Overview of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
CRS Report for Congress
Overview of the Medicare
Prescription Drug, Improvement,
and Modernization Act of 2003
Updated December 6, 2004
Jennifer O’Sullivan, Hinda Chaikind, Sibyl Tilson,
Jennifer Boulanger, and Paulette Morgan
Specialists and Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Overview of the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003
Summary
On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, P.L. 108-173. On November 22,
2003, the House of Representatives voted 220 to 215 to approve H.R. 1, the Medicare
prescription drug and modernization conference agreement. The Senate voted 54 to
The Act creates a prescription drug benefit for Medicare beneficiaries and
establishes a new Medicare Advantage program to replace the current
Medicare+Choice program. The prescription drug benefit, which begins in 2006, is
voluntary and beneficiaries would pay a monthly premium after enrolling. Until that
time, beneficiaries have access to a drug discount card to obtain discounts on their
drug purchases.
Medicare Advantage establishes payments based on a system of bids and
benchmarks. One area of major difference during the conference was the so-called
“premium support” provisions of H.R. 1 whereby the original Medicare fee-for-
service program would be required to compete against the new Medicare Advantage
program. The Act creates a six-year Comparative Cost Adjustment program in
which the concept of premium support would be applied in a limited number of
Metropolitan Statistical Areas (MSAs). The Act also provides a stabilization fund
to create incentives for plans to enter into and remain in the Medicare Advantage
program.
The Act includes a measure that would require congressional consideration of
legislation if general revenue funding for the entire Medicare program exceeds 45%.
In addition, beginning in 2007, the Medicare Part B premium will be increased for
high-income beneficiaries; it will be phased-in over five years. The Part B deductible
increases to $110 in 2005 and will be indexed beginning in 2006. The Act contains
numerous provisions that generally increase fee-for-service Medicare payments,
especially for rural health care providers, and modify numerous regulatory and
administrative practices. The Act also makes changes to the Medicaid program and
authorizes new tax-advantaged accounts for medical expenses called health savings
accounts.
Under Congress’s FY2004 budget resolution, $400 billion was reserved for
Medicare modernization, creation of a prescription drug benefit, and, in the Senate,
to promote geographic equity payment. The Congressional Budget Office (CBO)
estimated that the conference agreement for H.R. 1 would increase direct (or
mandatory) spending by $394.3 billion from FY2004 through FY2013. Prescription
drug spending is estimated at $409.8 billion over the 10-year period and Medicare
Advantage spending at $14.2 billion. The fee-for-service provisions are estimated
to save $21.5 billion over the 10-year period and the cost containment measures are
estimated to save $13.3 billion over the period.
Contents
Overview ........................................................1
Prescription Drugs.................................................2
Voluntary Prescription Drug Benefit Program........................2
Overview ................................................2
Eligibility and Enrollment...................................2
Prescription Drug Benefits...................................3
Beneficiary Protections for Qualified Prescription Drug Coverage....4
Electronic Prescription Program..............................5
Access to a Choice of Qualified Prescription Drug Coverage........6
PDP Regions.............................................6
Submission of Bids........................................6
Plan Approval............................................6
Fallback .................................................7
Contract Requirements......................................7
Premiums ................................................8
Premium and Cost-Sharing Subsidies for Low-Income Individuals...8
Direct Subsidies...........................................9
Risk Corridors...........................................10
Subsidies for Retiree Plans.................................10
Relationship to Other Programs..............................11
Medigap ................................................11
Medicare Prescription Drug Discount Card.........................11
Medicare Advantage..............................................12
Cost Containment................................................16
Administration of Medicare Part C and Part D..........................17
Appeals, Regulatory, and Contracting Provisions........................17
Provisions Affecting Medicare’s Fee-for-Service Program Payments,
Demonstration Projects, Expansion of Covered Benefits and
Beneficiary Cost Sharing.......................................18
Changes to Medicare’s Fee-for-Service Program ....................18
Selected Rural Provider Provisions...........................18
Selected Acute Hospital Provisions...........................19
Selected Physician Provisions...............................20
Selected Provisions Affecting Other Providers and Practitioners....20
Selected Fee-for Service Demonstration Projects................21
Expansion of Covered Benefits..............................22
Beneficiary Cost Sharing in Fee-for-Service............................23
Income Relating to the Part B Premium.......................23
Indexing the Part B Deductible..............................23
Medicaid and Miscellaneous Provisions...............................23
Tax Incentives for Health and Retirement Security.......................24
Overview of the Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003
Overview
On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. Earlier, the House of Representatives
voted 220 to 215 to approve H.R. 1, the conference agreement, on November 22,
2003. The Senate voted 54 to 44 to approve the conference agreement on November
The Act adds a prescription drug benefit and replaces the existing
Medicare+Choice program with a new program, called the Medicare Advantage
program. The prescription drug benefit, which begins in 2006, is voluntary and
beneficiaries would pay a monthly premium after enrolling. Until that time,
beneficiaries have access to a drug discount card to obtain discounts on their drug
purchases.
Medicare Advantage establishes payments based on a system of bids and
benchmarks. One area of major difference during the conference was the so-called
“premium support” provisions of H.R. 1 whereby the original Medicare fee-for-
service program would be required to compete against the new Medicare Advantage
program. The Act creates a six-year Comparative Cost Adjustment program in
which the concept of premium support would be applied in a limited number of
Metropolitan Statistical areas (MSAs). The Act also provides a stabilization fund to
create incentive for plans to enter into and remain in the Medicare Advantage
program.
The Act includes a measure that would require congressional consideration of
legislation if general revenue funding for the entire Medicare program exceeds 45%.
In addition, beginning in 2007, the Medicare Part B premium will be increased for
high-income beneficiaries; it will be phased-in over five years. The Part B deductible
increases to $110 in 2005 and will be indexed beginning in 2006. The Act contains
numerous provisions that generally increase fee-for-service Medicare payments,
especially for rural health care providers, and modify numerous regulatory and
administrative practices.
Under Congress’s FY2004 budget resolution, $400 billion was reserved for
Medicare modernization, creation of a prescription drug benefit, and, in the Senate,
to promote geographic equity payment, under Congress’ FY2004 budget resolution.
The Congressional Budget Office (CBO) estimated that the conference agreement for
H.R. 1 would increase direct (or mandatory) spending by $394.3 billion from
FY2004 through FY2013. Prescription drug spending is estimated at $409.8 billion
over the 10-year period and Medicare Advantage spending at $14.2 billion. The fee-
for-service provisions are estimated to save $21.5 billion over the 10-year period and
the cost containment measures are estimated to save $13.3 billion over the period.1
Prescription Drugs
Voluntary Prescription Drug Benefit Program
Overview. The legislation establishes a new Voluntary Prescription Drug
Benefit Program under a new Part D of Title XVIII of the Social Security Act.
Effective January 1, 2006, a new optional benefit will be established under a new
Part D. Beneficiaries will be able to purchase either “standard coverage” or
alternative coverage with actuarially equivalent benefits. In 2006, “standard
coverage” will have a $250 deductible, 25% coinsurance for costs between $251 and
$2,250, then no coverage until the beneficiary has out-of-pocket costs of $3,600
($5,100 in total spending). Once the beneficiary reaches the catastrophic limit, the
program will pay all costs except for nominal cost-sharing. Low-income subsidies
will be provided for persons with incomes below 150% of poverty. Coverage will
be provided through prescription drug plans or Medicare Advantage prescription drug
(MA-PD) plans. The program will rely on private plans to provide coverage and to
bear some of the financial risk for drug costs; federal subsidies covering the bulk of
the risk will be provided to encourage participation. Plans will determine payments
and will be expected to negotiate prices.
Eligibility and Enrollment. Each individual entitled to Medicare Part A or
enrolled in Medicare Part B will be entitled to obtain qualified prescription drug
coverage through enrollment in a prescription drug plan. A beneficiary enrolled in
a Medicare Advantage (MA) plan (see below) providing qualified prescription drug
coverage (MA-PD plan) will obtain coverage through that plan. In general, MA
enrollees may not enroll in a prescription drug plan under Part D.
The Secretary is required to establish a process for enrollment, disenrollment,
termination, and change of enrollment of eligible beneficiaries in prescription drug
plans. The Secretary is required to use rules similar to, and coordinated with rules
established for MA-PD plans. A six-month initial enrollment period, beginning
November 15, 2005, will be established for all persons who are eligible beneficiaries
on that date; it is the same period established for enrollment for MA plans for that
year. An initial enrollment period will apply for individuals becoming eligible after
that date; in no case can such period be less than six months.
The Secretary is required to conduct activities that are designed to broadly
disseminate information to eligible beneficiaries and prospective eligible
beneficiaries. It must be available at least 30 days prior to the initial enrollment
period. The information dissemination requirements are similar to and are to be
coordinated with the activities the Secretary is required to perform for MA plans
1 See [ftp://ftp.cbo.gov/48xx/doc4808/11-20-MedicareLetter.pdf] for cost estimate.
Comparative information is to include information on benefits and formularies under
a plan; monthly beneficiary premium; and beneficiary cost-sharing.
Prescription Drug Benefits. The legislation specifies the requirements for
qualified prescription drug coverage. Qualified coverage is defined as either
“standard prescription drug coverage” or “alternative prescription drug coverage”
with at least actuarially equivalent benefits. In both cases, access would have to be
provided to negotiated prices for covered drugs. Plans are permitted to provide
supplemental prescription coverage consisting of either certain reductions in cost-
sharing (i.e., reduction in deductible, reduction in coinsurance percentage, and
increase in initial coverage limit) or coverage of drugs which are excluded because
of application of the Medicaid definition of covered drugs. A PDP sponsor may not
offer a plan that provides supplemental benefits unless it also offers a basic plan in
the area.
For 2006, “standard prescription drug coverage” is defined as having a $250
deductible; 25% coinsurance up to the initial coverage limit ( $2,250, accounting for
$750 in total out-of-pocket costs and $2,250 in total spending); then no coverage
until the beneficiary had out-of-pocket costs of $3,600 ($5,100 total spending). Once
the beneficiary reached the catastrophic (“stop loss”) limit, the program would pay
costs, except for nominal cost-sharing. The cost-sharing is equal to the greater of:
(1) a copayment of $2 for a generic drug or preferred multiple source and $5 for any
other drug; or (2) 5% coinsurance. Nothing is to be construed as preventing a PDP
sponsor or MA organization from reducing the cost-sharing for preferred or generic
drugs. 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.
Plans will be permitted to 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 may also apply
tiered copayments (i.e., different levels, depending on whether a generic, preferred
multiple source, or other drug is used) provided such copayments were actuarially
consistent with the average 25% cost-sharing requirements.
The Act specifies incurred costs that count toward meeting the catastrophic
limit. Costs are only considered incurred if they are incurred for the deductible, cost-
sharing, or benefits not paid because of application of the initial coverage limit.
Incurred costs do not include amounts for which no benefits are provided because of
the application of a formulary. Costs can be treated as incurred costs only if they
were paid by the individual (or by another family member on behalf of the
individual), paid on behalf of a low-income individual under the subsidy provisions,
or under a state pharmaceutical assistance program. Any costs for which the
individual was reimbursed by insurance or otherwise will not count toward incurred
costs.
Coverage offered by a PDP plan sponsor or a MA-PD entity will be required
to provide beneficiaries with access to negotiated prices. Access must be provided
even when no benefits were payable because of the application of cost-sharing or an
initial coverage limits. Negotiated prices are to take into account negotiated price
concessions, such as discounts, direct or indirect subsidies, rebates, and direct or
indirect remunerations, for covered Part D drugs, and include dispensing fees. The
PDP sponsor or MA-PD entity is required to disclose to 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 will be
required to disclose pricing information to the Secretary.
Beneficiary Protections for Qualified Prescription Drug Coverage.
The Act establishes beneficiary protection requirements for qualified prescription
drug plans. PDP plan sponsors are required to disclose to each enrolling beneficiary
information about the plan’s benefit structure. Sponsors will be required to furnish
to enrollees a detailed explanation of benefits when drug benefits were provided,
including information on benefits compared to the initial coverage limit and the
applicable out-of-pocket threshold.
PDP sponsors are required to permit the participation of any pharmacy that
meets the plan’s terms and conditions. A PDP could reduce copayments for its
enrolled beneficiaries below the otherwise applicable level for drugs dispensed
through in-network pharmacies; in no case could the reduction result in an increase
in subsidy payments made by the Secretary to the plan. The PDP sponsor is required
to secure participation in its network of a sufficient number of pharmacies that
dispense drugs directly to patients (other than by mail order) to assure convenient
access. The Secretary will establish convenient access rules that are no less favorable
to enrollees than rules for convenient access established for the TRICARE Retail
Pharmacy program. The rules are to include adequate emergency assess for enrolled
beneficiaries. Sponsors will permit enrollees to receive benefits (which may include
a 90-day supply) through a community pharmacy, rather than through mail-order,
with any differential in charge paid by enrollees.
If a PDP sponsor uses a formulary, it will have to meet certain requirements.
A pharmaceutical and therapeutic committee must develop and review the formulary.
The committee will be required, when developing and reviewing the formulary, to
base clinical decisions on the strength of scientific evidence and standards of
practice. The committee must also take into account whether including a particular
covered drug in the formulary (or in a particular tier in a formulary) had therapeutic
advantages in terms of safety and efficacy. The formulary must include drugs within
each therapeutic category and class of covered Part D drugs, although not necessarily
all drugs within such categories or classes.
The Secretary is required to request the United States Pharmacopeia to develop
in consultation with pharmaceutical benefit managers and other interested parties, a
list of categories and classes that may be used by plans. The Secretary’s request must
also include the revision of such classification from time to time to reflect changes
in therapeutic uses of covered drugs and the addition of new covered drugs. The plan
sponsor can not change therapeutic categories and classes in a formulary other than
at the beginning of a plan year, except as the Secretary may permit to take into
account new therapeutic uses and newly approved covered drugs. Each sponsor is
required to establish policies and procedures to educate and inform health care
providers and enrollees concerning the formulary. Any removal of a drug from the
formulary, and any change in the preferred or tier cost-sharing status of a drug, could
not occur until appropriate notice had been provided to the Secretary, beneficiaries,
and physicians, pharmacies, and pharmacists. The plan must provide for periodic
evaluation and analysis of treatment protocols and procedures.
The PDP sponsor will be required to have (directly, or indirectly through
arrangements) a cost-effective drug utilization management program; quality
assurance measures, a medication therapy management program; and a program to
control fraud, waste, and abuse.
Each PDP sponsor will be required to have meaningful procedures for the
hearing and resolving of any grievances between the sponsor (including any entity
or individual through which the sponsor provided covered benefits) and enrollees.
Enrollees will be afforded access to expedited determinations and reconsiderations,
in the same manner afforded under MA. A beneficiary in a plan that provides for
tiered cost-sharing can request coverage of a non-preferred drug on the same
conditions applicable to preferred drugs, if the prescribing physician determines that
the preferred drug for the treatment of the same condition is not as effective for the
enrollee or has adverse effects for the enrollee. A PDP will be required to have an
exceptions process consistent with guidelines established by the Secretary.
In general, PDP plan sponsors will be required to meet the requirements for
independent review and appeals of coverage denials and tiered cost-sharing in the
same manner that such requirements applied to MA organizations for fee-for-service
benefits. An individual enrolled in a PDP plan may appeal to obtain coverage for a
drug not on the formulary only if the prescribing physician determines that all
covered Part D drugs on any tier of the formulary for treatment of the same condition
would not be as effective for the individual or would have adverse effects for the
individual or both. The PDP sponsor will be required to meet requirements related
to confidentiality and accuracy of enrollee records in the same manner that such
requirements applied to MA organizations.
Each PDP sponsor will provide that each pharmacy that dispenses a covered
drug shall inform enrolled beneficiaries at the time of purchase (or at the time of
delivery in the case of mail order drugs) 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 is permitted to waive this requirement.
PDP sponsors are required to issue (and reissue as appropriate) a card or other
technology that could be used by an enrolled beneficiary to assure access to
negotiated prices for drugs. The Secretary will provide for the development,
adoption, or recognition of standards relating to a standardized format for the card
or other technology.
Electronic Prescription Program. The Act requires the Secretary to
develop electronic prescription standards. The standards apply to prescriptions for
covered Part D drugs and required information that are transmitted electronically
under an electronic prescription drug program that meets the following requirements.
The program must provide for the electronic transmittal of information on eligibility
and benefits (including formulary drugs, any tiered formulary structure, and prior
authorization requirements), 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. Additionally, the program must provide for the electronic transmittal of the
patient’s medical history. Disclosure of information must meet the requirements of
the HIPAA privacy rule and, to the extent feasible, be on an interactive, real-time
basis.
Access to a Choice of Qualified Prescription Drug Coverage. The
Secretary is required to assure that each beneficiary has available a choice of
enrollment in at least 2 qualifying plans in the area in which the beneficiary resides.
At least one plan has to be a prescription drug plan. The requirement is not satisfied
for an area if only one PDP sponsor or one MA organization offering a MA-PD plan
offers all the qualifying plans for the area.
The Act permits the Secretary, in order to assure access, to approve limited risk
contracts (as discussed below). Only if access is still not provided, will the Secretary
provide for the offering of a fallback plan.
PDP Regions. The Act provides for the establishment of PDP regions. The
service area for a plan includes an entire PDP region. The Secretary shall establish,
and may revise PDP regions in a manner that is consistent with the requirements for
establishment and revision of MA regions. To the extent practicable, PDP regions
shall be the same as MA regions. The Secretary may establish different regions if the
Secretary determines that it would improve access to drug benefits. A plan can be
offered in more than one PDP region, including all PDP regions.
Submission of Bids. Each PDP sponsor is required to submit to the
Secretary specified information at the same time and in a similar manner as such
information is submitted by MA organizations. The information to be submitted is:
(1) information on the prescription drug coverage to be provided; (2) the actuarial
value of the qualified prescription drug coverage in the region for a beneficiary with
a national average risk profile; (3) information on the bid including the basis for the
actuarial value, the portion of the bid attributable to basic coverage and if applicable,
the portion attributable to supplemental benefits, and assumptions regarding
reinsurance subsidy payments; (4) service area; (5) level of risk assumed including
whether the sponsor requires a modification of risk level and if so the extent of the
modification; and (6) such other information required by the Secretary..
Plan Approval. The Secretary will review the submitted information for
purposes of conducting negotiations with the plan. The Secretary has the authority
to negotiate the terms and conditions of the plans. The authority is similar to the
authority the Director of the Office of Personnel Management has with respect to
Federal Employee Health Benefits (FEHB) plans. The Secretary may not interfere
with the negotiations between drug manufacturers and pharmacies and PDP sponsors.
Further, the Secretary may not require a particular formulary or institute a price
structure for the reimbursement of covered Part D drugs.
After review and negotiation, the Secretary will approve or disapprove the plan.
The Secretary may only approve a plan if certain requirements are met. The plan
must comply with Part D requirements, including those relating to beneficiary
protections. The Secretary must determine that the plan and the sponsor meet
requirements relating to actuarial determinations. Further, the Secretary may not find
that the design of the plan and its benefits (including any formulary and tiered
formulary structure) are likely to discourage enrollment by certain beneficiaries. The
Secretary may not make a finding with respect to design of categories and classes
within a formulary if such categories and classes are consistent with guidelines (if
any) for such categories and classes established by the United States Pharmacopeia.
The Act provides that the Secretary may only approve a limited risk plan for a
PDP region if the access requirements for the region would otherwise not be met
except for the approval of a limited risk or fallback plan. Only the minimum number
of limited risk plans necessary for a region to meet access requirements may be
approved. The Secretary shall provide priority to those with the highest level of risk.
In no case can the reduction of risk provide for no (or a de minimis) level of financial
risk. There is no limit on the number of full risk plans that may be approved.
Fallback. If required access is not provided, including through a limited risk
plan, the Act establishes a fallback process. The Secretary is required to establish a
separate process for the solicitation of bids from eligible fallback entities. A single
fallback entity may not offer all fallback plans throughout the United States. The
Secretary can only approve one fallback plan for all fallback service areas in any PDP
region for a contract period. Competitive contracting provisions apply. The
Secretary shall approve fallback plans so that if there are any fallback service areas
in the region for the year, they are offered at the same time as prescription drug plans
would otherwise be offered. Fallback prescription drug plans are permitted to offer
only standard prescription drug coverage and meet such other requirements specified
by the Secretary. The fallback plan would not be permitted to engage in any
marketing or branding of the contract.
Under a fallback contract, the Secretary would pay actual costs of Part D
covered drugs taking into account negotiated price concessions. Payment would also
be made for prescription management fees tied to performance management
requirements established by the Secretary. Beneficiary premiums under fallback
plans would be uniform and equal to 26% of the Secretary’s estimate of the average
monthly per capita actuarial cost (including administrative costs) to the entity
offering the fallback plan. The federal government would pay the remainder.
In general, contract requirements for fallback plans would be the same as those
established for prescription drug plans. A contract for a fallback plan would be for
three years (and be renewable after a subsequent bidding process. However, a
contract could not apply in an area in any year unless the area was a fallback service
area.
Contract Requirements. The Act establishes organizational requirements
for PDP sponsors. In general, a PDP sponsor must be licensed under state law as a
risk bearing entity eligible to offer health insurance or health benefits coverage in
each state in which it offers a prescription drug plan. Alternatively it could meet
solvency standards established by the Secretary for entities not licensed by the state.
To the extent an entity is at risk, it must assume financial risk on a prospective basis
for covered benefits that are not covered by direct subsidy payments. PDP plan
sponsors would be required to enter into a contract with the Secretary under which
the sponsor agreed to comply both with the applicable requirements and standards
and the terms and conditions of payment.
Premiums. The conferees have stated that the average monthly beneficiary
premium in 2006 will be $35 and represent, on average, 26% of the cost of the
benefit provided. The Act specifies the calculation as follows. The monthly
beneficiary premium for a prescription drug plan is defined as the base beneficiary
premium, as adjusted. The base beneficiary premium equals the product of the
beneficiary premium percentage and the national average monthly bid amount. The
beneficiary premium percentage is equal to: (1) 26%, divided by (2)100% minus a
percentage equal to total reinsurance payments divided by the sum of such
reinsurance payments and total payments the Secretary estimates will be paid to
prescription drug plans in a year that are attributable to the standardized bid amount
(taking into account amounts paid by the Secretary and enrollees and the application
of risk adjustment). The national average monthly bid amount is a weighted average
of standardized bid amounts for each prescription drug plan and each MA-PD plan.
Once the base beneficiary premium is calculated, it is adjusted up or down, as
appropriate, to reflect differences between it and the geographically-adjusted national
average monthly bid amount. It is further increased for any supplemental benefits
and decreased if the individual is entitled to a low-income subsidy. The premium is
uniform for all persons enrolled in the plan, except for those receiving low-income
subsidies or those subject to a late enrollment penalty.
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.
Beneficiary premium payments may be paid directly to the PDP sponsor or MA
organization. Alternatively the beneficiary has the option of having the amount
withheld from his or her social security payment or having payment made through
an electronic funds transfer mechanism. Payments withheld are to be paid to the PDP
sponsor.
Premium and Cost-Sharing Subsidies for Low-Income Individuals.
The Act provides premium and cost-sharing subsidies for low-income subsidy-
eligible individuals. There are two groups of subsidy eligible individuals. The first
group is composed of persons who: (1) are enrolled in a prescription drug plan or
MA-PD plan; (2) have incomes below 135% of poverty; and (3) have resources in
2006 below $6,000 for an individual and $9,000 for a couple (increased in future
years by the percentage increase in the CPI). Also included in this group are persons
who are dually eligible for Medicare and Medicaid, regardless of whether or not they
meet the other eligibility requirements. The second group of subsidy eligible
individuals are persons meeting the same requirements, except that the income level
is 150% of poverty and an alternative resources standard may be used; this alternative
standard in 2006 is $10,000 for an individual and $20,000 for a couple (increased in
future years by the percentage increase in the CPI).
Individuals with incomes below 135% of poverty, and resources meeting the
requirement for the first group, will have a premium subsidy equal to 100% of the
low-income benchmark premium amount (essentially a weighted average for the
region), but in no case higher than the actual premium amount for basic coverage
under the plan. Other low-income subsidy eligible persons will have a sliding scale
premium subsidy ranging from 100% of such value at 135% of poverty to 0% of such
value at 150% of poverty. Persons below 135% of poverty will have a premium
subsidy for any late enrollment penalty equal to 80% for the first 60 months of
delayed enrollment and 100% thereafter.
Beneficiaries in both groups are entitled to cost-sharing subsidies. Individuals
with incomes below 135% of poverty, and resources meeting the requirement for the
first group will have no deductible, cost-sharing for all costs up to the out-of-pocket
threshold of $2 for a generic drug or preferred multiple source and $5 for any other
drug. Institutionalized dual eligibles will have no cost-sharing. Full benefit dual
eligibles with incomes up to 100% of poverty will have cost-sharing for all costs up
to the out-of-pocket threshold of $1 for a generic drug or preferred multiple source
and $3 for any other drug. Other low-income subsidy eligible persons will have a
$50 deductible, 15% cost-sharing for all costs up to the out-of-pocket limit, and cost-
sharing for costs above the out-of-pocket threshold of $2 for a generic drug or
preferred multiple source and $5 for any other drug. The deductible amounts are
increased each year beginning in 2007 by the annual percentage increase in per capita
beneficiary expenditures for Part D covered drugs. The cost-sharing amounts are
increased by the increase in the consumer price index.
Eligibility determinations are to be made under the state Medicaid plan for the
state or by the Commissioner of Social Security. The determinations shall remain
effective for a period determined by the Secretary, not to exceed one year. Full dual
eligible persons are to be treated as subsidy eligible persons; the Secretary may
provide that other Medicaid beneficiaries be treated as subsidy eligible. The
Secretary will provide a process whereby the Secretary will 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.
The Act specifies that Medicare is the primary payer for covered drugs for dual
eligibles. Medicaid coverage is not available for such drugs or any cost-sharing for
such drugs. In 2006, states are liable for approximately 90% of the costs they would
otherwise incur if drug coverage for dual eligibles continued to be offered under
Medicaid; by 2015, this percentage drops to 75%.
Direct Subsidies. Federal subsidy payments will be made to qualifying
entities. The stated purpose of such payments is to reduce premiums for all
beneficiaries consistent with an overall subsidy level of 74% for basic coverage,
reduce adverse selection among plans, and promote the participation of PDP sponsors
and MA organizations. Such payments would be made as direct subsidies and
through reinsurance.
The Act specifies a formula for the calculation of the direct monthly per capita
subsidy amount. It is equal to the plans 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).
Risk Corridors. The Act provides for the establishment of risk corridors,
which are defined as specified percentages above and below a target amount. The
target amount is defined as total payments paid to the plan, taking into account the
amount paid by the Secretary and enrollees, based on the standardized bid amount,
risk adjusted, and reduced by total administrative expenses assumed in the bid. 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. If adjusted allowable costs exceed the first
threshold upper limit, then payments are increased. If adjusted allowable costs are
below the first threshold lower limit, then payments are reduced. Adjusted allowable
costs are reduced by reinsurance and subsidy payments. Payment adjustments would
not affect beneficiary premiums.
During 2006 and 2007, plans will 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 will receive increased payments. If their costs are between
2.5% of the target (first threshold upper limit) and 5% of the target (second threshold
upper limit), they will be at risk for 25% of the increased amount; that is, their
payments will equal 75% of adjusted allowable costs for spending in this range. If
their costs are above 5% of the target they will 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 will equal 80% of the adjusted allowable costs over
the second threshold upper limit. Conversely, if plans fell below the target, they will
share the savings with the government. They will have to refund 75% of the savings
if costs fall between 2.5% and 5% below the target level, and 80% of any amounts
below 5% of the target.
A higher risk sharing percentage will apply in 2006 and 2007 if the Secretary
determines that 60% of prescription drug plans and MA-PD plans, representing at
least 60% 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% of adjusted allowable costs between the first and second upper threshold
limits.
For 2008-2011, the risk corridors will be modified. Plans will be at full risk for
drug spending within 5.0% above or below the target level. Plans will be at risk for
they will be at risk for 20% of any spending exceeding 10% of the target level.
Subsidies for Retiree Plans. Under certain conditions, the Secretary is
required to make special subsidy payments to sponsors of qualified retiree
prescription drug plans. These payments are to be made on behalf of an individual
covered under the retiree plan, who is entitled to enroll under a PDP or MA-PD plan
but elected not to. Subsidy payments will equal 28% of a retiree’s gross covered
retiree plan-related prescription drug costs over the $250 deductible but not over
$5,000. (The dollar amounts would be adjusted annually by the percentage increase
in Medicare per capita prescription drug costs.)
Relationship to Other Programs. The Act 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. The coordination requirements are to relate to payment of
premiums and coverage and payment for supplemental drug benefits. Requirements
must be included for enrollment file-sharing, claims processing, claims reconciliation
reports, application of the catastrophic out-of-pocket protection, and other
administrative procedures specified by the Secretary. Similar coordination provisions
are to be applied to other prescription plans including Medicaid (including a plan
operating under an 1115 waiver), group health plans, federal employees health
benefits plan, military coverage (including TRICARE), and other coverage specified
by the Secretary.
Medigap. The Act prohibits, effective January 1, 2006, the selling, issuance,
or renewal of existing Medigap policies with prescription drug coverage for Part D
enrollees. 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 enroll in a Medigap plan without drug
coverage, or continue their previous policy as modified to exclude drugs. Medigap
issuers will be required to notify individuals of these changes 60 days prior to the
initial Part D enrollment period.
Medicare Prescription Drug Discount Card
For the period prior to implementation of the new drug program, the Secretary
was required to establish a temporary program to endorse prescription drug discount
card programs meeting certain requirements. The purpose is to provide access to
prescription drug discounts through card sponsors to persons who voluntarily enroll
in the program. Each card sponsor is to provide each enrollee with access to
negotiated prices. The program also provides transitional assistance for low-income2
persons enrolled in endorsed programs.
The Act requires the Secretary to implement the program so that discount cards
and transitional assistance are available no later than six months after enactment. It
does not apply to covered discount card drugs dispensed after December 31, 2005.
The Act specifies that persons eligible for the discount card are those entitled to or
enrolled under Part A or enrolled under Part B. However, an individual enrolled in
Medicaid (or under any Section 1115 Medicaid waiver) who is entitled to any
2 For a discussion of the card program, see CRS Report RL32283, Medicare Endorsed
Prescription Drug Discount Card Program, by Jennifer O’Sullivan.
medical assistance for outpatient prescribed drugs is not a discount card-eligible
individual.
An individual not enrolled in a card program may enroll in any card program
serving residents of the state at any time beginning on the initial enrollment date and
before January 1, 2006. A discount eligible individual may only be enrolled in one
endorsed card program at a time. An individual enrolled in one program in 2004 may
change the election for 2005. A card sponsor may charge an annual enrollment fee,
not to exceed $30.
The Act provides special provisions for low-income persons (defined as those
with incomes below 135% of poverty). A transitional assistance eligible individual
is entitled to have his or her discount card enrollment fee paid. Those individuals
with incomes below 100% of poverty (special transitional assistance eligible
individuals ) are liable for coinsurance charges of 5% of incurred costs up to $600 in
both 2004 and 2005. Other transitional assistance eligible individuals (those with
incomes between 100% and 135% of poverty) are liable for coinsurance charges of
10 % of incurred costs up to $600 in both 2004 and 2005. Thus, the program pays
95% of a special transitional eligible individual’s incurred drug costs up to $600 in
2004 and 90% of other transitional eligible individual’s incurred drug costs up to
$600 in 2004. Similarly, payment is made for 95% or 90%, whichever is appropriate,
of the individual’s incurred drug costs up to $600 in 2005. In addition, any balance
left over from 2004 may be added to the amount available in 2005, except no rollover
is permitted if the individual voluntarily disenrolled from an endorsed program.
Certain persons are not eligible for transitional assistance. These are persons who
have coverage for drugs under a group health plan, federal employees health benefits
plan, or through coverage made available to members of the uniformed services.
Medicare Advantage
The Act establishes the Medicare Advantage (MA) program under Part C of
Medicare, to replace the Medicare+Choice program. MA local plans continue to be
offered as coordinated care and other plans on a county-wide basis. Beginning in
2006, in addition to the MA local plans, the MA program will begin to offer MA
regional coordinated care plans that cover both in- and out-of-network required
services. Beginning in 2010, the Comparative Cost Adjustment (CCA) program will
be established for a six-year period, to: (1) examine a new MA payment system under
which payments to MA plans would be based on a weighted average of plans bids;
and (2) introduce possible adjustments (either increases or decreases) to fee-for-
service Part B premiums, based on a comparison of the costs of providing required
fee-for-service benefits to the costs of providing the same benefits in the MA
program.
Beneficiaries in MA plans will not be required to enroll in the new prescription
drug program, Part D. However, at least one plan offered by an MA organization in
an area is required to offer Part D prescription drug coverage. Therefore, if the
beneficiary has only one available MA plan from which to chose, then in effect, the
beneficiary must enroll in Part D in order to enroll in a plan.
Prior to the enactment of the Act, Medicare+Choice (M+C) plans were paid an
administered monthly payment, called the M+C payment rate, for each enrollee. The
per capita rate for a payment area was set at the highest of one of three amounts: (1)
a minimum payment (or floor) rate, (2) a rate calculated as a blend of an area-specific
(local) rate and a national rate, or (3) a rate reflecting a minimum increase from the
previous year’s rate (currently 2%).
For 2004, the Act modified payments to MA plans. First, a fourth payment
mechanism was added so that plans are paid the highest of the floor, minimum
percent increase, the blend, or a new amount. The new payment amount is 100% of
fee-for-service (FFS) payments made for persons enrolled in traditional Medicare.
The FFS payment is calculated based on the adjusted average per capita cost for the
year for an MA payment area (a county), for services covered under Medicare Parts
A and B for beneficiaries entitled to benefits under Part A, enrolled in Part B and not
enrolled in an MA plan. Second, there was a change made to the blend payment, so
that there is no adjustment for budget neutrality in 2004.3 Third, the calculation of
the minimum percentage increase was also be revised. For 2004 and beyond the
minimum percentage increase is the greater of a 2% increase over the previous year’s
payment rate (as under current law), or the previous year’s payment increased by the
growth in overall Medicare for the previous year. Beginning in 2005, the statute no
longer allows MA payments to be annually updated by the floor or blend. Thus only
the minimum increase, and in certain years4, 100% of per capita FFS will be used to
update payment rates.
Additional changes to the MA program will be made, beginning in 2006. The
Secretary will determine MA payment rates by comparing plan bids to a benchmark.
Plans will submit bids for providing required Parts A and B benefits. The benchmark
will be calculated by updating the previous year’s capitation rate by the annual
increase in the minimum percentage increase. For plans with bids below the
benchmark, the payment will equal the unadjusted MA statutory non-drug monthly
bid amount, as adjusted, and the rebate. The rebate will equal 75% of any average
per capita savings (the amount by which the risk-adjusted benchmark exceeds the
risk adjusted bid). The rebate may be used to provide additional benefits, reduce cost
sharing, or may be applied towards the monthly Part B premium, prescription drug
premium, or supplemental premium. The remaining 25% of the average per capita
savings will be retained by the federal government. For plans with bids at or above
the benchmark (for which there are no average per capita monthly savings), the
payment amount will equal the FFS area-specific non-drug monthly benchmark
amount, as adjusted. For the plans with bids above the benchmark, the enrollee’s
premium will equal the full amount by which the bid exceeds the benchmark.
3 Under current law, a budget neutrality adjustment is made so that estimated total M+C
payments in a given year will be equal to the total payments that would be made if payments
were based solely on area-specific rates. The budget neutrality adjustment may only be
applied to the blended rates, because rates cannot be reduced below the floor or minimum
increase amounts.
4 The Secretary must rebase, or update, 100% of FFS at least once every three years, but
could also choose to update more often. In years in which the Secretary does not rebase FFS
payments, MA payments would be based on the minimum update only.
Beginning in 2006, the MA program will also begin to offer MA regional
coordinated care plans that cover both in- and out-of-network required services.
There will be at least 10 regions established and no more than 50 regions. Each MA
regional plan must offer a maximum limit on out-of-pocket expenses and a unified
deductible. Each year an organization will submit a separate monthly bid amount for
each plan it intends to offer in a region. Payments will be based on a competitive
bidding system, so that the benchmark for MA regions will be calculated using a
statutory formula that includes a weighted average of plan bids for the region. For
plans with bids below the benchmark (for which there are average per capita monthly
savings), the payment will equal the unadjusted MA regional statutory non-drug
monthly bid amount, as adjusted, and the rebate. The plan will provide the enrollee
a monthly rebate equal to 75% of the average per capita savings. For plans with bids
at or above the benchmark (for which there are no average per capita monthly
savings), the payment amount will equal the region-specific non-drug monthly
benchmark amount, as adjusted. For the plans with bids above the benchmark, the
enrollee’s premium will be increased by the full amount by which the bid exceeds the
benchmark.
The Act also establishes a stabilization fund to provide incentives for plans to
enter into and to remain in the MA program. There will be $10 billion initially
provided to the stabilization fund and additional amounts will be added to the fund
from a portion of any average per capita monthly savings amounts.5 The Secretary
will be responsible for determining the amounts that may be given to MA plans from
this fund, based on statutory requirements. For example, the national bonus payment
will be available to an MA organization that offers an MA regional plan in every MA
region in the year, but only if there was no national plan in the previous year.
During 2006 and 2007, Medicare will share risk with MA regional plans if plan
costs fall above or below a statutorily-specified risk corridor. If the Secretary
determines that a plan’s allowable costs are over 103% of a specified target amount,
the plan will receive an additional payment. Conversely, if a regional plan’s
allowable costs are under 97% of the specified target amount, the plan will receive
a decrease in its payment.
The Act requires the Secretary to establish a program for the application of
comparative cost adjustment (CCA) in CCA areas. The six-year CCA program
begins January 1, 2010 and ends December 31, 2015. The CCA program is designed
to examine the efficiency of private plans in the Medicare program verses traditional
Medicare. For that purpose: (1) payments to local MA plans would be based on
competitive bids (similar to payments for the regional MA plans), and (2) premiums
for individuals enrolled in traditional Medicare could be adjusted, either up of down.
Upon completion of the CCA program, the Secretary will submit a report to Congress
that evaluates the cost of the program, provider access, beneficiary satisfaction and
recommendations for any extension or expansions.
5 Beneficiaries receive 75% of average per capita savings in the form of a rebate. The
federal government retains the remaining 25% of the average per capita savings and one-half
of the amount retained by the federal government is available to the stabilization fund.
The Secretary will select CCA areas from among those Metropolitan Statistical
Areas (MSA), or such similar area as the Secretary recognizes, that meet certain
requirements. The requirements for an MSA to qualify as a CCA include: (1) for the
reference month in 2010 (defined as the most recent month during the previous year
for which the Secretary determines that data are available to compute the relevant
calculation) at least 25% of MA eligible individuals who reside in the MSA are
enrolled in an MA local plan; and (2) before the beginning of 2010, at least two MA
local plans will be offered by different organizations in the MSA during the annual
coordinated election period, each meeting the current law minimum enrollment
requirements for a plan, as of the reference month. The number of MSAs selected
may not exceed the lesser of six sites or 25% of the number of MSAs meeting the
requirements. Additionally, an MA local area (a county) in an MSA will be excluded
from the CCA area, if, in 2010, it does not offer at least two MA local plans, each
offered by a different MA organization.
Payments will be based on a competitive bidding system, so that the benchmark
for CCA areas will be calculated using a statutory formula that includes a weighted
average of plan bids for the area. Similar to the rebates under the MA program,
beneficiaries in CCA areas will receive a rebate, equal to 75% of the average per
capita monthly savings, for plans with bids below the CCA benchmark. For plans
with bids above the benchmark, the enrollee’s premium will be equal to the full
amount by which the bid exceeds the benchmark. The CCA program is phased in
through 2013. During the first year of the phase-in, 2010, the benchmark is one-
fourth CCA benchmark and three-fourths non-CCA benchmark, increasing the CCA
share by another one-fourth each year until the benchmark is 100% CCA.
The CCA program will introduce competition between traditional FFS Medicare
and local private plans. As a result, an individual residing in a CCA area who is
enrolled in Part B of Medicare, but not enrolled in an MA plan, can have an
adjustment to his or her Part B premium, either as an increase or a decrease. No
premium adjustment will be made for individuals, for a month that they are a subsidy
eligible individual (those individuals qualifying for a subsidy under the Part D
prescription drug program). The Part B premium adjustment for FFS beneficiaries
in CCA areas will be made as follows: (1) if the FFS area-specific non-drug amount
for the month does not exceed the CCA non-drug benchmark, the Part B premium is
reduced by 75% of the difference; and (2) if the FFS area-specific non-drug amount
for the month exceeds the CCA non-drug benchmark, the Part B premium is
increased by the full amount of the difference. This adjustment will be phased-in
over four years. There is also a 5% annual limit on the adjustment, so that the
amount of the adjustment for a year, can not exceed 5% of the amount of the monthly
Part B premium, as otherwise determined.
CBO estimates that over the 10-year period FY2004-FY2013, direct spending
will be increased by $14.2 billion for the provisions of Title II. Of that total, $14.1
billion will be for payments to MA plans and $0.4 for other provisions. Offsetting
those costs, CBO estimates savings from the CCA program’s payments to plans of
$0.3 billion.
Cost Containment
The Act requires the President to propose and Congress to consider legislation6
to address Medicare spending any time general revenue funding of Medicare is
projected to exceed 45% in two consecutive years. Specifically, the Medicare Board
of Trustees of the Hospital Insurance Trust Fund (Part A) and the Supplementary
Medical Insurance Trust Fund (Part B) are required to include the their annual reports
a determination as to whether “excess general revenue medicare funding” exceeds
45%. Excess general revenue Medicare funding is general revenue Medicare funding
(defined as total Medicare outlays minus dedicated Medicare financing) expressed
as a percentage of total Medicare outlays. For the purposes of this provision, total
Medicare outlays are defined as total outlays from the Medicare trust funds and
includes Medicare administrative expenditures. Dedicated Medicare financing7
includes Medicare payroll taxes, premiums for Part A, Part B, and Part D, transfers
from the Railroad Retirement accounts, taxation of certain OASDI benefits, state
transfers for Medicare coverage of beneficiaries who receive public assistance, and
gi f t s 8.
Beginning with their report in 2005, the Trustees’ annual report is required to
include information on: (1) projections of growth of general revenue Medicare
spending as a percentage of the total Medicare outlays for each year within a seven-
fiscal-year timeframe, and 10, 50, and 75 years after the fiscal; (2) comparisons with
the growth trends for the gross domestic product, private health costs, national health
expenditures, and other appropriate measures; (3) expenditures and trends in
expenditures under Part D; and (4) a financial analysis of the combined Medicare
Part A and Part B trust funds if general revenue funding for Medicare were limited
to 45% of total Medicare outlays. The Trustees reports are also required to include
a determination as to whether there is projected to be “excess general revenue
Medicare funding” for any of the succeeding six fiscal years in their annual reports
of Medicare’s trust funds.
An affirmative determination of excess general revenue funding of Medicare for
two consecutive annual reports will be treated as funding warning for Medicare in the
second year for the purposes of the President’s budget content and submission to
Congress. Whenever any Trustees report includes a determination that within the
6 Currently, 75% of the Part B trust fund financing comes from general revenues; the
remaining 25% comes from beneficiary premiums that beneficiaries voluntarily pay to enroll
in Medicare Part B. The 2003 monthly premium is $58.70. The Part A trust fund revenues
come primarily from payroll taxes. Employers and employees each pay 1.45% of the
employees earnings, while self-employed workers pay 2.9% of their net income. Other HI
revenue sources include interest on the investments of the trust fund, federal income taxes
on Social Security benefits, premiums from voluntary enrollees into Part A, railroad
retirement account transfers and reimbursement for certain uninsured persons.
7 A small number of Medicare beneficiaries are not entitled to Part A but are eligible to
purchase the Part A benefit by paying monthly premiums, currently $316 per month.
8 Excluded from the list is interest on the Part A trust fund. According to the Medicare
Trustees 2002 report, this amounted to approximately 7.7% of the revenue to the trust fund
in 2002.
seven-fiscal-year timeframe that there is excess general revenue Medicare funding,
the President is required to submit to Congress proposed legislation to respond to the
warning. Procedures and timeframes for House and Senate consideration of the
legislation are prescribed.
Administration of Medicare Part C and Part D
The Medicare program is administered by the Centers for Medicare & Medicaid
Services (CMS) within the Department of Health and Human Services (HHS). Both
the House and Senate bills would have established a new agency to administer
Medicare Advantage, and Part D, prescription drugs within HHS but separate from
CMS. In the Act, a new Center for Beneficiary Services within CMS is established
to administer Medicare Advantage, the prescription drug benefit, and beneficiary
information activities.
Appeals, Regulatory, and Contracting Provisions
The Act contains numerous provisions addressing Medicare appeals, regulatory
relief, and contracting reform. Specifically, the Act modifies the way Medicare
regulations and guidance are communicated; modifies the procedures used to resolve
payment disputes; and establishes various provider appeal processes, particularly for
those who face termination of Medicare participation or denial of their application
to participate in the program. The Act refines the information required to be
provided in the appeals process and makes other modifications. The administrative
law judge (ALJ) function for Medicare hearings is required to be transferred from the
Social Security Administration (SSA) to HHS, no later than October 1, 2005. The
Act gives the Secretary the authority to competitively contract for claims processing
services with any qualified entities; requires these contracts to be competitively bid
at least every five years; and places new requirements on the Medicare claims
processing contractors, including an increased emphasis on provider education.
Other program changes, demonstration projects, and mandated studies are also
included in the Act. The Act authorizes increased funding but action by the
appropriations committees is required for CMS to receive additional money.
Provisions Affecting Medicare’s Fee-for-Service
Program Payments, Demonstration Projects,
Expansion of Covered Benefits and Beneficiary
Cost Sharing
Changes to Medicare’s Fee-for-Service Program 9
The Act contains extensive changes to Medicare’s fee-for-service (FFS)
program, including payment increases and, in certain instances, decreases;
development of competitive acquisition programs; implementation or refinement of
other prospective payment systems (notably, the development of an end-stage renal
disease (ESRD) basic payment system); expansion of covered preventive benefits;
establishment of demonstration programs; and required studies. The anticipated
financial impact of these changes on any individual provider, physician, or supplier
will vary depending on many factors, such as the unique characteristics of the
individual or entity participating in Medicare as well as the number and type of
services provided to the Medicare beneficiaries they serve. Selected highlights of the
FFS payment provisions and those establishing preventive care benefits and
demonstration programs will be briefly described.
Selected Rural Provider Provisions. Generally, Medicare payments to
certain rural providers increase; many of the rural provisions benefit urban providers
as well. CBO estimated that the rural provisions in Title IV of the Act increase
Medicare’s direct spending by $9.3 billion from 2004 through 2008 and by $19.9
billion from 2004 though 2013. It should be noted that other provider payment
provisions in the law can impact rural providers, but their cost implications for rural
providers is unclear.
Rural Hospitals. Rural hospitals (and hospitals in small urban areas) receive
an permanent 1.6% increase to Medicare’s base rate or per discharge payment; the
limit on rural and small urban hospitals that qualify for disproportionate share
hospital (DSH) payments increases from 5.25% to 12%; hospitals in low wage areas
(those with wage index values below 1) receive additional payments through a
decrease from 71% to 62% in the labor-related portion of the base payment rate;
certain small rural hospitals with less than 50 beds (those in newly established
scarcity areas) receive cost reimbursement for outpatient clinical laboratory tests;
rural hospitals with less than 100 beds are protected from payment declines
associated with the hospital outpatient prospective payment system (OPPS) for an
additional two years; these OPPS hold harmless provisions are extended to sole
community hospitals for services from 2004 through 2006. CBO estimated that these
provisions increase direct Medicare spending by $15.6 billion over the 10-year
period.
9 For a detailed discussion of these provisions, see CRS Report RL32005, Medicare Fee-
for-Service Modifications and Medicaid Provisions of H.R. 1 as Enacted, by Sibyl
Tilson et al.
Critical Access Hospitals. Critical access hospitals (CAHs) have their bed
limit increased from 15 to 25; there is no restriction on the number of these beds that
can be used for acute care services at any one time; CAHs are able to establish
distinct part rehabilitation and psychiatric units of up to 10 beds that will not be
included in the CAH bed count; cost reimbursement of CAH services increased to
101% of reasonable costs, starting January 1, 2004; periodic interim payments for
CAHs are authorized; state authority to waive the 35-mile requirement for new
entities to qualify as a CAH will be eliminated as of January 1, 2006. CBO estimated
that these provisions increase direct Medicare spending by $900 million over the 10-
year period.
Rural Physicians. Rural physicians in newly established scarcity areas
receive a 5% increase in Medicare payments in 2005, 2006, and 2007; physicians in
certain low-cost areas with geographic adjustment factors below 1 receive payment
increases so as to increase this factor to 1, starting in 2004 through 2006. CBO
estimated that these provisions will increase direct Medicare spending by $1.7 billion
over the 10-year period.
Rural Practitioners. Rural practitioners in rural health clinics and federally
qualified health centers can bill separately for services provided to beneficiaries in
skilled nursing facilities. CBO estimated that these provisions increase direct
Medicare spending by $100 million over the 10-year period.
Rural Home Health Providers. Rural home health providers received a 5%
increase in Medicare payments for one year beginning April 1, 2004. CBO estimated
that this one-year increase will increase direct Medicare spending by $100 million
over the 10-year period.
Selected Acute Hospital Provisions. Generally, Medicare payments to
hospitals increase under the law. Acute hospitals paid under the inpatient prospective
payment system (IPPS) that submit data on specified quality indicators will receive
a full update from 2005 through 2007; those hospitals that do not submit such data
will receive an update minus 0.4 percentage points for the year in question. CBO
expected that this latter provision will reduce direct spending 0.2 billion from 2004
through 2008. Teaching hospitals will receive an increase of an expected $400
million in their indirect medical education payments from 2004 through 2006. A
one-time, geographic reclassification process to increase hospitals’ wage index
values for three years that was expected to increase payments by $900 million from
2004 through 2008 was established. Low volume hospitals with fewer than 800
discharges that are 25 road miles away from a similar hospital may qualify for up to
a 25% increase in its Medicare payments. Changes to outpatient hospital payments
for covered drugs were expected to increase payments by $700 million from FY2004
through FY2008. A redistribution of unused resident positions increase both direct
and indirect graduate medical education spending by an anticipated $200 million
from FY2004 thought FY2008 and by $600 million from FY2004 through FY2013.
Certain teaching hospitals with high per resident payments will not receive a payment
increase from FY2004 through FY2013; this provision was scored by CBO as a
reduction in Medicare spending of $500 million from FY2004 through FY2008 and
$1.3 billion from FY2004 through FY2013. For 18 months from the date of
enactment, physicians can not to refer Medicare patients to specialty hospitals in
which they have an investment interest. This provision does not apply to hospitals
that are in operation or under development before November 18, 2003. Both
MedPAC and HHS are to complete required studies on specialty hospitals within 15
months of enactment.
Selected Physician Provisions. The impact of the Act on Medicare’s
spending for physician spending is difficult to determine. Although physicians
receive a 1.5% update in 2004 and 2005 which is expected to increase spending by
$2.8 billion from FY2004 through FY2007; subsequently, from FY2008 through
FY2012, the provision is expected to result in a decline of $2.8 billion in Medicare
spending. Medicare’s payments for practice expenses, particularly the administration
of covered drugs, increased starting in 2004. A transitional adjustment to the drug
administration payments of 32% in 2004 and 3% in 2005 was also established.
These payment increases were expected to be counterbalanced by a decrease in
Medicare’s payments for covered outpatient drugs provided in a doctor’s office.
Many covered outpatient drugs furnished in 2004 are reimbursed at 85% of the
average wholesale price (AWP), with certain of these drugs paid as low as 80% of
the AWP (as of April 1, 2003). Blood clotting factors and other blood products,
drugs or biologicals (drug products) that were not available for payment by April 1,
2003, covered vaccinations, drug products furnished in during 2004 in connection
with renal dialysis services, drugs provided through covered durable medical
equipment are paid at a higher rate during 2004. The decline in payments for covered
outpatient drugs in 2004 could only be implemented concurrently with the increased
payments for the administration of the drugs. Starting in 2005, Medicare’s payment
for many covered outpatient drugs is based on average sales price methodology, that
uses different pricing and cost data, depending on the prescription drug. Generally,
multiple source drugs are paid 106% of the average sales price; single source drugs
are paid 106% of the lower of the average sales price or the wholesale acquisition
costs, unless the widely available market price or the average manufacturer price for
those drugs exceeds a certain threshold. Starting in 2006, physicians will have the
option of obtaining covered Part B drugs from selected entities awarded contracts for
competitively biddable drug products under the newly established competitive
acquisition program.
Selected Provisions Affecting Other Providers and Practitioners.
The follow provisions affecting other providers and practitioners are included in the
legislation:
Ambulatory Surgical Centers. Payments to ambulatory surgical centers
(ASCs) are expected to be lower by $800 million from FY2004 through FY2008 and
by $3.1 billion from FY2004 through FY2013 as a result of the legislation. ASCs
received an update of the consumer price index for all urban consumers (CPI-U)
minus 3.0 percentage points starting April 1, 2004 and receive a 0% update for
services provided starting October 1, 2004 through December 31, 2009.
Therapy Caps. Application of the caps on outpatient therapy services
provided by non-hospital providers was suspended for the remainder of 2003, in 2004
and 2005. CBO estimated that the therapy cap moratorium will increase direct
Medicare spending by $700 million over the 10-year period.
Durable Medical Equipment (DME). Competitive bidding for DME will
be phased in beginning in 2007 with 10 of the largest metropolitan statistical areas
and may be phased in first among the highest cost and highest volume items and
services. The update for most DME items and services and for prosthetics and
orthotics is 0 in 2004, 2005, 2006, 2007, and 2008. For 2005, payment for certain
items, oxygen and oxygen equipment, standard wheelchairs, nebulizers, diabetic
lancets and testing strips, hospital beds and air mattresses are reduced by an amount
calculated using 2002 payment amounts and specified payment amounts by FEHP.
Beginning January 1, 2009, items and services included in the competitive
acquisition program will be paid as determined under that program and the Secretary
can use this information to adjust the payment amounts for DME, off-the-shelf
orthotics, and other items and services that are supplied in an area that is not a
competitive acquisition area. Class III items (devices that sustain or support life, are
implanted, or present potential unreasonable risk, e.g., implantable infusion pumps
and heart valve replacements, and are subject to premarket approval, the most
stringent regulatory control) receive the full increase in the consumer price index for
all urban consumers (CPI-U) in 2004, 2005, 2006 , 2008 and subsequent year. The
Secretary will determine the update in 2007. CBO scored the DME provisions of
the bill as reducing spending by $6.8 billion over the 10-year period.
Home Health. Home health agency payments were increased by the full
market basket percentage for the last quarter of 2003 (October, November, and
December) and for the first quarter of 2004 (January, February, and March). The
update for the remainder of 2004 and for 2005 and 2006 is the home health market
basket percentage increase minus 0.8 percentage points. CBO estimated that this
provision will reduce direct Medicare spending by $6.5 billion over the 10-year
period. The Act suspended the requirement that home health agencies must collect
OASIS data on private pay (non-Medicare, non-Medicaid) until the Secretary reports
to Congress and publishes final regulations regarding the collection and use of
OASIS.
Selected Fee-for Service Demonstration Projects. The Act establishes
numerous demonstration projects for the Medicare program. Several demonstrations
address aspects of disease management for beneficiaries with chronic conditions.
Chronic Care Improvement under Fee-for-Service. The Act requires
the Secretary to establish and implement chronic care improvement programs under
fee-for-service Medicare to improve clinical quality and beneficiary satisfaction and
achieve spending targets for Medicare for beneficiaries with certain chronic health
conditions. Participation by beneficiaries is voluntary. The contractors are required
to assume financial risk for performance under the contract. CBO estimated that this
demonstration will increase direct Medicare spending by $500 million over the 10-
year period.
Chronically Ill Beneficiary Research, Demonstration. The Act requires
the Secretary to develop a plan to improve quality of care and to reduce the cost of
care for chronically ill Medicare beneficiaries within six months after enactment.
The plan is required to use existing data and identify data gaps, develop research
initiatives, and propose intervention demonstration programs to provide better health
care for chronically ill Medicare beneficiaries. The Secretary is required to
implement the plan no later than two years after enactment.
Coverage of Certain Drugs and Biologicals Demonstration. The
Secretary is required by the Act to conduct a two-year demonstration where payment
is made for certain drugs and biologicals that are currently provided as “incident to”
a physician’s services under Part B. The demonstration is required to provide for
cost-sharing in the same manner as applies under Part D of Medicare. The
demonstration is required to begin within 90 days of enactment and is limited to
Homebound Demonstration. The Secretary is required to conduct a two-
year demonstration project where beneficiaries with chronic conditions would be
deemed to be homebound in order to receive home health services under Medicare.
Adult Day Care. The Secretary is required to establish a demonstration where
beneficiaries could receive adult day care services as a substitute for a portion of
home health services otherwise provided in a beneficiary’s home.
Expansion of Covered Benefits. The Act contains a number of provisions
that expand coverage beginning January 1, 2005, including the following:
Initial Physical Examination. Medicare coverage of an initial preventive
physical examination is authorized for those individuals whose Medicare coverage
begins on or after January 1, 2005. CBO estimated that this provision will increase
direct Medicare spending by $1.7 billion over the 10-year period.
Cardiovascular Screening Blood Tests. Medicare coverage of
cardiovascular screening blood tests is authorized. CBO estimated that this provision
will increase direct Medicare spending by $300 million over the 10-year period.
Diabetes Screening Tests. Diabetes screening tests furnished to an
individual at risk for diabetes for the purpose of early detection of diabetes are
included as a covered medical service. In this instance, diabetes screening tests
include fasting plasma glucose tests as well as other tests and modifications to those
tests deemed appropriate by the Secretary. CBO estimated that this provision will
increase direct Medicare spending less than $50 million over the 10-year period.
Screening and Diagnostic Mammography. Screening mammography
and diagnostic mammography are excluded from OPPS and paid separately. CBO
estimated that this provision will increase direct Medicare spending by $200 million
over the 10-year period.
Intravenous Immune Globulin. The Act includes intravenous immune
globulin for the treatment in the home of primary immune deficiency diseases as a
covered medical service under Medicare. CBO estimated that this provision will
increase direct Medicare spending by $100 million over the 10-year period.
Beneficiary Cost Sharing in Fee-for-Service
The Act contains two provisions changing beneficiary cost sharing
responsibilities under fee-for-service Medicare.
Income Relating to the Part B Premium. The Act increases the monthly
Part B premiums for higher-income enrollees beginning in 2007. Beneficiaries
whose modified adjusted gross income exceed $80,000 and couples filing joint
returns whose modified adjusted gross income exceeds $160,000 will be subject to
higher premium amounts. The increase will be calculated on a sliding scale basis and
will be phased-in over a five-year period. The highest category on the sliding scale
is for beneficiaries whose modified adjusted gross income is more than $200,000
($400,000 for a couple filing jointly). CBO estimated that direct Medicare spending
will be reduced by $13.3 billion over the 10-year period 2004 through 2013.
Indexing the Part B Deductible. The Medicare Part B deductible remained
$100 through 2004, increases to $110 for 2005, and in subsequent years the
deductible will be increased by the same percentage as the Part B premium increase.
Specifically, the annual percentage increase in the monthly actuarial value of benefits
payable from the Federal Supplementary Medical Insurance Trust Fund will be used
as the index.
Medicaid and Miscellaneous Provisions
Title X of the Act makes some changes to Medicaid and other programs.
Omitted from the Act were two provisions contained in S. 1, including a provision
to amend the Age Discrimination in Employment Act of 1967 to allow an employee
benefit plan to offer different benefits to their Medicare eligible employees than to
their non-Medicare eligible employees, and a provision to allow states to cover
certain lawfully residing aliens under the Medicaid program.
CBO estimated the Medicaid and other provisions included in the law will
increase direct spending by $5.7 billion between FY2004 and FY2013. The
following general points can be made about the Medicaid and Miscellaneous
provisions included in Title X of the Act:
!The Act temporarily increases states’ disproportionate share hospital
(DSH) allotments to erase the decline in these Medicaid amounts
that occurred after a special rule for their calculation expired.
!The Act includes several other Medicaid provisions, including
raising the floor on DSH allotments for “extremely low DSH states,”
providing DSH allotment adjustments impacting Hawaii and/or
Tennessee, increasing reporting requirements for DSH hospitals, and
exempting prices of drugs provided to certain safety net hospitals
from Medicaid’s best price drug program.
!Miscellaneous provisions in Title X of the Act include funding
federal reimbursement of emergency health services furnished to
ndocumented aliens, and funding administrative start-up costs for
Medicare reform, various research projects, work groups and
infrastructure improvement programs for the health care system.
Tax Incentives for Health and Retirement Security
Title XII of the Act authorizes new tax-advantaged accounts for medical
expenses called health savings accounts (HSAs). These accounts are similar to the
medical savings accounts (MSAs) that were authorized by the Health Insurance
Portability and Accountability Act of 1996 (P.L. 104-191), but they will be more
widely available and have more generous contribution limits. As is the case with
MSAs, unused balances can be carried over from year to year. Contributions to
HSAs may be made when individuals have qualifying high deductible medical
insurance and no other health insurance, with some exceptions; in 2004, the
insurance deductible for self-only coverage must be at least $1,000 (rather than
$1,700 for MSAs) while for family coverage it must be at least $2,000 (rather than
$3,450 for MSAs). In 2004, contributions are limited to the lesser of the insurance
deductible or $2,600 for self-only coverage and $5,150 for family coverage;
individuals who are at least 55 years of age but not yet 65 can contribute more.
Unlike MSAs, HSAs may be offered through an employer’s cafeteria plan. For more
details, see CRS Report RS21573, Tax-Advantaged Accounts for Health Care
Expenses: Side-by-Side Comparison. The Joint Committee on Taxation estimates
that the revenue loss attributable to HSAs for FY2004 through FY2013 will be $6.4
billion.
Title XII of the Act also includes a provision allowing employers to exclude
from gross income the Medicare subsidy payments they receive to maintain
prescription drug coverage for their retirees. The Joint Committee on Taxation
estimates that the revenue loss attributable to this exclusion for FY2004 through
FY2013 will be $17.8 billion.
The Act does not include two tax provisions that had been in the House bill, one
authorizing health savings security accounts (HSSAs) and another allowing up to
$500 in unused benefits in health care flexible spending arrangements to be rolled
over to the following year or to an HSA, HSSA, or certain qualified retirement plans.