstration. As a compromise between the House
and Senate, the Act requires the Secretary to establish a demonstration for the application
of “comparative cost adjustment”. The demonstration will provide that if traditional FFS
Medicare provides benefits less expensively than MA plans, then the premiums for
traditional FFS Medicare will decline. If private plans provide care less expensively,
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then premiums will be reduced for the private plans to encourage more private plan
enrollment. The program would adjust for health and other demographic factors.
Demonstration areas will be from among qualifying MSAs with substantial Medicare
Advantage enrollment. The demonstration will be phased in between 2010 and 2013.
Title III
Combating Waste, Fraud and Abuse
The Act reforms average wholesale price (“AWP”) payment systems, changes DME
reimbursement, toughens Medicare Secondary Payor rules:, and sets up demonstration
projects for recovery audit contractors and a pilot program for background checks on
long term care facility employees.
AWP Reform
Medicare Secondary Payer Changes
DME Reforms
Recovery Audit Contractor Demonstration Project
Long term care facility background checks
AVERAGE WHOLESALE PRICE ("AWP") REFORM
Section 303(b)-(d) of the Act reforms payment for Part B covered prescription drugs on
an AWP basis, replacing it with a new market-based payment system based on average
sales prices or a competitive acquisition program.
Application of Market-Based Payment Systems
Currently, the Medicare reimbursement for those outpatient prescription drugs and
biologicals that are covered by Medicare is ninety-five percent (95%) of the average
wholesale price (“AWP”). The AWP is not statutorily or regulatorily defined, but is
meant to reflect the average price at which the products are sold by wholesalers. The
AWP is computed based on prices reported by drug manufacturers and published in
industry publications or drug price lists. However, there are no standard criteria for
reporting these prices, nor do they necessarily reflect manufacturer and/or wholesaler
discounts. Accordingly, AWPs for many drugs and biologicals covered by Medicare
exceed physicians’ acquisition costs for such products, leading, the government was
concerned, to reimbursement for the physicians that is inflated and increased copayments
for beneficiaries. Sections 303(b)-(d) of the Act are designed to address this problem by
initially decreasing the amount of reimbursement available under the AWP payment
system and ultimately replacing that system with an average sales price (“ASP”)
methodology and a competitive acquisition program.
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Continued Application of AWP Payment Methodology
Certain categories of drugs and biologicals covered by Medicare will continue to be
reimbursed at 95% of the AWP as of April 1, 2003. For the most part, however,
Medicare-covered drugs and biologicals provided in 2004 will be reimbursed at 85% of
the AWP as of April 2003. The Secretary shall adjust this percentage based upon the
GAO and OIG data cited in the Secretary’s August 20, 2003 proposed rule, and may also
adjust the percentage based upon information provided by the manufacturer within
specified timeframes, but in any case may not reduce reimbursement below 80% of the
AWP.
Application of Average Sales Price Methodology

The Act creates new Sections 1847A and 1847B of the Social Security Act. The
former establishes an average sales price methodology to be applied for the
payment of covered drugs and biologicals furnished on or after January 1, 2005
(other than certain vaccines; products furnished in connection with certain renal
dialysis services; blood or blood products; or radiopharmaceuticals). The latter
section establishes a competitive acquisition program to be made available to
physicians as an alternative to reimbursement under the ASP methodology
starting in 2006.

Reimbursement under the new ASP methodology will equal 106% of the
applicable price for multiple or single source drugs, subject to applicable
beneficiary deductible and coinsurance requirements. In addition, as part of their
Medicaid reporting requirements, manufacturers will be required to specify the
lowest identifiable dispensing quantity, or “unit,” associated with each National
Drug Code (“NDC”) applicable to a covered drug or biological, provided that
after 2004, the Secretary may establish the counting method and unit to be used
by manufacturers in reporting

The applicable price for all products within the same multiple source drug billing
and payment code shall be the volume-weighted average of the sales prices. The
applicable price for single source products is the manufacturer’s ASP for an NDC
code or the wholesale acquisition cost (“WAC”), whichever is lower.

A manufacturer’s ASP shall be calculated by NDC code for each calendar quarter
by dividing the manufacturer’s total sales by the total number of units sold in that
quarter. Certain sales -- including, but not limited to, sales that are nominal in
amount and those to the Indian Health Service, the Department of Veterans
Affairs or the Department of Defense – shall be exempt from the ASP calculation.
Unlike the AWP, however, the ASP shall reflect volume, prompt pay and cash
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discounts; free goods that are contingent on purchase requirements; chargebacks
and certain rebates other than Medicaid rebates. In addition, after 2004, the
Secretary may, based upon recommendations by the HHS Office of Inspector
General, include other price concessions offered to purchasers.

The ASP shall be calculated and reported by the manufacturer on a quarterly
basis, provided that the Secretary may disregard the ASP during the first quarter
of a new drug’s sales if the price data is not sufficient to determine an average
amount payable. Furthermore, if rebate and chargeback data is reported on a
lagged basis, the manufacturer shall use a 12 month rolling average methodology
to estimate the amount of such discounts. After 2004, the Secretary may establish
a uniform methodology to estimate and apply such costs. The knowing
submission of false information by a manufacturer will subject the manufacturer
to liability under the federal Civil False Claims Act, 31 U.S.C. § 3729. In
addition, misrepresentation of the ASP of a drug shall be punishable by civil
monetary penalties of up to $10,000 for each price discrepancy for each day in
which the misrepresented price was applied.

Payment rates will be updated quarterly. However, the HHS OIG shall conduct
studies to monitor market prices, and shall compare the Medicare ASP with
average manufacturer prices and the “widely available market price” – defined as
the price a prudent physician or supplier would pay, taking into account routine
discounts and other price concessions. In the event that the ASP is more than a
specified percentage – 5% for 2005; thereafter as specified by the Secretary -over the market or average manufacturer price, the HHS OIG shall so notify the
Secretary and the Secretary shall substitute a reimbursement rate equal to the
lesser of the market price or 106% of the average manufacturer price in place of
the ASP.
Implementation of Competitive Acquisition Program
As an alternative to the ASP methodology described above, the Act calls for the
establishment of a competitive acquisition program, to be available to physicians starting
January 1, 2006, for the acquisition of and payment for drugs and biologicals eligible for
the program, called “competitively biddable drugs and biologicals.” Under the program,
a physician may elect to forego reimbursement under the ASP methodology and instead
obtain competitively biddable drugs and biologicals from selected contractors. The
contractors will be reimbursed directly by the Medicare program, and shall also be
responsible for collecting any applicable deductibles or coinsurance from beneficiaries.
Thus, physicians participating in the program will no longer bill Medicare for the
provision of competitively biddable drugs and biologicals, although the Act elsewhere
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provides for an adjustment of physician compensation to account for the cost of physician
services rendered in connection with the administration of such products.

To implement the program, the Secretary shall divide the country into distinct
geographic regions called “competitive acquisition areas.” Within each such area,
the Secretary shall conduct a competition for the selection of at least one
competitively biddable drug or biological: (i) within each billing and payment
code; (ii) within each category of covered drugs and biologicals. At least two
entities shall be selected for the provision of competitively biddable drugs and
biologicals within each category and area.

All contractors must meet certain threshold quality, service and financial
performance standards. The Secretary shall select contractors from the pool of
eligible entities based upon a range of factors, including, but not limited to, their
bid prices for the covered drugs and biologicals, their bid prices for distribution of
such drugs and biologicals, their ability to ensure product integrity, their customer
service, and their past experience with drug and biologic distribution. Contractors
shall sign a 3 year contract with the Secretary, and must comply with a code of
conduct, standards governing conflicts of interest, and all applicable fraud and
abuse provisions and guidelines promulgated by the United States Department of
Justice and the HHS OIG.

Physicians shall select the contractor from whom they will obtain competitively
biddable drugs and biologicals in the upcoming year on an annual basis. The
entity selected by the physician shall supply competitively biddable drugs and
biologicals directly to the physician, except where the beneficiary is presently
able to received the product at home or in another non-physician office as
provided by the Secretary. The contractor shall only deliver drugs and biologicals
upon receipt of a prescription from the physician, and shall collect reimbursement
and beneficiary cost-sharing amounts only after administration of the product.

Within each area, the Secretary shall establish a single payment amount for each
drug or biological. Such payments generally will be based upon the bids
submitted and accepted within the area, although the Secretary will apply
alternative payments amounts for products for which an average bid price has not
been previously determined and other exceptional cases.

Certain drugs and biologicals are excluded from the competitive acquisition
program. Excluded drugs and biologicals include certain vaccines; certain drugs
or biologicals furnished in connection with renal dialysis services starting January
1, 2006, radiopharmaceuticals, intravenous immunoglobulin products and blood
products. Excluded drugs and biologicals shall also include any drugs or
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biologicals determined by the Secretary to be inappropriate for competitive
bidding, either because their inclusion is not likely to result in significant savings
or because inclusion is likely to adversely affect access to them. The Secretary
may provide for drugs and biologicals excluded from the competitive acquisition
program to be reimbursed using the ASP methodology established by the Act.
MEDICARE SECONDARY PAYER PROVISIONS
The Act amends the Medicare secondary payer ("MSP") statute, 42 U.S.C. 1395y(b).
Section 301 makes significant changes to the MSP provisions relating to liability,
automobile and no-fault insurance and worker's compensation. This section expands the
scope of entities subject to the MSP provisions to include "an entity that engages in a
business, trade, or profession. . . if it carries its own risk . . . in whole or in part." This
provision may be seeking to impose MSP liability on businesses that self-insure for tort
exposure, for example, where liability payments are made to Medicare beneficiaries. The
Act also strengthens the ability of the Secretary to recover primary payments made by
Medicare where payers "are or were required or responsible” to make payment under a
primary plan and makes other technical changes. These changes are effective
retroactively either to 1984 or 1980 and are intended to save more than $9 billion. These
provisions have been the subject of contentious litigation in the past. Look for the
litigation to continue with the implementation of these new provisions. Section 943
prohibits the Secretary from requiring a hospital or critical access hospital to obtain MSP
information on reference laboratory services if the Secretary does not impose a similar
requirement on the labs themselves.
COVERAGE OF DURABLE MEDICAL EQUIPMENT

Establishment of Quality Enhancement and Accreditation Standards for DME
Suppliers
The Act requires the Secretary to establish quality standards that DME suppliers must
meet, in addition to the administrative and operational standards currently in place, in
order to qualify for Medicare reimbursement and to obtain or retain a Medicare supplier
number. The standards are to be developed in consultation with industry representatives
and applied by independent accreditation organizations designated by the Secretary. The
Act does not address the substance of the new standards, other than to require that they be
at least as stringent as those that would otherwise apply and are to include a consumer
services component.
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
Establishment of Clinical Standards for Coverage of DME
The Act also requires the Secretary to establish clinical standards for the coverage of
certain DME items. The standards are to include the specification of items that will only
be covered if they are dispensed pursuant to a prescription issued after a face-to-face
examination by a physician or other qualified practitioner. The standards are to be
established for different categories of covered items over time, with first priority given to
the establishment of standards for items whose use has proliferated, items for which there
have been consistent findings of charges for items not delivered, and items for which
there have been consistent findings of falsification of documentation. In addition,
effective immediately, the Act prohibits payment for power wheelchairs in the absence of
a prescription issued after a face-to-face examination by a physician or other qualified
practitioner.

Establishment of Competitive Acquisition Programs for DME
The Act also establishes a competitive acquisition program to replace the current fee
schedule payment methodologies used to reimburse DME under Medicare, and freezes
current DME payment rates from 2004 through 2008 pending implementation of the
program. The program will be phased-in across the country starting with 10 of the largest
metropolitan statistical areas in 2007, followed by 80 such areas in 2009 and additional
areas thereafter. Most DME items will be covered, with the exception of inhalation
drugs, Class III medical devices, and parenteral nutrients, equipment and supplies. The
highest cost items and services, or those determined to have the largest savings potential,
may be given priority for phase-in. Rural and low-density population areas may be
exempted, as may items and services for which application of competitive acquisition is
not likely to result in significant savings. The Secretary shall also establish a process for
grandfathering DME rental agreements and oxygen supply arrangements entered into
prior to the application of the competitive acquisition program.
The Secretary will award program contracts to multiple entities meeting specified quality
and financial criteria within each competitive acquisition area, but may limit the number
of contractors to those needed to meet projected demand. Program contracts shall be for
minimum three year terms. Bids submitted pursuant to the competitive bidding process
shall be used to determine a single payment for each item or service in each competitive
acquisition area. After the Part B deductible is met, the Medicare Program will pay DME
suppliers 80% of the competitive acquisition rate, with the beneficiary responsible for the
remaining 20%. However, with respect to payment for certain items furnished during
calendar year 2005, payments shall be reduced by the percentage difference between the
rate otherwise applicable for 2002 and the median charge for such services under the
Federal Employees Health Benefits Program (“FEHBP”) as reported by the HHS OIG.
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
Clinical Laboratory Demonstration Project
The Act also calls for HHS to conduct a demonstration project on a competitive
acquisition program for clinical diagnostic laboratory tests (other than pap smears and
colorectal screening) performed by entities that do not have face-to-face encounters with
their patients. The project will be subject to Clinical Laboratory Improvement
Amendment (“CLIA”) quality standards. Otherwise, the project will be conducted on the
same terms and conditions as the DME competitive acquisition program described above,
provided that payment under the project will be at 100% of the competitive acquisition
rate; laboratory services shall not be subject to the cost-sharing and deductible amounts
applicable to DME.
DEMONSTRATION PROJECT FOR USE OF RECOVERY AUDIT CONTRACTORS
The Act directs the Secretary to conduct a demonstration project for up to three years
examining the efficacy of using recovery audit contractors to identify underpayments and
overpayments, and to recoup overpayments, with respect to payments made under
Medicare Parts A and B. The project shall cover at least two states among the highest per
capita utilization of Medicare services, and shall involve at least three contractors.
Contractors may be paid on a contingent basis, and the Secretary may designate a
percentage of any recoveries to fund CMS program management activities.
Contractors eligible to participate in the project shall include those staffed by persons
with appropriate clinical knowledge and experience with Medicare payment rules and
regulations. Medicare fiscal intermediaries, carriers and administrative contractors are
not eligible. Preference will be given to those entities that have more than three years
experience managing cost control efforts and conducting recovery audits on behalf of
private payors or the Medicaid program.
Significantly, recovery of an overpayment by a recovery audit contractor participating in
the project will not bar the investigation and prosecution of allegations of fraud and abuse
arising from such overpayment.
PILOT PROGRAM FOR NATIONAL AND STATE BACKGROUND CHECKS ON
DIRECT PATIENT ACCESS EMPLOYEES OF LONG-TERM CARE FACILITIES
OR PROVIDERS
The Act directs the Secretary to establish a pilot program in up to 10 participating states
to identify effective and efficient procedures for long term care facilities or providers to
conduct background checks on prospective employees who will have direct access to
patients. Upon implementation of the program, long term care facilities and providers in
participating states shall conduct background checks on prospective direct access
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employees in accordance with procedures to be established by the participating state.
Such procedures should require, among other things, that prospective employees be
fingerprinted and sign a statement authorizing the facility to request a national and state
criminal history background check. Facilities or providers that reasonably rely on
information obtained through a background check to deny employment to an applicant
for a direct patient access position shall enjoy immunity from liability in any action
brought by the applicant based on that denial.
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Title IV
Rural Provisions
For Part A, Congress takes several significant steps to eliminate reimbursement
differentials between urban and rural hospitals. Beginning in FY 2004, Medicare will
pay hospitals in rural and small urban settings at the same rates as hospitals in large urban
areas. Disproportionate Share Hospital (“DSH”) payments to rural hospitals and small
urban hospitals will be made using the same DSH reimbursement formula as large urban
hospitals. Additionally, the percentage of a hospital’s Medicare payment that is adjusted
by the hospital’s area wage index is being reduced from 71% to 62%. The area wage
index, designed to tie a part of a hospital’s Medicare reimbursement to the cost-of-living
of the hospital’s geographic area, has historically lowered payments for rural hospitals
due to a cost-of-living lower than the national average. All together, these steps are
expected to amount to as much as $25 billion in additional payments to hospitals in rural
and small urban areas over the life of the legislation.
For Part B, Congress also took steps to reduce the gap in reimbursement rates for urban
and rural hospitals. Congress established a 1.0 floor on the Work Geographic
Adjustment, meaning that rural hospitals that fall below the national average for costs
would be paid at the national average rate.
Title V
Provisions Relating to Part A
The following is a summary of the key provisions of the Act impacting hospitals and
other providers under Part A of Medicare:
QUALITY INDICATORS
The Act amends Part A to provide hospitals with a financial incentive to submit qualityrelated data to CMS. For FY 2005 through FY 2007, an acute hospital that submits data
on the 10 quality indicators developed by the National Quality Foundation will receive
payment from Medicare for operating expenses by means of an operating update of the
hospital market basket. A hospital that does not submit such data will receive a reduction
in such payments by 0.4%. See 42 U.S.C. § 1395ww(b)(3)(B) (as amended by section
501 of the Act).
WAGE INDEX CLASSIFICATION
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Another concern addressed in the Act is wage index classification for acute hospitals.
The Act includes new provisions intended to address situations in which a hospital’s
employees reside in one area but work in another area with a higher wage index (referred
to as “out-migration”). Eligible hospitals may qualify for a commuting wage adjustment
under certain circumstances. See 42 U.S.C. § 1395ww(d) (as amended by section 505 of
the Act). The Act also establishes a one-time process by which a hospital can seek a
wage index reclassification, based on procedures to be announced by the Secretary no
later than January 1, 2004. An appeal must be submitted no later than February 15, 2004.
See section 508 of the Act.
NEW TECHNOLOGY
The Act also revisits the issue of costs associated with new medical services and
technologies, addressed previously by Congress in the Benefits Improvement &
Protection Act of 2000, P.L. 106-554. The Act establishes procedures for the Secretary
to provide for the addition of new diagnosis and procedure codes based on public input,
and assignment of new technology under existing DRGs. The Act also eliminates
budget-neutrality as a factor in the funding of new technology. See 42 U.S.C.
§ 1395ww(d)(5)(K) (as amended by section 503 of the Act).
PHYSICIAN SELF-REFERRAL
In an unusual twist, the Act calls for a temporary amendment of the physician selfreferral or “Stark” law. Effective for an eighteen month period following enactment of
the Act, the “whole hospital” exception would be amended such that it does not apply to
physician ownership in a “specialty hospital” (as defined under the Stark law). In other
words, the Act imposes an 18-month moratorium on self-referrals by physicians to
specialty hospitals. The amendment does not apply to specialty hospitals “in operation”
or “under development” as of November 18, 2003 (as defined). See 42 U.S.C.
§ 1395nn(d)&(h) (as amended by section 507 of the Act). The Act also requires the
Secretary and the Medicare Payment Advisory Commission (MedPAC) to report to
Congress on the effects of the Stark law’s whole-hospital exception for physicianownership in specialty hospitals. See section 507(c) of the Act.
HOSPICE CONSULTATION SERVICES
The Act provides for coverage under Medicare for certain hospice consultation services
provided by eligible physicians to the terminally ill. Coverage becomes effective January
1, 2005. See 42 U.S.C. §§ 1395d(a), 1395f(i) (as amended by section 512 of the Act).
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FUNDING
The Act also makes funding adjustments for certain categories of providers:


Teaching hospitals will receive a boost in payment under the Act. In particular,
the Act provides for a temporary increase in the Medicare indirect teaching
adjustment factor for FY 2004 through FY 2007. See 42 U.S.C.
§ 1395ww(d)(5)(B) (as amended by section 502 of the Act).
Hospitals in Puerto Rico will receive a higher ratio of federal to local funding as a
result of the Act’s increase in the federal rate for discharge payments. See 42
U.S.C. § 1395ww(d)(9) (as amended by section 504 of the Act).

Hospitals providing Medicare covered inpatient hospital services under the Indian
Health Services’ contract health services program are limited to a Medicare rate
of payment for such services. See 42 U.S.C. § 1395cc(a)(1) (as amended by
section 506 of the Act).

For skilled nursing facilities (SNFs), the Act increases the per diem resource
utilization group (RUG) payment for residents suffering from AIDS. See 42
U.S.C. § 1395yy(e) (as amended by section 511 of the Act).
REPORTS
In addition to the above changes, the Act requires submission of certain reports on areas
of interest to Congress:

The GAO is asked to study and submit a report on the appropriate level and
distribution of PPS payments for inpatient hospital services furnished by section
(d) hospitals, and whether “there is a need to adjust such payments under such
system to reflect legitimate differences in costs across different geographic areas,
kinds of hospitals, and types of cases.” Section 501(c) of the Act.

The Comptroller General is asked to study and submit a report on portable
diagnostic ultrasound services furnished to Medicare beneficiaries in SNFs. The
study is intended to focus, in particular, on the following areas: (1) the types of
portable diagnostic ultrasound services furnished to such beneficiaries, the types
of equipment used for such services, and the technical skills and/or training
required to furnish such services; (2) the clinical appropriateness of transporting
equipment and technicians to patients in SNFs versus transporting such patients to
a hospital or other facility that furnishes such services; (3) the financial impact if
Medicare were to make a separate payment for such services; and (4) whether the
Secretary should establish credentialing or other requirements for technicians that
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furnish portable diagnostic ultrasound services to Medicare beneficiaries. See
section 513 of the Act.
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Title VI
Key Changes to Medicare Part B

Inclusion of Podiatrists, Dentists, and Optometrists under Private
Contracting Authority
o Under existing Medicare law, certain physicians and practitioners have
been permitted to enter into private contracts with Medicare beneficiaries,
provided the physicians agree to forego Medicare reimbursement for all
Medicare beneficiaries for two years.
o Private contracting allows physicians to bill beneficiaries at their
discretion without being subject to Medicare’s upper payment limits.
o Under existing Medicare law, only doctors of medicine, doctors of
osteopathy, and practitioners (including physician assistants, nurse
practitioners, clinical nurse specialists, certified registered nurse
anesthetists, certified nurse midwives, clinical psychologists, and clinical
socials workers) have been permitted to engage in private contracting.
o Under the Act, doctors of dental surgery or of dental medicine, doctors of
podiatric medicine, and doctors of optometry also have contracting
authority.
Coverage of an Initial Preventive Physical Examination
o Under existing Medicare law, Medicare Part B covers various preventive
services. Routine physical examinations, however, have not been covered.
o Under the Act, Medicare Part B authorizes coverage of an initial
preventive physical examination for individuals whose coverage begins on
or after January 1, 2005.
o The initial preventive physical examination:
Is defined as physicians’ services consisting of a physical examination
(including measurement of height, weight, and blood pressure, and an
electrocardiogram) with the goal of health promotion and disease detection;
Includes education, counseling, and referrals for specified screening
services and other preventive services;
Does not include clinical laboratory tests;
Is subject to a deductible and beneficiary cost sharing;
Must be performed no later than 6 months after the individual’s initial
coverage date under Part B; and
Will be included in the definition of physician services for purposes of the
physician fee schedule.


Coverage of Cardiovascular Screening Blood Tests
o Under existing Medicare law, Medicare Part B covers various preventive
services. Cardiovascular screening blood tests, however, are not covered.
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o Under the Act, Medicare Part B authorizes coverage for cardiovascular
screening blood tests furnished on or after January 1, 2005.

Coverage of Diabetes Screening Tests
o Existing Medicare law provides coverage for outpatient diabetes selfmanagement training services as well as blood testing strips and home
blood glucose monitors for all individuals with diabetes. Laboratory
diagnostic tests and other services that are used to screen for diabetes,
however, have not been covered
o Under the Act, Medicare Part B will cover diabetes screening tests
furnished on or after January 1, 2005, for all individuals at risk for
diabetes.
o Diabetes screening tests include fasting plasma glucose tests as well as
other tests, and modifications to tests, deemed appropriate by the Secretary
in consultation with appropriate organizations.
o The Secretary must establish standards, in consultation with appropriate
organizations, regarding the frequency of screening tests. However, the
Secretary may not authorize screening more often than twice in the 12month period following the date of the individual’s most resent diabetes
screening test.

No Waiver of Deductible for Colorectal Cancer Screening Tests
o Medicare Part B currently covers certain colorectal screening tests for
prevention purposes, subject to applicable deductibles and coinsurance.
o The full Congress rejected a provision of the House Bill which would have
waived Part B deductibles for colorectal cancer screening tests.

Payment for Renal Dialysis Services
o Composite Rate Change. Under current Medicare law, dialysis facilities
providing care to beneficiaries with end-stage renal disease (“ESRD”)
receive a fixed prospectively determined payment amount, known as the
composite rate, for each dialysis treatment, regardless of whether services
are provided at the facility or in the patient’s home. The composite rate is
currently 2.4%. The Act provides that the composite rate will increase by
1.6% for services furnished on or after January 1, 2005.
o Exceptions to the Composite Rate. Prior to the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”), an
increase in the composite rate would enable facilities to request an
exception to the composite rate to receive higher payments. BIPA
prohibited the Secretary from granting new exceptions to the composite
rate for applications received after July 1, 2001. The Act provides that the
prohibition on exceptions to the composite rate will not apply to pediatric
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ESRD facilities as of October 1, 2002. (Pediatric ESRD facilities are renal
facilities with 50% of their patients under 18 years old.)
o Drugs and Biologicals Furnished to ESRD Patients. Under the current
Medicare law, the composite rate includes dialysis costs, but excludes
separately billable drugs, biologicals and laboratory services. Providers
receive 95% of the average wholesale price (“AWP”) for separately
billable injectable medications other than erythropoietin (“EPO”).
Medicare pays $10 per 1,000 units of EPO whether it is administered
intravenously or subcutaneously in dialysis facilities or in patients’ homes.
The Act requires the Inspector General to conduct studies to: determine
the difference between (1) the Medicare payment amount to ESRD
facilities for both existing and new drugs and biologicals (including EPO);
and (2) the facilities’ acquisition costs for the separately-billed drugs and
biologicals; and estimate the rates of growth of expenditures for these
drugs and biologicals.

Moratorium on Therapy Caps
o Medicare law previously imposed annual, per-beneficiary payment limits
on outpatient therapy services provided by non-hospital providers,
including independent therapists, comprehensive outpatient rehabilitation
facilities (CORFs), and other rehabilitation agencies. The Balanced
Budget Refinement Act of 1999 (“BBRA”) suspended therapy limits in
2000 and 2001, and BIPA extended the suspension through 2002.
o The Act suspends therapy caps as of the date of enactment through
calendar year 2005. This suspension will not retroactively impact
beneficiaries who exceeded their caps prior to the date of enactment.
o The Act requires the Secretary to submit, by March 31 2004, previously
required overdue reports relating to: (1) alternatives to a single annual
dollar cap on outpatient therapy; and (2) utilization patterns for outpatient
therapy.
o Under the Act, the General Accounting Office (“GAO”) must identify
conditions or diseases that may justify waiving the application of the
therapy caps and report to Congress by October 1, 2004.

Payments for Services Furnished in Ambulatory Surgical Centers
o Currently, Medicare uses a fee schedule to pay for services related to
surgery provided in an ambulatory care center (“ACC”), and the Secretary
is required to update ASC rates on an annual basis. In June 1998, the
Centers for Medicare and Medicaid Services (“CMS”) issued a proposed
notice to implement a prospective payment system (“PPS”) for ASCs.
However, a final rule has not yet been issued.
o The Act requires the GAO to conduct a study to:
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Compare the costs of procedures furnished in ASCs with the costs of
procedures furnished in hospital outpatient departments, under an
outpatient PPS (“OPPS”); and
Examine how accurately ambulatory payment categories reflect
procedures furnished in ASCs.
o The GAO must submit a report by January 1, 2005, including
recommended standards for a new ASC payment system.
o Taking into consideration the GAO’s recommendations, the Secretary
must implement a revised payment system for surgical services furnished
in an ASC.
o The new ASC system will be effective beginning on or after January 1,
2006, but not later than January 1, 2008.

Payment for Clinical Diagnostic Laboratory Tests
o Currently, Medicare payment for clinical diagnostic laboratory tests are
made using a fee schedule, which generally is updated on a calendar-year
basis using the Consumer Price Index-Urban (CPI-U). The Balanced
Budget Act of 1997 (“BBA”) froze the fee schedule from 1998 through
2002. The update for 2003 was equal to the full CPI-U increase.
o The Act provides that there shall be no annual adjustments to the clinical
diagnostic laboratory test fee schedule from 2004 through 2008.

No Medicare Coverage of Self Injected Biologicals
o The full Congress rejected a provision of the Senate Bill which would
have authorized coverage for certain FDA-approved, self-injected
biologicals, including self-injected drugs that are used to treat multiple
sclerosis.

Demonstration Project for Coverage of Certain Prescription Drugs and
Biologicals
o The Act requires the Secretary to conduct a 2-year demonstration project
(in certain sites selected by the Secretary) to provide Medicare payment
for certain drugs and biologicals.
o Specifically, the demonstration project will cover drugs and biologicals
that are prescribed as replacements for presently-covered drugs furnished
incident to a physician’s professional service and not usually selfadministered, including oral anticancer chemotherapeutic agents.
o The project will provide for cost-sharing applicable with respect to the
drugs or biologicals in the same manner as the cost-sharing applicable
under Part D for standard prescription drug coverage.
o The project will not exceed $500 million and will cover no more than
50,000 patients.
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
Extension of Coverage of Intravenous Immune Globulin (“IVIG”) for the
Treatment of Primary Immune Deficiency Diseases in the Home
o IVIG is a blood product prepared from the pooled plasma of donors and
has been used to treat a variety of autoimmune diseases. Under existing
Medicare law, IVIG has been covered for the treatment of certain
conditions for specified patient subpopulations.
o The Act makes IVIG for the treatment in the home of primary immune
deficiency diseases a covered medical service.
o For purposes of this provision, IVIG is defined as approved pooled plasma
derivative for at-home treatment of a patient with a diagnosed primary
immune deficiency disease, provided a physician determines
administration of the derivative in the patient’s home is appropriate.
o IVIG does not include items or services related to the administration of the
derivative.

Medicare Health Care Quality Demonstration Programs
o The Act requires the Secretary to establish a 5-year demonstration
program under which the Secretary will approve demonstration projects to
examine specified health delivery factors which encourage the delivery of
improved patient care including:
Incentives to improve the safety of care provided to beneficiaries;
Appropriate use of best practice guidelines;
Reduction of scientific uncertainty through examination of service
variation and outcomes measurement;
Encouragement of shared decision making between providers and patients;
The provision of incentives to improve safety, quality, and efficiency;
Appropriate use of culturally and ethnically sensitive care; and
Related financial effects associated with these changes.
o Health care groups, including physician groups, integrated health care
delivery systems, and regional coalitions, may qualify to participate in the
project if they, among other things:
Implement continuous quality improvement mechanisms that integrate
community-based support, primary care, and referral care;
Implement activities to increase the delivery of effective care to
beneficiaries;
Encourage patient participation in preference-based decisions;
Implement activities to encourage the coordination and integration of
medical service delivery;
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Implement activities to measure and document the financial impact on the
health care marketplace of altering the incentives of health care delivery
and changing the allocation of resources; and
Meet such other requirements that may be established by the Secretary.
o Health care groups participating in the program may include proposals for
alternative payment systems that are designed to encourage the delivery of
high quality care and streamline documentation and reporting
requirements.
o Health care groups participating in the program also may offer benefit
packages that vary from those that are currently available under Medicare
Parts A and B and under the Part C Medicare Advantage plan.

Demonstration Project for Consumer Directed Chronic Outpatient Services
o The Secretary must establish demonstration projects to evaluate methods
to improve the quality of care provided to Medicare beneficiaries with
chronic conditions, while simultaneously reducing expenditures that
would otherwise be made on their behalf by Medicare.
o The methods must incorporate permitting beneficiaries to direct their own
health care needs and services.
o There must be at least one demonstration project in each of the following:
(1) an urban area; (2) a rural area; and (3) an area that has a Medicare
population with a diabetes rate that significantly exceeds the national
average rate. A demonstration project in each of these areas must be
established within 2 years of enactment of the Act.
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Title VII
Provisions Relating to Parts A and B
The following is a summary of the key provisions of the Act impacting providers and
beneficiaries under Parts A and B of Medicare:
GRADUATE MEDICAL EDUCATION
 During a one-year period beginning on January 1, 2004, hospitals may count
residents in osteopathic and allopathic family practice programs training at nonhospital sites, regardless of the financial arrangement between the hospital and the
teaching physician. Note, however, that this exception only applies to programs
in existence as of January 1, 2002. See 42 U.S.C. § 1395ww(d)(5)(B) (as
amended by Section 713 of the Act).

The Act authorizes an extension of the inflation update limitation on high cost
programs, such that hospitals with per resident amounts above 140 percent of the
geographically adjusted national average would not receive an inflation update
between fiscal years 2004 and 2013. See 42 U.S.C. § 1395ww(h)(2)(D)(iv) (as
amended by Section 711 of the Act).

The Act clarifies Congressional intent with respect to the initial residency period
for geriatric residency programs, such that the time spent in geriatric residency
programs requiring two years of initial training are not counted against a
limitation on the initial residency period. Thus, geriatric residency programs are
excepted from the general requirements regarding number of years allowed in an
initial residency program. See 42 U.S.C. § 1395ww(h)(5)(F)(ii) (as amended by
Section 712 of the Act).
MEDICARE ADVANTAGE QUALITY IMPROVEMENT PROGRAMS
Medicare Advantage organizations will be required to implement quality improvement
programs for enrollees (except those under private fee-for-service or MSA plans)
beginning in 2006. Each such organization will be required to have a chronic care
improvement program, including methods for identifying and monitoring enrollees with
multiple or severe chronic conditions.
Each Medicare Organization must provide for the collection, analysis, and reporting of
data on quality and health outcomes; the Secretary will establish requirements for such
data collection and analysis by regional plans. See 42 U.S.C. § 1395w22(e) (as amended
by Section 722 of the Act).
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NATIONAL COVERAGE DECISIONS
The Act requires the Secretary to make public the factors used in making national
coverage decisions regarding whether an item or service is “reasonable and necessary.”
The Act also sets forth a timeframe for making decisions on requests for national
coverage decisions. See 42 U.S.C. § 1395y (as amended by Section 731 of the Act).
In addition, the Act prohibits the Secretary from excluding from coverage routine costs
associated with a beneficiary’s participation in a clinical trial of a Category A device,
effective January 1, 2005. See 42 U.S.C. § 1395y (as amended by Section 731 of the
Act).
MEDICARE PAYMENT ADVISORY COMMISSION (MEDPAC)
Another concern addressed in the Act is MedPAC, a 17-member body responsible for
reporting to Congress regarding Medicare payment policies. The Commission will now
be required to examine the budgetary requirements of all recommendations. In addition,
the Commission will be required to include at least one member with pharmaceutical
expertise. See 42 U.S.C. § 1395b-6(b) (as amended by Section 735 of the Act).
FUNDING
The Act also makes funding adjustments for certain categories of providers:

The Act adjusts the time frame for the home health update, changing it
from the federal fiscal year to a calendar year basis. In addition, home
health providers will receive an increase in payment by the full market
basket percentage through March 2004, followed by a market basket
percentage increase minus 0.8 percentage points through 2006. See 42
U.S.C. § 1395fff(b)(3) (as amended by Section 701 of the Act).

In addition, religious nonmedical health care institutions will now qualify
for reimbursement for services furnished to beneficiaries in their homes, if
those services are comparable to those services provided by home health
agencies. See 42 U.S.C. § 1395i(5)(a) (as amended by Section 706 of the
Act).

Direct payments for the technical component of physician pathology
services will be made for services furnished during 2005 and 2006. See
Section 732 of the Act.
DEMONSTRATION PROJECTS
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The Act requires that the Secretary conduct the following demonstration projects:

A two-year demonstration project under Part B to clarify the definition of
“homebound”. A select number of beneficiaries enrolled in Part B will be
deemed “homebound,” and thus eligible for home health services, if they
are certified by a physician as having a chronic condition requiring such
care. During the demonstration project, data on quality of care, patient
outcomes and costs will be collected, and must be reported to Congress
within one year of completing the demonstration. See Section 702 of the
Act.

A three-year demonstration project under which a home health agency,
under arrangement with a medical adult day care facility, offers medical
adult day care services in lieu of services in the beneficiary’s home. A
select number of beneficiaries may volunteer to participate, so long as they
are classified as “homebound.” Data on clinical and cost effectiveness
will be collected and reported to Congress within six months of
completion of the demonstration. See Section 703 of the Act.
BENEFICIARY ISSUES
The Act provides new benefits to certain categories of beneficiaries:

Implementation of a chronic care improvement program to promote health
for beneficiaries with chronic illness. Initial implementation of this
program will be evaluated for clinical quality, provider and beneficiary
satisfaction, and financial outcomes. See Section 721 of the Act.

Provides for pancreatic islet cell investigational transplants for
beneficiaries in clinical trials. See Section 733 of the Act.
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Title VIII
Cost Containment
SUBTITLE A: COST CONTAINMENT
The Medicare Board of Trustees was established under the Social Security Act to oversee
the financial operations of the Medicare Hospital Insurance trust fund and the Medicare
Supplementary Medical Insurance trust fund, which includes the Medicare Prescription
Drug Account. The Trustees are required to submit annual reports to Congress. Under
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
“Act”), beginning with the 2005 report, the Trustees’ annual report must include the
following: (1) projections of growth of general revenue Medicare spending as a
percentage of the total Medicare outlays for the fiscal year and each of the succeeding 6
fiscal years, for 10, 50, and 75 years after the fiscal year, and for previous fiscal years; (2)
comparisons with the growth trends for the gross domestic product, private health costs,
national health expenditures, and other appropriate measures; (3) expenditures, including
trends in expenditures, under Medicare Part D; and (4) a financial analysis of the
combined Medicare trust finds if general funding for Medicare were limited to 45% of
total Medicare outlays. See Act, Section 801(a)(1)(A). The annual report of the Trustees
must also include a determination as to whether there is projected to be “excess general
revenue Medicare funding” for the fiscal year in which the report is submitted or for any
of the succeeding 6 fiscal years.1 See Act, Section 801(a)(1)(B).
A determination of excess general revenue Medicare funding for two annual reports will
be treated as a Medicare funding warning. See Act, Section 801(a)(2). Under the Act, if
there is such a Medicare funding warning, the President is required to submit to Congress
proposed legislation to respond to such warning and eliminate excess general revenue
Medicare funding for the 7-fiscal-year period that begins in such year. See Act, Section
802(a). The Act details the procedures that must be followed by the House of
Representatives and the Senate when considering the President’s legislative proposal.
See Act, Sections 803, 804.
SUBTITLE B: INCOME-RELATED REDUCTION IN PART B PREMIUM
SUBSIDY
“Excess general revenue Medicare fund” is defined as general revenue Medicare
funding expressed as a percentage of total Medicare outlays in excess of 45%. See Act,
Section 801(c)(1). This measure is calculated by dividing total Medicare outlays minus
dedicated Medicare financing sources by total Medicare outlays. See Act, Section
801(c)(2).
1
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Prior to the passage of this Act, all seniors over the age of 65 who elected Medicare Part
B during their initial enrollment period paid the same Part B premium, regardless of
income. The Medicare Part B premium was set each year to cover 25% of Medicare’s
benefits under Part B. With the new Act, however, in an effort to address the fiscal
challenges facing the Medicare program, Medicare Part B premiums will be adjusted
based on income. There is a five year phase-in of the new premiums beginning in 2007.
See Act, Section 811(a).
Under the Act, individual Medicare beneficiaries with incomes under $80,000 and
married couple beneficiaries with incomes under $160,000 will continue to receive a
government subsidy at 75% and pay premiums at the 25% rate. Individual Medicare
beneficiaries with incomes between $80,000 and $100,000 and married couple
beneficiaries with incomes between $160,000 and $200,000 will receive a 65% subsidy
and pay 35% as a premium. Individual Medicare beneficiaries with incomes between
$100,000 and $150,000 and married couple beneficiaries with incomes between $200,000
and $300,000 will receive 50% subsidy and pay 50% as a premium. Individual Medicare
beneficiaries with incomes between $150,000 and $200,000 and married couple
beneficiaries with incomes between $300,000 and $4000,000 will receive a 35% subsidy
and pay a premium at a 65% rate. Individual Medicare beneficiaries with incomes above
$200,000 and married couple beneficiaries with incomes above $400,000 will receive a
20% subsidy and pay a premium at an 80% rate. See Act, Section 811(a). Beneficiaries
may request an adjustment in their premium levels if they can show evidence of major
life changing events, such as death of a spouse, marriage or divorce, that have affected
their income levels. See Act, Section 811(a).
According to the Conference Agreement issued in connection with this Act, this new
premium structure “will have a significant impact in controlling the growth of Medicare
spending in the future . . . . [It] . . . target[s] taxpayer dollars at those who need it the most
by reducing the government subsidy for those who have the resources to cover more of
their own costs.” Conference Agreement, at 299-300.
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TITLE IX
ADMINISTRATIVE IMPROVEMENTS,
REGULATORY REDUCTION,
AND CONTRACTING REFORM
The Act makes a series of important changes to the Medicare fiscal intermediary
contracting program, to rules and procedures for appeals and review of Medicare
decisions, and other administrative changes in the Medicare law.
Key changes are:
Regulatory Reform
Contractor Reform
Consumer Outreach
Appeals and Recovery
Miscellaneous
Subtitle A -- Regulatory Reform
The Act provides a definition of the term “supplier,” which was not included in the prior
law, Section 1861 of the Social Security Act. “Supplier” is now defined as “a physician
or other practitioner, a facility, or other entity (other than a provider of services) that
furnishes items or services under this Title.”
The Act requires the Secretary and OMB to establish and publish a timeline for the
publication of final regulations, which may not exceed three years. Any items in the final
regulation that are not “logical outgrowths” of the proposed or interim final regulations
should be treated as proposed regulations. The Act also bars retroactive application of
any substantive changes in regulations, manual instructions, interpretive rules, policy
statements or guidelines unless the Secretary deems such application necessary to comply
with the statute or is in the public interest. When furnishing items or services, or
submitting a claim, any provider or supplier that follows inaccurate written guidance
from the Secretary or a Medicare contractor will not be subject to penalty or interest
unless the inaccurate information was the result of a clerical or technical operational
error. Further, providers and suppliers are not subject to penalty or interest on a
repayment plan, relating to the Medicare Integrity Program or otherwise, if they
reasonably relied on guidance from the Secretary or a contractor.
The Act also requires the GAO to study the feasibility and appropriateness of the
Secretary providing legally binding advisory opinions on appropriate interpretation and
application of Medicare regulations. The Secretary must also report to Congress on the
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administration of Medicare and areas of conflict or inconsistency in the statute and
regulations, recommending remedial changes or action to be taken.
Subtitle B -- Contracting Reform
Introduction
The new legislation provides CMS with increased flexibility with regard to Medicare
contracting for the day-to-day administration of the Medicare fee-for-service program.
The new Medicare contractor reform legislation changes most of the rules relating to
Medicare contracts with fiscal intermediaries and carriers for the administration of
Parts A and B of the Medicare program.
Some of the more significant changes are associated with the increased risk of liability
that the new “Medicare administrative contractors” will face and the limits on
indemnification of contractors for adverse judgments and legal costs.
There are a number of other features of the new legislation that would also represent
significant changes from what intermediaries and carriers have come to expect from their
contractual relationship with CMS. Some of the changes are for the better while others
are not. For the most part, Medicare administrative contractors will, for the first time, be
governed by the Federal Acquisition Regulation in its entirety.
Changes are made in the following:
Changes to the Way Contracts Are Entered Into
Changes in Eligibility to Contract
Changes to Contractor Liability and Indemnification
Changes to the Way Contracts Will Be Administered
Changes to the Way Contracts Are Renewed
Changes to the Way Contracts Are Terminated
Other Changes
Effective Dates
Information Security

Changes to the Way Contracts Are Entered Into
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o The Demise of the Provider Nomination Process
Congress has given CMS authority to carry out what CMS has been
attempting to accomplish for a number of years: abolishing the right of a
provider to nominate the fiscal intermediary of its choice. CMS has long
considered the provider right of nomination to be antithetical to the best
interests of the Medicare program.
o Competitive Bidding Selection
CMS will select the Medicare administrative contractor through a
competitive bidding process. The bidding will be conducted under
procedures that are prescribed in the Federal Acquisition Regulation.
o No More “Freedom of Choice”
Providers will no longer have a right to choose who will review claims,
pay benefits, or perform many of the other functions that providers were
permitted to assign under the original Medicare legislation. The “freedom
of choice” concept that providers have come to expect is now in the past.

Changes to Eligibility -- The Universe of Part B Contractors Is No Longer
Confined to Entities that Meet the Special Definition of a Carrier
o The Previous Restrictive Definition of a “Carrier”
The original Medicare legislation limited the entities that are allowed to
serve as a Part B carrier to insurers. (We were able to convince CMS a
few years ago that a carrier’s wholly-owned subsidiary can also qualify to
be a carrier even if the subsidiary is not structured as an insurer.) For the
most part, the universe of Part B carriers has not been the product of full
and open competition, as will be the case under the new legislation.
o The New Requirements to Be a Medicare Administrative
Contractor
The legislation requires that an entity must have “demonstrated capability”
to carry out the various contractor functions. A Medicare administrative
contractor must also comply with conflict of interest standards that are
generally applicable to federal acquisitions. This means that the
organizational conflict of interest provisions in Subpart 9.5 of the FAR, as
interpreted by relevant caselaw, will be imposed as an initial threshold
requirement for qualifying as a Medicare administrative contractor. The
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new contractors will also be required to have “sufficient assets” to perform
the contract from a financial perspective and must meet other eligibility
requirements that CMS may impose.
o There No Longer Will Be A Distinction Between Part A and
Part B Contractors
No longer will Part A contractors be called “fiscal intermediaries” while
Part B contractors are called “carriers.” Instead, one label will be applied,
i.e., “Medicare administrative contractor.”

Changes to Contractor Liability and Indemnification
o Contractors Will No Longer Be Immune for Provider
Overpayments
Under the current law, Medicare intermediaries and carriers are not liable
for erroneous payments that they may make to providers. There are
specific provisions in the Medicare statute specifying that intermediaries
and carriers have full immunity for such liability.
The standard for a Medicare administrative contractor’s exposure under
the new legislation is that the contractor will be entitled to immunity for
making erroneous payments unless the contractor acted with reckless
disregard or with intent to defraud the United States. The reckless
disregard standard does not require specific intent to defraud and is the
same standard that is embodied in the False Claims Act.
o The New Legislation Authorizes Indemnification
CMS has been criticized for indemnifying Medicare contractors without
having express statutory authority. The legislation cures this defect by
providing CMS with express authority to indemnify a contractor for
judgments, settlements, and attorneys fees in litigation which a provider
brings against a contractor which the Government does not step in and
defend.
The limitations on when indemnification will not be paid are the same as
those that are in the existing intermediary and carrier contracts, i.e., gross
negligence, intent to defraud, or criminal conduct. The difference is that
in the current contract, it is the judicial or administrative tribunal that
makes the gross negligence finding. The legislation, however, allows the
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tribunal or CMS to make the finding. Thus, the legislation gives CMS
considerable discretion with regard to when it provides indemnification.
The amount of indemnification is also left to CMS’s discretion, which is a
change from the standard currently contained in the existing contracts.

Changes to the Way Contracts Will Be Administered
o Contracts Will No Longer Be Restricted to a CostReimbursement/No-Profit Form of Contract
Because the contracts will be subject to the Federal Acquisition
Regulation, contractors will be permitted to earn a profit.
Contracts can now be structured in whatever form CMS determines is
appropriate, e.g., cost-plus-fixed-fee, cost-plus-award-fee, firm-fixedprice, or any variation of these types as permitted in Part 16 of the FAR.
Currently, CMS is constrained, with some exceptions, to use a pure costreimbursement contract with no profit, but that will no longer be the case.
Instead, CMS will be permitted to use whatever form of contract it
believes to be most appropriate under the circumstances. Moreover, all
Medicare administrative contractors need not have the same type of
contract.
o CMS Will Be Permitted to Assign Contract Functions to
Various Contractors
The legislation specifies six specific functions and one catch-all function
that a Medicare administrative contractor will be expected to perform:
1. determination of payment amounts;
2. making payments;
3. beneficiary education and assistance;
4. provider consultative services;
5. communications with providers;
6. provider education and technical assistance; and
7. additional functions as are necessary to carry out the
purposes of the program.
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No longer must just one contractor for a particular provider have
responsibility for performing all of the intermediary or carrier functions.
Instead, CMS will be allowed to enter into contracts with Medicare
administrative contractors to perform any or all of the above functions.
This will give CMS the ability to utilize specialty contractors, such as the
current durable medical equipment carriers, to develop expertise in a given
area and ensure greater uniformity in the way a particular function is
administered.
o CMS Will Be Allowed to Transfer Functions from One
Contractor to Another
The legislation gives CMS the flexibility to transfer functions from one
contractor to another during the term of the contract. The legislation does
not say that the contractor must consent to such transfer, but it does
require public notice and consideration of performance quality. The loss
of a function(s) during the term of the contract would seem to qualify as a
partial termination for convenience and, since the new contracts are to be
governed by the FAR, costs associated with the loss of such function(s)
should be compensible in accordance with the FAR.
o Mandatory Incentives
The legislation requires that the contracts should contain “incentives” for
contractors to provide quality service and to promote efficiency. These
incentives will presumably be financial and should be in addition to the
profit that will otherwise be allowed.
o Performance Expectations Must Be Specified in the Contract
Another helpful provision for contractors is the feature that requires CMS
to include in the body of the contract all contractor requirements that CMS
will use to evaluate performance.
The legislative expectation is that the new contracts will be structured as
standard government contracts. This is exemplified by the fact that all
performance requirements that CMS will expect of its contractors must be
contained in the body of the contract and must be consistent with a written
statement of work that also must be included in the contract.
This requirement means that CMS will no longer be permitted to rely on
informal directives and general instructions to alter performance
expectations and obligations of the contractor.
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By mandating performance requirements to be in the contract and
subjecting the contracts to the FAR, CMS will be required to issue a
formal contract modification or change order and properly compensate the
contractor for the added or changed work.

Changes to the Way Contracts Are Renewed
o Automatic Renewals No Longer Permitted
Under the existing authorities, contracts are automatically renewed from
term to term unless either party gives notice that it does not want to enter
into another contract. Absent such notice, the contract automatically
renews.
Under the new legislation, the concept of an indefinite automatic renewal
will disappear. CMS will be permitted to renew a contract from term to
term for up to five years without being required to recompete the
contracts. But CMS will need to do something affirmative in order for the
contract to be renewed. (What will occur is tantamount to the unilateral
exercise of an option by the government under a standard government
contract.)
The legislation does not mandate or entitle the contractor to a renewal if a
contractor is performing acceptably. Rather, a renewal is permitted, but
not required, and then only if the contractor meets or exceeds performance
requirements. Hence, long-term stability as a contractor is no longer a
guarantee.
o Contractors Will Not Be Permitted to Give Notice of
Nonrenewal
Under the existing contracts, either CMS or the contractor can give notice
of nonrenewal. Under the new legislation, however, only CMS will have
the authority to renew a contract. If CMS gives notice of renewal and the
contractor does not want to continue as a contractor, the contractor will be
hard-pressed to decline the renewal without jeopardizing its ability to
obtain future work in the Medicare program.
o Termination Costs Under a Nonrenewal May Be Difficult to
Recover
Under the existing contracts, if either CMS or the contractor gives notice
of nonrenewal, CMS has allowed the contractor to be reimbursed for what
CMS determines to be the contractor’s reasonable termination costs.
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The new legislation is silent with regard to whether a contractor will be
entitled to recover termination costs in situations where CMS decides not
to renew the contract or where a contractor declines to accept an offer of
renewal. Encouragingly, the legislative history states that CMS has
authority to pay termination costs in the transition from the current
contracts to competitively bid contracts.

Changes to the Way Contracts Are Terminated
o Contracts Will Be Able to Be Terminated for the
Government’s Convenience
The existing contracts do not have a standard FAR termination for
convenience clause because the original Medicare legislation only
permitted CMS to terminate a contract where the contractor was in default.
Because the new contracts will be subject to the FAR, the inclusion of a
standard termination for convenience clause will be required. CMS will
then have the discretion to terminate a contract, either partially or entirely,
for reasons that CMS believes to be in the program’s best interest. When
there is a termination for convenience under a standard government
contract, the government is required to reimburse the contractor for its
termination costs.
o Contractors Will No Longer Be Able to Terminate the
Contract Early
Under the current contracts, contractors are permitted to terminate the
contracts before they expire upon giving CMS timely notice. Under the
new legislation, contractors will no longer enjoy this right because, under
the FAR, contractors do not ordinarily have the ability to terminate a
contract. The right of termination generally belongs exclusively to the
government.
o Contractors Will No Longer Be Entitled to Administrative
Due Process Before a Termination Can Be Effective
Under the existing statute, before CMS can terminate a contract, it must
give the contractor notice of intent to terminate and the opportunity for an
administrative hearing. Under the new legislation, however, the FAR does
not give a contractor the right to an administrative hearing as a necessary
prerequisite prior to the time that the government can terminate for
default. A contractor is permitted to challenge a termination for default
after the fact, but the usual remedy that a board of contract appeals or
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court will impose is not to reinstate the contract but, instead, to convert the
termination for default into one for convenience.

Other Changes as a Result of Contracts Being Fully Subject to the FAR
o Contractors Will No Longer Be Exempt from Standard FAR
Clauses
Currently, the Medicare contracts contain a few standard FAR clauses but
many clauses are not required because at the time the Medicare program
was enacted, Medicare contractors were considered to be agents of the
government and therefore not subject to a number of requirements that
would otherwise be imposed on government contractors. The new
contracts will likely incorporate by reference a number of FAR clauses.
Each of these clauses will need to be studied to determine the
government’s expectations as well as the risks associated with
noncompliance.
o Contractors Will Be Subject to the Full Range of Cost
Accounting Standards
Medicare administrative contractors will not be exempt from the Cost
Accounting Standards (CAS). Historically, Medicare contracts have not
been subject to full CAS coverage (some, but not all, of the CAS currently
are incorporated into Medicare carrier/intermediary contracts), but that
will no longer be the case.
o Contractors Will Be Subject to the Service Contract Act
Another potentially significant change by virtue of the new legislation
treating Medicare administrative contractors like any other government
contractor is that there will likely be a requirement to comply with the
Service Contract Act of 1965. This requirement could have an impact on
the compensation some contractors pay their employees.
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
The Legislation’s Effective Dates
o A Lengthy Transition
The amendments would take effect on October 1, 2005 but would only
apply to new contracts that are entered into on or after that date unless the
new legislation provides otherwise. For example, CMS can enter into new
intermediary agreements upon the legislation’s enactment without being
required to observe the provider nomination process. All contracts for the
period beginning October 1, 2011 will need to have been competitively
bid. Thus, CMS is given a long period of time to fully implement the
competitive bidding requirement, although it may begin transition to the
new competitively bid contracts upon enactment.
o Existing Contracts Will Generally Not Be Subject to the New
Requirements
Until the new competitive contracts are awarded, the current contracting
authorities and practices will continue to be applied unless the legislation
says otherwise, e.g., the immediate abolishment of the provider
nomination process for new intermediary contracts.
Upon enactment, CMS is permitted to take whatever steps are necessary to
provide for an appropriate transition from the old contracts to the new
contracts. It will therefore be important for intermediaries and carriers to
remain alert to any changes that are imposed on their contracts, either by
way of contract amendments or general instructions that are issued as
“necessary transition steps.”

Changes To Information Security Requirements
o Information Security Program
Medicare administrative contractors involved in the determination and
making of payment determinations will face increased information
security requirements. The new legislation requires such contractors to
implement a “contractor-wide” information security program that must
meet the same level of security that is required for CMS and all other
Federal agencies.
o Audit of a Contractor’s Information Security Program
The new legislation provides that those contractors who determine and
make payments to providers and suppliers will be required to undergo an
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annual audit by an independent entity that will examine the integrity of the
contractor’s information security program.
For Medicare administrative contractors entering the program for the first
time, the audit will be performed before contract performance commences.
For Medicare administrative contractors that have previously been fiscal
intermediaries or carriers, the audit must be completed by the end of the
first year of the contract.
The audit requirement will also apply to existing fiscal intermediaries and
carriers and must be completed within one year of the legislation’s
effective date.
Subtitle C -- Education and Outreach
INTRODUCTION
The new legislation requires Medicare administrative contractors, as well as existing fiscal
intermediaries and carriers, to devote increased attention to education and technical
assistance to the providers and suppliers they serve. Contractors will also be required to be
more responsive to inquiries and complaints from the beneficiary population. To this end,
the legislation establishes the position of a Medicare Beneficiary Ombudsman to address the
complaints, grievances, and requests for information from the beneficiary community.
INCREASED MEDICARE CONTRACTOR RESPONSIBILITIES TO
PROVIDERS AND SUPPLIERS
Congress has mandated a detailed agenda relating to improved communications with
providers and suppliers. For example, contractors must answer written inquiries within 45
business days. Dedicated toll-free telephone lines must be established for providers and
suppliers to obtain information. Internet websites must also be created to respond to
frequently asked questions.
Medicare contractors will be evaluated on how well they perform and monitor their
performance in this area based on standards CMS will develop after consulting with industry
representatives. These standards will measure a contractor’s accuracy, consistency, and
timeliness. The new standards will also apply to existing fiscal intermediaries and carriers
with additional incentives available for implementing effective education and outreach
programs.
The new legislation requires Medicare contractors to give extra attention to small providers
and suppliers. Small providers and suppliers are defined as having fewer than 25 full-time
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employees or fewer than 10 full-time employees respectively. The legislation further
provides for a technical assistance demonstration program to educate small providers and
suppliers so that they improve their compliance with the Medicare authorities in such matters
as billing, coding, and reimbursement.
MEDICARE BENEFICIARY IMPROVEMENTS
The position of a Medicare Beneficiary Ombudsman is created to assist beneficiaries with
complaints, grievances, and requests for assistance. This position must be filled no later than
one year after the legislation is enacted. To emphasize Congress’s concern, beneficiaries
must have access to more user-friendly resources, including an expanded toll-free 1-800MEDICARE number.
A demonstration outreach program is established whereby CMS employees will be
physically located at selected Social Security Administration field offices to assist
beneficiaries with questions and problems.
The new legislation requires CMS to better educate beneficiaries and the public about posthospital skilled nursing facility benefits.
Subtitle D -- Appeals and Recovery
The Act makes a variety of changes with respect to Medicare appeals and recovery.
RESPONSIBILITY FOR MEDICARE APPEALS
The Act requires the Secretary and Commissioner of the Social Security Administration
(“SSA”) to develop a plan by April 1, 2004 for transferring the administrative law judge
(“ALJ”) function for Medicare Appeals from the SSA to HHS. GAO will evaluate the plan
within six months after its submission. ALJ functions are to be transferred between July 1,
2005 and October 1, 2005. ALJs must be placed in an administrative office that is separate,
both organizationally and functionally, from CMS. ALJs will report to, and be under the
supervision of, the Secretary. Appropriations are made for FY 2005 and subsequent years to
increase the number of ALJs, improve their training and education, and increase staff of the
Departmental Appeals Board (“DAB”).
PROCESS FOR EXPEDITED ACCESS TO APPEALS
Under the prior law, administrative appeals must be exhausted before judicial review could
be sought. This Act requires a new process whereby providers, suppliers or beneficiaries
may obtain access to judicial review when a review entity determines within 60 days of a
complete written request that it lacks authority to decide the matter and where material facts
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are not in dispute. Expedited access to review is permitted in cases where the Secretary
terminates participation of, or does not enter into participation agreements with, a provider.
Likewise, expedited access to review of provider termination and other remedies imposed on
skilled nursing facilities shall be established.
REVISIONS TO MEDICARE APPEALS PROCESS
Providers and suppliers may not introduce evidence in any appeals that was not presented at
the qualified independent contractor’s (“QIC’s”) reconsideration of a Medicare appeal unless
there is “good cause” precluding the introduction of the evidence at or before the
reconsideration. The Act permits QICs to use beneficiaries’ medical records in appeals
reconsiderations.
In the initial determination phase and in subsequent appeals, written notice of Medicare claim
denials are required and must be written in a manner that is understood by the beneficiary.
Notification of appeal rights and appeal instructions must also be included, in addition to the
reasons for the determination. When a redetermination (the first level of appeal) is denied,
written notice must include specific reasons for the redetermination, summary of the clinical
or scientific evidence used in making the redetermination and a description of the procedures
for obtaining additional information about the redetermination. When a reconsideration (the
second level of appeal) is decided, the written notice must include information about appeal
rights and processes. Finally, for appeals to the ALJ or DAB, notice of the decision must be
in writing and include specific reasons for the determination.
QICs must submit information needed for the appeal of a decision. The QICs and their
reviewer-employees must (1) have medical and legal expertise; (2) not be a related party, as
defined by the Act; (3) not have material familial, financial or professional relationships with
parties in a case under review; and (4) not otherwise have a conflict of interest with such
party. Compensation is also limited and may not be contingent on decisions rendered. The
required number of QICs is reduced from BIPA’s requirements, from not fewer than 12 to
not fewer than 4.
PREPAYMENT REVIEW
Medicare administrative contractors may conduct random prepayment reviews to develop
contractor-wide or program-wide claims payment error rates. Random prepayment reviews
are “demand[s] for the production of records or documentation absent cause with respect to a
claim.” Such reviews shall only be conducted in accordance with standard protocols for
random prepayment audits developed by the Secretary. Non-random prepayment reviews
may not be initiated unless there is a likelihood of sustained or high level of payment error.
RECOVERY OF OVERPAYMENTS
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Under the former law, CMS negotiates repayment plans with providers that need additional
time in which to refund Medicare overpayments. The Act permits the Secretary to enter into
extended repayment plans with providers in instances where repayment within 30 days would
pose hardship. The extension may be as short as six months or as long as three years, or five
years in cases of extreme hardship. Interest will accrue on the balance during the period of
repayment. Hardship exists where the aggregate amount of the overpayments exceeds ten
percent of the amount paid to the provider or supplier for the cost reporting period covered
by the most recently submitted cost report. If there is reason to suspect that the provider of
services or supplier may file for bankruptcy, otherwise cease to do business, or discontinue
participation in the Medicare program, or where there is indication of fraud or abuse against
the program, the Secretary is not obligated to enter into an extended repayment plan.
Further, if the provider or supplier fails to make a payment in accordance with the repayment
plan, the Secretary may immediately seek to offset or otherwise recover the total balance
outstanding under the plan.
The Secretary may not recoup any overpayments until a reconsideration or redetermination is
decided, if requested. Interest must be paid to the provider if the appeal is successful or paid
to the Secretary if the appeal is unsuccessful. In determining overpayment amounts to be
recovered by recoupment, offset or otherwise, a Medicare contractor may not use
extrapolation unless the Secretary has determined that there is a sustained or high level of
payment error, or documented educational intervention has failed to correct the payment
error. Medicare contractors may request periodic production of records or supporting
documentation for a limited sample of submitted claims to ensure that the previous practice is
not continuing. Consent settlements may be used to settle a projected overpayment. The
Act defines “consent settlements” as “an agreement between the Secretary and a provider of
services or supplier whereby both parties agree to settle a projected overpayment based on
less than a statistically valid sample of claims and the provider of services or supplier agrees
not to appeal the claims involved.” Before offering to settle, the Secretary must
communicate to the provider or supplier that a medical review has indicated the
overpayment, identify the problems, address remedial steps, and afford 45 days in which to
furnish additional information for the reviewed claims.
Where post-payment audits are conducted, the contractor must provider the provider or
supplier with written notice of its intent to conduct the audit and inform the provider or
supplier of its findings and the related appeal rights, except where such notice would
compromise pending law enforcement activities or reveal findings of law enforcementrelated audits. Finally, the Secretary must establish a standard methodology for Medicare
contractors to use in selecting a sample of claims for review in instances of abnormal billing
patterns.
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PROVIDER ENROLLMENT PROCESS AND APPEALS RIGHTS
The Secretary must establish in regulations a provider enrollment process and monitor
contractors in meeting deadlines for such enrollment. The Secretary must also consult with
providers and suppliers prior to making changes in provider enrollment forms required for
eligibility of claims submissions for payment under the Act. Providers or suppliers whose
applications for renewal or initial enrollment are denied are given hearing and judicial review
rights. The enrollment process must be established within six months of enactment. The
consultation process for provider enrollment forms will take effect January 1, 2004.
CORRECTION OF MINOR ERRORS AND OMISSIONS
Within a year of enacting the legislation, the Secretary must establish a process by which
providers and suppliers can correct minor errors in claims submitted for payment.
PRIOR DETERMINATION PROCESS
By regulation, the Secretary must also establish a prior determination process through which
participating physicians and beneficiaries may submit requests to Medicare contractors to
determine if a service will be covered by Medicare. These prior determinations would be
binding on the contractor, absent fraud or misrepresentation of facts. A beneficiary’s right
not to seek the prior determination, or a negative determination, shall not effect further
appeal or review of the services or the beneficiary’s right to obtain services or to seek
reimbursement of the services.
APPEALS BY PROVIDERS
When a beneficiary dies prior to assigning appeal rights, a provider or supplier is permitted
under the Act to appeal a payment denial by a Medicare contractor related to services or
items furnished upon or after enactment.
REVISIONS TO TIMEFRAMES AND AMOUNTS
The amount of time in which appeals at the redetermination and reconsideration levels may
be decided is increased from thirty to sixty days. Further, the Act provides that for hearing or
judicial review requests made after FY 2004, dollar amounts for appeals will be indexed to
the consumer price index for all urban consumers, rounded to the nearest multiple of $10.
MEDIATION PROCESS FOR LOCAL COVERAGE DETERMINATIONS
The Act requires the Secretary to establish a mediation process using a CMS-employed
physician who is trained in mediation to mediate disputes between groups representing
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providers of services, suppliers and Medicare contractors whenever the appropriate regional
administrator determines that there was a “systematic pattern and a large volume of
complaints from such groups” regarding the medical director of the contractor, or when there
is a complaint from the co-chair of the advisory committee for that contractor to the regional
administrator.
Subpart E -- Miscellaneous Provisions
Subpart E of Title IX modifies a variety of Medicare administrative provisions.
AUTHORITY TO WAIVE A PROGRAM EXCLUSION
Individuals and entities participating in federal health care programs who have been
convicted of certain criminal offenses have, in the past, been the subject of mandatory
program exclusions. The Act permits the administrator of federal health care program to
waive certain five-year exclusions if the exclusion would impose a hardship on beneficiaries
because it involves a sole community physician or sole source of essential specialized
services in a community.
PAYMENT FOR EMERGENCY MEDICAL TREATMENT AND LABOR ACT
(EMTALA) MANDATED SCREENING AND STABILIZATION SERVICES
Determinations as to whether an item or service provided in order to screen and stabilize a
Medicare beneficiary is “reasonable and necessary” shall be made on the basis of the
information available to the treating practitioner at the time the service was offered. Such
determinations shall not be based on the patient’s principal diagnosis, and the Secretary may
not consider the frequency with which the item or service was provided to the patient.
REFERENCE LABORATORY SERVICES UNDER MEDICARE SECONDARY PAYER
(MSP) PROVISIONS
In the case of reference laboratory services, the Secretary may no longer require hospitals to
obtain from beneficiaries information relating to the MSP provisions, if the Secretary does
not impose such requirements on independent laboratories.
AUTHORIZING USE OF ARRANGEMENTS TO PROVIDE CORE HOSPICE
SERVICES
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The Act permits a hospice to enter into an arrangement with another hospice to provide care
in extraordinary circumstances, such as unanticipated high patient loads or staffing shortages,
and bill Medicare for the hospice care provided under the arrangement.
APPLICATION OF OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION
(OSHA) BLOOD BORNE PATHOGENS STANDARD TO CERTAIN HOSPITALS
The Act requires public hospitals, not otherwise subject to the OSHA Act of 1970, to comply
with OSHA’s blood borne pathogens standard by July 1, 2004. Hospitals that fail to comply
may be subject to civil penalties.
FURNISHING HOSPITALS WITH INFORMATION TO COMPUTE
DISPROPORTIONATE SHARE HOSPITAL (DSH) PAYMENT FORMULA
Within one year of enactment of the Act, the Secretary is required to provide hospitals with
the information needed to calculate the number of patient days used in computing the
Medicare DSH percentage for that hospital for the current cost reporting year.
TREATMENT OF DENTAL CLAIMS
Group health plans often require a claim denial from Medicare before accepting a dental
claim for payment review, even if the particular service at issue is not covered by Medicare.
The Act prohibits group health plans providing supplemental or secondary coverage to
Medicare beneficiaries from requiring dental providers to obtain a claim denial from
Medicare for services not covered by Medicare.
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Title X
Medicaid & Miscellaneous Provisions
Hospitals that serve a large number of uninsured patients and Medicaid enrollees have
traditionally received disproportionate share hospital (“DSH”) payments through Medicare
program reimbursement. Until now, DSH payments have been limited to a set percentage of
a hospital’s costs of providing inpatient and outpatient services to Medicaid and uninsured
patients less the payments the hospital receives on behalf of or from Medicaid and uninsured
patients. The legislation establishes a temporary increase in DSH payments for FY 2004 and
subsequent FYs.
For FY 2004, DSH payments will be set at 116% of the FY 2003 allotments and will not be
subject to the ceiling which caps states’ allotments at 12% of medical assistance payments.
After FY 2004, DSH payments will be equal to FY 2004 amounts unless the Secretary
determines that the amount, if calculated using the methodology in place prior to the
enactment of the new legislation, would equal or no longer exceed FY 2004 amounts. For
those years, the DSH payments will equal allotments for the prior FY increased by the
percentage change in the consumer price index for all urban consumers for the previous FY.
For extremely low DSH states, which are those states whose FY 1999 federal and state DSH
expenditures are between 0 and 1% of the state’s total medical assistance expenditures for
that FY, the temporary floor will increase by 16% above current amounts for the next five
years, FYs 2004 through 2008. These provisions are effective upon enactment.
The legislation also requires increased reporting requirements to ensure that DSH payment
adjustments are appropriate. Each state must submit an annual report detailing for the
previous FY each DSH payment, the amount received, and other requested information. The
law also requires independent certified audits to verify reductions in uncompensated care
costs to reflect DSH payments, the methodology used, and documentation maintained.
These provisions are effective upon enactment.
In addition, the legislation modifies the Medicaid “best price” drug rebate program to permit
drug manufacturers to provide large discounts to certain safety net public hospitals without
affecting calculation of the manufacturer’s “best price”. Otherwise, if discounts to such
hospitals would have reflected the manufacturer’s “best price,” the manufacturers would
have to give larger rebates to state Medicaid programs. The change removes a disincentive
for low prices to these safety net hospitals. This provision is effective October 1, 2003.
Also, in certain limited instances, the legislation authorizes the Secretary to allow publicly
owned regional medical centers operating in tri-state metropolitan statistical areas to utilize
DSH allotments of another state through December 31, 2005.
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OTHER HIGHLIGHTS NOT RELATED TO MEDICAID
 Appropriates funding to eligible providers to render emergency health services to
undocumented aliens for FYs 2005 through 2008.

Instructs the Secretary to establish a Commission on Systemic Interoperability to
develop strategies for adopting and implementing healthcare information
technology standards.

Establishes a loan program to improve cancer-related healthcare and hospitals via
construction, renovation and capital improvements. $200 million to be expended
between July 2004 and FY 2008.

Establishes a three year demonstration project for palliative care to children with
life-threatening illness.
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Title XI
Access to Affordable Pharmaceuticals
The Act modifies the Hatch-Waxman law to further ease entry of generic drugs into the
marketplace, and clarifies conditions on importation of prescription drugs.
HATCH-WAXMAN REFORM
The legislation amends various aspects of submission and consideration of ANDAs and
505(b)(2) applications, for most the part in ways that benefit generic manufacturers. To
some degree, the changes merely codify existing FDA practice. Provisions in the law or
addressed in the conference report include:

NDA holder can receive only one 30-month stay per product.

If neither the NDA holder nor patent owner sues the ANDA applicant within 45
days of receiving notice of an ANDA containing a Paragraph IV certification,
federal courts are explicitly given jurisdiction over a declaratory judgment suit by
the ANDA applicant.

ANDA applicant seeking declaratory judgment as to non-infringement (as
opposed to invalidity of the patent) must offer NDA holder or patent owner
confidential access to the ANDA application, for the purposes of evaluating the
claim.

If NDA holder or patent owner brings a patent infringement action, ANDA
applicant can assert a counterclaim seeking delisting of the patent from the
Orange Book. This is available only as a counterclaim to an infringement suit, is
not an independent cause of action, and there are no damages for improper listing
of a patent. (This does not preclude damages that otherwise might be available
for improper Orange Book listing, such as under antitrust law.)

Any ANDA submitted on the same day as the first ANDA for a drug will be
eligible for 180-day exclusivity. Accordingly, multiple 180-day exclusivities can
be provided.

The 180-day exclusivity is forfeited under certain conditions, including failure to
market in a timely fashion and entering into a collusive agreement with another
applicant, the NDA holder or the patent owner.
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
If all holders of 180-day exclusivity forfeit the exclusivity, no subsequent
applicants are entitled to the exclusivity.

Agreements between ANDA applicants and NDA holders or patent owners, or
between two ANDA applicants, must be filed with the FTC and DOJ.
IMPORTING PRESCRIPTION DRUGS
Although the final bill directs HHS to issue regulations permitting importation of
prescription drugs from Canada, such action is not required unless HHS certifies that the
importation will create no additional risk to public health and safety, and will lead to
significant cost savings to U.S. consumers. In that regard, the new law is not
significantly different from current law, and should not be expected to lead to new
imports, as HHS Secretaries in both the Clinton and Bush administrations acting under
the old law determined they could not make the certification necessary to issue
regulations permitting imports.
Nonetheless, the revisions to the statute ultimately may lead to a different outcome, at
least in some respects.

Unlike current law, the importation provision (and presumably the scope of the
certification required of HHS) is limited to Canada, which has a sophisticated
regulatory system that is accessible to FDA.

Importation would not be permitted for all prescription drugs. The statute
excludes controlled substances, biologics, infused drugs, intravenously injected
drugs, drugs inhaled during surgery, and certain parenteral drugs.

HHS must conduct a study on importation of drugs and report to Congress within
one year. The conference report identifies a number of issues to be addressed in
the report.

Although the envisioned regulations would be limited to importation by
pharmacists and wholesalers, there also is language that would broaden the scope
of the “personal importation policy” FDA has used as a matter of enforcement
discretion regarding imports by individuals.
HHS is also directed to study and report on several issues related to trade law and the
importation of pharmaceuticals.
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Title XII
Health Savings Accounts
IN GENERAL
Continuing the trend toward consumer-driven health care, effective for tax years beginning
after December 31, 2003, the Act creates a new type of tax-favored defined contribution
health care vehicle, known as the Health Savings Account (“HSA”). HSAs are trust accounts
or custodial arrangements that provide tax-favored treatment for the payment of current
medical expenses as well as the ability to save on a tax-favored basis for future medical
expenses. They can be used to pay medical expenses of the account holder and his or her
spouse and dependents. Like an IRA, they are the account holder’s property and they are
portable.
TAX ADVANTAGES
Within limits, contributions to HSAs are deductible if made by an eligible individual and are
excludable for income and employment tax purposes if made by an eligible individual’s
employer. In addition, distributions to pay for qualified medical expenses are not included in
the recipient’s income. Distributions that are not for qualified medical expenses are
includible in income and subject to an additional 10% tax. The additional tax does not apply
after death, disability, or the individual becoming eligible for Medicare.
ELIGIBLE INDIVIDUAL
Eligible individuals are individuals who are covered by an employer-sponsored “high
deductible health plan.” Self-employed individuals covered by high deductible health plans
also can maintain HSAs. Individuals who are eligible for Medicare benefits and those who
can be claimed as a dependent on someone else’s tax return, however, cannot contribute to an
HSA.
HIGH DEDUCTIBLE HEALTH PLAN
A high deductible health plan is a health plan with a deductible of at least $1,000 for
individual coverage or $2,000 for family coverage and an out-of-pocket expense limit that
does not exceed $5,000 for individual coverage or $10,000 for family coverage. These
figures are indexed for inflation. The $5,000 and $10,000 limits are applied to plans using a
network of providers by applying the limits for in-network services.
TAX TREATMENT OF AND LIMITS ON CONTRIBUTION
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HSA contributions are deductible (within limits) for federal income tax purposes “above the
line.” In addition, employer contributions (including salary reduction contributions under
through a cafeteria plan—which are now permitted under the Act) are excludable for income
and employment tax purposes to the extent the contribution would be deductible if made by
the employee. An individual also can deduct contributions made by family members on his
or her behalf.
The maximum annual contribution that can be made to an HSA is the lesser of (1) 100% of
the annual deductible under the high deductible plan, or (2) the maximum deductible
permitted under an Archer MSA high deductible health plan under present law, as adjusted
for inflation. For 2004, the maximum high deductible is estimated to be $2,600 for individual
coverage and $5,150 for family coverage. In addition, individuals who will reach age 55 by
the end of the tax year can make “catch-up” contributions over and above the otherwise
applicable limit. The limit on catch-ups is $500 in 2004. It increases in $100 annual
increments until it reaches $1,000 in 2009 and thereafter. Contributions, including catch-up
contributions, however, cannot be made once an individual becomes eligible for Medicare.
Contributions that exceed the above limits are subject to a 6% excise tax unless distributed to
the contributor. Amounts can be rolled over tax-free into an HSA from an Archer MSA, a
health FSA or another HSA. Such rollovers do not count against the annual contribution
limits.
COMPARABILITY RULE
An employer that contributes to employees’ HSAs, must make comparable contributions
(i.e., same dollar amount or same percentage of the deductible under the high-deductible
health plan) on behalf of all employees with comparable coverage during the same period.
An employer that violates this rule is subject to an excise tax equal to 35% of the amount
contributed to HSAs by the employer for the relevant period. The IRS can waive part or all
of this tax.
TAXATION OF DISTRIBUTIONS
Distributions from an HSA for qualified medical expenses of the individual and his or her
spouse or dependents are completely tax-free. Distributions that are not for qualified medical
expenses are subject to income tax as well as an additional 10% tax unless made after death,
disability, or after the individual becomes eligible for Medicare.
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EXCLUSION FROM INCOME OF FEDERAL SUBSIDIES FOR
PRESCRIPTION DRUG PLANS
The Act excludes from an individual’s gross income the 28% employer subsidy for retiree
prescription drugs enacted by the Act. In addition, a taxpayer can deduct prescription drug
expenses incurred even though the taxpayer also received an excludible subsidy related to the
same expenses. The provision is effective for tax years ending after the Act’s enactment date.
EXCEPTION TO INFORMATION REPORTING REQUIREMENTS FOR
CERTAIN HEALTH ARRANGEMENTS
Anyone in a trade or business who makes certain payments to another person totaling $600
or more in a year, must provide an information report to the IRS on Form 1099. Treasury
regulations specify that fees for professional services, including the services of physicians,
must be reported. The regulations exempt payments made to corporations, unless the
corporation is “engaged in providing medical and health care services” or if the payment is
made to a hospital that is tax-exempt or that is owned and operated by a governmental entity.
Revenue Ruling 2003-43, 2003-21 I.R.B. 935, provides that payments made to medical
service providers through the use of debit, credit, and stored value cards must be reported by
the employer on Form 1099-MISC.
The Act exempts from these reporting rules payments for medical care made under either: (1)
a flexible spending arrangement, or (2) a health reimbursement arrangement (“HRA”) that is
treated as employer-provided coverage. The provision applies to payments made after
December 31, 2002.
©2003 Crowell & Moring LLP. ALL RIGHTS RESERVED
This material is made available for information purposes only and should not be relied upon to resolve
specific legal questions. If you have such a question, you should consult with legal counsel. If you have
questions about this summary or on the Medicare Prescription Drug Improvement and Modernization Act of
2003, you may contact any attorney in the health law group at Crowell & Moring at 202 624-2500 or contact
us via email.
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