1. INTRODUCTION

Today President Clinton signed into law legislation designed to mitigate the effects of the "Balanced Budget Act of 1997" (P.L. 105-33) ("BBA"). Specifically, the President enacted the Conference Report (H.Rept. 106-479) to accompany H.R. 3194, the "Consolidated Appropriations Act" ("the Act") (public law number not yet available). The Act incorporated the text of H.R. 3426, the "Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999." The Conference Report was approved by the House of Representatives on November 18, 1999, and the Senate approved the measure on November 19, 1999.

The Act restores approximately $1.2 billion in funding in 2000 and $16 billion over five years, and affects a wide range of health care providers. Among other things, the legislation:

• Temporarily increases Medicare prospective payment system payments to skilled nursing facilities for certain high-cost patients;
• Increases indirect medical education and disproportionate share hospital payments;
• Creates a three-year pass-through for certain drugs, devices, biologicals, and radiopharmaceuticals under the Medicare outpatient prospective payment system, establishes an outlier policy for high-cost cases, and clarifies that Congress did not intend to impose a 5.7 percent across-the-board cut in Medicare payments for hospital outpatient services;
• Suspends for two years the caps on physical therapy and occupational therapy services under Medicare;
• Temporarily prohibits the Secretary of the Department of Health and Human Services ("Secretary" or "HHS") from exercising her inherent reasonableness authority to reduce payments to non-physician Part B services;
• Temporarily increases Medicare payment rates for durable medical equipment; and
• Delays a 15 percent reduction in home health payments, increases per beneficiary limits under the interim payment system, and excludes durable medical equipment and oxygen and oxygen supplies from the home health consolidated billing requirements.

Due to the length and complexity of the legislation, this memorandum offers a summary of the provisions we expect to be of most interest to our clients. Please do not hesitate to contact us if you require additional information. The complete text of the legislation is on the internet at http://www.senate.gov/~finance/fin-leg.htm, or you can obtain a copy from our office.

1. MEDICARE PART A PROVISIONS
1. Skilled Nursing Facility Provisions
1. Temporary Increase In Payments For High-Cost Patients

The Act temporarily increases the federal per diem payment rates under the skilled nursing facility ("SNF") prospective payment system ("PPS") by 20 percent for 15 resource utilization groups ("RUGs"), falling under the Extensive Care, Special Care, Clinically Complex, and Rehabilitation Major Patient Types. The specific RUG categories affected are SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, CB2, CB1, CA2, CA1, RHC, RMC, and RMB.

As evidenced by the language of the Act, this payment increase is intended to compensate SNFs for the provision of care to medically complex patients, pending appropriate refinements to the RUG system. SNFs providing care to patients falling within every non-rehabilitation RUG above the presumptive (rebuttable) Medicare eligibility line will benefit from this increase. Three RUGs falling within the "high" and "medium" rehabilitation category also are subject to the increase, although Congress does not provide further insight into the selection of these three RUGs, as compared to the other eleven rehabilitation RUGs.

The increased payments will begin on April 1, 2000, and end before the later of (1) October 1, 2000, or (2) the date the Health Care Financing Administration ("HCFA") implements a refined RUG system that better accounts for medically-complex patients. Neither the Act nor the Conference Report provides HCFA with specific directions regarding such refinements to the RUGs system.

In addition, the Act provides for a 4 percent increase in the federal per diem payment rates for all RUGs in both fiscal year ("FY") 2001 and 2002. This increase is calculated exclusive of the 20 percent RUG rate increase. Thus, for patients falling within the 15 specified RUGs listed above, SNFs will receive both a 4 percent increase in the federal payment rate, and a 20 percent increase to compensate for medical complexity. This increase will not be built into the base payment rates, however, and therefore future updates to the federal payment rates will be calculated from the initial base rate.

2. Authorization Of Facilities To Elect Immediate Transition To Federal Rate

The Act allows SNFs to elect immediate transition to the fully federal rate (rather than a blend of the federal rate and a facility-specific rate) on or after December 15, 1999, for cost reporting periods beginning on or after January 1, 2000. SNFs may elect immediate transition up to 30 days after the start of their cost reporting period. SNFs which had costs lower than the national average in the base year (1995) will want to take advantage of this waiver.

3. Part A Pass-Through Payment For Certain Ambulance Services, Prostheses, And Chemotherapy Drugs

The Act excludes certain items and services from the formerly all-inclusive SNF per diem rates. Specifically, the following items and services will become separately reimbursable outside of the PPS rates: (1) ambulance services furnished to an individual in conjunction with renal dialysis services; (2) chemotherapy items and administration services (as identified by certain HCFA Common Procedure Coding System ("HCPCS") codes); (3) radioisotope services (as identified by certain HCPCS codes); and (4) customized prosthetic devices (artificial limbs) and other custom prostheses if provided to a SNF resident and intended to be used after discharge (as identified by certain HCPCS codes and other instances chosen by HCFA). Payment for such items and services, which are "passed-through" the per diem payment rates, will be made under Part B, in conformance with Part B payment rules.

Regarding ambulance services, the Act does not address the long-standing controversy over SNF responsibility for ambulance services. The modification should provide some relief, however, for SNFs that must transport residents off-site for dialysis. Note, however, that in the Conference Report, the conferees urge SNFs to utilize cost-saving alternatives to ambulance transportation for patients with end-stage renal disease ("ESRD"), as appropriate.

In addition, the conferees recognize, with respect to items and services excluded by HCPCS codes, that new codes may come into use, and code use may change over time. Therefore, the conferees direct HCFA to periodically review and modify the list of excluded codes, to reflect changes and developments in medical technology.

Congress also addressed the SNF market basked index ("MBI") in this section of the Conference Report. In short, Congress directs HCFA to ensure that the MBI reflects the cost of new medications and continues to be responsive to changes in medication therapy.

While the legislation temporarily increases payments to SNFs in several ways, beginning with FY 2001, the Act directs HCFA to make appropriate adjustments to the PPS payments rates to reflect the fact that certain items and services have been excluded, and to ensure budget neutrality. Thus, HCFA is directed to make an appropriate proportional reduction in PPS payments at that time.

4. Part B Add-Ons For Facilities Participating In The NHCMQ Demonstration Project

Under the Act, the facility-specific component of payment rates for SNFs participating in the Nursing Home Case Mix and Quality Demonstration Project ("NHCMQ") will be supplemented by a Part B add-on. This addition includes updates of the SNF MBI minus 1 percentage point. These changes are effective retroactive to the enactment of the BBA.

5. Special Consideration For Facilities Serving Specialized Patient Populations

The Act provides relief for certain SNFs that provide care to patients with AIDS or other immuno-compromising conditions. Specifically, for hospital-based SNFs that

(1) Were Medicare certified before July 1, 1992, and

(2) For cost reporting periods beginning in FY 1998, had more than 60 percent of total patient days for patients who were immuno-compromised secondary to an infectious disease, with specific diagnoses (to be specified by HCFA),

payments will be based on 50 percent facility-specific and 50 percent federal rates until September 30, 2001.

6. MedPAC Study On Special Payment For Facilities Located In Hawaii And Alaska

The Act requires the Medicare Payment Advisory Commission ("MedPAC") to study and report to Congress on the need for additional payment under the PPS to take into account the unique circumstances of SNFs in Alaska and Hawaii. The report must be made within 18 months of the enactment of the Act.

7. Study And Report Regarding State Licensure And Certification Standards And Respiratory Therapy Competency Examinations

The Act requires HCFA to study and report to Congress on the variations in state licensure and certifications standards regarding providers of respiratory therapy in SNFs, and the need for Medicare to require examinations for, or certification of, workers providing respiratory therapy. The report must be made within 18 months of enactment of the Act.

8. Special Rule For Certain SNFs

The Act modifies the PPS for certain SNFs in Alabama. That is, for FYs 2000 and 2001, eligible SNFs may elect to participate in a special payment system. Specifically, SNFs located in Baldwin or Mobile Counties, Alabama, that began participating in the Medicare program before January 1, 1995, and for which at least 80 percent of the total inpatient days of the facility in the cost reporting period beginning in FY 1998 were persons entitled to Medicare, may be paid 100 percent at the facility-specific rate (instead of blended rate). Moreover, the facility-specific rate will be calculated from the SNFs costs in 1998, instead of the BBA base year, FY 1995.

2. PPS Hospitals
1. Modification In Transition For Indirect Medical Education Percentage Adjustment

The Act increases indirect medical education ("IME") payments to hospitals for FY 2000 and subsequent years from BBA-mandated levels. Specifically, the Act freezes the IME adjustment at 6.5 percent through FY 2000, reduced to 6.25 percent in FY 2001, and then to 5.5 percent in FY 2002 and subsequent years. The Act also provides for a special adjustment to achieve the 6.5 percent IME payment for the first six months of FY 2000.

2. Decrease In Reductions For Disproportionate Share Hospitals; Data Collection Requirements

The Act restores a portion of disproportionate share hospital ("DSH") payments that were reduced by the BBA. Specifically, the Act freezes the reduction in the DSH payment formula to 3 percent in FY 2000, and 4 percent in FY 2002.

The Act also requires the Secretary to collect hospital cost data on uncompensated inpatient and outpatient care, including non-Medicare bad debt and charity care, and Medicaid and indigent care charges for cost reporting periods beginning on or after October 1, 2001. The Conference Report notes that while "there may be problems in defining and appropriately measuring such costs and charges in a way that avoids duplication, such problems can best be overcome by developing standard definitions at the national level." In addition, the Conference Report states that the conferees "expect the Secretary to report on the financial interactions and potential for shifts between Federal and State governments."

3. PPS-Exempt Hospitals
1. Wage Adjustment Of Percentile Cap For PPS-Exempt Hospitals

The BBA established a national cap on the limits applicable to pre-BBA hospitals excluded from the prospective payment system ("PPS"). The limit was set at the 75th percentile of the target amount for that class of hospital. The Act provides for the adjustment of the labor-related portion of the 75th percentile cap to reflect differences between the wage-related costs in the hospital’s area and the national average of such costs within each class of PPS-excluded hospitals (e.g., long-term care ("LTC") hospitals). In other words, the pre-BBA payment cap will now be adjusted to reflect differences in wage-related costs across geographic regions. This change will affect cost reporting periods beginning on or after October 1, 1999.

2. Enhanced Payments For Long-Term Care And Psychiatric Hospitals Until Development Of Prospective Payment Systems For Those Hospitals

The Act provides for an increase to the amount of "continuous improvement bonus" payments to the eligible LTC and psychiatric providers from 1 percent to 1.5 percent for cost reporting periods beginning on or after October 1, 2000, and before September 30, 2001, and 2 percent for cost reporting periods beginning on or after October 1, 2001, and before September 30, 2002.

3. Per Discharge Prospective Payment System For Long-Term Care Hospitals

The BBA directed HCFA to develop a legislative proposal for a PPS for LTC hospitals that includes an adequate patient classification system, by October 1, 1999. The Act contains a more specific mandate, requiring HCFA to develop a per discharge PPS for inpatient hospital services of LTC hospitals. The payment system is to include an "adequate patient classification system that is based on diagnosis-related groups ("DRGs")." The Act also provides that the PPS for LTC hospitals must be budget neutral. The PPS for LTC hospitals will be effective for cost reporting periods beginning on or after October 1, 2002.

Although similar to the patient classification system currently in place for general acute care hospital inpatient services, i.e., DRGs, Congress has specified that the PPS for LTC hospitals must "reflect the differences in patient resource use and costs." Therefore, the new PPS for LTC hospitals must be responsive to longer lengths-of-stay and the associated costs. In general, industry believes that a payment system driven by diagnoses is better suited for long-term acute care than a per diem system currently utilized by SNFs. However, it is unclear whether HCFA will be able to appropriately adapt the new system to a subset of hospital inpatients that has, historically, fallen outside of predictable ranges.

To facilitate the development of this new system, the Act provides that HCFA may require LTC hospitals to submit certain information. Further, in the Conference Report, the conferees encourage HCFA to measure "quality of outcomes" in developing and implementing the new payment system. Lastly, HCFA must submit to Congress a report that includes a description of the PPS for LTC hospitals to the appropriate congressional committees by October 1, 2001.

4. Per Diem PPS For Psychiatric Hospitals

In contrast to the PPS for LTC hospitals, the Act provides that HCFA must develop a per diem PPS for inpatient hospital services of psychiatric hospitals and units. However, similar to the PPS for LTC hospitals, the PPS for psychiatric hospitals and units must also be implemented in a budget neutral manner for cost reporting periods beginning on or after October 1, 2002. Psychiatric hospitals and units may be directed by HCFA to submit information to facilitate development, and HCFA must submit a report describing the new system by October 1, 2001.

5. Refinement Of PPS For Inpatient Rehabilitation Hospitals

Similar to LTC hospitals, the Act requires the PPS for rehabilitation hospitals to be based on discharges. However, HCFA must create classes of patient discharges of rehabilitation hospitals and units by functional-related groups (referred to as "case-mix groups"), based on impairment, age, co-morbidities, functional capabilities, and other factors HCFA deems appropriate to improve functional independence. HCFA is also authorized to make payment adjustments for patients transferred to other sites for care.

Congress also directs HCFA to study the impact on utilization and beneficiary access to services under the PPS. HCFA must prepare and submit such a report within 3 years after the PPS is implemented.

4. Hospice Care

The Act increases the hospice payment rate by 0.5 percent in FY 2001 and 0.75 percent in FY 2002. It also requires the General Accounting Office ("GAO") to conduct a study on the feasibility and advisability of updating the hospice rates and certain capped payment amounts, including an evaluation of whether the cost factors used to determine the rates should be modified, eliminated, or supplemented with additional cost factors.

5. Other Part A Provisions
1. MedPAC Study On Nonphysician Health Professional Clinical Training

The Act requires MedPAC, within 18 months of enactment, to submit to Congress a study of Medicare payment policy with respect to professional clinical training of different classes of nonphysician health care professionals (such as nurses, nurse practitioners, allied health professionals, physician assistants, and psychologists), and the basis for any differences in treatment among such classes.

The conferees note that they are pleased that the Secretary, consistent with language included in the Conference Report (Report 105-217) to accompany the BBA, is considering a proposal to initiate graduate medical education payments to institutions involved in the training of clinical psychologists. The conferees urge the Secretary to issue a notice of proposed rulemaking to accomplish this modification before June 1, 2000.

2. Exception To CMI Qualifier For One Year

The Act deems that Northwest Mississippi Regional Medical Center meets the case-mix index ("CMI") criterion for classification as a referral center for FY 2000, allowing it to qualify for certain exceptions and adjustments to PPS amounts.

3. Reclassification Of Certain Counties And Areas For Purposes Of Medicare Reimbursement

The Act deems that, for purposes of Medicare inpatient PPS payments in FYs 2000 and 2001:

• Iredell County, North Carolina is to be considered part of the Charlotte-Gastonia Rock Hill North Carolina-South Carolina Metropolitan Statistical Area ("MSA");
• Orange County, New York is to be considered part of the large urban area of New York, New York;
• Lake County, Indiana and Lee County, Illinois are to be considered part of the Chicago, Illinois MSA;
• Hamilton-Middletown, Ohio is to be considered part of the Cincinnati, Ohio-Kentucky-Indiana MSA;
• Brazonia County, Texas is to be considered part of the Houston, Texas MSA; and
• Chittenden County, Vermont is deemed to be considered part of the Boston-Worcester-Lawrence-Lowell-Brockton, Massachusetts-New Hampshire MSA.

For FY 2001, these reclassifications should be treated as a decision of the Medicare Geographic Reclassification Review Board.

1. Wage Index Correction

The Act requires the Secretary to recalculate and apply the Hattiesburg, Mississippi MSA wage index for FY 2000 using FY 1996 wage and hour data for Wesley Medical Center, without adjusting the wage indices in any other areas.

2. Calculation And Application Of Wage Index Floor For Allentown-Bethlehem-Easton

The Act requires the Secretary to calculate and apply the wage index for the Allentown-Bethlehem-Easton MSA for FY 2000 as if Lehigh Valley Hospital were classified in such area. Such recalculation would not affect the wage index for any other area. For FY 2001, Lehigh Valley Hospital will be treated as being classified to the Allentown-Bethlehem-Easton MSA.

1. MEDICARE PART B PROVISIONS
1. Hospital Outpatient Services

The BBA requires the Secretary to establish a prospective payment system ("PPS") for hospital outpatient services. Under this system, payments will be uniform and fixed for all patients undergoing certain procedures in certain hospitals. The BBA also was intended to reduce patient copayments for hospital outpatient services. The Secretary issued a proposed rule to implement the outpatient PPS on September 7, 1998 (63 Fed. Reg. 47,551), with payments based on ambulatory payment classification ("APC") groups. On June 30, 1999, the Secretary published a correction notice (64 Fed. Reg. 35,258) addressing a number of technical errors in the initial proposed rule.

The Act makes several structural changes intended to improve the design of the outpatient PPS. Perhaps most significantly, the Act clarifies that Congress did not intend to impose a 5.7 percent across-the-board cut in Medicare payments for hospital outpatient services, a provision that is expected to save hospitals $3.9 billion over five years and $9.6 billion over ten years. The Act also provides important relief by establishing outlier payments for high-cost patients and transitional pass-through payments for certain medical devices, drugs, biologicals, and radiopharmaceuticals. Since these provisions are so extensive and detailed, this Memorandum summarizes below only the most significant provisions. We understand that HCFA expects to issue a revised outpatient PPS proposal in February 2000, and it hopes to implement the APCs in the second half of 2000.

1. Outlier Adjustment And Transitional Pass-Through For Certain Medical Devices, Drugs, And Biologicals

The Conference Report notes that HCFA’s proposed regulations raise a number of concerns. In particular, according to the conferees, the proposal: (1) fails to provide adjustments for high cost care; (2) does not adequately provide a transition for certain medical devices, drugs, and biologicals; and (3) will not be updated annually to keep pace with changes in technology and medical practice.

In response, the Act includes a number of provisions that can be expected to benefit all hospitals and raise the payment level for a number of APCs. First, the Act requires the Secretary to provide an additional "outlier" payment to hospitals for certain high cost cases for which costs for each covered service exceed a fixed multiple of the APC amount. Total outlier payments must be made in a budget-neutral manner. Also, aggregate outlier payments are limited to 2.5 percent of total outpatient payments for the first three years of the new system, and up to 3 percent of total payments in subsequent years.

Second, the Act requires the Secretary to provide for two to three years of additional "pass-through" payments for certain devices, drugs, biologicals, and radiopharmaceuticals. In particular, the provision allows additional payments for:

• Current orphan drugs;
• Current cancer therapy drugs and biologicals and brachytherapy;
• Current radiopharmaceutical drugs and biological products; and
• Certain high-cost new medical devices, drugs, or biologicals.

The amount of the additional payment to hospitals, subject to limits described below, will equal the amount specified for the new technology less the average cost included in the outpatient payment schedule for the existing technology. Specifically, for drugs and biologicals, the amount of the additional payment is the amount by which 95 percent of the average wholesale price ("AWP") exceeds the portion of the applicable outpatient fee schedule amount for the drug or biological. For new medical devices, the add-on payment is the amount by which the hospital’s charges for the device, adjusted to cost, exceed the outpatient fee schedule amount associated with the device. The total amount of additional pass-through payments in a year could not exceed the following prescribed percentages of total projected outpatient PPS payments: (1) 2.5 percent for the first three years after implementation of the new outpatient payment system; and (2) up to 2.0 percent in subsequent years. The payments must be made on a budget-neutral basis.

The Act also includes provisions to limit variations in the cost of services classified within an APC. Specifically, the most costly item or service in a group could not have a mean or median cost that was more than twice the mean or median cost of the least costly item or service in the group.

The Conference Report notes that conferees expect the Secretary to develop a process to address new devices, drugs, and biologicals introduced after the outpatient fee schedule for a particular year has been set. This process should include assigning an appropriate code (or codes) to the product and establishing the amount of the add-on payment. New codes and add-on payment amounts should be made effective quarterly, according to the Conference Report. In classifying drugs and biologicals into payment categories, the conferees expect that consideration will be given to products that are therapeutically equivalent.

The Act also states that beneficiary copayments shall be computed without considering outlier or transitional add-on payments.

Finally, the Act addresses other specific policies within the outpatient PPS. For instance, it requires the Secretary to conduct a study of intravenous immune globulin services in settings other than hospital outpatient departments and physicians’ offices. The Conference Report also encourages the Secretary to examine Medicare policies regarding outpatient rehabilitation services (including cardiac and pulmonary rehabilitation services) in hospital outpatient departments and other ambulatory settings in light of advances in medical technology.

1. Establishing A Transitional Corridor For Application Of Outpatient PPS

The BBA requires the outpatient PPS to be implemented fully and simultaneously for all services and hospitals (currently estimated for July 2000). The Act provides payments in addition to PPS payments to hospitals during the first three years of the PPS if their payments are less than thei