[Senate Prints 105-30]
[From the U.S. Government Publishing Office]


105th Congress                                                  S. Prt.
                            COMMITTEE PRINT

 1st Session                                                     105-30
_______________________________________________________________________


 
               BALANCED BUDGET RECONCILIATION ACT OF 1997

                               __________

 COMMITTEE RECOMMENDATIONS AS SUBMITTED TO THE BUDGET COMMITTEE ON THE 
                   BUDGET PURSUANT TO H. CON. RES. 84



                        COMMITTEE ON THE BUDGET

                          UNITED STATES SENATE


                       Pete V. Domenici, Chairman




                               JUNE 1997

           Printed for the use of the Committee on the Budget



               BALANCED BUDGET RECONCILIATION ACT OF 1997



105th Congress                                                  S. Prt.
                            COMMITTEE PRINT

 1st Session                                                     105-30
_______________________________________________________________________


                    BALANCED BUDGET RECONCILIATION

                              ACT OF 1997

                               ----------                              

 COMMITTEE RECOMMENDATIONS AS SUBMITTED TO THE BUDGET COMMITTEE ON THE 
                   BUDGET PURSUANT TO H. CON. RES. 84

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                       Pete V. Domenici, Chairman




                               JUNE 1997

           Printed for the use of the Committee on the Budget


                        COMMITTEE ON THE BUDGET

                 PETE V. DOMENICI, New Mexico, Chairman
CHARLES E. GRASSLEY, Iowa            FRANK R. LAUTENBERG, New Jersey
DON NICKLES, Oklahoma                ERNEST F. HOLLINGS, South Carolina
PHIL GRAMM, Texas                    KENT CONRAD, North Dakota
CHRISTOPHER S. BOND, Missouri        PAUL S. SARBANES, Maryland
SLADE GORTON, Washington             BARBARA BOXER, California
JUDD GREGG, New Hampshire            PATTY MURRAY, Washington
OLYMPIA J. SNOWE, Maine              RON WYDEN, Oregon
SPENCER ABRAHAM, Michigan            RUSSELL D. FEINGOLD, Wisconsin
BILL FRIST, Tennessee                TIM JOHNSON, South Dakota
ROD GRAMS, Minnesota                 RICHARD J. DURBIN, Illinois
GORDON SMITH, Oregon

                  G. William Hoagland, Staff Director
              Bruce King, Staff Director for the Minority



                            C O N T E N T S

                              ----------                              
                                                                   Page
A. Overview......................................................     1
B. Summary of Recommendations....................................     2
C. Reconciliation Process and Procedures.........................     3
D. Additional Views..............................................     7
E. Title-by-Title Analysis.......................................     9
  I. Committee on Agriculture, Nutrition, and Forestry...............10
          CBO Cost Estimate......................................    12
 II. Committee on Banking, Housing, and Urban Affairs................20
          CBO Cost Estimate......................................    22
III. Committee on Commerce, Science, and Transportation..............52
          Views..................................................    53
          CBO Cost Estimate......................................    56
 IV. Committee on Energy and Natural Resources.......................67
          CBO Cost Estimate......................................    69
  V. Committee on Finance............................................71
 VI. Committee on the Governmental Affairs..........................198
          CBO Cost Estimate......................................   200
VII. Committee on Labor and Human Resources.........................213
          Views..................................................   214
          CBO Cost Estimate......................................   217
VIII.Committee on Veterans' Affairs.................................224

          CBO Cost Estimate......................................   226
F. Roll Call Vote in Budget Committee............................   241


                              A. Overview

    The FY 1998 Congressional Budget Resolution (H. Con. Res. 
84) adopted by the U.S. Senate on June 5, 1997 was the first 
step in implementing the Bipartisan Budget Agreement approved 
by the President, the Speaker of the House, the Senate Majority 
and Minority Leaders on May 15, 1997. The second major step to 
implement the Agreement is embodied in the Balanced Budget Act 
of 1997 reported from the Senate Budget Committee on June 20, 
1997.
    The Balanced Budget Act of 1997 (reconciliation bill) 
includes reforms to federal programs within the jurisdiction of 
eight Senate authorizing committees. This legislation results 
from instructions included in H. Con. Res. 84 to these eight 
committees to make changes to laws within their jurisdictions 
that would reduce federal spending $137.2 billion over the next 
five years, including reductions of $59.4 billion in 2002. 
Savings from this reconciliation bill, combined with $138 
billion in appropriation savings, and other legislation 
directed in the Agreement will place the country's fiscal books 
on a road to balance in 2002.
    The figures included in this summary print are based on 
preliminary estimates for some of the reconciled committees. 
Based on these preliminary estimates, however, the reported 
reconciliation bill achieves savings of approximately $132.6 
billion over the next five years slightly below the 
reconciliation instruction, but fundamentally following the 
blueprint of the Bipartisan Budget Agreement.
    It is the stated intent of the Congressional Leadership and 
all parties to the Agreement to take such actions as are 
necessary to assure consistency with the Agreement. Such action 
may require amendments to the Balanced Budget Act of 1997 as 
reported by the Committee to comply with both the budget 
resolution's instructions and the Bipartisan Budget Agreement.


                     B. Summary of Recommendations

                                   RECONCILIATION SUMMARY BY SENATE COMMITTEE                                   
                                 [Preliminary estimates in billions of dollars]                                 
----------------------------------------------------------------------------------------------------------------
          Committee                               1998       1999       2000       2001       2002       Total  
----------------------------------------------------------------------------------------------------------------
Instruction:                                                                                                    
  Agriculture, Nutrition and   OT............      0.300      0.300      0.300      0.300      0.300       1.500
   Forestry.                                                                                                    
  Banking, Housing and Urban   DR............     -0.136     -0.233     -0.365     -0.422     -0.434      -1.590
   Affairs.                                                                                                     
  Commerce, Science and        DR............         --     -3.549     -3.549     -4.549    -14.849     -26.496
   Transportation.                                                                                              
  Energy and Natural           OT............         --     -0.001     -0.002     -0.004     -0.006      -0.013
   Resources.                                                                                                   
  Finance....................  OT............     -1.137    -12.681    -19.079    -26.838    -40.911    -100.646
  Governmental Affairs.......  DR............     -0.632     -0.839     -1.042     -1.185     -1.769      -5.467
  Labor and Human Resources..  OT............     -0.242     -0.247     -0.158     -0.088     -1.057      -1.792
  Veterans Affairs...........  OT............     -0.247     -0.540     -0.659     -0.606     -0.681      -2.733
                                              ------------------------------------------------------------------
      Total instruction......  DR............     -2.094    -17.790    -24.554    -33.392    -59.407    -137.237
                                              ==================================================================
Reported:                                                                                                       
  Agriculture, Nutrition and   OT............      0.190      0.300      0.350      0.350      0.300       1.490
   Forestry \1\.                                                                                                
  Banking, Housing and Urban   DR............     -0.660     -0.206     -0.332     -0.409     -0.448      -2.055
   Affairs.                                                                                                     
  Commerce, Science and        DR............         --     -1.749     -3.449     -3.249     -7.449     -15.896
   Transportation.                                                                                              
  Energy and Natural           OT............         --     -0.001     -0.002     -0.004     -0.006      -0.013
   Resources \1\.                                                                                               
  Finance....................  OT............     -2.797    -13.459    -22.845    -24.912    -42.067    -106.080
  Governmental Affairs \1\...  DR............     -0.632     -0.845     -1.049     -1.192     -1.809      -5.527
  Labor and Human Resources    OT............     -0.239     -0.233     -0.155     -0.085     -1.080      -1.792
   \1\.                                                                                                         
  Veterans Affairs...........  OT............     -0.247     -0.540     -0.659     -0.606     -0.681      -2.733
                                              ------------------------------------------------------------------
      Total reported.........  DR............     -4.385    -16.733    -28.141    -30.107    -53.240    -132.606
                                              ==================================================================
Reported compared to                                                                                            
 instruction:                                                                                                   
    Agriculture, Nutrition     OT............     -0.110         --      0.050      0.050         --      -0.010
     and Forestry.                                                                                              
    Banking, Housing and       DR............     -0.524      0.027      0.033      0.013     -0.014      -0.465
     Urban Affairs.                                                                                             
    Commerce, Science and      DR............         --      1.800      0.100      1.300      7.400      10.600
     Transportation.                                                                                            
    Energy and Natural         OT............         --         --         --         --         --       0.000
     Resources.                                                                                                 
    Finance..................  OT............     -1.660     -0.778     -3.766      1.926     -1.156      -5.434
    Governmental Affairs.....  DR............         --     -0.006     -0.007     -0.007     -0.040      -0.060
    Labor and Human Resources  OT............      0.003      0.014      0.003      0.003     -0.023          --
    Veterans Affairs.........  OT............         --         --         --         --         --          --
                                              ------------------------------------------------------------------
      Total comparison.......  DR............     -2.291      1.057     -3.587      3.285      6.167       4.631
----------------------------------------------------------------------------------------------------------------
\1\ Final CBO Estimates.                                                                                        
                                                                                                                
Note: OT=outlays,  DR=deficit reduction. Staff estimates unless otherwise indicated.                            


                C. Reconciliation Process and Procedures

Overview
    Section 310 of the congressional Budget Act (the Budget 
Act) authorizes the inclusion of reconciliation instructions in 
the budget resolution. The Budget Committee is not required to 
include such instructions, but will include them when changes 
in existing direct spending and revenue laws are necessary in 
order to implement the budget resolution.
    When the budget resolution contains reconciliation 
instructions, the Budget Committee specifies, to each committee 
to be reconciled, the total amount by which direct spending or 
revenues under existing laws is to be changed. The Committee 
may also specify the total amount by which the statutory limit 
on the public debt is to be changed. Each committee is then 
instructed to recommend the appropriate legislative changes to 
meet the instructions and to report those recommendations to 
the Senate Committee on the Budget. Once all of the committee's 
recommendations are received, the Budget Committee consolidates 
the legislative language into a single piece of legislation and 
reports it to the Senate, without substantive change.
Reconciliation Instructions in the FY 1998 Budget Resolution
    Section 104(a) of the budget resolution for fiscal year 
1998 (H. Con. Res. 84, 105th Congress, 1st Session) sets out 
reconciliation instructions to 8 Senate committees calling for 
spending reductions totaling $137.24 billion over 5 years (1998 
through 2002). Committees were to report their recommendations 
to the Committee on the Budget by June 13, 1997. The Committee 
on the Budget consolidated, without substantive change, the 
recommendations submitted and ordered the matter reported on 
June 20, 1997. As of the printing of this document, preliminary 
scoring by the Congressional Budget Office indicated that all 
committee had complied with their instructions with the 
exception of the Committee on Commerce.
Reconciliation Procedures
            In General
    Section 310 of the Congressional Budget Act of 1974 sets 
forth expedited procedures for the consideration of a 
reconciliation measure in the Senate. These procedures provide 
for a limited period of consideration and restrict the content 
of amendments offered from the floor. In particular, section 
313 (known as the ``Byrd Rule'') prohibits the inclusion of 
``extraneous'' provisions in the legislation (and any 
amendments thereto or conference report thereon).
            Motion to Proceed and Time Limits
    Since the reconciliation legislation is a privileged 
matter, the motion to proceed to the consideration of a 
reconciliation bill is not debatable. Total debate on a 
reconciliation bill is limited to 20 hours. Note that this is a 
limit on overall debate time, not overall consideration. The 
time is controlled by and divided equally between the majority 
leader and the minority leader or their designees. The 20 hours 
does not include time consumed for the reading of amendments, 
quorum calls immediately preceding a roll call vote, or roll 
call votes. Debate on debatable motion or appeal is limited to 
1 hour. The proponent of an amendment or motion is entitled to 
one-half of the allotted time. The time in opposition is 
controlled by the majority leader or his designee unless he or 
she supports the amendment or motion. If so, the time in 
opposition is controlled by the minority leader or his 
designee.
            Compliance with Reconciliation Directives
    Section 104(a) of the fiscal year 1998 budget resolution 
instructed Senate committees to submit legislation to the 
Budget Committee to reduce direct spending for two time 
periods: (i) the five-year period of 1998-2002 and (ii) the 
last year, 2002. Compliance with reconciliation directives is 
measured by the amount of savings the Congressional Budget 
Office (CBO) estimates will result from the enactment of the 
legislative recommendations submitted by the committees.
    The Budget Committee is responsible for scoring 
reconciliation bills and any amendments thereto and will make 
these determinations based upon cost estimates provided by the 
Congressional Budget Office. Because the Budget Committee must 
report the committee's recommendations without any substantive 
change, any action to bring a committee into compliance must 
occur on the Senate floor. If a committee fails to meet its 
instructions, one possible remedy is the making of a motion to 
recommit with instructions to report back forthwith with an 
amendment that brings the committee into compliance. The text 
of such an amendment need not be germane to the underlying 
bill. A committee could also be brought into compliance by the 
offering of a simple floor amendment. This amendment, however, 
would have to be germane.
            Restrictions upon the Content of Amendments
    The Budget Act provides for a number of restrictions upon 
the content of amendments offered from the floor to a 
reconciliation bill: section 305(b) requires that amendments be 
germane; section 310(d) requires that amendments be, in effect, 
deficit neutral; section 310(g) prohibits amendments that 
effect the Social Security Trust Fund; and section 313 
prohibits amendments which are extraneous to the reconciliation 
instructions. All of these restrictions are enforced in the 
Senate by points of order which require 60 affirmative votes to 
waive or overturn the ruling of the Presiding Officer by an 
appeal.

                              Germaneness

    Section 305(b)(2) imposes a germaneness requirement upon 
all amendments offered to a reconciliation bill. Germaneness is 
determined pursuant to the precedents of the Senate and rulings 
will be made by the Presiding Officer of the Senate with the 
advice of the Parliamentarian. Germaneness is a much more 
narrow concept than ``relevance'' which generally requires a 
mere subject matter relationship. There are, however, 4 classes 
of amendments whichthe precedents of the Senate deem to be per 
se germane: (i) committee amendments; (ii) amendments which only strike 
language from the bill; (iii) amendments which change numbers or dates; 
and (iv) amendments containing non-binding or precatory language within 
the jurisdiction of the committee which reported the bill. Note: 
amendments which fall into one of the per se germane classes are still 
subject to points of order set out in other sections of the Budget Act. 
Therefore, for example, while amendments containing non-binding 
language within the jurisdiction of a reporting committee may be per se 
germane, such language by its very nature has no budgetary effect and 
consequently violates section 313(b)(1)(A) as explained below.
    If an amendment does not fall within one of the classes of 
per se germane amendments discussed above, germaneness is 
determined on a case-by-case basis. Members are encouraged to 
consult with the Parliamentarian to determine if any particular 
amendment is germane.

                           Deficit Neutrality

    Section 310(d) of the Budget Act provides that an amendment 
to a reconciliation bill is out of order in the Senate if it 
would reduce outlay reductions or revenue increases below the 
level called for by the reconciliation instructions unless the 
amendment also provides offsetting outlay reductions or revenue 
increases. In other words, an amendment may not increase 
spending or cut taxes unless it is ``paid for''--that is, it 
may not worsen the deficit.
    It must be noted, however, that 310(d) provides that ``a 
motion to strike a provision shall always be in order''. This 
language thus permits language to be removed from a bill 
regardless of the budgetary effects.

                            Social Security

    Section 310(g) provides that an amendment to a 
reconciliation bill (or the bill itself) is not in order if it 
contains ``recommendations with respect to the old age, 
survivors, and disability insurance program established under 
title II of the Social Security Act''. This language generally 
has been interpreted to prohibit the consideration of any 
legislation in the reconciliation process which affects the 
receipts (taxes paid) into or the outlays (benefits paid) from 
the OASDI trust fund. As discussed below, a violation of 310(g) 
also constitutes a violation of section 313(b)(1)(F).

             Extraneous Matter: section 313, the Byrd Rule

    The Byrd rule provides a point of order against extraneous 
provisions in a reconciliation bill, an amendment thereto, and 
the conference report thereon. It is unique in that it permits 
a point of order to be raised against a ``provision''. 
Consequently, unlike other points of order which would lie 
against the bill or conference report in its entirety, a Byrd 
rule point of order, if sustained, will result in the offending 
language being stricken from the bill or the conference report. 
The Byrd rule provides a specific definition of ``extraneous'' 
in subsection 313(b). A provision will be considered extraneous 
if it:
          produces no change in outlays or revenues, unless it 
        is a term or condition of a provisions which produces 
        such a change--section 313(b)(1)(A);
          increases outlays or reduces revenues if the 
        reporting committee has failed to comply with its 
        reconciliation instruction--section 313(b)(1)(B);
          is within the jurisdiction of another committee--
        section 313(b)(1)(C);
          produces changes in outlays or revenues which are 
        merely incidental to the non-budgetary components of 
        the provision--section 313(b)(1)(D);
          causes the committee's work product to worsen the 
        deficit in any year beyond those reconciled for--
        section 313(b)(1)(E); and
          affects the receipts into or outlays from the OASDI 
        trust fund in violation of section 319(g)--section 
        313(b)(1)(F).
                          D. Additional Views

                              ----------                              


              DISSENTING VIEWS OF SENATOR PAUL S. SARBANES

    This spending reconciliation bill is plagued by the same 
misplaced priorities that characterize the FY98 budget plan as 
a whole. In particular, this bill, when combined with the tax 
breaks approved by the Senate Finance Committee and the House 
Ways and Means Committee, places a disproportionate share of 
the burden of deficit reduction on ordinary citizens. Such 
citizens will be impacted by the program cuts in this bill 
while those at the top end of the income and wealth scale will 
reap large tax benefits.
    Given the objective of a balanced budget, the inclusion of 
tax cuts in the budget plan necessitates program reductions 
substantially greater than would be needed to eliminate the 
deficit if tax breaks were not a part of the budget plan.
    The math is simple. The budget resolution provides for $85 
billion in net tax cuts over the next five years and $250 in 
net tax cuts over the next 10 years. In the framework of a 
balanced budget, these tax cuts require additional program 
reductions of $85 billion over the next five years and $250 
billion over the next 10 years over what would otherwise be 
required. The structure of the bills reported out by the tax 
Committees make it clear that those at the very top of the 
income pyramid will receive very substantial tax breaks 
(thereby absenting themselves from the deficit reduction 
effort, indeed shifting the burden to others), while ordinary 
people will carry a greater burden of program reductions to 
compensate for the tax breaks.
    May programs important to working people--e.g., Medicare 
and Medicaid--are being reduced to pay for capital gains tax 
cuts, inheritance tax cuts, and IRA expansion that will benefit 
the wealthiest people in the nation. Indeed, the tax bills 
reported from the Committees give the top 1% of the income 
scale the same percentage of the tax reductions as the bottom 
60 of the income scale.
    I cannot support the priorities reflected by these choices. 
For every dollar lost to the treasury in tax cuts, one dollar 
must be added to the treasury through reductions in programs 
that are essential to many of our citizens. Therefore, in 
assessing the spending reconciliation bill before us, we should 
ask ourselves: Whether providing tax breaks to the very well-
to-do should be a higher priority than adequate funding for 
programs essential to the wellbeing of ordinary citizens.
    I think not and therefore vote no on the measure before us.

                                                  Paul S. Sarbanes.
                ADDITIONAL VIEW OF SENATOR PATTY MURRAY

    Today the Budget Committee is scheduled to report out the 
Budget Reconciliation spending bill. Unfortunately, I was 
unable to be present for the final vote, but had I been here I 
would have voted ``Aye.''
    Several months ago, I made a commitment to the graduating 
class at North Seattle Community College, that I would be 
honored to be their 1997 commencement speaker. This commitment 
was extremely important to me and the graduating class, I 
simply could not back out at the last minute. Today's Budget 
Committee mark up was not finalized until last night.
    I am extremely troubled by some of the provisions within 
the reconciliation package as I believe that they violate the 
bi-partisan balanced budget agreement that was recently 
adopted. I am also disappointed that the Committee will not 
have final legislative language and final CBO numbers on parts 
of the Finance Committee sections. It is difficult to 
understand why the leadership is in such a rush to complete 
action on major changes to Medicare and Medicaid. This rush to 
bring this bill to the floor does jeopardize our efforts to 
enact a balanced budget.
    As we all know the Budget Committee cannot amend the 
reconciliation legislation. This will be done on the floor next 
week. At that time I will be supporting amendments that ensure 
this package is in compliance with the agreement and that it 
does not violate our commitment to our nation's senior citizens 
and our children. We must seize on this unique opportunity to 
balance the budget, reform Medicare and expand health benefits 
for children. Unfortunately, as it stands now it does not 
appear that the current reconciliation language will achieve 
these goals.
    Today's action by the Budget Committee is an important step 
in the process which is why I would have voted to report the 
measure to the full Senate. This does not mean that the package 
is one I will support when it reaches the floor. I am simply 
acting to move us closer to achieving a balanced budget.
    I am disappointed that this legislation does violate the 
agreement that we worked so hard to achieve. But, I am hopeful 
that significant improvements will be made on the floor and 
that we can send to the President a bill that he can sign.

                                                      Patty Murray.
                       E. Title-By-Title Analysis

    The following is a title-by-title analysis of the 
legislation. In each case, the analysis is that of the 
respective committee and is presented as it was submitted to 
the Budget Committee without revision. In certain cases, the 
final Congressional Budget Office estimate was not available 
when the committee made its submission. Where that occurred, 
the Budget Committee has included that CBO estimate at the end 
of the committee's analysis.


               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Reconciliation recommendations of the Senate Committee on Agriculture 
        (Title I)

    Summary: The Senate Agriculture Committee reconciliation 
recommendations would increase federal Food Stamp spending by 
$1.5 billion over the 1998 to 2002 period.
    The Personal Responsibility and Work Opportunity 
Reconciliation Act (PRWORA) of 1996 limited Food Stamp receipt 
to a period of three months in any 36-month period for able-
bodied adults who do not have dependent children and who are 
not working or participating in an appropriate training or work 
activity. The title would allow states to exempt some 
individuals from this limitation and would provide additional 
federal Food Stamp Employment and Training funds to states.
    This title contains an intergovernmental mandate as defined 
in the Unfunded Mandates Reform Act of 1995 (UMRA). CBO 
estimates that the costs of complying with the mandate would 
not be significant. The title does not contain any private-
sector mandates as defined in UMRA.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the title for the 1998-2002 period is shown 
in the following table. The appendix table shows the budgetary 
impacts through 2007.
    The effects of this legislation fall within budget function 
600 (Income Security).

     ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON AGRICULTURE    
----------------------------------------------------------------------------------------------------------------
                                                           Outlays by fiscal years, in millions of dollars--    
                                                     -----------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
Food Stamp Spending Under Current Law...............    23,794    24,450    25,884    27,226    28,645    29,417
                                                     ===========================================================
Proposed Changes:                                                                                               
    Section 1001: Hardship exemption................         0       110       110       110       120       130
    Section 1002: Additional funding for employment                                                             
     and training...................................         0        80       190       240       230       170
                                                     -----------------------------------------------------------
      Total Changes.................................         0       190       300       350       350       300
                                                     ===========================================================
Spending Under Title I..............................    23,794    24,640    26,184    27,576    28,995    29,717
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: The Personal Responsibility and Work 
Opportunity Reconciliation Act (PRWORA) of 1996 limited Food 
Stamp receipt to a period of three months in any 36-month 
period for able-bodied adults who do not have dependent 
children and who are not working or participating in an 
appropriate training or work activity. An individual can 
reestablish eligibility for another three-month period after a 
month of working or participating in an allowable employment or 
training program. The Secretary of Agriculture can provide a 
waiver from the provision for areas that have an unemployment 
rate greater than ten percent or insufficient jobs. The 
Department of Agriculture estimates that currently about 35 
percent of the people who otherwise would be affected by this 
provision live in areas that are covered by a waiver.
    Title I contains two provisions that address this component 
of current law. The first would allow states to exempt a 
certain number of individuals from the requirements. The second 
provides additional federal money for Food Stamp Employment and 
Training.

Section 1001: Exemption

    Under this provision, each state would be allowed to 
continue food stamp benefits past the three month limit for 15 
percent of the state's covered individuals, as estimated 
annually by the Secretary of Agriculture based on Food Stamp 
Program administrative data. Covered individuals would be 
defined as individuals who are covered by the time-limit 
provision by virtue of their age, work status, and household 
circumstances, do not live in an area that is covered by a 
waiver, and are not receiving benefits under a three-month 
period of eligibility.
    Based on CBO's analysis of the Food Stamp administrative 
data and projections of Food Stamp participation, CBO assumes 
that approximately 1.1 million Food Stamp recipients would, in 
fiscal year 1998, be able-bodied, between the ages of 18 and 50 
with no children in the home, and not working or complying with 
an appropriate work activity. Of these individuals, CBO assumes 
that 75 percent would not be in a three-month period of 
eligibility and, of the remainder, 65 percent would not reside 
in a waiver area.
    Under these assumptions, the Secretary would identify 
approximately 550,000 individuals nationwide as covered 
individuals, and would distribute the number among the states. 
States could, therefore, allow a total of about 82,000 people 
(15 percent) to receive food stamps each month who would 
otherwise be ineligible. CBO assumes that only about 74,000 
people would actually continue to receive benefits because a 
few states would choose not to implement the exemption. 
Continuing food stamps for these newly exempt individuals (at 
an average cost of about $120 a month) would increase Food 
Stamp outlays by $100 million in 1998, $130 million in 2002, 
and $580 million over the 1998-2002 period.

Section 1002: Additional funding for employment and training

    Under current law, the Food Stamp Employment and Training 
component of the Food Stamp Program has two federal funding 
sources. The federal government provides a stated amount 
annually in funds that do not require a state match. States may 
also draw down an unlimited amount of additional funds at a 50 
percent match rate. In 1996, the federal government provided 
about $75 million dollars in federal-only funds and about the 
same amount as a match to state funds.
    Section 1002 would increase the federal-only Food Stamp 
Employment and Training funds by $140 million in each of fiscal 
years 1998 to 2001 and by $80 million in fiscal year 2002. In 
addition to the increase in federal-only employment and 
training funds, CBO estimates that this section would increase 
Food Stamp benefits and slightly reduce federal matching funds 
for employment and training. In total, CBO estimates that 
Section 1002 would increase federal outlays by $910 million 
over the 1998-2002 period.
    The bill would create new procedures for states to use in 
drawing down federal-only funds. Under current law, states draw 
down money based on their costs, regardless of who they serve 
in what type of employment and training service. Under the 
bill, the Secretary of Agriculture would set two levels of 
reimbursement rates, and states would receive federal funding 
on a per-placement basis. The federal government would pay a 
state the higher amount when it placed an individual who is 
subject to the 3-month time limit in the type of activity that 
would allow him to retain his food stamps. The federal 
government would pay the lower amount when a state placed the 
same individual in another type of service, or when it served 
any person who is not subject to the time limit. The type of 
reimbursement the state received would not depend on whether 
the individual lived in an area covered by a waiver. The bill 
also would require that states spend at least 75 percent of the 
federal-only money on the types of employment and training 
services that would receive the higher reimbursement rate. 
Furthermore, in order to receive any federal-only funds a state 
must continue to spend state funds at a minimum of 75 percent 
of its fiscal year 1996 level.
    The requirement that states spend 75 percent of the 
federal-only money on designated services would induce states 
to spend more on these types of services. By 2000, CBO 
estimates that states would spend an additional $100 million on 
such services. In the first few years, however, states would 
draw down less than the full amount of federal-only money 
because many would have to restructure their Employment and 
Training programs to focus on the types of services that would 
be eligible for the higher rate. The amount that a state does 
not drawn down would be available for reallocation in future 
years and to other states.
    Additional spending for employment and training services 
will also result in payment of additional Food Stamp benefits. 
CBO assumes that states would spend 50 percent of the new money 
in areas that are not covered by a waiver in fiscal year 1998, 
and 70 percent by fiscal year 2000 and later. CBO assumes that 
the Secretary of Agriculture would set the higher reimbursement 
rate at about $90 per placement per month and the lower rate at 
half that amount. Under these assumptions, CBO estimates that 
20,000 individuals in an average month would remain eligible 
for Food Stamps at a cost of $25 million in fiscal year 1998. 
By 2001, CBO expects that 60,000 individuals would remain 
eligible at a cost of about $90 million. In 2002 the amount of 
new federal funds is somewhat lower, so fewer people would 
remain eligible (55,000) at a lower cost ($85 million).
    Because the bill would require states to maintain their 
effort at only 75 percent of their 1996 amount and provides 
such a large amount of new federal funds, CBO expects that the 
aggregate states would withdraw about 20 percent of what they 
otherwise would have spent on employment and training services. 
Because these funds would have received a federal match, CBO 
estimates that federal outlays would be lower by $17 million in 
1998 and $19 million in 2002.
    Estimated impact on State, local, and tribal governments: 
This title contains an intergovernmental mandate as defined in 
UMRA, but CBO estimates that the cost of complying would not 
exceed the threshold established in that act ($50 million in 
1996, adjusted annually for inflation). The bill would require 
states to continue spending at least 75 percent of FY 1996 
expenditures for employment and training and workfare programs 
under Food Stamps in order to continue receiving federal 
funding for those programs. Under current law, CBO estimates 
that state spending, in aggregate, would meet this maintenance-
of-effort requirement and therefore the total cost of this 
mandate would not be significant. States meeting this new 
requirement would receive additional funds for Food Stamp 
employment and training programs totaling $140 million in 
fiscal year 1998 and $640 million over the period 1998 to 2002.
    Estimated impacts on the private sector: The bill contains 
no private-sector mandates as defined in UMRA.
    Comparison to other estimates: On June 16, CBO prepared an 
estimate of the House Agriculture Committee's reconciliation 
recommendations. That bill also contains a new exemption and 
additional funds for employment and training. The cost estimate 
of the exemption provisions are the same in the two estimates. 
The estimates of the changes to federal spending resulting from 
the additional employment and training funds differ because of 
key differences in the policies.
    First, the House increases Food Stamp Employment and 
Training funding but does not change the program's structure: 
states would continue to be reimbursed based on their actual 
costs. The CBO baseline assumption about per-placement costs is 
$100 per month per person. In the Senate bill, the Secretary of 
Agriculture would set two reimbursement amounts that states 
would draw down on a per-placement basis. CBO assumes that the 
Secretary would set that rate at $90 a month for the higher 
rate and $45 per month for the lower rates. These amounts are 
lower than the CBO baseline amount because the Administration 
assumes a lower amount in its legislative proposal on the 
provision, which is similar to the Senate provision.
    Second, the House bill requires that 75 percent of the 
federal-only funds be spent on people subject to the time 
limit. The Senate bill requires that 75 percent of the federal-
only funds be spent on people subject to the time limit in the 
types of services that would allow them to retain Food Stamp 
eligibility. This difference results in lower federal spending 
in the first few years, as states must restructure their 
employment and training services in order to draw down all the 
federal-only money, and in higher Food Stamp outlays in later 
years because more people retain benefits.
    Third, the House bill requires that states maintain their 
spending at their 1996 level in order to receive any of the 
additional federal-only funds provided in this bill. The Senate 
requires that states maintain 75 percent of their 1996 level in 
order to receive any federal-only funds. This difference 
results in lower spending in the Senate version because states 
would withdraw more of their effort.
    Estimate prepared by: Federal Cost: Dorothy Rosenbaum; 
Impact on State, Local, and Tribal Governments: Marc Nicole; 
and Impact on the Private Sector: Ralph Smith.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                                                  APPENDIX TABLE--FEDERAL BUDGETARY EFFECTS OF TITLE I                                                  
                                                        [By fiscal year, in millions of dollars]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Total       
                                                               1998   1999   2000   2001   2002   2003   2004   2005   2006   2007 ---------------------
                                                                                                                                    1998-2002  1998-2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     DIRECT SPENDING                                                                    
                                                                                                                                                        
Section 1001: Hardship Exemption:                                                                                                                       
    Budget authority........................................    110    110    110    120    130    130    130    140    140    140       580      1,260 
    Outlays.................................................    110    110    110    120    130    130    130    140    140    140       580      1,260 
Section 1002: Additional funding for Employment and                                                                                                     
 Training:                                                                                                                                              
    Budget authority........................................    150    190    210    210    150    120    130    130    130    130       910      1,550 
    Outlays.................................................     80    190    240    230    170    120    130    130    130    130       910      1,550 
Total, Direct Spending:                                                                                                                                 
    Budget authority........................................    260    300    320    330    280    250    260    270    270    270     1,490      2,810 
    Outlays.................................................    190    300    350    350    300    250    260    270    270    270     1,490      2,810 
--------------------------------------------------------------------------------------------------------------------------------------------------------

                          Title I--Agriculture

                          descriptive language

Section 1001. Hardship exemption
    A state agency may provide a hardship exemption for a 
portion of those individuals in a state who are no longer 
eligible to receive food stamp benefits due to the work 
requirement time limits under section 6(o)(2) of the Food Stamp 
Act.
    The average monthly number of hardship exemptions a state 
agency may grant is limited to 15 percent of the estimated 
number of individuals in the state to whom the work requirement 
time limits apply. These ``covered individuals'' are defined as 
those: not excepted (e.g., because of age, disability, etc.); 
not living in an area for which a waiver has been granted under 
section 6(o)(4) of the Food Stamp Act; not complying with the 
work requirement; and not in their first (or second) 3 months 
of eligibility under the work requirement. If a state chooses 
to provide exemptions under this new rule, it can do so in any 
way--including defining categories of recipients who will be 
exempted--so long as it adheres to the 15 percent limit.
    For FY 1998, the Secretary will determine the estimated 
number of covered individuals from which each state may exempt 
15 percent, using the FY 1996 survey conducted under the 
Integrated Quality Control System and other information deemed 
necessary by the Secretary due to the timing of the survey and 
its limitations. The estimate will reflect adjustments for 
those covered by current-law exceptions (e.g., age, 
disability), those covered by waivers, those complying with the 
work requirement, and those in their first or second 3-month 
periods of eligibility. In later fiscal years, the number of 
covered individuals in a state from which the state may exempt 
15 percent will be estimated by adjusting the FY 1998 number to 
reflect changes in the state's food stamp caseload in the prior 
year and the Secretary's estimate of changes in the proportion 
of food stamp recipients living in areas covered by waivers.
    If a state's food stamp participation, during a fiscal 
year, varies from the prior year's caseload by more than 10 
percent, the Secretary will adjust, upward or downward 
accordingly, the estimated number of covered individuals which 
the state may exempt to reflect the increase or decrease.
    If a state exempts more or less than an average of 15 
percent of individuals who are no longer eligible to receive 
food stamp benefits in a fiscal year, the Secretary must 
decrease or increase the number of allowable exemptions, in the 
next fiscal year, to compensate for the number of the state's 
exemptions over or under 15 percent in the previous year.
    The Secretary can require documentation from states to 
ensure compliance with the rules governing the hardship 
exemption.
    The Committee intends to give states flexibility in 
administering the 15 percent hardship exemption. States would 
not, for example, be required to terminate individuals from the 
food stamp program prior to awarding them exemptions. Persons 
completing their third month of benefits could be given 
exemptions for the fourth month without first having their food 
stamp benefits terminated.
    Those states wishing to grant the exemptions provided under 
this legislation may benefit from assistance from the 
Department as to the effect of exempting certain categories of 
food stamp recipients. To help states evaluate options 
available to them, the Committee encourages the Department to 
prepare technical assistance materials that give examples of 
criteria that states might wish to apply in granting hardship 
exemptions, together with the Department's best estimate of the 
percentage of the caseload that would be covered by each of 
these criteria. The Committee encourages the Department to 
provide states with as much information of this kind as 
possible before the beginning of fiscal year 1998. The 
Committee also encourages the Department to continue reviewing 
information from states and update the information it provides 
to the states.
Section 1002. Additional funding for employment and training
    New money is added to the existing mandatory unmatched 
federal grants to states for the Employment and Training 
program for food stamp recipients. Current grant levels--
totaling $81 million for FY 1998, $84 million for FY 1999, $86 
million for FY 2000, $88 million for FY 2001, and $90 million 
for FY 2002--are increased to $221 million in FY 1998, $224 
million in FY 1999, $226 million in FY 2000, $228 million in FY 
2001 and $170 million in FY 2002. The amounts provided are to 
remain available until expended, so as to facilitate 
reallocation of unused funds.
    The total grant amounts noted above (including ``old'' and 
``new'' money) will be allocated to state agencies using a 
formula, determined by the Secretary, that reflects each 
state's proportion of able-bodied adults without dependents 
subject to the work requirement time limits who are not 
excepted (e.g., because of age, disability, etc.) under section 
6(o)(3) of the Food Stamp Act. The Secretary will base state 
agencies' allocations on information from the FY 1996 survey 
conducted under the Integrated Quality Control System (and 
other factors deemed necessary by the Secretary due to the 
timing of the survey and its limitations), adjusted to reflect 
changes in the state's food stamp caseload in the prior year.
    To the extent state agencies do not use all of the 
unmatched federal grant money allocated for a fiscal year, the 
Secretary will reallocate the unexpended amounts to other 
states. Unexpended amounts from one fiscal year may be 
reallocated for use in the following fiscal year.
    States will be paid specific amounts based on the average 
monthly number of recipients placed in employment and training 
activities. Payment rates will be set by theSecretary to 
reflect the reasonable cost of efficiently and economically providing 
the appropriate services, as periodically adjusted by the Secretary.
    A higher payment rate will be paid in the case of able-
bodied adults without dependents subject to work requirement 
time limits who are placed in workfare or in employment and 
training programs supervised or operated by a state or 
political subdivision requiring participation for 20 hours or 
more per week--but not including job search or job search 
training (or Job Training Partnership Act or Trade Adjustment 
Assistance programs). A lower payment rate will be paid in the 
case of recipients placed in other, less rigorous, employment 
and training activities. The Committee encourages the 
Department to set the payment rates so as to allow for the 
creation of the maximum number of work/training opportunities.
    State agencies will be required to use 75 percent of their 
unmatched federal grant money to serve food stamp recipients 
subject to work requirement time limits who are placed in 
employment and training programs qualifying for the higher 
payment rate.
    In order to receive their unmatched federal grant money, 
state agencies must maintain their federally matched 
expenditures for employment and training program 
administrative/operating costs at no less than 75 percent of 
the FY 1996 level.
    Federal matching money for any employment and training 
activities will continue to be available for all support costs 
(e.g., transportation, child care). But in the case of 
administrative/operating costs, federal matching money will 
only be available for costs incurred to place individuals for 
whom unmatched federal grant money has not been used.


               congressional budget office cost estimate

Reconciliation Recommendations of the State Committee on Banking, 
        Housing, and Urban Affairs (Title II)

    Summary: This bill would permanently prohibit the Federal 
Housing Administration (FHA) from providing foreclosure 
avoidance relief to mortgagors who have defaulted in making 
payments on FHA-insured single-family mortgages. The bill would 
also authorize a so-called Mark-to-Market approach for the 
restructuring of certain FHA-insured multifamily mortgages and 
for renewing section 8 contracts; section 8 contracts would be 
renewed at market rents for FHA-insured projects that currently 
receive above-market rents, and mortgages would be written down 
to levels that could be supported by those lower rents. The 
bill would also make several other changes to the section 8 
program that would reduce costs. First it would establish 
minimum rents of up to $25 per month for all section 8 project-
based programs. Second, it would eliminate federal preference 
rules for admitting new recipients into units with project-
based assistance. Third, it would generally prohibit rent 
increases for projects assisted under the section 8 new 
construction and substantial or moderate rehabilitation 
programs, if their assisted rents exceeded the fair market rent 
(FMR) established by the Department of Housing and Urban 
Development (HUD) for that housing area. Finally, the bill 
would limit rent increases for units without tenant turnover.
    This title contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act of 1995 
(UMRA) and would impose no costs on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: CBO estimates 
that the committee's proposals would reduce direct spending by 
about $2.1 billion over the 1997-2002 period. The estimated 
budgetary effects of these proposals by program over the 1997-
2002 period are shown in table 1. Table 2 shows the estimated 
changes in direct spending by provision through 2007.

  TABLE 1: ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON BANKING, 
                                           HOUSING, AND URBAN AFFAIRS                                           
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
                                    FHA Single-Family Mortgage Insurance Fund                                   
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................      -772      -977    -1,226    -1,221    -1,109    -1,095
    Estimated budget outlays........................      -772      -977    -1,226    -1,221    -1,109    -1,095
Proposed changes:                                                                                               
    Estimated budget authority......................         0      -136      -161      -183      -183      -183
    Estimated outlays...............................         0      -136      -161      -183      -183      -183
Spending under Title II:                                                                                        
    Estimate budget authority.......................      -772    -1,113    -1,387    -1,404    -1,292    -1,278
    Estimate outlays................................      -772    -1,113    -1,387    -1,404    -1,292    -1,278
                                                                                                                
                                     FHA Multifamily Mortgage Insurance Fund                                    
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................        41     1,357     1,688     1,555     1,419     1,300
    Estimated outlays...............................      -357     1,566     1,897     1,764     1,628     1,509
Proposed changes:                                                                                               
    Estimated budget authority......................      -533         0         0         0         0         0
    Estimated outlays...............................      -533         0         0         0         0         0
Spending under Title II:                                                                                        
    Estiamted budget authority......................      -492     1,357     1,688     1,555     1,419     1,300
    Estimated outlays...............................      -890     1,566     1,897     1,764     1,628     1,509
                                                                                                                
                                                 Capital Grants                                                 
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................         0         0         0         0         0         0
    Estimated outlays...............................         0         0         0         0         0         0
Proposed changes:                                                                                               
    Estimated budget authority......................         0       218       528       340        76        47
    Estimated outlays...............................         0        16        56        84        91        96
Spending under Title II:                                                                                        
    Estimated budget authority......................         0       218       528       340        76        47
    Estimated outlays...............................         0        16        56        84        91        96
                                                                                                                
                                           Section 8 Rental Assistance                                          
                                                                                                                
Spending under current law:\1\                                                                                  
    Estimated budget authority......................     3,550    10,286    12,295    14,424    16,085    17,461
    Estimated outlays...............................    15,941    16,360    17,025    17,717    18,402    19,121
Propsed changes:                                                                                                
    Estimated budget authority......................         0        -2        -2        -2      -113         0
    Estimated outlays...............................         0        -6      -101      -234      -320      -366
Spending under Title II:                                                                                        
    Estimated budget authority......................     3,550    10,284    12,293    14,422    15,972    17,461
    Estimated outlays...............................    15,941    16,354    16,924    17,483    18,082    18,755
                                                                                                                
                                        Total Changes in Direct Spending                                        
                                                                                                                
Estimated budget authority..........................      -533        80       365       155      -220      -136
Estimated outlays...................................      -533      -126      -206      -333      -412      -453
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
Civil money penalties...............................     (\2\)     (\2\)     (\2\)     (\2\)     (\2\)     (\2\)
----------------------------------------------------------------------------------------------------------------
\1\ CBO's baseline with annual adjustments for anticipated inflation.                                           
\2\ Less than $500,000.                                                                                         

    The budgetary effects of this legislation fall within 
budget functions 600 (income security) and 370 (commerce and 
housing credit).

Basis of estimate

            Elimination of FHA's single-family assignment program
    Under current law, FHA's assignment program has been 
suspended through fiscal year 1997. Section 2002 would 
permanently eliminate the assignment program, enabling FHA to 
foreclose more quickly on properties that would otherwise enter 
the assignment program. CBO estimates that more rapid 
foreclosure would reduce FHA's costs by decreasing the amount 
of taxes and other expenses that FHA would pay while holding 
these properties. Early foreclosures also would expedite the 
receipt of sales revenues that FHA would collect on the 
affected properties. CBO estimates that 16 percent of all 
claims from new loan guarantees will eventually enter the 
assignment program if it continues in place. Based on 
information provided by FHA, we estimate that eliminating the 
program would increase FHA's recoveries on such defaults by an 
average of 30 to 40 percent.
    CBO estimates that the decrease in FHA's costs from 
defaults would reduce direct spending by $846 million over the 
next five years. These estimated savings represent the net 
decrease in subsidy costs of new loan guarantees expected to be 
made by FHA over the 1998-2002 period. Under current law, FHA 
guarantees of new single-family mortgages result in offsetting 
receipts on the budget because the credit subsidies are 
estimated to be negative. (That is, guarantee fees for new 
mortgages more than offset the costs of expected defaults.) 
Eliminating the assignment program would make such subsidies 
more negative and the estimated change in those subsidy 
receipts would be recorded in the years in which new loans are 
guaranteed. For example, estimated savings for 1998 represent 
the present value (subsidy) savings of avoided costs in all 
future years associated with the new guarantees made in 1998.
            Mark-to-market provisions for FHA-insured multifamily 
                    housing mortgages
    The Federal Housing Administration (FHA) currently insures 
the mortgages of about 850,000 rental units in projects that 
also receive project-based rent subsidies under section 8 of 
the United States Housing Act of 1937. About 58 percent of 
these units have rents that exceed those for comparable 
unassisted units. The original section 8 contracts attached to 
these projects were written for periods typically ranging from 
15 to 40 years, and most will expire over the next five to ten 
years. HUD does not have the authority to renew these contracts 
at more than 120 percent of the fair market rent. The vast 
majority of these projects could not survive if their rental 
income was reduced to market levels and would therefore default 
on their mortgages, generating large losses to the FHA 
insurance fund and possibly displacing many of the tenants in 
these projects. Indeed, CBO's baseline for this fund includes 
estimated net losses for these projects of $7.6 billion over 
the 1998-2010 period, under the assumption that the rental 
income of these projects would be reduced to market levels at 
contract expiration.
    Subtitle B of the bill--often referred to as the Mark-to-
Market provisions--would generally direct the renewal of 
section 8 contracts for above-market units at market rents. In 
cases where the market rents would be so low that a project 
could not meet its operating and other expenses, even if the 
mortgage were extinguished, the bill would authorize exception 
rents that would be set at the level necessary to cover project 
expenses, including a return to the owner.
    The bill would authorize a variety of tools to prevent 
defaults on the FHA-insured mortgages once rents were reduced. 
In particular, the bill would authorize a bifurcation of the 
current mortgage into a first mortgage that could be supported 
by the lower rent and a so-called soft second mortgage that 
would be repaid over a 50-year period, starting after the first 
mortgage was paid off. During the period that the first 
mortgage was being paid, the second mortgage would accrue 
interest at the applicable federal interest rate. One purpose 
of this provision is to prevent a tax liability that owners 
would incur if that part of the current mortgage was simply 
forgiven. In that way, the provision also intends to encourage 
those owners whose section 8 contracts expire after the program 
would sunset, at the end of fiscal year 2001, to have their 
mortgages restructured early rather than choosing to default on 
their mortgages later. The bill would also authorize the 
insurance fund to pay for the credit subsidies that would be 
associated with any FHA-insured first mortgages or with the 
second mortgages, which would typically be held by HUD in the 
form of direct loans. For projects that could not support any 
mortgage, the fund would pay off the entire mortgage.
    The bill also would authorize the insurance fund to pay for 
part of the cost of repairs to the projects, not to exceed 
$5,000 per unit. In addition, Section 2201 would authorize a 
capital grant program that would reduce the restructuring cost 
to the insurance fund. Annual grant payments could be used by 
owners, for example, to help them pay for repairs through loans 
obtained from private lenders rather than through grants paid 
for by the fund. Funding for this capital grant program would 
not be derived from the insurance fund.
    CBO estimates that the Mark-to-Market provisions of the 
bill would save a total of $240 million over the 1997-2002 
period, as shown in Table 2. Restructuring mortgages would 
reduce the annual cash flows from the FHA-insurance fund over 
the next 15 to 20 years relative to CBO's baseline, which 
assumes mortgage defaults for the projects whose mortgages 
would be restructured under the bill. Under credit reform, that 
reduction in annual cash flows is scored on a net present value 
basis in the year the legislation would be enacted. Assuming 
that the bill is enacted before October 1, 1997, CBO estimates 
that those savings would amount to $533 million, recorded in 
fiscal year 1997. Rent reductions are estimated to save $50 
million for existing Section 8 contracts. The capital grant 
program wouldincrease direct spending by an estimated $343 
million. The budgetary impact of the proposal would represent the net 
result of a number of factors, some of which make the cost of 
restructuring more expensive and others that make it less expensive 
than the cost of defaults.
    FHA Insurance Fund. One factor that would make the cost of 
restructuring more expensive to the FHA-insurance fund is the 
timing of the restructuring. To the extent that owners would 
have their mortgages restructured before the time that they 
would be expected to default, the FHA insurance fund must make 
payments at an earlier date. That shift in timing increases the 
cost of restructuring on a net present value basis. CBO 
estimates that this impact would not to be very large, however, 
because the bill's provisions may entice relatively few owners 
whose contracts expire after 2001 to have their mortgages 
restructured because most might face large tax liabilities at 
the time of restructuring. Based on conversations with staff of 
the Joint Committee on Taxation, CBO assumes that, when there 
is a realistic possibility that the mortgage would be repaid, 
the Internal Revenue Service (IRS) would consider the soft 
second mortgages as valid indebtedness because they would 
accrue interest at the federal rate. On the other hand, if the 
economic circumstances of a project were such that the project 
was highly unlikely to ever pay off that debt, the IRS has the 
authority to recharacterize the mortgage as a forgiveness of 
indebtedness, in which case it would become taxable at the 
owner's personal income tax rate. That tax could be 
substantially higher than the tax owners would have to pay if 
they defaulted on their current mortgage years later, because 
(1) the unpaid mortgage balance would be lower at such a later 
date and (2) that unpaid balance would be taxed after default 
and foreclosure at the capital gains tax rate, which could be 
much lower than the owner's marginal personal income tax rate.
    Available data suggest that mortgages covering only about 
22 percent of all units that could receive the soft second 
mortgages (representing about 8 percent of all debt outstanding 
in the form of these mortgages) would likely be repaid. For the 
purposes of this estimate, CBO assumes that all owners in that 
category whose section 8 contacts expire after the program 
sunsets would have their mortgages restructured but that only 
10 percent of the remaining 78 percent would. In addition, CBO 
assumes that none of the owners whose mortgage would be written 
off completely would come in prior to the expiration of their 
contracts.
    A second factor that would increase the cost of 
restructuring is the credit subsidies associated with any new 
FHA-insured first mortgages. CBO assumes that the great 
majority--85 percent--of the first mortgages would need credit 
enhancement in the form of FHA insurance because of the 
relatively high risk associated with these mortgages. Those 
credit subsidies are estimated to add about $131 million to the 
cost of restructuring.
    A factor that would make the cost of restructuring less 
expensive than the cost of defaults is avoidance of the 
frictional costs associated with the default and foreclosure 
process. CBO assumes that restructuring would reduce losses to 
the fund by 4 percent of the unpaid mortgage balance compared 
with the cost of a default. Another factor is the use of the 
soft second mortgages instead of the outright payment of claims 
under a default on the current mortgage. Although most of these 
mortgages are expected not to be repaid, CBO estimates that HUD 
would be able to recover about 8 percent of their total unpaid 
balance upon default.
    Capital Grants Program. The availability of funds from the 
capital grant program would reduce the cost of restructuring to 
the FHA fund, but increase the cost of the proposal to the 
government over the long run. CBO estimates that those funds 
alone would reduce the restructuring cost to the fund by $531 
million on a net present value basis. However, the annual 
payments of these grants would generate direct spending of $343 
million over the 1998-2002 period, and would continue for as 
long as 15 years thereafter.
    Reduction in Rents for Units Subject to Mortgage 
Restructuring. For projects participating in the mark-to-Market 
provisions, rents received by project owners would be reduced 
at the time that the mortgage was restructured from their 
current high levels to the going market rent for comparable 
unassisted units. The bill also would authorize the state and 
local government entities that would carry the mortgage 
restructuring process to take over the administration of the 
section 8 contracts from HUD. Thus, the savings in federal 
subsidies from the rent reductions would be offset to some 
extent by the cost of fees that HUD would have to pay the 
administering agencies.
    The Mark-to-Market provisions would result in savings from 
existing section 8 appropriations because of the rent 
reductions in properties that have their mortgages restructured 
prior to the expiration of their section 8 contracts. CBO 
estimates that outlays for existing contracts would be reduced 
by $50 million over the five-year period. In 1998, average net 
savings relative to CBO's baseline would range from $825 to 
over $1,800 per unit per year, depending on the type of section 
8 program under which a unit is assisted. That estimate 
includes the added cost of administrative fees, which are 
assumed to be set at the same level as those received by public 
housing agencies under the section 8 certificate and voucher 
programs--7 percent of the two-bedroom FMR. Because few owners 
are expected to restructure their mortgage prior to contract 
expiration, CBO estimates that savings would be incurred for at 
most 29,000 units, or 20 percent of all units with contracts 
expiring after 2001.
            Other decreases in the Federal cost of section 8 housing
    Under the section 8 rental assistance program, the federal 
government generally pays the difference between a maximum rent 
that owners receive and 30 percent of a tenant's income.The 
bill would modify several other aspects of the section 8 program that 
would affect spending from previous appropriations. CBO estimates that 
those provisions would save the government $977 million on subsidies 
for existing contracts over the 1998-2002 period (see Table 2). They 
would also reduce the amounts of budget authority that would need to be 
appropriated for renewals of expiring contracts in future years.
    Minimum Rents. Section 2202 would allow HUD to set minimum 
rents of up to $25 per month for all project-based section 8 
programs. Based on data provided by HUD, CBO estimates that 
this provision would affect less than 4 percent of assisted 
families and would increase their rent contributions on average 
by about $12 per month. As a result, outlays for existing 
contracts are estimated to decline by about $18 million over 
the five-year period.
    Repeal of Preferences. Section 2203 would repeal federal 
preference rules for admitting new recipients of section 8 
project-based assistance. Current rules give priority to 
applicants on waiting lists who have the most severe housing 
problems and who typically have much lower incomes than other 
eligible families. If this provision were enacted, CBO expects 
that private owners of assisted projects would offer a portion 
of their newly vacant units to working families with somewhat 
higher incomes to serve as role models. Because such tenants 
would pay a larger share of the rent, federal spending for 
existing contracts would decline by an estimated $47 million 
over the five-year period.
    Freeze Rents for High Cost Units. Starting in fiscal year 
1999, section 2003 would bar rent increases in projects 
assisted under the section 8 new construction and substantial 
rehabilitation or moderate rehabilitation programs, if their 
assisted rents exceed the higher of the local market rents for 
similar unassisted units or the fair market rent, which is set 
by HUD at the 40th percentile of local rents. CBO estimates 
that this provision would reduce spending for existing 
contracts by $773 million over the five-year period. We 
estimate that provision would initially affect about three-
quarters of all units assisted under these programs. That 
proportion would decrease by about 4 percent per year, as some 
of the assisted rents would begin to fall below the market 
rents or the FMR. In addition, the number of units affected 
would decline sharply each year as contracts expire. In all, 
CBO estimates the average number of affected units to decline 
from about 787,000 in 1999 to 418,000 in 2002.
    Reduce Rent Increases for Stayers. Starting in fiscal year 
1999, Section 2004 would reduce by 1 percentage point rent 
increases for units occupied by the same families at the time 
of the last annual rent adjustment. (Such families are oftened 
referred to as stayers.) This provision would reduce outlays 
for existing contracts by and estimated $151 million over the 
five-year period. CBO estimates that, in a given year, this 
provision would affect between 80 and 85 percent of assisted 
units that receive an annual rent adjustment. (The provision 
would generate no savings from units that would be affected by 
section 2003.) Because of expiring contracts, the number of 
affected units is estimated to decline from about 430,000 in 
1999 to about 230,000 in 2002.
    Interaction Effects. Implementing the Mark-to-Market 
provisions would reduce the savings from the two provisions 
that would limit rent increases. CBO estimates that this 
interaction effect would reduce overall savings to the section 
8 program by about $12 million over the five-year period. For 
example, when a unit's rent is reduced to market level under 
the Mark-to-Market provisions, that unit would no longer be 
affected by the rent freeze.
            Civil money penalties
    Sections 2313, 2320, and 2321 would provide for civil 
penalties for varous violations of the section 8 and FHA 
programs. Payments of these civil penalties would be recorded 
as miscellaneous receipts to the Treasury. CBO expects that any 
increase in penalty collections would be insignificant.
    Intergovernmental and private-sector impact: This bill 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act of 1995, and would 
not impose any costs on state, local, or tribal governments. If 
they choose, a state housing finance agency or a local housing 
agency would be allowed to act as the designee for HUD in 
implementing mortgage restructuring for FHA-insured multifamily 
housing.
    Previous CBO estimates: On June 13, 1997, CBO provided an 
estimate for the reconciliation recommendations of the House 
Committee on Banking and Financial Services (Title II), as 
approved on June 11, 1997. The House and Senate reconciliation 
recommendations contain identical FHA single-family assignment 
reform and section 8 rental adjustment provisions. The Senate 
reconciliation recommendations also include provisions for 
restructuring FHA-insured multifamily mortgages and two more 
provisions that would affect the federal cost of the section 8 
program. As a result of these additional provisions, the 
budgetary effects of this bill differ from those in the House 
version.
    Estimate prepared by: FHA Single-Family Mortgage 
Insurance--Susanne S. Mehlman; All Other Provisions--Carla 
Pedone.
    Estimate approved by: Paul V. Van de Water, Assistant 
Director for Budget Analysis.

                                                TABLE 2. ESTIMATED CHANGES IN DIRECT SPENDING OF TITLE II                                               
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   1998-2002   1998-2007
                                 1997     1998     1999     2000     2001     2002     2003     2004     2005     2006     2007      total       total  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           FHA SINGLE-FAMILY ASSIGNMENT REFORM                                                          
                                                                                                                                                        
Estimated budget authority...        0     -136     -161     -183     -183     -183     -183     -183     -183     -183     -183        -846      -1,761
Estimated outlays............        0     -136     -161     -183     -183     -183     -183     -183     -183     -183     -183        -846      -1,761
                                                                                                                                                        
                                                        FHA MULTIFAMILY MARK-TO-MARKET PROVISIONS                                                       
                                                                                                                                                        
FHA Insurance Fund:                                                                                                                                     
    Estimated budget                                                                                                                                    
     authority...............     -533        0        0        0        0        0        0        0        0        0        0        -533        -533
    Estimated outlays........     -533        0        0        0        0        0        0        0        0        0        0        -533        -533
Capital grants:                                                                                                                                         
    Estimated budget                                                                                                                                    
     authority...............        0      218      528      340       76       47       42       40       35       30       25       1,209       1,381
    Estimated outlays........        0       16       56       84       91       96      101      106      111      116      121         343         898
Reduce rents to market rents                                                                                                                            
 prior to contract                                                                                                                                      
 expiration:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............        0       -2       -2       -2     -113        0        0        0        0        0        0        -119        -119
    Estimated outlays........        0      \1\       -1       -1      -13      -35      -33      -14       -7       -5       -4         -50        -113
Subtotal mark-to-market                                                                                                                                 
 provisions:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............     -533      216      526      338      -37       47       42       40       35       30       25         557         729
    Estimated outlays........     -533       16       55       83       78       61       68       92      104      111      117        -240         252
                                                                                                                                                        
                                                               OTHER SECTION 8 PROVISIONS                                                               
                                                                                                                                                        
Minimum rent up to $25 per                                                                                                                              
 month for families with                                                                                                                                
 project-based section 8:                                                                                                                               
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -3       -5       -4       -3       -3       -2       -2       -2       -1       -1         -18         -26
Eliminate preference rules                                                                                                                              
 for project-based section 8:                                                                                                                           
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -3       -7      -10      -13      -14      -15      -16      -17      -18      -20         -47        -133
Freeze rents for high cost                                                                                                                              
 units:                                                                                                                                                 
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0        0      -71     -182     -248     -272     -268     -245     -239     -237     -235        -773      -1,997
Reduce rent increases for                                                                                                                               
 stayers by 1 percentage                                                                                                                                
 point: \2\                                                                                                                                             
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0        0      -17      -37      -46      -51      -53      -55      -62      -69      -76        -151        -466
Interaction of mark-to-market                                                                                                                           
 with freeze and stayers                                                                                                                                
 provisions:                                                                                                                                            
    Estimate budget authority        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0    (\1\)    (\1\)    (\1\)        3        9       10        3        2        0        0          12          27
Subtotal other section 8                                                                                                                                
 provisions:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -6     -100     -233     -307     -331     -328     -315     -318     -325     -332        -977      -2,595
                                                                                                                                                        
                                                        TOTAL PROPOSED CHANGES IN DIRECT SPENDING                                                       
                                                                                                                                                        
Estimated budget authority...     -533       80      365      155     -220     -136     -141     -143     -148     -153     -158        -289      -1,032
Estimated outlays............     -533     -126     -206     -333     -412     -453     -443     -406     -397     -397     -398      -2,063      -4,104
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Less than $500,000.                                                                                                                                 
\2\ Estimate includes effects of interaction with freeze provision.                                                                                     

                       Explanation of Provisions

     Subtitle A--Mortgage Assignment and Annual Adjustment Factors

Sec. 2002. Extension of foreclosure avoidance and borrower assistance 
        provisions for FHA single family housing mortgage insurance 
        program.
    This section extends the foreclosure avoidance and borrower 
assistance provisions enacted in 1995. The original Federal 
Housing Administration (FHA) single family mortgage assignment 
program was created in 1959, but was not operational until 1976 
after a court consent decree required the Department of Housing 
and Urban Development (HUD) to implement the program. 
Subsequent modifications to the temporary mortgage assistance 
program and the assignment program required HUD to accept 
defaulted FHA borrowers into the program. As a condition for 
assignment, a borrower's default was be based on circumstances 
beyond his or her control, such as sickness or loss of 
employment and a reasonable expectation that the borrower will 
resume normal and regular mortgage payments and correct any 
loan deficiencies within a reasonable time. The program allows 
up to 36 months in forbearance in anticipation that a mortgagor 
will be able to resume his or her mortgage payments. Since the 
majority of assigned loans are insured under the FHA Mutual 
Mortgage Insurance Fund (MMIF), the cost of the assignment 
program was borne by the Fund.
    The Committee noted in 1995 that if the well-intentioned 
objectives of the current assignment program are not achieved, 
it could cause some $1.6 billion in future losses to the FHA 
MMIF. A General Accounting Office (GAO) study indicated that 
there were currently 71,500 loans in the program and that it 
``operates at a high cost to FHA's Fund and has not been very 
successful helping borrowers avoid foreclosures in the long 
run.'' Approximately 30% of assigned borrowers eventually 
become current and graduate out of the FHA assignment program, 
thereby indicating a current failure rate at approximately 70%. 
Thus, FHA borrowers were paying higher premiums to meet the 
capital ratio standards of the MMIF as well as to cover the 
exorbitant costs of the assignment program. The Committee, 
therefore, chose to replace the existing program.
    The replacement assignment program continued in the 
Committee's proposal provides HUD with authority to pay partial 
mortgage insurance claims limited to the amount equivalent to 
or less than twelve monthly mortgage payments. As a condition 
for accepting a partial claim payment, the lender agrees, on a 
short term basis, to modify the terms of the loan to a level 
where the borrower has the ability to pay and retain the loan 
in its portfolio. In some circumstances, however, where the 
default and modification may be for a longer period of time, 
the replaced program allows HUD to pay the mortgage insurance 
claim and accept the borrower into a new assignment program. It 
is expected that HUD will use private sector sources for 
servicing and foreclosure activities.
Sec. 2003. Adjustment of maximum monthly rents for certain dwelling 
        units in new construction and substantial or moderate 
        rehabilitation projects assisted under section 8 rental 
        assistance program.
    Under the Section 8 new construction, substantial 
rehabilitation, and moderate rehabilitation programs, the 
Department of Housing and Urban Development (HUD) pays the 
owner of a rental housing property the difference between 30 
percent of the tenant's income and a contract rent that was 
established when the project was built. Under the program, 
owners are provided an increase in the contract rent each year 
to cover the effects of inflation on the costs of operating the 
property. The rent increase is known as the annual adjustment 
factor (AAF).
    This proposal would limit the application of AAFs to only 
that portion of the contract rent attributable to the operating 
costs of the project. This restraint in the annual growth in 
the rents paid to owners will only apply to high-cost projects 
with current contract rents in excess of 100 percent of the 
fair market rent for the area. Since the portion of the rent 
goes to pay debt generally will remain fixed each year, it 
should not increase with inflation. This proposal will still 
permit increases sufficient to cover the costs of operating and 
maintaining a development in decent, safe, and sanitary 
condition.
Sec. 2004. Adjustment of maximum monthly rents for nonturnover dwelling 
        units assisted under section 8 rental assistance program.
    For section 8 units for which there has been no resident 
turnover since the preceding annual rental adjustment, this 
section would reduce the AAF by one percent.

                 Subtitle B--Multifamily Housing Reform

Part 1--FHA-Insured Multifamily Housing Mortgage and Housing Assistance 
                             Restructuring

    The Committee recognizes that the cost of renewing expiring 
section 8 rental assistance contracts will begin to grow 
substantially. The Committee believes that the expiration of 
Section 8 contracts should be seized as an opportunity to 
reduce the present costs of the assisted housing programs while 
maintaining the long-term availability and affordability of 
this important federal housing resource. The Federal Government 
has invested billions of dollars in creating and maintaining 
this housing as an importantpublic resource. Since 1994, the 
Committee has recognized that reforming the assisted and insured 
multifamily housing programs of the Federal Government would be an 
enormous challenge due to the program complexities, budgetary costs, 
and social policy implications. The Committee also recognized that the 
inevitable expiration of thousands of housing assistance payment 
contracts could not be ignored and that delays would risk a loss of the 
affordable housing supply as well as tenant displacement.
    In response to this problem, the Committee is incorporating 
S. 513, the Multifamily Assisted Housing Reform and 
Affordability Act of 1997, which represents a major effort to 
address the escalating budgetary costs and operational 
inefficiencies affecting the nation's assisted and insured 
housing programs. This bill continues the Committee's serious 
effort to reform Federal housing programs while ensuring that 
residents continue to be provided decent, safe, and affordable 
housing.
    The Committee bill reduces the ongoing costs of operating 
the Department of Housing and Urban Development's (HUD) insured 
multifamily rental housing portfolio that receive project-based 
rental assistance from HUD's Section 8 programs through a 
restructuring process called ``mark-to-market.'' In addition, 
it expands the enforcement authorities of the Federal 
Government to ensure that the public interest is safeguarded 
and that the assisted housing programs serve their intended 
purposes.
     In 1996, the Committee introduced S. 2042 to authorize HUD 
to reduce oversubsidized contract rents to market rent levels 
by simultaneously restructuring the underlying FHA-insured 
debt. This legislation was reintroduced in the 105th Congress 
as S. 513. In crafting this legislation, the Committee has made 
a great effort to obtain and incorporate the views of those 
involved in rental assisted housing programs, including the 
Administration, private sector apartment owners and managers of 
assisted housing properties, residents, community groups, and 
state and local governments. The Subcommittee on Housing 
Opportunity and Community Development has held three hearings 
on reforming the federal assisted housing programs.
    Project-based section 8 assistance for these properties is 
provided under housing assistance payment contracts that are 
generally 20 years in duration. In many cases, contract rents 
on these properties far exceed market-area rents. Between 1996 
and 2004, Section 8 project-based assistance contracts on over 
800,000 units will expire. Most of these contracts assist 
properties whose mortgages are insured by the Federal Housing 
Administration (FHA). The combination of insurance and rental 
assistance makes this matter extremely complicated and 
difficult since changes to either program can impact the other. 
The failure to continue Section 8 assistance will impede the 
borrower's ability to meet its debt service payment. The 
failure to meet debt service payments will then result in 
substantial costs to the FHA insurance funds since FHA 
insurance guarantees lenders the repayment of project debts if 
borrowers default. However, if the government attempts to 
reduce its insurance liabilities by increasing Section 8 
subsidies, the cost and commitment of future Section 8 
assistance is increased. In other words, this situation has 
created a dilemma where the Federal Government will end up 
paying for this housing either through the continuation of 
direct rental subsidies or through claim payments from the 
mortgage insurance funds.
    Continuing Section 8 assistance at current subsidy levels, 
however, will be extremely difficult in an era of shrinking 
federal resources as indicated in recent appropriation actions. 
Further, the recent budget resolution adopted by the Congress 
places rent limitations on contract renewals that would not be 
adequate for a significant portion of the FHA-insured inventory 
to meet its operating costs and debt service payments. 
Estimates indicate that if project-based housing assistance 
contracts were renewed under existing rent levels, the 
budgetary cost would grow from $1.2 billion in fiscal year 1997 
to almost $8 billion by fiscal year 2006. The Committee also 
recognizes that the Section 8 program has allowed project 
owners to receive more Federal dollars in rental assistance 
than is necessary to maintain properties as decent and 
affordable rental housing. The Department has estimated that 
almost two-thirds of assisted properties have rent levels that 
are higher than comparable market rents. Therefore, renewing 
expiring contracts at current levels is not only unacceptable 
from a housing policy standpoint, but in an era of diminishing 
Federal resources, it is not practical.
    The Committee also recognizes that the assisted housing 
inventory of almost 8,500 properties is a valuable Federal 
investment. This housing currently provides decent, safe, and 
affordable housing to almost 1.6 million families. Although 
federally assisted housing provides much needed affordable 
housing for lower income families and persons, a significant 
portion of this stock is physically and financially distressed.
    Compounding these problems is HUD's inability to administer 
and oversee its portfolio of multifamily housing properties. 
Despite the Administration's recent efforts to correct its 
management deficiencies, the current HUD management structure 
fails to guarantee the viability of the housing stock and does 
not provide adequate assurance to the American taxpayer that 
funds are being spent appropriately. The General Accounting 
Office and the HUD Office of Inspector General (IG) have found 
that even though HUD has various enforcement tools to ensure 
that properties are properly maintained, poor management 
information systems and ineffective oversight of properties 
have impeded HUD's ability to identify problems and pursue 
enforcement actions in a timely fashion.HUD is further hampered 
by the lack of adequate staffing and inadequately trained staff.
    In response to these problems, the Committee developed a 
comprehensive reform proposal that reduces the growing costs of 
providing Section 8 rental assistance while protecting existing 
residents and maintaining the affordability and availability of 
the housing stock. The bill would focus on the most significant 
problems affecting this portfolio, that is, oversubsidized 
housing properties and housing of poor quality. Oversubsidized 
housing properties would have their rental subsidies reduced to 
the level of market comparables or to the minimum level 
necessary to support proper operations and maintenance. To 
achieve these lower rent levels without forcing loan defaults, 
the bill would provide a variety of tools that would reduce the 
project's debt service such as refinancing and restructuring 
the mortgage. In response to the long recognized problems with 
HUD's capacity, the Committee has also designed a new 
administrative and oversight structure to ensure the long-term 
viability of this important housing resource. The Committee has 
proposed to alter significantly the administration and 
management of this portfolio by shifting these responsibilities 
from HUD to capable public entities such as State and local 
housing finance agencies that have demonstrated expertise in 
affordable housing and management. The Committee bill would 
also terminate the government's relationship with owners who 
have failed to comply with federal requirements such as housing 
quality standards and prevent the continued subsidization of 
properties that are not economically viable.

Sec. 2101. Findings and purposes.

    The Committee believes that the assisted and insured rental 
housing programs are too costly, inefficiently administered, 
and too often exposed to mismanagement by private owners. The 
Committee believes that the operational flaws need to be 
corrected in order to protect the financial liability of the 
Federal Government and to ensure that the housing stock 
provides long-term affordable, decent, and safe housing.
    The findings and purposes contained in this section 
describe the problems affecting the current assisted and 
insured rental housing programs and the solutions that will 
make the programs more efficient and effective at the least 
cost to the American taxpayer.
    The Committee recognizes that there exists a need for 
decent, safe, and affordable housing throughout the Nation and 
that the inventory of assisted and insured rental housing is an 
important resource for meeting some of this need. HUD's ``Worst 
Case Housing Needs'' report found that the number of households 
with unmet worst case needs for housing assistance rose to an 
all-time high of 5.3 million households in 1993. The study also 
found that the private market stock of extremely low-rent units 
declined by 478,000 units between 1985 and 1993. The Committee 
recognizes that this housing represents a substantial and 
significant Federal investment in meeting the affordable 
housing needs of an estimated 2 million lower income families 
and persons. The Committee, however, observes that federally 
assisted housing properties are plagued by high subsidy costs 
and mismanagement.
    The Committee finds that the subsidy costs of most of the 
assisted and insured housing inventory are substantially 
greater than those of comparable, unassisted rental units in 
the same housing market. Many of the contracts for this subsidy 
will expire during the next several years. It is estimated that 
if the Federal Government renews these contracts at the same 
rent levels, then the cost of renewing all expiring project-
based rental assistance contracts will increase from $1.2 
billion in fiscal year 1997 to almost $8 billion by fiscal year 
2006. As a result, these costs will require an increasingly 
larger portion of the discretionary budget authority of the 
Department.
    The Committee recognizes, however, that many of these 
rental assistance contracts are attached to properties whose 
mortgages are insured by the Federal Housing Administration 
(FHA). Therefore, if these contracts are not renewed or reduced 
to market levels, FHA's mortgage insurance funds will be 
exposed to huge claims, potentially resulting in tenant 
disruption and forcing HUD to act as the landlord for these 
properties.
    A portion of the federally assisted housing inventory is 
also plagued by mismanagement and some properties are 
physically or financially distressed. These problems have been 
affected by the Department's lack of capacity to administer and 
manage its housing portfolio.
    The Committee finds that the public interest and the 
interests of the housing stock and its residents and 
communities will be served by a system that: reduces the cost 
of Section 8 rental assistance to these properties by reducing 
the debt service and operating costs while retaining the low-
income affordability and availability of this housing; 
addresses the physical and economic distress of this housing 
and the failure of some project managers and owners to comply 
with management and ownership rules and requirements; and 
transfers and shares many of the loan and contract 
administration functions and responsibilities of the Secretary 
to capable State, local, and other entities.
    Therefore, it is the intent of this legislation: (1) to 
preserve low-income rentalhousing affordability and 
availability while reducing the long-term costs of project-based rental 
assistance; (2) to reform the design and operation of Federal rental 
housing assistance programs to promote greater project operating and 
cost efficiencies; (3) to encourage owners of eligible multifamily 
housing projects to restructure their FHA- insured mortgages and 
project-based rental assistance contracts before the expiration of the 
housing assistance contract; (4) to streamline and improve project 
oversight and administration; (5) to resolve the problems affecting 
financially and physically troubled housing projects through 
cooperation with residents, owners, State and local governments, and 
other interested parties; and (6) to grant additional enforcement tools 
to use against those who violate agreements and program requirements, 
in order to ensure that the public interest is safeguarded and that the 
Federal multifamily housing programs serve their intended purposes.

Sec. 2102. Definitions.

    Under this section, the Committee bill defines what types 
of multifamily housing properties would be eligible for ``mark-
to-market.'' This would focus portfolio restructuring on only a 
segment of the assisted and insured housing inventory--
specifically, assisted properties with contract rents above 
market rent levels.
    The Committee has elected to address only the assisted 
portfolio with contract rents above market rents for the 
following reasons. One, the costs of Section 8 rental 
assistance attached to these properties are much greater than 
those in the below market assisted inventory and the budgetary 
costs to maintain this inventory is greater. Therefore, greater 
budgetary savings will be realized on the oversubsidized stock. 
Further, most of the Section 8 contract rents on the below 
market assisted stock are regulated on a budget-based process. 
In other words, the rents are already set at the minimum level 
necessary to meet operating and debt service expenses. On the 
other hand, the above market assisted stock, which is generally 
newer assisted properties, have contract rents that are higher 
than prevailing market rates due to the initial construction 
costs and automatic rent increases that have been provided 
during the term of the assistance contract regardless of 
operating needs.
    Two, restructuring the debt on the below market and older 
assisted portfolio would likely achieve only minimal Section 8 
subsidy savings since the unpaid principal balance (UPB) on the 
remaining mortgage is small. Older assisted properties have an 
average UPB of $14,000 per unit compared to an average UPB of 
$35,000 per unit for newer assisted properties. Therefore, 
allowing below market assisted properties for debt 
restructuring would not be cost beneficial especially when 
considering the time and transaction costs of such a process.

Sec. 2103. Authority of participating administrative entities.

    The Committee believes portfolio restructuring is being 
undertaken to reform and improve the programs from a financial 
and operating perspective, but not to abandon the long-term 
commitment to resident protection and ongoing affordability. 
Balancing the fiscal goals of reducing costs with the public 
policy goals of maintaining affordable housing requires an 
intermediary accountable to the public interest. In light of 
the Department's capacity and management problems documented by 
the Inspector General and the General Accounting Office, the 
Committee believes that capable public entities should act as 
participating administrative entities (PAEs) on behalf of the 
Federal Government. The Committee believes that State housing 
finance agencies (HFAs), local HFAs, public housing agencies, 
and other State and local housing and community development 
entities have the capacity to implement the mortgage 
restructuring program outlined in this bill.
    The Committee expects many public entities to volunteer and 
establish working agreements with the Secretary to implement 
``mark-to-market.'' The Committee believes that State and local 
HFAs can carry out portfolio restructuring consistent with the 
public interest for three primary reasons: (1) State and local 
HFAs already have a track record of working with HUD through 
the multifamily loan risk-sharing programs created under the 
1992 Housing and Community Development Act, multifamily 
mortgage sales program, and the multifamily property 
disposition demonstration program; (2) many State and local 
public entities have experience with the Section 8 programs as 
contract administrators and bond financiers of Section 8 
assisted properties and various other multifamily affordable 
housing programs such as the Low Income Housing Tax Credit 
program and HOME; and (3) HFAs are publicly accountable and 
closely scrutinized by their respective governments.
    This section provides the Secretary with the authority to 
select capable public entities that are determined to meet 
specific criteria related to management capacity, financial 
performance and strength, and expertise in affordable housing. 
Further, public entities that qualified under the mortgage 
risk-sharing and fiscal year 1997 demonstration had to meet 
similar criteria, which the Secretary had to determine, to 
ensure that only capable entities could act on behalf of the 
Federal Government. For example, the 1997 demonstration 
provided the Secretary with the authority to determine and 
select capable public entities. In fact, HUD has selected 42 
state and local housing finance agencies. By allowing these 
qualified entities to automatically qualify, the Committee 
believes thatit will streamline HUD's efforts in implementing 
this legislation in a timely manner.
    These criteria would form the basis for determining if the 
public entity had the capacity, experience, and management 
capability to implement portfolio restructuring in a manner 
that balances the social and fiscal goals of the legislation. 
The first criterion requires that the entity is located in the 
State or local jurisdiction in which the eligible multifamily 
housing project or projects are located. The Committee believes 
that this criterion will ensure that the public entity has some 
knowledge of the local markets and local housing needs. The 
second, third, and fourth criteria, as discussed below, are 
those used by rating agencies to evaluate the financial, 
administrative, and management performance of public entities. 
The second selection criterion requires that the entity has 
demonstrated expertise in low-income affordable rental housing. 
The entity also has to have a history of stable, financially 
sound, and responsible administrative performance. In this 
context, historical financial performance, the experience and 
qualifications of the entity's personnel and financial 
management, and the quality and dependability of reporting and 
monitoring systems would be important factors. Lastly, the 
entity must demonstrate financial strength in terms of asset 
quality, capital adequacy, and liquidity. This would include 
revenue sources, cost controls, loan loss reserves, and various 
characteristics of its real estate assets such as underwriting 
and delinquency rates.
    The Committee encourages qualified PAEs to create 
partnerships or subcontract with various other entities such as 
public housing agencies, private financial institutions, 
mortgage servicers including current mortgagees of FHA-insured 
mortgages, nonprofit and for-profit housing organizations, 
Fannie Mae and Freddie Mac, the Federal Home Loan Banks, and 
other State or local mortgage insurance companies or bank 
lending consortia. Further, coordination or partnerships among 
different State and local housing entities would be encouraged 
under this bill.
    Under this bill, PAEs would be responsible for the entire 
universe of eligible multifamily housing properties in their 
jurisdiction. The Committee is very concerned about PAEs taking 
on the portfolio restructuring responsibilities for only those 
projects where little or no physical, financial, or management 
problems exist. The Committee, however, does not expect that a 
PAE would necessarily take on the entire portfolio in its 
jurisdiction if there are other qualified public entities in 
the jurisdiction that could share the portfolio 
responsibilities.
    In cases where a qualified public entity is not available 
or does not volunteer, the Secretary would be allowed to either 
perform the restructuring in-house or use alternative 
administrators. Alternative administrators could be 
partnerships created out of private and public entities. The 
Committee believes that a public entity should be involved in 
all restructuring deals in order to protect the Federal 
government's investment.
    The Committee bill authorizes PAEs to perform a variety of 
functions in order to reduce project rents, address troubled 
projects, and correct management and ownership problems. PAEs 
would be given portfolio restructuring program responsibilities 
through a working agreement with the Secretary called 
``Portfolio Restructuring Agreements.'' The main elements of 
these cooperative agreements would (1) establish the 
obligations and requirements between the Secretary and the PAE, 
(2) identify the eligible multifamily projects for which the 
PAE is responsible for, (3) require the PAE to review and 
certify comprehensive needs assessments, and (4) identify the 
responsibilities of both the Secretary and the PAE in 
implementing the portfolio restructuring program.
    Under these agreements, PAEs would be authorized to take a 
number of actions in order to fulfill the goals of ``mark-to-
market.'' These actions would include the use of a number of 
tools to restructure the project's debt, screening out bad 
projects and bad owners from the renewal and restructuring 
process, creating partnerships with other housing and financial 
entities, and ensuring the project's long-term compliance with 
housing quality and management performance requirements.

Sec. 2104. Mortgage restructuring and rental assistance sufficiency 
        plan.

    Central to the Portfolio Restructuring Agreement is the 
``mortgage restructuring and rental assistance sufficiency 
plan.'' This plan would be developed at the initiative of the 
owner, in cooperation with the qualified mortgagee currently 
servicing the loan, and with the PAE before contract 
expiration.
    Under these plans, owners who elect to continue Section 8 
rental assistance would be required to determine the most cost-
effective and efficient manner to reduce project-based 
assistance rents, determine the project repair and capital 
needs, and ensure that competent management is provided to the 
project. Each plan would also: require the owner to take such 
actions as necessary to rehabilitate, maintain adequate 
reserves, and maintain the project in decent and safe 
condition; require the owner to maintain affordability and use 
restrictions for the remaining term of the existing mortgage 
and, if applicable, the remaining term of the second mortgage; 
and meet subsidy layering requirements established by the 
Secretary. The PAE would establish appropriate affordability 
and use restrictions that are consistent with the post-
restructuring rent levels, but in a manner that does not impact 
the physical and financial viability of the project. In other 
words, the Committee does not expect PAEs to set affordability 
and use restrictionsthat would compromise financial stability 
so that debt service and operating expense payments could not be met.

Resident and community participation

    One of the most important elements of the Committee bill is 
the opportunity and ability of residents, local governments, 
and community groups to participate in the mortgage 
restructuring process. The Committee believes that those who 
are most affected by renewal and restructuring decisions--the 
residents, local governments, and communities--must be given 
the opportunity to provide meaningful input. Resident and 
community participation, however, should not be used to unduly 
delay the renewal and restructuring process.
    Residents, local governments, and community entities would 
be provided an opportunity to participate meaningfully in the 
discussion of major issues such as physical inspections, a 
project's eligibility for restructuring or renewal, and the 
Portfolio Restructuring Agreement. Under the renewal and 
restructuring procedures, these affected parties would be 
given: the rights to timely and adequate notice of proposed 
decisions, timely access to all relevant information, an 
adequate period of time to analyze and comment on all relevant 
information, and if requested by any of the parties, a meeting 
with the PAE and other affected parties.
    The Committee bill also facilitates the participation of 
residents and community groups by authorizing an annual fund of 
$10 million for capacity building and technical assistance 
purposes. These funds are intended to be used by resident 
groups and nonprofit organizations to assist residents and 
community groups in understanding the renewal and restructuring 
process and to facilitate their participation in key decisions 
that affect their lives. Further, this fund could be used to 
assist residents and nonprofits in developing plans to acquire 
projects where owners have expressed an interest to sell.

Rent setting

    One of the most important elements of restructuring is 
establishing the appropriate rent levels at the time of 
restructuring. In addition, the Committee was concerned about 
the administrative burden in rent setting. The rent level 
affects financing and the project's future viability due to the 
uncertainty facing future congressional appropriations for 
contract renewals. The Committee considered a variety of rent 
setting approaches such as using (1) a formulaic approach that 
would set the rents based on some percentage of HUD's fair 
market rent (FMR) system, (2) market rents based on comparable 
properties in the same locality, and (3) rents based on 
operating costs (budget-based).
    The Committee bill reflects the belief that rents should be 
set at a reasonable level near or at market levels but through 
a process that will not require a significant amount of 
resources or time. The bill would set rents at comparable 
market rent levels where comparable rents are available and 
easily determined. The Committee believed that setting rents at 
comparable market rent levels was appropriate so that the 
Federal Government was not oversubsidizing properties and so 
that rent levels were not more than what the property could 
command on the market.
    In addition, the Committee was concerned that HUD's 
existing FMR system is problematic in some respects and in 
specific cases results in either an over-estimate or under-
estimate of prevailing market rents in metropolitan or regional 
areas. For example, in cities or states with rent regulated 
apartments, the controlled or stabilized rents have been 
included in the FMR calculations, despite their relative lack 
of relevance in determining the costs of operating or providing 
housing--resulting in an underestimate of prevailing market 
rents.
    The Committee, however, recognized that many assisted 
properties were built in areas where the private market would 
not build properties because of the neighborhood conditions and 
low-income clientele. Also, the Committee was concerned about 
the inherent subjectivity in determining market rents and the 
past problems with other programs such as the Low Income 
Housing Preservation and Resident Homeownership Act. In cases 
where no comparable properties exist, the Committee bill would 
establish rents at 90 percent of the FMR. The Committee used 90 
percent of FMR as a proxy for comparable market rents since the 
national median of comparable market rents is about 90 percent 
of FMR.
    The Committee also recognized that a small portion of the 
inventory could not meet its operating expenses at market rent 
levels even if the entire debt service was eliminated. In these 
cases, the Committee bill would allow for exception rents set 
at the minimal level necessary for proper operations and 
maintenance. Exception rents would be set using a budget-based 
method. Budget-based exception rents would be capped at 120 
percent of the FMR and only 20 percent of the inventory's units 
could receive these rents. The Committee established these 
limitations to minimize the administrative work for the PAEs or 
Secretary in determining these rents. A recent study by HUD 
indicated that about 20 percent of the inventory would need 
exception rents.
    The Committee, though, is sensitive to the reality that 
many of the propertieswhich may require budget-based exception 
rents may be concentrated in certain metropolitan or regional areas. To 
address this problem, the Secretary has the authority to waive the 20 
percent limitation in any jurisdiction which can demonstrate a special 
need. The Committee expects that the Secretary shall utilize this 
important discretionary tool to address the unique circumstances of 
various communities and regions throughout the nation. The Secretary 
should consider relevant local or regional conditions to determine 
whether good cause exists in granting such a waiver. Such factors 
should include, but should not be limited to: (1) whether the 
jurisdiction is classified as a ``high cost area'' under other federal 
statutes or programs; (2) prevailing costs of constructing or 
developing housing; (3) local regulatory barriers which may have 
contributed to increased development costs; (4) State or local rent 
control or rent stabilization laws; (5) the costs of providing 
necessary security or services; high energy costs; the relative age of 
housing in a jurisdiction; or (6) other factors which may have 
contributed to high development or operational costs of affordable 
housing in a given jurisdiction.
    The Committee believes that such waivers will be used on a 
limited basis. Nonetheless, the Committee firmly intends that 
the Secretary should grant due deference to the need to 
maintain affordable housing and preserve the federal investment 
in high cost areas. Therefore, the Committee instructs the 
Secretary to properly utilize this authority based on local 
factors. Such concerns should outweigh the federal desire for a 
``one-size-fits-all'' solution which may be unworkable in 
practice in certain jurisdictions.

Exempt multifamily housing projects

    In addition to the assisted and insured properties with 
rents below market rent levels, the Committee bill would exempt 
two other types of properties from debt restructuring. 
Properties with mortgages financed through obligations that 
prohibit a mortgage modification or rent reduction would be 
exempt from the Committee's restructuring program. Most of 
these properties receive Section 8 new construction or 
substantial rehabilitation assistance and are financed by State 
and local housing agencies. The Committee is sensitive to these 
contractual obligations and believes that the Federal 
Government should honor those agreements. The Committee, 
however, is concerned about the high subsidy costs and rent 
levels of these properties and therefore, allows the Secretary 
to reduce the rents using a budget-based method, without 
affecting the financing. The other class of exempt properties 
would be those where restructuring would not result in 
significant Section 8 savings to the Federal Government. In 
these cases, the Committee expects the PAEs to perform a cost-
benefit analysis of the estimated Section 8 savings compared to 
the transaction costs of conducting debt restructuring.
    The Committee bill would not automatically renew the 
contracts on exempt properties. All properties would be subject 
to restructuring and renewal prohibition criteria. The 
Secretary and its designees would have to screen all properties 
with expiring contracts before a renewal decision is made. This 
would encompass reviewing the ownership, management, and 
economic viability of the properties to ensure that the Federal 
Government is only assisting viable properties that have been 
managed and operated well.

Sec. 2105. Section 8 renewals and long-term affordability commitment by 
        owner of project.

    Under this section, owners whose projects have been 
restructured under this program would be required to accept 
section 8 renewals for as long as the existing mortgage and if 
applicable, the second mortgage remains outstanding.

Sec. 2106. Prohibition on restructuring.

    One of the most critical functions of portfolio 
restructuring will be screening owners and properties under the 
federal assistance programs. The Committee recognizes that the 
Federal Government did not adequately screen owners/developers 
and proposals for construction or rehabilitation at the outset 
of the assistance programs and as a result, a segment of the 
inventory has been fraught with waste, fraud, and abuse.
    The Committee believes that the renewal and restructuring 
process provides the Federal Government an important 
opportunity to cleanse the inventory of bad project owners and 
properties which hurt residents and communities, and threaten 
the financial interests of the American taxpayer. Some owners 
and managers have engaged in practices which do not warrant 
continued federal assistance. Some properties are in such 
distressed physical condition that the costs of rehabilitation 
or assistance may be unfeasible. The Committee expects that 
those properties whose repair and rehabilitation estimates 
exceed $5,000 per unit be carefully examined before considering 
renewal or restructuring. It is highly questionable why a 
project would be in a physically or financially distressed 
condition when the assistance programs have provided high 
contract rent subsidies with generous automatic rent increases. 
In these cases, the Committee suspects that the property was 
either poorly managed or exists in a market where the housing 
is not sustainable.
    The Committee bill lays out the criteria which PAEs would 
use to determine which properties would qualify for renewal and 
restructuring. These criteria would primarilyfocus on ownership 
and management performance and the economic viability of the 
properties. All properties, whether FHA-insured or not, would be 
subject to this screening process. The Secretary may choose not to 
renew a contract or consider a mortgage restructuring if: (1) the owner 
has engaged in adverse financial or managerial actions, including the 
material violation of a law or regulation, the material breach of a 
Section 8 contract, the repeated failure to make mortgage payments, or 
the failure to maintain the property; (2) the owner fails to follow the 
procedures of this title; or (3) the poor condition of the property 
cannot be remedied in a cost-effective manner. Owners or purchasers who 
have been rejected would be provided an opportunity to dispute the 
basis for the rejection and an opportunity to remedy the problem.
    The Secretary or PAE would be provided the discretion in 
affirming, modifying, or reversing any rejection. The 
Committee, however, expects that modifications or reversals 
should be carefully used. The Committee believes that owners 
should be provided a fair and reasonable process for 
challenging rejections but that the process should not be 
administratively burdensome or allow for repeated challenges.
    Properties or owners that have been rejected under the 
prohibition criteria would be dealt with by the Secretary in a 
number of possible ways. One option would be to sell or 
transfer the project to a qualified purchaser. The Committee 
bill would give a preference to resident organizations and 
tenant-endorsed community-based nonprofit and public agency 
entities. If sale or transfer to a qualified purchaser is 
accepted, the project could then reenter the mortgage 
restructuring process. Another option that could be exercised 
by the Secretary would be partial or complete demolition of the 
project if the project is in such poor condition that 
rehabilitation would not be cost-effective. The Secretary could 
also exercise its foreclosure and property disposition powers 
to deal with troubled projects and owners. Under any 
circumstance where a project is disqualified from the 
restructuring process, residents would be protected with the 
provision of tenant-based assistance and reasonable moving 
expense funds.
    The Committee expects that the Secretary or its 
intermediaries consult with all affected parties when 
considering a restructuring or renewal proposal or when dealing 
with owners or properties that may be disqualified. The 
Committee understands that the current HUD use of Special 
Workout Assistance Teams (SWAT) has done a fairly adequate job 
of consulting with all affected parties when dealing with 
troubled properties and owners. The Committee, however, expects 
that the SWATs or intermediaries to consider more creative 
options in resolving troubled properties rather than just 
converting all project-based assistance to tenant-based 
assistance. Some options such as transfers or sales to 
nonprofits and resident-sponsored entities would be one 
possibility.

Sec. 2107. Restructuring tools.

    The Committee recognizes that restructuring a multi-billion 
dollar inventory is a challenging and risky task. Therefore, 
the Committee believes that those responsible for managing this 
inventory should have the maximum number of tools at its 
disposal. Since the majority of assisted projects could not 
meet operating and debt service payments at or near market rent 
levels, the Committee bill authorizes a number of tools that 
would allow projects to operate at reduced rent levels without 
causing mortgage defaults or harm to residents. The 
restructuring tools would allow the Secretary or its 
intermediaries (PAEs) to reduce rent levels with a 
corresponding modification of the debt service. Tools would 
also be provided to the PAEs to facilitate the refinancing of 
new loans.
    Refinancing of debt financed at high interest rates and the 
restructuring of debt through a bifurcation of the mortgage 
would be the two primary tools provided under the Committee 
bill. In some cases, projects developed with Section 8 new 
construction, substantial rehabilitation, or moderate 
rehabilitation assistance were financed with high interest rate 
loans. The Committee believes that a refinancing of part or all 
of the mortgage would reduce the debt service and therefore, 
reduce Section 8 contract rents and the long-term need for 
Section 8 rental assistance.

Debt restructuring

    The second primary tool, bifurcation of the mortgage, would 
also be used to reduce debt service payments while preventing 
adverse tax consequences to owners. Under current tax law, debt 
forgiveness or restructuring could result in the triggering of 
a large income tax liability on the owners and investors 
without generating sufficient cash with which the owners and 
investors could pay the tax. As a result, an effective tax 
solution is needed to avoid resistance and delays from owners 
and investors. Debt forgiveness or restructuring can result in 
an event that reduces the outstanding mortgage that is owed by 
the owners and investors. This reduction in the mortgage amount 
will result in a tax liability--referred to as ``cancellation 
of indebtedness'' or COD. COD is generally treated as ordinary 
taxable income under the Internal Revenue Code. Based on these 
considerations, the Committee rejected debt forgiveness 
proposals, both to avoid a loss to the federal treasury and to 
avoid granting a windfall gain to owners and investors.
    The Committee believes that the tax risks to debt 
restructuring can be addressed within the current Internal 
Revenue Code without requiring a statutory amendment using the 
approach provided under the bill. After consultation with 
Department of Treasury officials, and staff from the Joint 
Committee on Taxation and Senate Finance Committee,the 
Committee developed a ``bifurcated'' mortgage approach. Under this 
approach, the existing mortgage would be split into two obligations. 
The first piece would be determined on the amount the mortgage could be 
supported by the rental income stream. Payment on the second piece 
would be deferred until the first mortgage is paid off or from excess 
project income.
    It is the Committee's firm intention that workouts 
utilizing mortgage bifurcation will be implemented in a manner 
which will not result in a cancellation of indebtedness. This 
approach will effectively achieve the Committee's goals of 
reducing the Section 8 subsidy needs while simultaneously 
reforming the program and the stock. The Committee points to 
the Section 223(f) refinancings which occurred during the mid-
1970s, as well as other current industry mortgage bifurcation 
practices, as models for tax-neutral debt restructuring. The 
Committee instructs the Department of Treasury and the Internal 
Revenue Service to view the mortgage bifurcation proposal in 
light of its goals of reducing costs while protecting the 
federal investment in affordable housing.
    The Committee believes that, based on analogous structures, 
a bifurcated mortgage would not result in an immediate tax 
liability even if the second mortgage accrued at interest at a 
below-market rate. Section 7872 of the Code provides for 
exemptions to the Original Issue Discount (OID) rules for 
transactions, similar to the proposed bifurcation, where 
government funding is involved. Like these similar transactions 
(such as the Flexible Subsidy program), debt restructuring 
under ``mark-to-market'' encompasses (1) new government funding 
in the form of a payment from the FHA insurance fund, (2) 
public purpose in the transaction creating the new funding, (3) 
a process initiated and controlled by the Federal Government, 
and (4) applicability limited to HUD properties. Based on these 
elements, the Committee believes that the tax risks associated 
with ``mark-to-market'' can be prevented, and looks to the 
Treasury to confirm the validity of this approach.

Credit enhancement

    The Committee bill also allows the use of FHA mortgage 
insurance and other forms of credit enhancement to facilitate 
the restructuring program. The Committee strongly believes that 
FHA mortgage insurance and other forms of credit enhancement 
are necessary for debt financing considering the short terms of 
Section 8 contract renewals that are being provided in recent 
appropriation acts. Without long term Section 8 contracts, debt 
financing would be extremely difficult for restructured 
projects. If no insurance is provided when mortgages are 
restructured, debt restructuring costs would likely be higher 
than if the mortgages were restructured with insurance because 
private lenders would set the terms of the loans to reflect the 
risk of default. In other words, if private financing was 
obtained without insurance, financiers would likely heavily 
discount the debt to reduce their risks. The Committee 
understands that these projects could not have been built or 
financed without the original FHA mortgage insurance due to the 
inherent risks in developing low-income housing and the areas 
that these projects were built in.
    The Committee expects that the use of FHA mortgage 
insurance and other forms of credit enhancement will be 
explored carefully to minimize the default risk to the Federal 
government. In some cases, mortgage insurance may not be 
necessary when owners can obtain reasonable financing without 
insurance. Thus, the Committee bill provides broad discretion 
to explore and create new forms of credit enhancement that 
would reduce the default risk and credit subsidy costs to the 
Federal government. The Committee bill also includes the use of 
mortgage insurance under risk-sharing arrangements currently 
practiced under the mortgage risk-sharing programs enacted 
under the Housing and Community Development Act of 1992. 
Mortgage insurance under these risk-sharing arrangements would 
be encouraged by not applying the current statutory limitations 
on the number of units that can be made available for mortgage 
insurance under this program.

Residual receipts

    Another important tool provided is the use of residual 
receipts funds. Certain project owners are restricted in the 
amount of profits they can receive from a project's annual 
surplus cash after expenses. Residual receipts are surplus 
funds in excess of profits. Project owners are required to 
deposit residual receipt funds into an account but are unable 
to use these funds except for certain circumstances such as 
repairs. Some housing industry experts believe that residual 
receipt accounts are quite significant and growing. For those 
projects that had residual receipts accounts, one property 
owner estimated that the average residual receipts account was 
about $3,500 per unit or $402,500 per project. On a national 
scale, the residual receipts balance could be as high as $300 
million. The Committee would allow the Secretary and PAEs to 
acquire these funds for repair and maintenance purposes. Since 
these funds cannot be acquired before the mortgage is repaid, 
the Committee bill would allow the acquired funds to be 
expedited by providing an owner with a share of the receipts, 
not to exceed 10 percent of the account. Any acquired residual 
receipt funds would be used for providing rehabilitation 
grants.

Rehabilitation assistance

    One of the most significant problems that the Committee 
bill addresses is the deferred maintenance and rehabilitation 
needs of some properties in the HUD inventory. A recent HUD 
study estimated that the deferred maintenance and 
rehabilitation needs are about an average of $9,000 per unit. 
HUD's finding, however, is questionable considering recent 
evaluations by the General Accounting Office and comprehensive 
needs assessments that are required under current law.
    The Committee bill provides rehabilitation assistance but 
limits the amount to $5,000 per unit and requires a 25 percent 
match from the owner as discussed above. The purpose of this 
matching requirement is to encourage owners to invest their own 
funds in their properties and to reduce the risk to the Federal 
Government. This requirement is modeled after the Capital 
Improvement Loan program. Rehabilitation assistance would be 
provided either through project reserves, grants funded from 
acquired residual receipts, additional debt writedown as part 
of the mortgage restructuring transaction, or from the 
rehabilitation grant program established under section 2201.

GSEs' affordable housing programs

    The purpose of subsection (b) is to provide technical 
assistance and other support under the current GSEs' affordable 
housing programs for maintaining the availability of affordable 
housing. This subsection should not be interpreted as to impose 
any new regulatory mandate on Fannie Mae or Freddie Mac to 
continue existing Section 8 contracts in their current 
subsidized form.

Sec. 2108. Shared savings incentive.

    To maximize the participation of capable public entities 
into the portfolio restructuring program and to ensure that the 
American taxpayer is paying the least cost to maintain the 
affordable housing stock, the Committee bill includes a shared 
savings incentive provision. Under this provision, the 
Secretary would be able to negotiate with public third parties 
to establish agreements where the Federal Government and third 
parties would share in any savings resulting from restructuring 
transactions.

Sec. 2109. Management standards.

    Participating administrative entities would be required to 
establish and implement management standards related to 
conflicts of interest between owners, managers, and contractors 
with an identity of interest. These standards would be 
developed pursuant to guidelines established by the Secretary 
and consistent with housing industry standards.

Sec. 2110. Monitoring of compliance.

    Under this section, each PAE would be required to establish 
contractual agreements with project owners to ensure long-term 
compliance with the provisions of this part. The agreements 
would provide for the enforcement of the provisions and 
remedies for breach of those provisions.

Sec. 2111. Review.

    To ensure compliance with this legislation, HUD would be 
required to conduct annual reviews on the actions taken under 
``mark-to-market'' and the status of every multifamily 
property. HUD would have to annually report the findings of 
this review to Congress.

Sec. 2112. GAO audit and review.

    This section requires the Comptroller General of the United 
States to conduct an audit to evaluate a representative sample 
of all eligible projects and the implementation of portfolio 
restructuring. These reports would have to contain a 
description of the audit and any legislative recommendations.

Sec. 2113. Regulations.

    This section requires HUD to use negotiated rulemaking 
procedures for developing regulations necessary to implement 
``mark-to-market.'' The ``mark-to-market'' demonstration 
program enacted previously would be repealed.

Sec. 2115. Termination of authority.

    The program established under this subtitle would be 
repealed on October 1, 2001, but would not apply to projects 
that have already entered into binding commitments.

                    Part 2--Miscellaneous Provisions

Sec. 2201.--Rehabilitation grants for certain insured projects.

    This section establishes new authority for the Secretary to 
recapture interest reduction payment (IRP) subsidies from 
section 236 insured multifamily housing properties for purposes 
of providing rehabilitation grants to properties that suffer 
from deferred maintenance.

Sec. 2202. Minimum rent.

    The Secretary would be authorized to require project-based 
Section 8 assisted households to pay minimum rents up to $25 a 
month.

Sec. 2203. Repeal of Federal preferences.

    This section repeals Federal preferences for all project-
based Section 8 programs.

                     Part 3--Enforcement Provisions

    Part 3 of the Committee bill contains a number of 
provisions that will minimize the incidence of fraud and abuse 
of federally assisted programs. Such key provisions include (1) 
expanding HUD's ability to impose sanctions on lenders, (2) 
expanding equity skimming prohibitions, and (3) broadening the 
use of civil money penalties. Many of these provisions were 
included in previous legislative bills such as the 1994 
``Housing Choice and Community Investment Act'' (S. 2281), S. 
1057, which was introduced in the 104th Congress, and the 
Administration's 1996 legislative proposal ``The Housing 
Enforcement Act of 1996.'' These provisions will assist the 
Secretary in ensuring that federal funds are spent as intended.

          Subpart A--FHA Single Family and Multifamily Housing

Sec. 2311. Authorization to immediately suspend mortgagees.

    HUD conducts a number of loan servicing activities in order 
to ensure that FHA-insured projects are providing decent, safe, 
and sanitary housing. One of these activities is to review 
inspection reports from its mortgagees. According to HUD 
regulations, mortgagees are required to perform annual physical 
inspections of all HUD insured projects. Mortgagee inspections 
can be an effective and useful tool to not only ensure that 
projects are providing good housing, but also to minimize 
duplication of effort between mortgagees and HUD and to reduce 
HUD staff responsibilities. Unfortunately, the HUD Office of 
Inspector General has found numerous instances where 
inspections are either inadequate or not performed. Further, 
some mortgagees have failed to protect the financial interests 
of the Federal government by misappropriating mortgagor funds 
and failing to remit payments collected from mortgagors.
    The Committee bill addresses these problems by allowing 
HUD's Mortgagee Review Board to immediately suspend mortgagees 
where there is adequate evidence that the mortgagee's actions 
are threatening or resulting in financial losses to the 
American taxpayer. Immediate suspension is currently available 
to other federal entities such as Ginnie Mae.

Sec. 2312. Extension of equity skimming to other single family and 
        multifamily housing programs.

    The Committee bill would extend the coverage of the equity 
skimming penalty to all multifamily and all single family 
programs. The equity skimming penalty would be extended to all 
insured, held, or acquired mortgages, Section 202 insurance 
program, and insured and held mortgages under the section 542 
mortgage insurance programs. Equity skimming is the act, 
typically by an owner or management agent, of willfully using 
any project funds for purposes not attributable to operating or 
maintenance expenses. A similar provision was included in the 
Committee's 1994 housing legislation and S. 1057.

Sec. 2313. Civil money penalties against mortgagees, lenders, and other 
        participants in FHA programs.

    The National Housing Act is amended by S. 513 to authorize 
the Secretary to levy civil money penalties against persons or 
entities who knowingly submit false information, make false 
statements, or withhold information from the Secretary in 
connection with a FHA insured mortgage or title I application.
    This provision would strengthen HUD's ability to deter 
unlawful actions by participants in FHA insurance programs. 
Civil money penalties will also strengthen the Secretary's 
ability to protect program abuses.

                 Subpart B--FHA Multifamily Provisions

Sec. 2320. Civil money penalties against general partners, officers, 
        directors, and certain managing agents of multifamily projects.

    The Committee bill also closes a loophole in the current 
statute regarding civil money penalties. Specifically, the 
Secretary would be authorized to use civil money penalties on 
general partners, officers, directors, and certain managing 
agents of multifamily mortgagors. Civil money penalties would 
also be expanded to cases where a mortgagor has failed to 
maintain the project in good condition and where a mortgagor 
hasfailed to provide adequate management.
    Civil money penalties under current law has had limited 
impact since the term ``mortgagor'' has been interpreted to 
mean the entity (instead of the person) that owns the project.

Sec. 2321. Civil money penalties for noncompliance with section 8 HAP 
        contracts.

    Coverage of civil money penalties would also be extended to 
include all project-based section 8 assistance programs. This 
section would allow the Secretary to impose civil money 
penalties against project owners that have failed to comply 
with the rules and terms of section 8 contracts. This would 
assist the government's efforts in ensuring that owners 
maintain their assisted units in decent, safe, and sanitary 
condition.

Sec. 2322. Extension of double damages remedy.

    This section amends section 421 of the Housing and 
Community Development Act of 1987 to include multifamily 
housing for the elderly and persons with disabilities under 
section 202 of the Housing Act of 1959. In addition, the double 
damages remedy would be extended to multifamily housing 
properties with mortgages insured under the risk-sharing 
programs authorized under section 542 of the Housing and 
Community Development Act of 1992.

Sec. 2323. Obstruction of Federal audits.

    Section 2323 would expand the criminal penalties provisions 
under section 1516 of title 18 of the United States Code. This 
would address problems being experienced by HUD's Office of 
Inspector General in performing audits of HUD program 
participants.


             DISSENTING VIEWS OF SENATOR ERNEST F. HOLLINGS

    The Committee has been tasked with a totally unrealistic 
objective in trying to meet our Reconciliation Instructions to 
raise over $26 billion in spectrum auctions. The underlying 
assumptions are without basis. There is no way the FCC can 
raise $26 billion from spectrum auctions. Yet, here we are once 
again being told that shortfalls in the budget can be made up 
by spectrum auctions--the Congress' favorite way to plug a 
budget number.
    The assumptions in the Budget Resolution stand 
communications policy on its head. The best example of why the 
Congress should not micromanage the FCC's process was last 
fall's Omnibus Appropriations Act. The budget negotiators fell 
short on their projected receipts and decided to make up the 
difference through spectrum auctions. The problem, however, was 
that the Congressional Budget Office (CBO) told the budget 
negotiators what spectrum to auction, what limitations could be 
placed on its use and that the receipts from this specific 
auction had to be collected in FY 1997. The result, of course, 
is that Congress dictated the auction which netted only 13 
million dollars--far less than the 2.8 billion dollars 
originally projected. Some licenses were assigned for only ONE 
DOLLAR!
    When will the Congress learn from its own mistakes? The 
legislation reported by the Committee calls for the following 
auctions in an effort to meet its target:
    1. Auction of the returned analog spectrum.--The budget 
proposal requires an auction of 78 MHZ of analog spectrum in 
2002 with a return of the analog spectrum in 2006. There are 
many problems inherent in this. First, the proposal backloads a 
majority of the auction revenue for FY 2002 but the winning 
bidders will not have access to the spectrum for at least 4 
years. In a effort to protect consumers from this short-sighted 
policy, the Committee adopted a provision that requires the FCC 
``to extend or waive this date for any station in any 
television market unless 95 percent of the television 
households have access to digital local television signals, 
either by direct off-air reception or by other means.''
    This provision is necessary because the transition to 
digital television is fraught with many uncertainties, such as 
tower construction, potential zoning delays, and most 
importantly, no one knows how quickly consumers will respond to 
the new technology. Even if local stations are transmitting 
digital signals, most consumers are not likely to go out and 
buy a new television set until their current sets are no longer 
needed. Most consumers keep their sets at least thirteen years 
with a nationwide average of 2.4 television sets per household.
    2. Auction of 36 MHz of spectrum from Channel 60-69.--This 
spectrum was originally set aside for the transition to digital 
television. Again, here the Congress is micromanaging the job 
of the FCC and codifying a policy that could have dire 
consequences to the American consumer. No one knows if the FCC 
computer model will actually work. The FCC's Table of 
Allocations likely will be challenged at the FCC and possibly 
in the courts. The budget deal will enshrine the FCC's plan 
before we know its implications and possible foreclose 
necessary revisions to the FCC's plan. Such a result is again 
unacceptably shortsighted. It is highly unlikely this proposal 
will result in a valuable block of spectrum by 2002.
    3. ``Spectrum Penalty''.--The Budget Committee assumed a $2 
billion ``penalty fee'' to be levied against broadcasters. The 
Commerce Committee deleted this provision because there was no 
basis for it other than to fill in a budget gap. This had to be 
one of the more incredulous proposals of all.
    4. Auction of additional 120 MHz.--This proposal also falls 
short of reality. FCC Chairman Reed Hundt wrote the House 
Commerce Committee on June 9, 1997 informing the Committee that 
the FCC could not identify that amount of spectrum for an 
auction. Now, if the FCC submits on the record that there is no 
spectrum available, how can the Budget Committee second guess 
the expert agency?
    Finally, the Committee eliminated several other proposals 
that were counter to sound communications policy, were totally 
unrealistic and obviously pulled out of ``thin air.'' 
Unfortunately, it will be the American consumer who will not 
only pay the price for these shortsighted decisions in terms of 
bad policies, but when these auctions fail, we once again will 
prove that spectrum auctions are far too speculative and will 
not produce a balanced budget.


               congressional budget office cost estimate

Reconciliation recommendations of the Senate Committee on Commerce, 
        Science, and Transportation (Title III)

    Summary: Title III contains three subtitles aimed at 
providing budgetary savings from auctioning licenses for use of 
portions of the electromagnetic spectrum, imposing spectrum 
lease fees on certain users of the electromagnetic spectrum, 
and extending previously enacted increases in vessel tonnage 
duties. CBO estimates that enacting the provisions of Title III 
would produce note budgetary savings totaling $15.9 billing 
over the 1998-2002 period and $16.9 over the 1998-2007 period.
    This title contains no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act of 1995 (UMRA) and 
would not impose any costs on state, local, or tribal 
governments. The title would extend an expiring private-sector 
mandate on owners or operators of vessels that enter U.S. 
ports. UMRA is unclear whether extension of an expiring mandate 
would impose new direct costs on the private sector. In any 
case, such costs would not exceed the $100 million threshold 
specified in UMRA.
    Description of major provisions: Subtitle A contains 
several provisions relating to assignment of licenses for using 
the electromagnetic spectrum. It would instruct the Federal 
Communications Commission (FCC) to use competitive bidding to 
assign licenses for most mutually exclusive applications of the 
electromagnetic spectrum, and it would extend the FCC's 
authority to conduct such auctions through fiscal year 2007. 
Under current law, that authority expires at the end of fiscal 
year 1998. The subtitle would also broaden the commission's 
authority to use competitive bidding to assign licenses. 
Current law restricts the use of competitive bidding to those 
mutually exclusive applications in which the licensee would 
receive compensation from subscribers to a communications 
service.
    In addition, Subtitle A would require the FCC and the 
National Telecommunications and Information Administration 
(NTIA), to make available blocks of spectrum for allocation for 
commercial use and to assign the rights to use those blocks by 
competitive bidding by the end of fiscal year 2002. The 
additional licenses to be assigned by competitive bidding would 
grant the right to use 145 megahertz (MHz) currently under the 
FCC's jurisdiction, of which 85 MHz must be located below 3 
gigahertz (GHz), and an additional 20 MHz also below 3 GHz to 
be identified by the NTIA and transferred to the FCC's 
jurisdiction. The subtitle also would authorize federal users 
of the electromagnetic spectrum that have been identified by 
NTIA for relocation to receive compensation from the private 
sector to facilitate the relocation of the agency to another 
band of spectrum.
    Under current law, a part of the spectrum currently 
reserved for television broadcasting will become available for 
reallocation as broadcasters comply (over the next several 
years) with the FCC's direction to adopt digital television 
broadcasting technology to replace the current analog 
technology. This subtitle would make available for licensing 
and assignment by competitive bidding certain frequencies that 
are currently allocated for analog television broadcasting, 
including a part of the spectrum between 746 MHz and 806 MHz 
(frequencies currently allocated for primary use by ultra high 
frequency television broadcasting on channels 60 through 69).
    Subtitle B would direct the FCC to allocate 12 MHz of 
spectrum available of a nationwide basis to private wireless 
services. The subtitle would direct the FCC to charge a lease 
fee, based on the value of the frequencies, to private wireless 
services granted access to the 12 MHz of reallocated spectrum. 
The subtitle stipulates that no fee would be imposed on 
licensees holding the right to use frequencies that are 
currently allocated to private wireless services. The subtitle 
also would prevent the FCC from using auctions to assign 
virtually any license for private wireless services. Private 
wireless services are land mobile telecommunications systems 
that are operated by private companies and nonprofit 
organizations for their internal use, rather than for the 
provision of telecommunications services to subscribers.
    Subtitle C would extend previously enacted vessel tonnage 
duties through fiscal year 2002.
    Estimated cost to the Federal Government: CBO estimates 
that the provisions of Title III would reduce direct spending 
by about $15.9 billion--$15.7 billion from spectrum auctions 
and $196 million from extending vessel tonnage fees--over the 
next five years. In addition, CBO estimates that enacting the 
title would increase costs to the FCC, subject to appropriation 
of the necessary funds, by less than $500,000 over fiscal years 
2001 and 2002 for completing a study on conversion from analog 
to digital television. (Additional small discretionary expenses 
would be incurred for subsequent studies after 2002.) Table 1 
summarizes the estimated budgetary impact of Title III over the 
1998-2002 period, and Table 2 displays detailed estimates 
through 2007.

 TABLE 1.--ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON COMMERCE,
                                           SCIENCE, AND TRANSPORTATION                                          
----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal years, in millions of dollars--      
                                                          ------------------------------------------------------
                                                              1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                           CHANGES IN DIRECT SPENDING                                           
                                                                                                                
Subtitle A: Spectrum Auctions: \1\                                                                              
    Estimated budget authority...........................          0     -1,700     -3,400     -3,200     -7,400
    Estimated outlays....................................          0     -1,700     -3,400     -3,200     -7,400
Subtitle C: Vessel Tonnage Fees:                                                                                
    Estimated budget authority...........................          0        -49        -49        -49        -49
    Estimated outlays....................................          0        -49        -49        -49        -49
Total Changes in Direct Spending:                                                                               
    Estimated budget authority...........................          0     -1,749     -3,449     -3,249     -7,449
    Estimated outlays....................................          0     -1,749     -3,449     -3,249     -7,449
----------------------------------------------------------------------------------------------------------------
\1\ Including the effect of Subtitle B on auctions to be held under Subtitle A.                                 

    The budgetary effects of this legislation fall within 
budget functions 370 (commerce and housing credit), 400 
(transportation), and 950 (undistributed offsetting receipts).

Basis of estimate

            Spectrum auctions
    CBO estimates that the federal government would collect 
$15.7 billion in offsetting receipts over the 1998-2002 period 
and $16.7 billion over the 1998-2007 period from enacting the 
provisions contained in Subtitles A and B. Assuming 
appropriation of the necessary amounts, CBO also estimates that 
the FCC would incur costs of less than $500,000 every two 
years, beginning in fiscal year 2001, to prepare the studies on 
digital television conversion required by the bill.
    Broaden and Extend. CBO expects that extending and 
broadening the FCC's authority to auction licenses through 2002 
(under section 3001) would increase receipts by $5.7 billion 
over the 1998-2002 period. Most of the estimated receipts would 
be generated by the auction of licenses permitting the use of 
frequencies above 3 GHz that have not been specifically 
designated for reallocation or auction under existing law. CBO 
anticipates that, in complying with its mandate to assign 
licenses for most mutually exclusive applications of the 
spectrum by competitive bidding, the commission will make 
available such frequencies under the general authority that 
would be extended by this section. This subtitle also would 
require the FCC to use competitive bidding to assign rights to 
use 165 MHz of spectrum below 10 GHz, of which 60 MHz may be 
located above 3 GHz. Our estimate for extending and broadening 
the FCC's auction authority includes the expected receipts from 
the reallocation of 60 MHz between 3 GHz and 10 GHz. Subtitle B 
also would restrict the FCC's discretion to auction licenses 
for private wireless services, and we have reduced our 
estimates of extending and broadening the FCC's auction 
authority granted in Subtitle A accordingly.
    Reallocation of 105 MHz below 3 GHz. CBO estimates that the 
provisions of Subtitle A requiring the FCC to use competitive 
bidding to assign the rights to use 105 MHz of spectrum located 
below 3 GHz (85 MHz to be reallocated by the FCC and 20 MHz to 
be identified by NTIA) would generate $5.6 billion over the 
1998-2002 period and $6.6 billion over the 1998-2007 period. 
CBO's estimate of receipts for future FCC auctions is based on 
the expectation that prices for FCC licenses will fall from the 
levels of recent years as more spectrum is brought to the 
market. CBO has further reduced its estimate for the 85 MHz of 
spectrum identified for auction in this subtitle because the 
legislation does not specify the location on the 
electromagnetic spectrum for 40 MHz of the 85 MHz under 3 GHz 
that it would require the commission to reallocate and auction. 
Some doubt exists as to whether sufficient spectrum that would 
be attractive to commercial users can be identified and 
auctioned to meet the 85 MHz target.
    Subtitle A would authorize federal agencies scheduled for 
relocation by NTIA to receive compensation from a licensee 
entering the band in order to facilitate that relocation of the 
federal user. CBO would expect some licensees or service 
providers to compensate federal agencies for their relocation 
costs, but we are uncertain as to the extent and timing of the 
reimbursement. Because the funds paid by the private sector 
could be spent by the agencies without further appropriations 
action, this provision would have no net budgetary impact.
    Analog Return. CBO estimates that enacting section 3002, 
which pertains to the recovery and auction of frequencies now 
allocated for analog television broadcasting, would yield $2.7 
billion in auction receipts. This section would require the FCC 
to delay the recovery of the frequencies used by analog TV 
broadcasters in a market beyond December 31, 2006, if more than 
5 percent of households in that market do not have access to 
digital local television signals. The meaning of this 
legislative language is unclear. For the purposes of this 
estimate, CBO assumes ``access to digital local television 
signals'' means that households would need to possess the 
equipment necessary to receive digital signals in their home. 
Such a stipulation would introduce significant uncertainty as 
to when bidders would be able to use the frequencies and could 
reduce auction receipts by 50 percent or more. Our estimate 
reflects that uncertainty.
    Channels 60-69. CBO estimates that enacting section 3003, 
which pertains to the allocation of current television 
frequencies between 746 MHz and 806 MHz for commercial and 
public safety uses, would yield $1.7 billion in auction 
receipts. Under this section the FCC would be required to 
auction 36 MHz of spectrum for commercial purposes in 1998, but 
the winners of the auction would not receive full use of the 
spectrum until 2006 or until 95 percent of the population has 
access to digital local television signals. Assuming that 
``access to the spectrum'' means that households would need to 
possess the equipment necessary to receive digital signals in 
their home, CBO believes that bidders would be uncertain as to 
when they could fully utilize the spectrum and would discount 
their bids accordingly.
    Spectrum Lease Fees. CBO estimates that the spectrum lease 
fees to be established under Subtitle B would produce no 
additional receipts. The FCC has indicated that in order to 
allocate 12 MHz of spectrum as required by the subtitle, 
incumbent services and licensees would have to be relocated to 
other bands. Under the principles of the commission's rules 
adopted in the emerging technology band proceeding, which made 
spectrum available for personal communications services, the 
licensees granted the right to use the 12 MHz of spectrum 
allocated for private wireless radio services would be required 
to cover the cost of relocating incumbent license holders. CBO 
anticipates that the cost of such relocation requirements would 
discourage would-be private wireless licensees from seeking 
licenses and, accordingly, that no fees would be collected.
            Vessel Tonnage Duties
    Subtitle C would extend, through fiscal year 2002, the 
increase in vessel tonnage duties that was enacted (and 
subsequently extended) in two earlier reconciliation acts. 
These earlier acts increased per-ton duties from $0.02 to $0.09 
(up to a maximum of $0.45 per ton per year) on vessels entering 
the United States from western hemisphere foreign ports and 
from $0.06 to $0.27 (up to a maximum annual duty of $1.35 per 
ton) on those arriving from other foreign ports. As specified 
in earlier acts, the additional amounts collected would be 
deposited into the general fund as offsetting receipts. Based 
on the current levels of shipping traffic at U.S. ports, CBO 
estimates that the enactment of this section would increase 
offsetting receipts by $49 million in each of fiscal years 1999 
through 2002.
    Estimated impact on state, local and tribal governments: 
This title contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act of 1995, and would not impose 
any costs on state, local, or tribal governments. Subtitle A 
would instruct the FCC to allocate a portion of the spectrum 
for public safety services. State and local governments would 
be eligible for licenses to that portion of the spectrum. 
Subtitle A also would allow state and local governments to use 
unassigned radio frequencies for public safety purposes under 
certain circumstances.
    Estimated impact on the private sector: Subtitle C would 
impose a mandate on the private sector by extending the current 
vessel tonnage duty. CBO estimates that the direct costs of 
this mandate would not exceed the annual $100 million threshold 
specified in UMRA.
    Under current law, the duty imposed on both domestic and 
foreign vessel owners at U.S. ports expires the end of the 
fiscal year 1998. At the time of expiration, this duty would 
revert to a prior lower amount. This bill would extend the 
current duty through fiscal year 2002.
    The direct cost of this mandate would depend on what base 
case is used. Measured against the private-sector costs that 
would be incurred if current law remains in place and the 
amount of the duty declines, the total cost of extending this 
mandate would be $49 million annually beginning in fiscal year 
1999. The cost to domestic vessel owners would be less than 
this amount, however, because owners of foreign vessels would 
incur a portion of those costs. In contrast, measured against 
current private-sector costs, the direct cost of this mandate 
would be zero, because duties would be extended at their 
current levels. UMRA is unclear about which comparison is 
required. In either case, the cost of the additional duties 
imposed on owners of domestic vessels would not exceed the 
statutory threshold for private-sector mandates.
    Estimate prepared by: Federal Costs: Spectrum--Rachel 
Forward; David Moore and Perry Beider. Vessel Tonnage Fees--
Deborah Reis. Impact on State, Local, and Tribal Governments: 
Pepper Santalucia. Impact on the Private Sector: Jean Wooster.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

       TABLE 2. ESTIMATED 10-YEAR BUDGETARY EFFECTS OF TITLE III: RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON COMMERCE, SCIENCE, AND      
                                                                     TRANSPORTATION                                                                     
                                  [Estimated budgetary effects of title III on direct spending, fiscal years 1997-2007                                  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         By fiscal years, in million of dollars--                                       
                                ------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               1997-2007
                                   1997      1998      1999      2000      2001      2002      2003      2004      2005      2006      2007      Total  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               SPECTRUM (Subtitles A & B)                                                               
                                                                                                                                                        
Auction Receipts Under Current                                                                                                                          
 Law:                                                                                                                                                   
    Estimated budget authority.    -9,600    -7,100    -1,600      -550      -150         0         0         0         0         0         0    -19,000
    Estimated outlays..........    -9,600    -7,100    -1,600      -550      -150         0         0         0         0         0         0    -19,000
Proposed Changes:                                                                                                                                       
    Broaden and Extend: \1\                                                                                                                             
         Estimated budget                                                                                                                               
         authority.............         0         0      -800    -1,500    -1,700    -1,700         0         0         0         0         0     -5,700
        Estimated outlays......         0         0      -800    -1,500    -1,700    -1,700         0         0         0         0         0     -5,700
    Reallocation of 105 MHz                                                                                                                             
     below 3 GHz:                                                                                                                                       
        Estimated budget                                                                                                                                
         authority.............         0         0      -500      -800    -1,300    -3,000      -500      -500         0         0         0     -6,600
        Estimated outlays......         0         0      -500      -800    -1,300    -3,000      -500      -500         0         0         0     -6,600
    Analog Return:                                                                                                                                      
        Estimated budget                                                                                                                                
         authority.............         0         0         0         0         0    -2,700         0         0         0         0         0     -2,700
        Estimated outlays......         0         0         0         0         0    -2,700         0         0         0         0         0     -2,700
    Channels 60-69:                                                                                                                                     
        Estimated budget                                                                                                                                
         authority.............         0         0      -400    -1,100      -200         0         0         0         0         0         0     -1,700
        Estimated outlays......         0         0      -400    -1,100      -200         0         0         0         0         0         0     -1,700
    Total Changes:                                                                                                                                      
        Estimated budget                                                                                                                                
         authority.............         0         0    -1,700    -3,400    -3,200    -7,400      -500      -500         0         0         0    -16,700
        Estimated outlays......         0         0    -1,700    -3,400    -3,200    -7,400      -500      -500         0         0         0    -16,700
Auction Receipts Under Title                                                                                                                            
 III:                                                                                                                                                   
    Estimated budget authority.    -9,600    -7,100    -3,300    -3,950    -3,350    -7,400      -500      -500         0         0         0    -35,700
    Estimated outlays..........    -9,600    -7,100    -3,300    -3,950    -3,350    -7,400      -500      -500         0         0         0    -35,700
                                                                                                                                                        
                                                            VESSEL TONNAGE FEES (Subtitle C)                                                            
                                                                                                                                                        
Vessel Tonnage Fees Under                                                                                                                               
 Current Law: \2\                                                                                                                                       
    Estimated budget authority.       -49       -49         0         0         0         0         0         0         0         0         0        -98
    Estimated outlays..........       -49       -49         0         0         0         0         0         0         0         0         0        -98
Proposed Changes:                                                                                                                                       
    Estimated budget authority.         0         0       -49       -49       -49       -49         0         0         0         0         0       -196
    Estimated outlays..........         0         0       -49       -49       -49       -49         0         0         0         0         0       -196
Vessel Tonnage Fees Under                                                                                                                               
 Proposal:                                                                                                                                              
    Estimated budget authority.       -49       -49       -49       -49       -49       -49         0         0         0         0         0       -294
    Estimated outlays..........       -49       -49       -49       -49       -49       -49         0         0         0         0         0       -294
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ CBO estimates that receipts in 2002 from the ``broaden and extend'' authority included in Subtitle-A would be lower than they would otherwise be,   
  because of restriction contained in Subtitle B regarding the auction of licenses for private wireless services. The amount shown in the table reflects
  that interaction between the subtitles.                                                                                                               
\2\ These amounts represent proceeds from the increase in tonnage fees originally mandated in the Ominbus Budget Reconciliation Act of 1990, which are  
  recorded in the budget as offsetting receipts. The tonnage fees that were established prior to that time (and are still in effect) are recorded as    
  governmental receipts (i.e., revenues); the proceeds from those fees (about $15 million a year) are not included in this table.                       

                     Subtitle A--Spectrum auctions

Section 3001. Spectrum auctions

    Subsection 3001(a) would extend the FCC's authority to use 
auctions to assign licenses, set to expire in 1998, to the year 
2007. The FCC's auction authority was established in the 
Omnibus Budget Reconciliation Act of 1993.
    The subsection also would broaden the FCC's auction 
authority to include virtually any service in which mutually 
exclusive applications are filed for licenses. In addition, the 
FCC may postpone an auction if it determines that doing so 
would be more likely to recover for the public a fair portion 
of the value of the spectrum, as long as the auction is 
completed before the end of fiscal year 2002. Public safety, 
noncommercial public broadcasting, international satellite 
systems, digital television, and potentially all broadcasting 
services are exempt from auctions.
    Subsection 3001(a) specifically provides for an exemption 
to the FCC's competitive bidding authority ``for public safety 
radio services, including private internal radio services used 
by State and local government and non-government entities that 
protect the safety of life, health, or property and that are 
not made commercially available to the public.'' The reference 
to non-government uses recognizes that utilities, railroads, 
pipelines, and other industries use radio spectrum for public 
safety purposes. In addition, this exemption includes spectrum 
allocated for certain private mobile and special emergency 
radio services where public safety is the sole or primary 
purpose of the use, such as private ambulance services, 
volunteer fire departments, and automobile emergency road 
services.
    Subsection 3001(b) requires the FCC to auction 45 megahertz 
(MHz) of spectrum located between 1,710-1,755 MHz no later than 
December 31, 2001, for commercial use. Government use of this 
band is to continue until December 31, 2003 unless such use is 
exempted from relocation.
    Subsection 3001(c) directs the FCC, by September 30, 2002, 
to auction not less than 100 MHz of spectrum below 10 gigahertz 
(GHz), at least 40 of which must be located below 3 GHz. This 
100 MHz of spectrum is to be reallocated from government to 
private use pursuant to joint efforts by the FCC and NTIA. The 
frequencies chosen by the FCC must not have been assigned or 
designated for assignment using auctions by the FCC prior to 
the date of enactment, nor reserved for government use under 
section 305.
    This subsection provides that in using any license assigned 
under the subsection the licensee must avoid interference with 
space research uses and earth exploration satellite services 
authorized under notes 750A and US90 to section 2.106 of the 
FCC's rules, if such rules are in effect on the date of 
enactment.
    In making its reassignments, the FCC must consider the cost 
of relocation to incumbent licensees. The FCC also must 
consider the needs of public safety and comply with 
international spectrum allocation agreements. Coordination with 
the Secretary of Commerce also is required under this 
subsection when government use is affected by the 
reassignments.
    The subsection requires the FCC to submit a report to the 
President, the Senate Commerce Committee, and the House 
Commerce Committee recommending bands of frequencies for 
reallocation. The report must include relocation plans for 
displaced users.
    Subsection 3001(c) provides that the FCC must notify the 
Secretary of Commerce when the FCC is unable to relocate 
incumbent licensees effectively. The notification must explain 
why the incumbents cannot be accommodated. With the assistance 
of NTIA, the FCC must submit a report to the Secretary of 
Commerce describing why incumbents cannot be accommodated in 
existing non-government spectrum. NTIA must review this report 
when determining if a commercial user can be relocated to 
government spectrum.
    Subsection 3001(d) directs the Secretary to submit a report 
with the Secretary's recommendations to the President, the 
Congress, and the FCC if the Secretary receives a report from 
the FCC pursuant to subsection 3001(c)(6).
    In addition, the subsection requires private parties 
causing federal entities to relocate to reimburse such entities 
for the costs of relocation . This will allow private industry 
to pay to move government users off valuable spectrum and speed 
relocation to less valuable spectrum at no cost to the 
taxpayer.
    Subsection 3001(d) also requires a party seeking to 
relocate a federal government station that is located within a 
frequency band allocated for federal and non-federal use to 
file a petition for relocation with NTIA. The NTIA must limit 
or terminate the federal government station's license within 6 
months when the stated requirements are met.
    Subsection 3001(e) directs the Secretary to make available 
for reallocation a total of 20 MHz in a second report, for 
other than federal government use under section 305, that is 
located below 3 GHz and that meets the criteria set forth in 
section 113(a) of the National Telecommunications and 
Information Administration Organization Act.
    Within 12 months after it receives the second report from 
the Secretary, the FCC must submit a plan to the President, the 
Senate Commerce Committee, and the House Commerce Committee to 
implement the report. The FCC must then implement its plan.

Section 3002. Digital television services

    Section 3002 contains a definitive analog spectrum return 
date of December 31, 2006. This will maximize the value of 
analog television broadcast spectrum that will be auctioned in 
2001 (although not actually reassigned until 2006 at the 
earliest, as incumbent television licensees finish converting 
to digital transmission). The Committee recognizes that digital 
conversion may not have taken place by this return date. 
Therefore, an extension or waiver of this section shall be 
granted for any station in a television market unless 95 
percent of television households have access to digital 
television. The Committee notes that a television household can 
have access to a service without subscribing to it or buying 
it. For example, where a digital cable television system 
carries local signals and passes a television household, that 
household is considered to have access to digital television 
whether it subscribes to the service or not.
    The section also provides that a commercial digital 
television license expires on September 30, 2003 and that the 
license will be renewed only if the licensee is transmitting 
programming in digital format in the 30 largest markets by 
November 1, 1999.
    Under this section, the FCC is required to report to 
Congress, no later than December 31, 2001, and every 2 years 
thereafter, on the status of digital television conversion. The 
report must contain information on market penetration, 
percentage of television householdswith access to digital 
television, and the cost of purchasing digital television receivers or 
conversion equipment.
    Section 3002 also requires the FCC to ensure that 
broadcasters return analog spectrum as the analog television 
licenses expire. Such analog spectrum must be auctioned by the 
FCC by July 1, 2001. The FCC is required to report the total 
revenues from the auctions by January 1, 2002.
    The section further directs the FCC to encourage the 
transmission of digital television signals in the top 30 
markets by November 1, 1999. This section is not intended to 
override any FCC rule or guideline on the digital conversion 
timetable.

Section 3003. Allocation and Assignment of New Public Safety and 
        Commercial Licenses

    Subsection 3003(a) provides for the reallocation, by 
January 1, 1998, of 24 MHz of spectrum between 746 MHz and 806 
MHz for public safety use. The remaining 36 MHz is to be 
auctioned for commercial use.
    Subsection 3003(b) directs the FCC to commence assignment 
of the public safety licenses no later than September 30, 1998. 
In addition, the FCC must begin auctioning the commercial 
licenses no later than March 31, 1998.
    Subsection 3003(c) requires the FCC to waive any licensee 
eligibility and other requirements, including bidding 
requirements, in order to provide for public safety use of 
unassigned frequencies by a State or local government when such 
use is necessary and technically feasible without causing 
interference to existing stations.
    Subsection 3003(d) provides for flexible spectrum use, 
subject to interference limits and any technical restrictions 
designed to protect full-service analog and digital television 
licenses during a transition to digital television. Under this 
subsection, licenses may be aggregated, disaggregated, or 
transferred to any other person qualified to be a licensee.
    Subsection 3003(e) protects public safety users from 
interference from broadcasters.
    Subsection 3003(f) directs the FCC to minimize the number 
of digital television allotments between 746 MHz and 806 MHz 
and maximize the amount of spectrum for public safety and new 
services. The FCC also must recover an additional 78 MHz of 
spectrum to be auctioned.
    Subsection 3003(g) prohibits anyone holding an analog or 
digital television license between 746 and 806 MHz from 
operating at that frequency after the digital transition is 
complete. Such licenses must be returned immediately pursuant 
to FCC rules.
    Subsection 3003(h) provides protection for low-power 
television stations by requiring the FCC to assign each station 
a frequency below 746 MHz, as long as such action does not 
cause interference with primary licensees.
    Subsection 3003(j) directs the FCC to provide for 
flexibility in spectrum use.

Section 3004. Private Wireless Spectrum Availability

    Subsection 3004(a) would require the FCC, within 6 months 
of enactment, to implement a system of spectrum lease fees for 
private wireless service licenses. Such lease fees would 
supplement auctions in compensating the public for spectrum 
use. Certified frequency advisory committees would assist the 
FCC in determining and collecting the appropriate fee amounts. 
The FCC is to develop a formula for computing the fees.
    Subsection 3004(a) also provides that the spectrum lease 
fees must be based on the approximate value of the assigned 
frequencies. The FCC is directed to consider several factors in 
assessing the value and is allowed to adjust its formula when 
necessary. The lease fees are capped so that, over a 10-year 
license term, the amount will not exceed revenues gained from 
the auction of comparable spectrum.
    The subsection further directs the FCC to apply spectrum 
lease fees to private wireless systems.
    Subsection 3004(b) allocates not less than 12 MHz located 
between 150 MHz and 1000 MHz to private wireless within 6 
months after the date of enactment. Initial access to this 
spectrum should commence not later than 12 months after 
enactment.
    Subsection 3004(c) authorizes the FCC to use a certified 
private frequency advisory committee for the computation and 
collection of the lease fees.
    Subsection 3004(d) allows the FCC to consider whether the 
public interest might be better served by assigning private 
wireless licenses outside the auctions process where specific 
criteria set forth in this subsection are met. These criteria 
basically seek to identify those instances in which auction 
revenues in any event would be likely to be minimal.
    Subsection 3004(e) requires all proceeds from spectrum 
lease fees to be deposited in the Treasury, except that a 
certified frequency advisory committee may retain a fair amount 
of the spectrum lease proceeds to cover its costs in 
administering the lease fee program.


               congressional budget office cost estimate

Reconciliation recommendations of the Senate Committee on Energy and 
        Natural Resources (Title IV)

    Summary: Title IV would revise the terms under which the 
Department of Energy (DOE) could lease excess capacity of the 
Strategic Petroleum Reserve (SPR) to foreign governments and 
would allow the department to spend any proceeds collected 
after 2002 to purchase oil for the SPR without further 
appropriation. CBO estimates that enacting this legislation 
would reduce direct spending by a total of $13 million over the 
1999-2002 period.
    Title IV contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform act of 1995 
(UMRA) and would have no impact on the budgets of state, local, 
or tribal governments.
    Estimated cost to the Federal Government: This provision 
would remove some of the statutory impediments to leasing the 
excess capacity of the SPR to foreign governments. For example, 
products stored on behalf of foreign governments would not be 
considered part of the U.S. reserve and could be exported. 
Estimates of how much of the excess capacity (currently about 
110 million barrels) would be leased are speculative, because 
the decision to lease resides with foreign governments, not 
DOE. At this time, most nations needing capacity either have 
plans for domestic storage or face regulatory barriers to using 
U.S. facilities. CBO expects, however, that one or more nations 
would chose to store small quantities of oil in the SPR to 
accommodate growth in their storage requirements or to satisfy 
other strategic objectives. We estimate that such leasing 
activity would generate receipts totaling about $13 million 
over the 1999-2002 period, assuming a storage fee of about 
$1.20 per barrel (in 1997 dollars). Beginning in 2003, this 
provision would no longer generate net receipts, because DOE 
would be authorized to spend the proceeds from leasing to 
purchase oil for the reserve without further appropriation.
    Table 1 shows the estimated budgetary impact of enacting 
Title IV over the 1998-2002 period. Table 2 (at the end of this 
estimate) shows the estimated budgetary effects through 2007.

        TABLE 1. ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION       
 RECOMMENDATIONS OF THE SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
------------------------------------------------------------------------
                                      By fiscal years, in millions of   
                                                 dollars--              
                                 ---------------------------------------
                                   1998    1999    2000    2001    2002 
------------------------------------------------------------------------
                       CHANGES IN DIRECT SPENDING                       
                                                                        
Lease Excess SPR Capacity:                                              
    Estimated budget authority..       0      -1      -2      -4      -6
    Estimated outlays...........       0      -1      -2      -4      -6
------------------------------------------------------------------------

    The effects of this legislation fall within budget function 
270 (energy).
    Intergovernmental and private-sector impact: Title IV 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would have no impact on the budgets of 
state, local, or tribal governments.
    Previous CBO estimate: On June 16, 1997, CBO transmitted a 
cost estimate for the reconciliation recommendations of the 
House Committee on Commerce (Title III), which included 
provisions that would authorize DOE to lease the excess 
capacity of the SPR to foreign governments (Subtitle B). The 
estimated budgetary impact of the House and Senate proposals is 
the same.
    Estimate prepared by: Federal Costs: Kathleen Gramp.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

TABLE 2. ESTIMATED 10-YEAR BUDGETARY EFFECTS OF TITLE IV: RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE
                                         ON ENERGY AND NATURAL RESOURCES                                        
                                    [In millions of dollars, by fiscal years]                                   
----------------------------------------------------------------------------------------------------------------
                                                                                                       1998-2007
                                  1998   1999   2000   2001   2002   2003   2004   2005   2006   2007    total  
----------------------------------------------------------------------------------------------------------------
Lease of Excess SPR Capacity:                                                                                   
    Estimated budget authority.      0     -1     -2     -4     -6      0      0      0      0      0       -13 
    Estimated outlays..........      0     -1     -2     -4     -6     -6      0      0      0      0       -19 
----------------------------------------------------------------------------------------------------------------

     Title IV--Lease of Excess Strategic Petroleum Reserve Capacity

                            report language

    The Committee's recommendation would add a new section 168 
to EPCA that would authorize the Secretary to lease 
underutilized Strategic Petroleum Reserve facilities for the 
storage of petroleum owned by a foreign government or its 
representatives. If necessary or appropriate, lease terms could 
exceed the five-year limitation of section 649(b) of the 
Department of Energy Organization Act. The provision also 
provides that, after October 1, 2002, funds resulting from the 
leasing of SPR facilities shall be available to the Secretary, 
without further appropriation, to purchase petroleum products 
for storage in the SPR.


                          DIVISION 1--MEDICARE

                  Subtitle A--Medicare Choice Program

              Chapter 1--Establishment of Medicare Choice

                        Medicare Choice Program

                      Medicare Health Plan Options

                              Present Law

    Medicare beneficiaries have two basic coverage options. 
They may elect to obtain services through the traditional fee-
for-service system under which program payments are made for 
each service rendered, or Medicare beneficiaries may enroll in 
a managed care organization that has a contract with the Health 
Care Financing Administration (HCFA).
    There are two types of contracts: cost and risk. Under cost 
contracts, Medicare arranges to reimburse the organization in a 
different way for Medicare covered services but essentially 
pays the same amount as it would under the Medicare fee-for-
service program. The Committee is not proposing to change the 
Medicare HMO cost contracting program. Therefore, the following 
description of current law for Medicare payments to HMOs refers 
only to Medicare risk contracts.
    Organizations eligible to contract with HCFA on a risk 
basis must be organized under State laws and be either:
          1. A Federally qualified health maintenance 
        organization (HMO) as defined by section 1310(d) of the 
        Public Health Service Act; or
          2. An organization called a ``competitive medical 
        plan'' (CMP) that meets the following requirements:
                  a. Provides at least the following services 
                to its enrollees:
                          (1) Physician services;
                          (2) Inpatient hospital services;
                          (3) Laboratory, x-ray, emergency, and 
                        preventive services; and
                          (4) Out-of-area coverage.
                  b. Is compensated on a periodic, capitated 
                basis without regard to the volume of services 
                provided to members.
                  c. Physician services are provided by 
                physicians on salary or through contracts with 
                individual physicians or groups of physicians.
                  d. Assumes full financial risk on a 
                prospective basis for the provision of health 
                care services, except the organization may 
                insure for:
                          (1) Services exceeding $5,000 per 
                        member per year;
                          (2) Services provided to members by 
                        providers outside the network;
                          (3) Not more than 90 percent of costs 
                        which exceed 115 percent of income in a 
                        fiscal year; and
                          (4) Make arrangements with other 
                        providers to accept all or part of the 
                        risk.
                  e. Meets solvency standards satisfactory to 
                the Secretary.
    For Medicare purposes, the requirements for HMOs and CMPs 
are essentially identical. For simplicity, the term ``Medicare 
HMO'' is used in this document to refer to both HMOs and CMPs 
that have Medicare risk contracts.

                              Eligibility

                              Present Law

    Any person entitled to coverage under Medicare Part A and 
enrolled under Medicare Part B, or enrolled under Medicare Part 
B only, except persons with end-stage renal disease, is 
eligible to enroll in a Medicare HMO that serves the geographic 
area in which the person resides. A Medicare beneficiary 
developing end-stage renal disease after having enrolled in a 
Medicare HMO may continue enrollment in that Medicare HMO.

                        Election and Enrollment

                              Present Law

    Persons are automatically enrolled in the Medicare fee-for-
service system when they first become eligible for Medicare. 
Once enrolled in the Medicare program, persons wishing to 
enroll in a Medicare HMO must do so directly through the 
Medicare HMO.
    Each Medicare HMO is required to have at least a 30 day 
annual open enrollment period for Medicare beneficiaries. Open 
enrollment periods are not coordinated. Secretary may waive 
open enrollment under certain conditions. Medicare HMOs must 
accept persons on a first-come basis up to plan capacity.

                             Disenrollment

                              Present Law

    Medicare beneficiaries enrolled in Medicare HMOs may 
disenroll at any time and return to the regular Medicare 
program or switch to another Medicare HMO at the time of that 
Medicare HMO's open enrollment period.

                              Information

                              Present Law

    Information on Medicare HMOs must be obtained from the 
Medicare HMOs directly. The Health Care Financing 
Administration (HCFA) does not distribute any specific 
information on Medicare HMO options to Medicare beneficiaries.
     Medicare HMOs are required to make available to enrollees 
at the time of enrollment, and at least annually thereafter, 
the following information:
           1. The enrollee's rights to benefits from the 
        organization;
           2. The restrictions on Medicare payment for services 
        furnished to the enrollee by other than the Medicare 
        HMO's providers;
           3. Out-of-area coverage provided by the Medicare 
        HMO;
          4. Coverage of emergency services and urgently needed 
        care;
          5. Appeal rights of enrollees; and
          6. Notice that the Medicare HMO is authorized by law 
        to terminate or refuse to renew its Medicare contract, 
        and, therefore, may terminate or refuse to renew the 
        enrollment of Medicare individuals.

                               Marketing

                              Present Law

    Medicare HMOs must submit any brochures, application forms, 
and promotional or informational material to the Secretary for 
approval 45 days before distribution of the material.

                                Benefits

                              Present Law

    Medicare HMOs are required to provide all services and 
items covered by Part A and Part B of the Medicare program. 
Beneficiaries must receive all Medicare covered services from 
the HMO's providers, except in emergencies or unless the plan 
has an approved point-of-service option which allows some out 
of service use.
    Medicare HMOs may adopt cost-sharing requirements that are 
different from the cost-sharing requirements in the Medicare 
program. However, the average total amount of cost-sharing per 
enrollee may not exceed the average total amount of cost-
sharing per enrollee in the fee-for-service Medicare program.
    Medicare HMOs may offer additional benefits. The additional 
benefits may be included in the basic package of benefits 
offered by the HMO, subject to the approval of HCFA. Or, 
additional supplemental benefits may be offered for an 
additional, separate premium payment. The same supplemental 
benefit options must be offered to all of the HMO's Medicare 
enrollees and premiums for supplemental benefits may not exceed 
what the Medicare HMO would have charged for the same set of 
services in the private market.
    Medicare HMOs are required to include additional benefits 
in their basic benefit package to the extent that the HMO 
achieves a ``savings'' from Medicare. The ``savings'' is the 
amount by which the capitated payment from Medicare exceeds the 
estimated rate the HMO would charge for coverage in the private 
market (called the adjusted community rate, or ACR). The 
additional benefits may be in the form of:
          1. Reduced cost sharing;
          2. Expanded scope of benefits; or
          3. Reduction in the premium charged to the 
        beneficiary by the Medicare HMO.
    Instead of offering additional benefits up to the full 
value of their ``savings,'' Medicare HMOs may elect to have a 
portion of their ``savings'' placed in a benefit stabilization 
fund. This fund enables Medicare HMOs to continue to offer the 
same benefit package from year to year without concern about 
the degree of annual fluctuation in the Medicare payment 
amount.

           beneficiary protections and health plan standards

                              Present Law

    Quality assurance. Medicare HMOs are required to have an 
ongoing quality assurance program. Medicare HMOs are also 
required to contract with Medicare Peer Review Organizations 
(PROs) for external quality oversight.
    Capacity and enrollment. Medicare HMOs must have at least 
5,000 enrollees, unless the HMO serves a primarily rural area 
(specified in regulation as 1,500 enrollees).
    50/50 Rule. No more than 50 percent of a Medicare HMO's 
enrollment may be Medicare or Medicaid beneficiaries (called 
the ``50/50'' rule). Medicare HMOs serving areas where more 
than 50 percent of the population qualifies for Medicare or 
Medicaid may receive a waiver of this rule.
    Access. An HMO must make all Medicare covered services and 
all other services contracted for available and accessible 
within its service area, with reasonable promptness and in a 
manner that assures continuity of care. Urgent care must be 
available and accessible 24 hours a day and 7 days a week.
    Emergency Services. Medicare HMOs must also pay for 
emergency services provided by nonaffiliated providers when it 
is not reasonable, given the circumstances, to obtain the 
services through the Medicare HMO.
    Consumer Protections. Medicare HMOs may not disenroll or 
refuse to re-enroll a beneficiary because of health status or 
need for health care services.
    Medicare HMOs must have meaningful grievance and procedures 
for the resolution of individual enrollee complaints. An 
enrollees who is dissatisfied with the outcome of the grievance 
procedure has the right to a hearing before the Secretary if 
the amount involved is greater than $100. If the amount is 
greater than $1,000, either the enrollee or the Medicare HMO 
may seek judicial review.
    Medicare HMOs must also inform beneficiaries of the rights 
to appeal and of HCFA's appeals process.
    Physician Incentive Policies. A Medicare HMO may not adopt 
physician compensation policies that may directly or indirectly 
have the effect of reducing or limiting services to a specific 
enrollee.
    Contract Termination. A Medicare HMO terminating its 
contract with HCFA must arrange for supplementary coverage for 
its Medicare enrollees for the duration of any preexisting 
condition exclusion under the enrollee's successor coverage for 
the lesser of 6 months or the duration of the exclusion period.
    If a Medicare HMO terminates its Medicare contract, other 
Medicare HMOs serving the same service area must hold a 30 day 
open enrollment period for persons enrolled under the 
terminated contract.

                       medicare payments to hmos

                              Present Law

    Medicare HMOs are paid a single monthly capitation payment 
issued by Medicare for each enrolled beneficiary. In order to 
determine appropriate payments to HMOs, two key numbers are 
calculated: the adjusted average per capita cost, or AAPCC, and 
the adjusted community rate, the ACR.
    The AAPCC is Medicare's estimate of the average per capita 
amount it would spend for a given beneficiary (classified by 
certain demographic characteristics and county of residence) 
who obtained services on the usual fee-for-service basis. 
Separate AAPCCs are established for enrollees on the basis of 
age, disability status, and other classes determined by the 
Secretary (which, by regulation, includes sex, whether they are 
in a nursing home or other institution, and whether they are 
also eligible for Medicaid) and the county of their residence. 
These AAPCC values are calculated in four basic steps:
          1. Medicare national average calendar year per capita 
        costs are projected for the future year under 
        consideration. These numbers are known as the U.S. per 
        capita costs (USPCCs). USPCCs are developed separately 
        for Parts A and B of Medicare, and for costs incurred 
        by the aged, disabled, and those with ESRD in those two 
        parts of the program.
          2. Geographic adjustment factors that reflect the 
        historical relationship between each county's and the 
        Nation's per capita costs are used to convert the 
        national average per capita costs to the county level.
          3. Expected Medicare per capita costs for the county 
        are adjusted to a fee-for-service basis by removing 
        both reimbursement and enrollment attributable to 
        Medicare beneficiaries in prepaid plans.
          4. The recalculated county per capita cost is 
        converted into rates that vary according to the 
        demographic variables enumerated above: age, sex, 
        institutional status, and Medicaid status.
    For each Medicare beneficiary enrolled in a Medicare HMO, 
Medicare will pay the Medicare HMO 95 percent of the rate 
corresponding to the demographic class to which the beneficiary 
belongs.
    The ACR is an estimate of what each Medicare HMO would 
charge comparable private enrollees for the set of benefits the 
Medicare HMO will be furnishing to Medicare beneficiaries under 
its contract. The starting point for this estimate is the 
community rate that the HMO actually charges its non-Medicare 
enrollees. This figure is then adjusted to reflect differences 
between the scope of benefits covered under Medicare and those 
offered under private contracts, as well as expected 
differences in the use of services by Medicare enrollees as 
compared to other HMO members. The ACR is an estimated market 
price for those services and may include allowances for reserve 
funds or profits.
    The degree to which the average Medicare payment rate to a 
Medicare HMO exceeds the Medicare HMO's ACR is the ``savings'' 
amount available to provide additional benefits to Medicare 
enrollees, beyond the basic services covered by Medicare.

                                premiums

                              Present Law

    Section 1876 provides for requirements relating to 
benefits, payment to the plans by Medicare, and payments to the 
plans by beneficiaries. A Medicare beneficiary enrolled in an 
HMO/CMP is entitled to receive all services and supplies 
covered under Medicare Parts A and B (or Part B only, if only 
enrolled in Part B). These services must be provided directly 
by the organization or under arrangements with the 
organization. Enrollees in risk-based organizations are 
required to receive all services from the HMO/CMP except in 
emergencies.
    In general, HMOs/CMPs offer benefits in addition to those 
provided under Medicare's benefit package. In certain cases, 
the beneficiary has the option of selecting the additional 
benefits, while in other cases some or all of the supplementary 
benefits are mandatory.
    Some entities may require members to accept additional 
benefits (and pay extra for them in some cases). These required 
additional services may be approved by the Secretary if it is 
determined that the provision of such additional services will 
not discourage enrollment in the organization by other Medicare 
beneficiaries.
    The amount an HMO/CMP may charge for additional benefits is 
based on a comparison of the entity's adjusted community rate 
(ACR, essentially the estimated market price) for the Medicare 
package and the average of the Medicare per capita payment 
rate. A risk-based organization is required to offer 
``additional benefits'' at no additional charge if the 
organization achieves a savings from Medicare. This ``savings'' 
occurs if the ACR for the Medicare package is less than the 
average of the per capita Medicare payment rates. The 
difference between the two is the amount available to pay 
additional benefits to enrollees. These may include types of 
services not covered, such as outpatient prescription drugs, or 
waivers of coverage limits, such as Medicare's lifetime limit 
on reserve days for inpatient hospital care. The organization 
might also waive some or all of the Medicare's cost-sharing 
requirements.
    The entity may elect to have a portion of its ``savings'' 
placed in a benefit stabilization fund. The purpose of this 
fund is to permit the entity to continue to offer the same set 
of benefits in future years even if the revenues available to 
finance those benefits diminish. Any amounts not provided as 
additional benefits or placed in a stabilization fund would 
beoffset by a reduction in Medicare's payment rate.
    If the difference between the average Medicare payment rate 
and the adjusted ACR is insufficient to cover the cost of 
additional benefits, the HMO/CMP may charge a supplemental 
premium or impose additional cost-sharing charges. If, on the 
other hand, the HMO does not offer additional benefits equal in 
value to the difference between the ACR and the average 
Medicare payment, the Medicare payments are reduced until the 
average payment is equal to the sum of the ACR and the value of 
the additional benefits.
    For the basic Medicare covered services, premiums and the 
projected average amount of any other cost-sharing may not 
exceed what would have been paid by the average enrollee under 
Medicare rules if she or he had not joined the HMO. For 
supplementary services, premiums and projected average cost-
sharing may not exceed what the HMO would have charged for the 
same set of services in the private market.

               Organizational and Financial Requirements

                              Present Law

    Under section 1876 of the Social Security Act, Medicare 
specifies requirements to be met by an organization seeking to 
become a managed care contractor with Medicare. In general, 
these include the following: (1) the entity must be organized 
under the laws of the State and be a Federally qualified HMO or 
a competitive medical plan (CMP) which is an organization that 
meets specified requirements (it provides physician, inpatient, 
laboratory, and other services, and provides out-of-area 
coverage); (2) the organization is paid a predetermined amount 
without regard to the frequency, extent, or kind of services 
actually delivered to a member; (3) the entity provides 
physicians' services primarily through physicians who are 
either employees or partners of the organization or through 
contracts with individual physicians or physician groups; (4) 
the entity assumes full financial risk on a prospective basis 
for the provision of covered services, except that it may 
obtain stop-loss coverage and other insurance for catastrophic 
and other specified costs; and (5) the entity has made adequate 
protection against the risk of insolvency.
    Provider Sponsored Organizations (PSOs) that are not 
organized under the laws of a state and are neither a Federally 
qualified HMO or CMP are not eligible to contract with Medicare 
under the risk contract program. A PSO is a term generally used 
to describe a cooperative venture of a group of providers who 
control its health service delivery and financial arrangements.

               Contracts, Administration and Enforcement

                              Present Law

    Contracts with Medicare HMOs are for one year, and may be 
made automatically renewable. However, the contract may be 
terminated by the Secretary at any time (after reasonable 
notice and opportunity for a hearing) if the organization no 
longer meets the requirements for Medicare HMOs. The Secretary 
also has authority to impose certain lesser sanctions, 
including suspension of enrollment or payment and imposition of 
civil monetary penalties. These sanctions may be applied for 
denial of medically necessary services, overcharging, 
enrollment violations, misrepresentation, failure to pay 
promptly for services, or employment of providers barred from 
Medicare participation.
    The Secretary transmits to each Medicare beneficiary's 
selected plan a payment amount equal to the pertinent Medicare 
payment amount for that individual in that payment area. 
Payments occur in advance and on a monthly basis.
    Payments to plans are made with funds withdrawn from the 
Federal Hospital Insurance Trust Fund and the Federal 
Supplementary Medical Insurance Trust Fund. The allocation from 
each fund is determined each year by the Secretary, based on 
the relative weight that benefits from each fund contribute to 
the determination of the Medicare payment amounts.

                           Reasons for Change

    The existing Medicare HMO risk contracting program has 
enjoyed only limited success for a number of reasons. First of 
all, there has been no assertive effort by the Health Care 
Financing Administration to inform Medicare beneficiaries of 
the option of enrolling in a Medicare HMO and encourage them to 
do so.
    Second, the current Medicare risk-contracting program is, 
for the most part, limited to closed panel health maintenance 
organizations and does not allow Medicare beneficiaries a 
choice of the full range of health plan options currently 
available to the non-Medicare population.
    The greatest impediment to increased enrollment in Medicare 
HMO plans is the existing methodology for computing the amount 
that the Medicare program pays for enrollees in Medicare HMOs. 
The payments, which are the direct result of per capita 
spending in an area by the traditional Medicare program, vary 
greatly from county to county.
    For example, in 1995, monthly payment amounts range across 
counties from $221 per month to $767 per month. Not 
surprisingly, most Medicare HMO activity is concentrated in 
high-payment areas.
    Using the county as the geographic area also causes 
volatility of Medicare payment rates from year to year, 
especially in sparsely populated counties. Such unpredictable 
payment rates discourages HMOs from offering plans in many 
market areas.
    Lastly, the Medicare program is not realizing any financial 
benefits from the enrollment of Medicare beneficiaries in 
private health maintenance organizations. The Medicare risk 
contracting program is structured so that any savings achieved 
by enrollment in private health plans are returned to the 
beneficiaries in the form of additional benefits.

                          Committee Provision

    A new ``Medicare Choice'' program is created. Medicare 
Choice builds on the existing Medicare program which allows 
health maintenance organizations (HMOs) to enter into risk 
contracts with the Health Care Financing Administration. Under 
Medicare Choice, Medicare beneficiaries will have the 
opportunity to choose from a variety of private health plan 
options the health care plan that best suits their needs and 
preferences.

                      Medicare Choice Plan Options

    Medicare beneficiaries will be given the option of 
enrolling in the traditional fee-for-service Medicare program 
or enrolling in a Medicare Choice plan available in the area of 
their residence.
    The types of health plans that may be available as Medicare 
Choice plans include:
          (1) Fee-for-service indemnity health plans which pay 
        providers on the basis of a privately determined fee 
        schedule;
          (2) Preferred provider organizations (PPOs) which 
        offer enrollees the option to use providers with whom 
        discounts have been negotiated;
          (3) Point-of-service plans (PoS) which give 
        beneficiaries in a coordinated care plan the option of 
        using out-of-network providers;
          (4) Provider sponsored organization (PSOs) plans, 
        which are plans formed by affiliated providers and 
        which enroll and treat beneficiaries for a capitated 
        payment;
          (5) Health maintenance organizations (HMOs) which are 
        tightly closed networks of contracted or salaried 
        providers which coordinate care and provide health 
        services for a capitated payment;
          (6) Medical savings accounts (MSAs) combined with 
        high deductible health plans. (A limited option for a 
        maximum of 100,000 Medicare beneficiaries and only from 
        1999 to 2002.); and
          (7) Any other types of health plans that meet the 
        standards required of Medicare Choice health plans.

                              ELIGIBILITY

    Any person entitled to coverage under Medicare Part A and 
enrolled in Medicare Part B, is eligible to enroll in a 
Medicare Choice plan that serves the geographic area in which 
the person resides, except persons with end-stage renal disease 
(ESRD). However, a Medicare beneficiary developing end-stage 
renal disease after having enrolled in a Medicare Choice plan 
may continue enrollment in that Medicare Choice plan.

                        ELECTION AND ENROLLMENT

    The Medicare Choice plans will be responsible for enrolling 
individuals. Plans must hold open enrollment during the month 
of November and during other specified times including when 
beneficiaries in the plan's area becomes newly eligible for 
Medicare, and when another plan's contract in the area is 
terminated. In addition to these specified times, plans may be 
open for enrollment at any other time. If an individual does 
not make an election upon initial enrollment, that individual 
will be deemed to have chosen the traditional fee-for-service 
Medicare plan.
    Guaranteed Renewal. Medicare Choice plan sponsors may not 
cancel or refuse to renew a beneficiary except in cases of 
fraud or non-payment of premium amounts due the plan.

                             DISENROLLMENT

    As under current law, Medicare enrollees will be able to 
disenroll from a Medicare Choice plan and enroll in another 
Medicare Choice plan or revert to the traditional Medicare 
program at any time. A beneficiary's disenrollment and 
reenrollment will become effective on the first day of the 
month following their notification to disenroll. There will be 
an exception for MSA plan holders who will only be able to 
enroll and disenroll in an MSA plan during the coordinated 
enrollment period and during certain other periods such as when 
a plan's contract is terminated or when the beneficiary moves 
out of the area served by the plan.

                              INFORMATION

    Information to be distributed by the Secretary. The 
Secretary of HHS is responsible for developing informational 
materials that include (1) General information about Medicare 
choice plans and (2) information describing and comparing the 
Medicare Choice plans available in each area. The materials 
will be mailed to each Medicare beneficiary no later than 15 
days prior to the annual coordinated information period. And no 
later than 30 days prior to a beneficiary becoming eligible for 
Medicare. The Secretary of HHS may contract with private 
organizations to develop and distribute the informational 
materials. The Secretary will coordinate with the States, to 
the extent possible, in developing and disseminating any 
information that is provided to beneficiaries.
    General Information. The general information distributed by 
the Secretary will include at minimum (1) The Medicare Part B 
premium rate for the upcoming calendar year (paid by all 
Medicare beneficiaries with Part B benefits); (2) instructions 
on how to enroll in a Medicare choice plan; (3) enrollees' 
rights and responsibilities in a Medicare Choice Plan, 
including appeal and grievance rights; (4) notice that Medicare 
Choice plan sponsors are authorized by law to terminate or 
refuse to renew their Medicare contracts, and, therefore, may 
terminate or refuse to renew the enrollment of Medicare 
individuals.
    Comparative Information. The comparative informational 
material distributed by the Secretary will be in a standardized 
chart-like format, written in the most easily understandable 
manner possible, and include the information described below as 
well as any other information the Secretary determines is 
necessary to assist Medicare beneficiaries in selection of a 
Medicare Choice plan. The Secretary will develop this 
information in consultation with outside organizations, 
including groups representing the elderly, eligible 
organizations under this section, providers of services, and 
physicians and other health care professionals. The comparative 
information will be of a similar level of specificity as the 
information distributed by the Office of Personnel Management 
for the Federal Employees Health Benefits Program (FEHBP).
    The comparative informational materials will contain at a 
minimum for each plan in the area:
                  (1) A description of the plan's covered items 
                and services, including those that are in 
                addition to those provided in the government-
                run Medicare fee-for-service plan;
                  (2) Supplemental benefits offered by the plan 
                and premiums associated with such supplemental 
                benefits;
                  (3) All cost-sharing amounts including 
                premiums, deductibles, coinsurance, or any 
                monetary limits on benefits;
                  (4) Special cost sharing and balance billing 
                rules for medical savings account plans and 
                private fee-for-service plans;
                  (5) Quality indicators for the traditional 
                Medicare program and each of the Medicare 
                Choice plans, including disenrollment rates for 
                the previous two fiscal years (excluding 
                disenrollment due to death or moving outside a 
                plan's service area) enrollee satisfaction 
                rates, and health outcomes information;
                  (6) The plans' service areas;
                  (7) The extent to which beneficiaries may 
                select the provider of their choice, including 
                providers both within the network and outside 
                the network (if the plan allows out-of-network 
                services);
                  (8) An indication of beneficiaries' exposure 
                to balance billing and the restrictions on 
                payment for services furnished to the enrollee 
                by other than the Medicare Choice plan's 
                participating providers; and
                  (9) An overall summary description on how 
                participating plan physicians are compensated.

                               MARKETING

    Medicare Choice plans may prepare and distribute marketing 
materials and pursue marketing strategies so long as they 
accurately describe the benefits available from the plan in 
comparison to the traditional Medicare program. Marketing will 
be pursued in a manner not intended to violate the 
antidiscrimination requirements. Marketing materials will not 
contain false or materially misleading information, and will 
conform to all other applicable fair marketing and advertising 
standards and requirements.
    Medicare Choice plan sponsors must submit any brochures, 
application forms, and promotional or informational material to 
the Secretary for review. Materials not disapproved by the 
Secretary within 45 days may be distributed. Marketing 
materials reviewed and not disapproved in one HHS regional 
office will be deemed approved for use in all other areas where 
the Medicare Choice plan is offered.

                                BENEFITS

    Benefits and Cost-Sharing. All Medicare Choice plans, other 
than medical savings account plans, must offer, at a minimum, 
coverage for the same items and services as the traditional 
Medicare program. Medicare Choice plans may require cost-
sharing that is different from the cost-sharing requirements in 
the Medicare program. However, the average total amount of 
cost-sharing per enrollee for Medicare covered items and 
services in a Medicare Choice plan may not exceed the average 
total amount of cost-sharing per enrollee in the traditional 
Medicare program. MSA plans and fee-for-service plans will be 
exempted from these cost-sharing requirements.
    Additional Basic Benefits. Medicare Choice plans may 
include additional benefits as part of their basic benefit 
package offered to Medicare enrollees and included in the basic 
premium price.
    Supplemental Benefits. Medicare Choice plans may offer 
optional, supplemental benefits to Medicare Choice plan 
enrollees for an additional premium. The supplemental benefits 
may be marketed and sold by the Medicare Choice plan separate 
from the Medicare Choice enrollment process. However, if the 
supplemental benefits are offered only to enrollees in the 
sponsor's Medicare Choice plan(s) the same supplemental benefit 
options must be offered to all of the Medicare Choice plan 
sponsor's Medicare enrollees for the same premium amount.
    National Coverage Determinations. If the Secretary of HHS 
makes a national coverage determination that will result in 
added costs for Medicare Choice plans, the Medicare Choice 
plans arenot responsible for assuming responsibility for such 
coverage until the beginning of the next contract year. Medicare Choice 
plan enrollees may obtain any new benefits on a fee-for-service basis 
until the new coverage requirement goes into effect at the beginning of 
the next contract year.
    Hospitalized at Time of Disenrollment. In the case of a 
Medicare beneficiary who is hospitalized at the time of 
enrollment or disenrollment from a Medicare Choice plan, 
responsibility for payment for the hospitalization is 
determined by the status of coverage at the time of admission 
to the hospital.
    Medicare as Secondary Payor. Medicare Choice plans may 
recover payment for services provided to a plan enrollee which 
qualify for coverage under workers compensation, automobile, or 
other insurance policies of an enrollee.

           BENEFICIARY PROTECTIONS AND HEALTH PLAN STANDARDS

    Beneficiary Antidiscrimination. Medicare Choice plan 
sponsors may not discriminate against individuals on the basis 
of health status or anticipated need for health services during 
the enrollment, disenrollment, or provision of services.
    Balance Billing. Current law balance billing restrictions 
will apply to all Medicare Choice plans except Medical Savings 
Account Plans and Fee-for-Service plans.
    Information to be distributed by the Medicare Choice Plan 
upon enrollment.
          (1) Benefits offered including exclusions from 
        coverage;
          (2) The number, mix, and distribution of 
        participating providers;
          (3) Out-of-area coverage;
          (4) Optional supplemental coverage including the 
        premium price for optional supplemental benefits;
          (5) Prior authorization rules;
          (6) Plan grievance and appeals procedures, including 
        both general Medicare procedures and plan-specific 
        procedures;
          (7) Coverage of emergency services and urgently 
        needed care;
          (8) A description of the organization's quality 
        assurance program;
          (9) The organization's coverage of out-of-network 
        services (if any); and
          (10) The plan's service area.
    In addition to the above material specified to be 
distributed by the Medicare Choice plan, all Medicare Choice 
plans must have available to distribute, at the request of any 
eligible Medicare beneficiary, the comparative and general 
information developed and distributed by the Secretary.
    Also, at the request of a beneficiary, plans must provide 
information on utilization review procedures.
    Access to Services and Specialists. Medicare Choice plans 
must make all Medicare covered services and all other services 
contracted for available and accessible within their service 
areas, with reasonable promptness and in a manner that assures 
continuity of care. All Medicare Choice plans must provide 
access to the appropriate providers, including specialists 
credentialed by the Medicare Choice plan sponsor, for all 
medically necessary treatment and services.
    Emergency Services. Urgent care must be available and 
accessible 24 hours a day and 7 days a week. Medicare Choice 
plans must also pay for emergency services provided by 
nonaffiliated providers when a medical condition manifesting 
itself by acute symptoms of sufficient severity (including 
severe pain) such that a prudent layperson, who possesses an 
average knowledge of health and medicine, could reasonably 
expect the absence of immediate medical attention to result in 
placing the health of the individual in serious jeopardy, 
serious impairment to bodily functions or serious dysfunction 
of any bodily organ or part.
    Post-Stabilization Guidelines. A plan must comply with 
guidelines to be issued by the Secretary regarding post-
stabilization care. These guidelines shall provide that a 
provider of emergency service shall make a documented good 
faith effort to contact the plan in a timely fashion from the 
point at which the individual is stabilized to request approval 
for medically necessary post-stabilization care. The plan shall 
respond in a timely fashion with a decision as to whether the 
services will be authorized. If a request is denied, the plan 
shall, upon request from the treating physician, arrange for a 
physician who is authorized by the plan to review the denial to 
communicate directly with the treating physician.
    In the case of emergency services or urgent care provided 
outside of the Medicare Choice plan's service area to an 
enrollee of a Medicare Choice plan which utilizes an integrated 
network of providers, the provider will accept as payment in 
full from the Medicare Choice plan the amount that would be 
payable to the provider, under the Medicare program and from 
the individual enrolled in Medicare, if the individual were not 
enrolled in the Medicare Choice plan.
    Ongoing Quality Assurance Program. Each Medicare Choice 
plan sponsor must have arrangements for an ongoing quality 
assurance program, including review by an external 
organization. The program must:
          (1) Stress health outcomes;
          (2) Provide written protocols for utilization review;
          (3) Provide review by physicians and other health 
        care professionals of the process followed in the 
        provision of health services;
          (4) Monitor and evaluate high volume and high risk 
        services;
          (5) Evaluate the continuity of care enrollees 
        receive;
          (6) Have mechanisms to identify underutilization and 
        overutilization of services;
          (7) Alter practice parameters after identifying areas 
        for improvement;
          (8) Take actions to improve quality;
          (9) Make available information on quality and 
        outcomes to facilitate beneficiary comparisons;
          (10) Be evaluated on an ongoing basis as to its 
        effectiveness;
          (11) Include measures of consumer satisfaction; and
          (12) Provide the Secretary with such access to 
        information collection as may be appropriate to monitor 
        and ensure the quality of care provided under this 
        part.
    Independent Accrediting Organizations. Medicare Choice plan 
sponsors will be accredited for meeting quality standards 
established by the Secretary of HHS. Medicare Choice plans 
accredited by external independent accrediting organizations, 
recognized by the Secretary of HHS as establishing standards at 
least as stringent as Medicare standards, will be ``deemed'' 
accredited for Medicare purposes.
    Coverage Determinations. A Medicare Choice organization 
would be required to make determinations regarding 
authorization requests for nonemergency care on a timely basis. 
Appeals of denials would generally have to be decided within 30 
days of receiving medical information, but not later than 60 
days after the coverage determination. Physicians would be the 
only individuals permitted to make decisions to deny coverage 
based on medical necessity. Appeals of determinations involving 
a life-threatening or emergency situation would have to be made 
in an expedited manner and within 72 hours of denial.
    Grievance and Appeals Procedures. Medicare Choice plan 
sponsors must have meaningful grievance procedures for the 
resolution of individual enrollee complaints. An enrollee who 
is dissatisfied with the outcome of the grievance procedure has 
the right to appeal through a hearing before the Secretary if 
the amount involved is greater than $100. If the amount is 
greater than $1,000, either the enrollee or the Medicare Choice 
plan sponsor may seek judicial review.
    Independent Review of Certain Coverage Denials. The 
Secretary will contract with an independent, outside entity to 
review and resolve reconsiderations that affirm denial of 
coverage.
    Confidentiality and Accuracy of Enrollee Records. A 
planmust have procedures to maintain accurate medical records, 
safeguard the privacy of the individuals' records, and make these 
records accessible to beneficiaries.
    Ability to Service Enrollment. Medicare Choice plans must 
demonstrate the capacity to adequately serve their expected 
enrollment of Medicare beneficiaries.
    50/50 Rule. During 1998, Medicare Choice plans must 
maintain at least as many commercial enrollees at any time as 
Medicare enrollees. (Medicare Choice plans will be relieved of 
the requirement to maintain a commercial enrollment equal to or 
greater than its enrollment of both Medicare and Medicaid 
enrollees.) This requirement may be waived if the Secretary 
determines that the plan meets all other beneficiary 
protections and quality standards. Beginning January of 1999, 
the 50/50 requirement will be repealed.
    Rural access. If the Medicare Choice plan restricts 
coverage to services provided by a network of providers, 
primary care services in rural areas must be available within 
30 minutes or 30 miles from an enrollee's place of residence. 
The Secretary may make exceptions to this standard on a case-
by-case basis.
    Advance Directives. A Medicare Choice plan must maintain 
written policies and procedures respecting advance directives. 
Nothing in this section will be construed to require the 
provision of information regarding assisted suicide, 
euthanasia, or mercy killing.
    Physician Incentive Plans. Medicare Choice plans may not 
operate physician incentive plans as an inducement for 
physicians to reduce or limit medically necessary services.
    Provider Antidiscrimination. A Medicare Choice plan may not 
discriminate in participation, reimbursement or indemnification 
against a provider who is acting within the scope of his or her 
license or certification under applicable state law, solely 
based on such license or certification of the provider. This 
provision is not intended to prevent a plan from matching the 
number and type of health care providers to the needs of the 
plan's members or establish any other measure designed to 
maintain quality and control costs consistent with the 
responsibilities of the plan.

               payments to medicare choice organizations

    A Medicare payment amount will be established for each 
Medicare payment area (by county) within the United States. The 
same Medicare payment amount will apply to each Medicare 
beneficiary eligible for coverage within a Medicare payment 
area. The Medicare payment rates will be based on the current 
Medicare HMO payment methods with adjustments made so that the 
variation in Medicare payment amounts across geographic areas 
are reasonable.
    A base Medicare payment amount will be established for each 
Medicare payment area. The link between traditional Medicare 
fee-for-service spending and the Medicare payment amounts will 
be broken. The base Medicare payment amount for an area will be 
determined through adjustments over 5 years.
    Beginning in 1998, plans are to be paid the greatest of:
          (1) A blended local/national rate (initially based on 
        1997 rates), updated by the nominal per capita growth 
        in the gross domestic product (GDP) plus .5 percentage 
        points;
          (2) A minimum payment amount of up to 85% of the 
        national average payment (to be determined annually 
        depending on enrollment and other factors), for U.S. 
        territories the minimum payment amount will equal 150% 
        of the 1997 payment;
          (3) 100 percent of the plan's 1997 payment.
    Blended local/national rate. Blending of local and national 
rates will be phased in over five years beginning in 1998. 
Local rates of 90% in 1998, 80% in 1999, 70% in 2000, 60% in 
2001, and 50% in 2002 will be blended with national rates of 
10% in 1998, 20% in 1999, 30% in 2000, 40% in 2001, and 50% in 
2002.
    GME/DSH Payments. 100 percent of the amount of payments for 
indirect medical education, graduate medical education (GME), 
and disproportionate share (DSH) will be carved out of local 
rates over a four year period (1998-2001). Hospitals will be 
allowed to submit a Medicare claim for each Medicare Choice 
enrollee and receive the amount of medical education and DSH 
payments they would otherwise receive for a patient enrolled in 
traditional Medicare. During the first 3 years, payments will 
be proportionate to the amount of the carve out.
    Risk Adjustment. In making payments to Medicare Choice 
plans on behalf of Medicare beneficiaries, the Medicare payment 
amount will be adjusted by the Secretary to reflect demographic 
and health status factors applicable to the beneficiary.
    Payments to Medicare Choice plans will also be adjusted for 
new enrollees by 5 percent for beneficiaries in their first 
year of enrollment, and then 4 percent, 3 percent, 2 percent 
and 1 percent in their second, third, fourth, and fifth years 
of enrollment respectively. Payments for beneficiaries who 
``age-in'' to a Medicare Choice plan--i.e. beneficiaries who 
are already enrolled in a risk plan with a Medicare Choice 
contract upon turning 65 would not be subjected to this 
adjustment if the enrollee remained with the same sponsoring 
organization. New Medicare Choice plans in any county where the 
Medicare Choice payment is below the national average Medicare 
Choice payment will be exempt from the new enrollee adjustment 
during the 12 months after they enroll their first Medicare 
Choice beneficiary. The new enrollee adjustment would be 
discontinued when the Secretary has fully implemented a risk 
adjustment methodology that accounts for variations in per 
capita costs based on health status and which has been 
evaluated as effective by an independent actuary of the 
actuarial soundness of the risk adjuster.
    Encounter Data Collection. The Secretary will require 
Medicare Choice organizations (and risk-contract plans) to 
submit, for periods beginning on or after January 1, 1998, data 
physician visits, nursing home days, home health visits, 
hospital inpatient days, and rehabilitation services.
    Study on Input Price Adjustments. With the Medicare Payment 
Advisory Commission, the Secretary shall study appropriate 
input price adjustments for applying national rates to local 
areas--including the Medicare hospital wage index and the 
actual case mix of a geographic region. Recommendations shall 
be submitted in a report to Congress.
    Payment areas with highly variable rates. In the case of a 
Medicare Choice payment area for which the AAPCC for 1997 
varies by more than 20% from such rate for 1996, the Secretary, 
where appropriate, could substitute for the 1997 rate a rate 
that is more representative of the cost of the enrollees in the 
area.
    Request for alternate Medicare Choice payment area. Upon 
request of a state for a contract year (beginning after 1998) 
made at least 7 months before the beginning of the year, the 
Secretary would redefine Medicare Choice payment areas in the 
state to: (1) a single statewide Medicare Choice payment area; 
(2) a metropolitan system (described in the provision); or (3) 
a single Medicare Choice payment area consolidating 
noncontiguous counties (or equivalent areas) within a state. 
This adjustment would be effective for payments for months 
beginning with January of the year following the year in which 
the request was received. The Secretary would be required to 
make an adjustment to payment areas in the state to ensure 
budget neutrality.
    Analysis of Payment Variation. The Secretary will conduct 
an analysis, based on the developments in the Medicare Choice 
program up to December 31, 2000, of the variation in Medicare 
payment amounts, taking into consideration measurable input 
cost differences, and the degree to which Medicare Choice 
payment amounts have enhanced or limited beneficiary choice of 
health plans in areas. The Secretary would report the findings 
to the appropriate committees of the Congress, and the public, 
not later than December 31, 2002.

                                premiums

    Annual filing by Plan. Each Medicare Choice organization 
would be required annually to file with the Secretary the 
amount of the monthly premium for coverage under each of the 
plans it would be offering in each payment area, and the 
enrollment capacity in relation to the plan in each such area.
    Monthly Amount. The monthly premium charged for a plan 
offered in a payment area would equal \1/12\ of the amount (if 
any) by which the premium exceeded the Medicare Choice 
capitation rate. The organization would have to permit monthly 
payment of premiums.
    Uniform Plan Premium. Premiums could not vary among 
individuals who resided in the same payment area.
    Limitation on Cost Sharing. In no case could the actuarial 
value of the deductibles, coinsurance, and copayments 
applicable on average to individuals enrolled with a Medicare 
Choice plan with respect to required benefits exceed the 
actuarial value of the deductibles, coinsurance, and copayments 
applicable in Medicare FFS. This provision would not apply to 
an MSA plan or a private fee-for-service plan. If the Secretary 
determined that adequate data were not available to determine 
the actuarial value of the cost-sharing elements of the plan, 
the Secretary could determine the amount.
    Requirement for Additional Benefits. The extent to which a 
Medicare Choice plan (other than a MSA plan) would have to 
provide additional benefits would depend on whether the plan's 
adjusted community rate (ACR) was lower than its average 
capitation payments. The ACR would mean, at the election of the 
Medicare Choice organization, either: (I) the rate of payment 
for services which the Secretary annually determined would 
apply to the individuals electing a Medicare Choice plan if the 
payment were determined under a community rating system, or 
(ii) the portion of the weighted aggregate premium which the 
Secretary annually estimated would apply to the individual but 
adjusted for differences between the utilization of individuals 
under Medicare and the utilization of other enrollees (or 
through another specified manner). For PSOs, the ACR could be 
computed using data in the general commercial marketplace or 
(during a transition period) based on the costs incurred by the 
organization in providing such a plan.
    If the actuarial value of the benefits under the Medicare 
Choice plan (as determined based upon the ACR) for individuals 
was less than the average of the capitation payments made to 
the organization for the plan at the beginning of a contract 
year, the organization would have to provide additional 
benefits in a value which was at least as much as the amount by 
which the capitation payment exceeded the ACR. These benefits 
would have to be uniform for all enrollees in a plan area. (The 
excess amount could, however, be lower if the organization 
elected to withhold some of it for a stabilization fund.) A 
Medicare Choice organization could provide additional benefits 
(over and above those required to be added as a result of the 
excess payment), and could impose a premium for such additional 
benefits. A Medicare Choice organization could not provide for 
cash or other monetary rebates as an inducement for enrollment 
or otherwise.
    Periodic Auditing. The Secretary would be required to 
provide annually for the auditing of the financial records 
(including data relating to utilization and computation of the 
ACR) of at least one-third of the Medicare Choice organizations 
offering Medicare Choice plans. The General Accounting Office 
would be required to monitor such auditing activities.
    Prohibition of State Imposition of Premium Taxes. No state 
could impose a premium tax or similar tax on the premiums of 
Medicare Choice plans or the offering of such plans.

     organizational and financial requirements for medicare choice 
                             organizations

    State Licensure. Organizations eligible to contract with 
the Secretary of Health and Human Services (HHS) to offer 
Medicare Choice plans must be organized and licensed under 
state laws applicable to entities bearing risk for the 
provision of health services, by each state in which they wish 
to enroll Medicare beneficiaries.
    Solvency Standards. Eligible Medicare Choice plan 
sponsoring organizations must meet solvency requirements 
satisfactory to the Secretary of HHS. Organizations licensed in 
states recognized by the Secretary of HHS as requiring solvency 
standards at least as stringent as those required by Medicare 
will be deemed to meet Medicare Choice plan solvency 
requirements.
    Exceptions for Provider Sponsored Organizations (PSOs). To 
help facilitate the availability of Medicare Choice plans 
throughout the United States, a waiver process to temporarily 
certify PSOs to enroll Medicare beneficiaries without a state 
license is established.
    Prior to January 1, 2001, PSOs would be granted a waiver 
which would allow them to contract directly with HCFA for 
Medicare enrollees without first obtaining a state license.
    The Federal waiver would allow PSOs to circumvent the 
solvency requirements of the State, but other State 
requirements, including the State's patient protection 
standards, would be imposed upon the PSO through the Medicare 
Choice contracting process. The Secretary will enter into 
agreements with States to ensure adequate enforcement of State 
non-solvency standards. If the Secretary is notified by the 
State that the PSO is not in compliance, and the Secretary 
agrees that the PSO is not in compliance, the Secretary will 
terminate the PSO's Medicare Choice. Before termination of 
contract, the PSO must be allowed 60 days to reach compliance.
    A PSO's Federal waiver will be effective until the State in 
which the PSO is located receives Federal certification that 
the State's solvency requirements for PSOs are identical to the 
Federal government's solvency standards for PSOs.
    Federal solvency standards for PSOs will be developed 
through a negotiated rule-making process taking into 
consideration risk based capital standards developed by the 
National Association of Insurance Commissioners. The target 
publishing date of the interim rule on Medicare Choice solvency 
requirements for PSOs is April 1, 1998. The rule will be 
effective immediately on an interim basis. The final rule will 
be published not later than April 1, 1999.
    Beginning January 1, 2001, PSOs will be required to have 
state licenses to enroll Medicare beneficiaries.
    The Secretary is required to report to Congress evaluating 
the temporary certification process by December 31, 1998. The 
report will include an analysis of state efforts to adopt 
regulatory standards that take into account health plan 
sponsors that provide services directly to enrollees through 
affiliated providers.
    A PSO is defined as a locally, organized and operated 
entity that provides a substantial proportion of services 
directly through affiliated providers, and that is organized to 
deliver a spectrum of health care services. A provider is 
affiliated if through contract, ownership or otherwise (1) one 
provider, directly or indirectly, is controlled by, or is under 
common control with the other; (2) both providers are part of a 
controlled group of corporations; (3) each provider is a 
participant in a lawful combination under which the providers 
share substantial financial risk in connection with the PSO's 
operations; or (4) both providers are part of an affiliated 
service group.
    Assume Full Risk. All Medicare Choice plan sponsoring 
organizations must assume full financial risk (except, at the 
election of the organization, hospice care) on a prospective 
basis for the provision of health care services, except the 
organization may insure or make arrangements for stop-loss 
coverage for costs exceeding an amount established by 
regulation and adjusted annually based on the consumer price 
index; services provided to members by providers outside of the 
organization; and for not more than 90 percent of costs which 
exceed 115 percent ofincome in a fiscal year. An organization 
may also make arrangements with providers to assume all or part of the 
risk on a prospective basis for the provision of basic health services.
    Establishment of Other Standards and Interim Standards. The 
Secretary would be required to establish by regulation other 
standards for Medicare Choice organizations and plans 
consistent with this act. By January 1, 1998, the Secretary 
would be required to issue interim standards based on currently 
applicable standards for Medicare HMOs/CMPs. The new standards 
established under this provision would supersede any state law 
or regulation with respect to Medicare Choice plans offered by 
Medicare contractors to the extent that such state law or 
regulations was inconsistent with such standards.

                CONTRACTS/ADMINISTRATION AND ENFORCEMENT

    The Secretary will enter into a contract with every 
organization eligible to offer a Medicare Choice plan and 
certified by the Secretary as meeting Medicare Choice plan 
standards. The contracts may be made automatically renewable.
    Minimum Enrollment. A Medicare Choice organization must 
have a minimum of 1,500 commercial enrollees, or no less than 
500 commercial enrollees in rural areas. Provider sponsored 
organizations can include as commercial enrollees those 
individuals for whom the organization has assumed financial 
risk. This requirement will be waived for the first two years 
of a Medicare Choice contract.
    Payments to Plans. The Secretary will transmit to each 
Medicare beneficiary's selected Medicare Choice plan a payment 
amount equal to the pertinent adjusted Medicare payment amount 
for that individual in that Medicare payment area. Payments 
will occur in advance and on a monthly basis, except in the 
case of an MSA plan which will be paid on an annual basis with 
the remainder of the premium being deposited into the holder's 
Medicare Choice Medical Savings Account on an annual basis. 
Monthly Medicare Choice payments for October 1, 2001 would be 
paid on the last business day of September, 2001.
    Trust Fund Allocation. Payments to plans will be made with 
funds withdrawn from the Federal Hospital Insurance Trust Fund 
and the Federal Supplementary Medical Insurance Trust Fund. The 
allocation from each fund will be determined each year by the 
Secretary of HHS, based on the relative weight that benefits 
from each fund contribute to the determination of the Medicare 
payment amounts.
    Right to Inspect and Audit. The Medicare Choice contract 
will provide that the Secretary, or the Secretary's designee, 
will have the right to inspect or otherwise evaluate the 
quality, appropriateness, and timeliness of services performed 
under the contract; the facilities of the plan's sponsor; and 
the books and records of the plan sponsor that pertain to the 
ability of the sponsor to bear responsibility for potential 
financial losses. The Secretary will also require a Medicare 
Choice plan sponsor to provide notice to enrollees in the event 
of termination of the plan's contract and include in the notice 
a description of each enrollee's options for obtaining 
benefits.
    Rate Disclosure. Each Medicare Choice plan must submit to 
the Secretary of HHS a table of its rates for all actuarial 
categories of beneficiaries prior to contract approval by the 
Secretary.
    Risk of Insolvency. Medicare Choice plan sponsors must make 
adequate provision against the risk of insolvency, including 
provisions to prevent the plan's enrollees from being held 
liable to any person or entity for the plan sponsor's debts in 
the event of the plan sponsor's insolvency.
    User Fees. The Secretary may require plans to share in the 
cost of disseminating information to beneficiaries.
    Plan Service Areas. Medicare Choice plan service areas must 
correspond to Medicare payment areas. The Secretary of HHS may 
waive this requirement and approve service areas that are 
smaller than Medicare payment areas if the Secretary determines 
that the service areas are not defined so as to discriminate 
against any population.
    Beneficiary Protection upon Contract Termination. A 
Medicare Choice plan terminating its contract with the 
Secretary of HHS must arrange for supplementary coverage for 
its Medicare enrollees for the duration of any preexisting 
condition exclusion under the enrollee's successor coverage for 
the lesser of 6 months or the duration of the exclusion period.
    Prompt Payment. Medicare Choice plan sponsors must provide 
prompt payment for covered items and services to providers who 
are not under contract with the plan. If the Medicare Choice 
plan sponsor does not provide prompt payment, the Secretary may 
pay such providers directly and deduct the payment amount from 
the payments made to the Medicare Choice plan.
    Intermediate Sanctions. The Secretary of HHS may impose 
certain lesser intermediate sanctions, including suspension of 
enrollment or payment and imposition of civil monetary 
penalties. These sanctions may be applied for denial of 
medically necessary services, overcharging, enrollment 
violations, misrepresentation, failure to pay promptly for 
services, or employment of providers barred from Medicare 
participation.
    Contract Termination and Due Process. A contract may be 
terminated by the Secretary of HHS at any time if the 
organization no longer meets the Medicare Choice plan 
requirements. Prior to terminating a contract for non-
compliance on a Medicare Choice plan sponsor, the Secretary 
will provide the Medicare Choice plan sponsor with the 
opportunity to develop and implement a corrective action plan. 
The Secretary must also provide the Medicare Choice plan 
sponsor with the opportunity for a hearing, including the 
opportunity to appeal an initial decision, before terminating 
the contract.
    Previous Termination. The Secretary may not enter into a 
contract with a Medicare Choice plan sponsor if a previous 
contract with the plan sponsor was terminated within the 
previous five years, except in circumstances that warrant 
special consideration.

                            OTHER PROVISIONS

    Restrictions on Enrollment for Certain Medicare Choice 
Plans. A Medicare Choice religious fraternal benefit society 
plan could restrict enrollment to individuals who are members 
of the church, convention, or group with which the society is 
affiliated. A Medicare Choice religious fraternal benefit 
society plan would be a Medicare Choice plan that (i) is 
offered by a religious fraternal benefit society only to 
members of the church, convention, or affiliated group, and 
(ii) permits all members to enroll without regard to health 
status-related factors. This provision could not be construed 
as waiving plan requirements for financial solvency. In 
developing solvency standards, the Secretary would take into 
account open contract and assessment features characteristic of 
fraternal insurance certificates. Under regulations, the 
Secretary would provide for adjustments to payment amounts 
under section 1854 to assure an appropriate payment level, 
taking account of the actuarial characteristics of the 
individuals enrolled in such a plan.
    A religious fraternal benefit society is an organization 
that (i) is exempt from Federal income taxation under section 
501(c)(8) of the Internal Revenue Code; (ii) is affiliated 
with, carries out the tenets of, and shares a religious bond 
with, a church or convention or association of churches or an 
affiliated group of churches; (iii) offers, in addition to a 
Medicare Choice religious fraternal benefit society plan, at 
least the same level of health coverage to individuals entitled 
to Medicare benefits who are members of such church, 
convention, or group; and (iv) does not impose any limitation 
on membership in the society based on any health status-related 
factor.

                            TRANSITION RULES

    Existing Medicare HMO risk-contract plans are pre-
approvedas Medicare Choice plans and have up to three years to meet any 
new or different standards.
    The Secretary would be prohibited from entering into, 
renewing, or continuing any risk-sharing contract under section 
1876 for any contract year beginning on or after the date 
Medicare Choice standards are first established for Medicare 
Choice organizations that are insurers or HMOs. If the 
organization had a contract in effect on that date, the 
prohibition would be effective one year later. The Secretary 
could not enter into, renew, or continue a risk-sharing 
contract for any contract year beginning on or after January 1, 
2000. An individual who is enrolled in Medicare part B only and 
also in an organization with a risk-sharing contract on 
December 31, 1998 could continue enrollment in accordance with 
regulations issued not later than July 1, 1998.

   CHAPTER 2: PROVISIONS RELATING TO MEDICARE SUPPLEMENTAL INSURANCE

                     PORTABILITY AND OTHER CHANGES

                              Present Law

    1. Medigap Portability. Medicare beneficiaries have a 6-
month open enrollment period to purchase a Medigap insurance 
policy when they first turn 65. During this open enrollment 
period, medical underwriting (i.e. requiring a beneficiary to 
pass a physical exam in order to be able to purchase insurance) 
is prohibited. After this initial 6-month open enrollment 
period seniors maybe unable to purchase a Medigap policy if 
they are forced to change their Medigap insurer or if their 
employer stops providing retiree health benefits.
    2. Preexisting Condition Limitations. A 6 month pre-
existing condition limitation is currently allowed during the 
initial open enrollment period available to beneficiaries when 
they first become eligible for Medicare benefits.
    3. Medigap for the Medicare Disabled. The 6 month open 
enrollment period available to Medicare beneficiaries to 
purchase a Medigap insurance policy without any medical 
underwriting applies only to beneficiaries turning 65 years 
old.
    4. Standard Benefit Packages. Current law requires that all 
Medigap policies conform with one of ten authorized standard 
policies. These standard policies range from very basic cost 
sharing coverage to very rich cost sharing plus coverage plus 
coverage of extra benefits.

                           Reason for Change

    When a Medicare beneficiary decides to leave the 
traditional Medicare program to try a Medicare Choice plan, 
they no longer need their supplemental coverage (Medigap) 
policy because most (if not all) Medicare Choice plans will 
cover the ``gaps'' that traditional Medicare does not cover. 
However, Medicare beneficiaries who want to try a Medicare 
Choice plan may be discouraged from doing so because once they 
give up their Medigap policy to enroll in a Medicare Choice 
plan, they may never be able to purchase that policy at the 
same price again if they should decide to return to traditional 
Medicare. This is because their guaranteed issue period expired 
six months after becoming eligible for Medicare at age 65.
    In addition, the 10 standardized Medigap policies all 
include first dollar coverage which creates an incentive for 
over-utilization of Medicare services. A Medigap policy option 
with a high deductible and lower premiums may help to reduce 
incentives for overutilization of Medicare services.

                          Committee Provision

    Current Medigap Laws will be amended as follows:
    1. Portability. Medigap insurers would be required to sell 
a Medigap insurance policy without underwriting during a 63 day 
period if:
          (a) an individual covered under a Medigap policy, 
        discontinues that policy to enroll in a Medicare Choice 
        plan or a Medicare Select plan and then decides--before 
        the end of their first 12 months of their first 
        enrollment--to return to the traditional Medicare 
        program;
          (b) an individual enrolls in a Medicare Choice plan 
        upon turning 65 and then decides--before the end of 
        their first 12 months--to disenroll and enroll in the 
        traditional Medicare program;
          (c) an individual loses their employer sponsored 
        retiree health benefits,
          (d) an individual insured by a Medigap plan, a 
        Medicare Choice plan, or a Medicare Select plan moves 
        outside the state in which the insurer is licensed, 
        moves outside the plan's or the insurer's service area, 
        or the insurer or health plan goes out of business or 
        withdraws from the market; or has its Medicare contract 
        terminated.
    (Note. In the case of a beneficiary who previously owned a 
Medigap policy, that individual would not be guaranteed issued 
a Medigap plan with benefits which are greater than those 
contained in the individual's previous policy.)
    2. Pre-existing Condition Exclusions. Medigap insurers will 
no longer be allowed to impose pre-existing condition 
exclusions during guaranteed issue periods (i.e. during first 6 
months of Medicare eligibility, and during the new guaranteed 
issue periods listed above under portability.)
    3. Guarantee issue for the Disabled. Provides a one time 
open enrollment period for disabled Medicare beneficiaries 
during the six month period after they first become eligible 
for Medicare.
    4. New Medigap High Deductible Option. The 10 standard 
Medigap policies will be amended to allow an optional high 
deductible feature. Under this provision, a State must choose 
one or more of the current 10 Medigap standard policies and 
authorize the sale of those policies with an optional high 
deductible feature. The new products will be authorized to have 
an annual $1,500 deductible before the policy begins paying 
benefits.

                             Effective Date

    January 1, 1998.

                        CHAPTER 3: PACE PROGRAM

                              Present Law

    OBRA 86 required the Secretary to grant waivers of certain 
Medicare and Medicaid requirements to not more than 10 public 
or non-profit private community-based organizations to provide 
health and long-term care services on a capitated basis to 
frail elderly persons at risk of institutionalization. These 
projects, known as the Programs of All Inclusive Care for the 
Elderly, or PACE projects, were intended to determine whether 
an earlier demonstration program, ON LOK, could be replicated 
across the country. OBRA 90 expanded the number of 
organizations eligible for waivers to 15.

                          Committee Provision

    The provision would repeal current ON LOK and PACE project 
demonstration waiver authority and establish in Medicare law 
PACE as a permanent benefit category eligible for coverage and 
reimbursement under the Medicare program. PACE providers would 
offer comprehensive health care services to eligible 
individuals in accordance with a PACE program agreement and 
regulations. In general, PACE providers would be public or 
private nonprofit entities, except for entities (up to 10) 
participating in a demonstration to test the operation of a 
PACE program by private, for-profit entities.

                       CHAPTER 4: DEMONSTRATIONS

             MEDICARE MEDICAL SAVINGS ACCOUNT DEMONSTRATION

                              Present Law

    Medical Savings Accounts are not currently an option for 
Medicare beneficiaries.

                           Reason for Change

    The intention of this act is to give Medicare beneficiaries 
the same choices for health care delivery as the private sector 
currently has, including Medical Savings Accounts. In addition, 
Medical Savings Accounts coupled with high-deductible insurance 
policies discourage over-utilization of health care items and 
services and therefore help to slow the growth in health care 
spending.

                          Committee Provision

    Medicare beneficiaries will be able toelect as a Medicare 
Choice option, a medical savings account high deductible insurance 
policy in combination with a medical savings account. The high 
deductible insurance policy must provide reimbursement for at least the 
items and services covered under Medicare Parts A and B--but only after 
the enrollee incurs countable expenses equal to the amount of an annual 
deductible of not more than $2,250 and not less than $1,500 in 1999, 
updated annually by an inflation factor.
    To the extent an individual chooses such a plan, the 
Secretary of Health and Human Services would pay the premium of 
the high deductible insurance policy and also make an annual 
contribution to the beneficiary's medical savings account equal 
to the difference between the premium of the insurance policy 
and the Medicare Choice capitation rate in the beneficiary's 
county. Only contributions by the Secretary of Health and Human 
Services could be made to a Medicare Choice MSA and such 
contributions would not be included in the taxable income of 
the Medicare Choice MSA holder.
    Contributions to the enrollee's MSA can be used by the 
enrollee to pay for any medical care they choose. Withdrawals 
from Medicare Choice MSAs are excludable from taxable income if 
used for qualified medical expenses regardless of whether an 
account holder is enrolled in an MSA Plan at the time of the 
distribution. Withdrawals for purposes other than qualified 
medical expenses are includable in taxable income. An 
additional tax of 50% of the amount includible in taxable 
income applies to the extent total distributions for purposes 
other than qualified medical expenses in a taxable year exceed 
the amount by which the value of the MSA (as of December 31 of 
the preceding taxable year) exceeds 60 percent of the MSA 
plan's deductible.
    Any MSA plan purchased by a Medicare beneficiary must 
include a cap on out-of-pocket costs of $3,000.
    The demonstration will be limited to the first 100,000 
Medicare beneficiaries who enroll and new enrollments will not 
be permitted after January 1, 2003.
    An exception to the enrollment and date limits listed above 
will be made for individuals who already have tax-deductible 
MSAs upon turning 65. These individuals will be permitted to 
retain qualified MSAs under Medicare Choice without respect to 
this demonstration's limit on enrollment or sunset date.

                             Effective Date

    January 1, 1998.

         COMPETITIVE PRICING DEMONSTRATION FOR MEDICARE CHOICE

                              Present Law

    Under section 402 of the Social Security Amendments of 1967 
(P.L. 90-248, 42 U.S.C. 1395b-1), the Secretary is authorized 
to develop and engage in experiments and demonstration projects 
for specified purposes, including to determine whether, and if 
so, which changes in methods of payment or reimbursement for 
Medicare services, including a change to methods based on 
negotiated rates, would have the effect of increasing the 
efficiency and economy of such health services.

                           Reason for Change

    Under the authority described above, HCFA is currently 
seeking to demonstrate the application of competitive pricing 
as a method for establishing payments for risk contract HMOs in 
the Denver area. HCFA's actions have been challenged in the 
courts.

                          Committee Provision

    An Office of Competition would be established within the 
Department of Health of Human Services to negotiate with plans 
and administer the competitive pricing process.
    Plans would submit a premium amount based on core benefit 
package which must include benefits currently provided under 
Medicare A & B plus prescription drugs. The Office of 
Competition would calculate the weighted average premium--90% 
would be paid by Medicare and 10% by the enrollee. Plans would 
be allowed to offer two standardized supplemental benefit 
packages to be included in the comparative information given to 
beneficiaries.
    The Secretary must establish a technical advisory group in 
each demonstration site that includes plan representatives, 
beneficiaries, employers and providers. The Secretary must meet 
with the technical advisory group at least monthly beginning 
six months prior to the demonstration and regularly throughout 
the implementation period.

Standardized Medicare payment amount (government contribution)

    Not later than June 1 of each year, the Office of 
Competition would solicit premium bids on a core package of 
standardized benefits.
    The government contribution would be set at the weighted 
average of the premium bids. The Office of Competition would 
have the authority to negotiate with plans to adjust their 
premium bids to ensure that the standardized Medicare payment 
amount would never be greater than per capita fee- for-service 
spending in that area.
    The Office of Competition would negotiate with plans to 
ensure that premiums are actuarially sound and fair and do not 
foster adverse selection.
    The standardized Medicare payment amount would be adjusted 
upward or downward at the time the beneficiary enrolls in the 
plan according to their health status. The beneficiary's share 
of the premium would be based on the standardized Medicare 
payment amount regardless of the risk adjustment made to the 
amount the plan is paid.

Enrollees cost-sharing

    Beneficiaries would be required to pay a minimum of 10% of 
the premium. If seniors choose a plan that costs less than the 
standardized Medicare payment amount, their premium will be 
lower. If seniors choose a plan that costs more than the 
federal payment, they will have to pay the difference.

Transition/Phase-in

    Beginning on January 1, 1999, this competitive pricing 
model would be tested as a demonstration in 10 urban areas with 
less than 25% Medicare HMO penetration and 3 rural markets. By 
December 31, 2001, the Secretary will evaluate the 
demonstration project. The President will make a legislative 
recommendation to Congress on whether the method of paying 
plans as tested in the demonstration project should be extended 
to the entire Medicare population.

                             Effective Date

    Payment under the demonstration will begin on January 1, 
1999. The demonstration will last no longer than December 31, 
2002. The Office of Competition will be established upon 
enactment.

                   MEDICARE ENROLLMENT DEMONSTRATION

                              Present Law

    HMOs with Medicare contracts may directly market to and 
enroll Medicare beneficiaries.

                           Reason for Change

    There is some evidence that allowing plans to conduct their 
own enrollment operations may lead to greater risk selection 
(i.e. ``cherry picking'' healthier beneficiaries). One possible 
solution to this would be to require all beneficiaries to 
enroll through HCFA. However a preferred option would be to 
requiring plans to contract with a private third party enroller 
approved by the Secretary.

                          Committee Provision

    The Secretary is authorized to conduct a demonstration for 
using a third-party contractor to conduct the Medicare Choice 
plan enrollment and disenrollment functions in an area. Such 
demonstration shall be conducted separately from the Medicare 
competitive pricing demonstrations. In conducting the 
demonstrations the Secretary must:
          1. Consult with affected parties on the design of the 
        demonstration, selection criteria for the third party 
        contractor, and the establishment of performance 
        standards
          2. Establish performance standards relative to 
        accuracy and timeliness. Should the third-party broker 
        not comply with these standards, the enrollment and 
        disenrollment functions would immediately revert to the 
        Medicare Choice plans.
          3. In the case of a dispute between the Secretary and 
        the Medicare Choice plans in the demonstration 
        regarding compliance with the standards, the plans 
        shall conduct these functions.

          EXTENSION AND EXPANSION OF SOCIAL HMO DEMONSTRATION

                              Present Law

    The Deficit Reduction Act of 1984 required the Secretary to 
grant 3-year waivers for demonstrations of social health 
maintenance organizations (SHMOs) which provide integrated 
health and long-term care services on a prepaid capitation 
basis. The waivers have been extended on several occasions 
since then and a second generation of projects was authorized 
by OBRA 90.

                          Committee Provision

    The provision would require the Secretary to extend waivers 
for SHMOs through December 31, 2000, and to submit a final 
report on the projects by March 31, 2001. The limit on the 
number of persons served per site would be expanded from 12,000 
to 36,000. The Secretary also would be required to submit to 
Congress by January 1, 1999, a plan, including an appropriate 
transition, for the integration of health plans offered by 
first and second generation SHMOs and similar plans into the 
Medicare Choice program. The report on the plan would be 
required to include recommendations on appropriate payment 
levels for SHMO plans, including an analysis of the extent to 
which it is appropriate to apply the Medicare Choice risk 
adjustment factors to SHMO populations.

         COMMUNITY NURSING ORGANIZATION DEMONSTRATION PROJECTS

                              Present Law

    OBRA 87 required the Secretary to conduct demonstration 
projects to test a prepaid capitated, nurse-managed system of 
care. Covered services include home health care, durable 
medical equipment, and certain ambulatory care services. Four 
sites (Mahomet, Illinois; Tucson, Arizona; New York, New York; 
and St. Paul, Minnesota) were awarded contracts in September, 
1992, and represent a mix of urban and rural sites and 
different types of health provider, including a home health 
agency, a hospital-based system, and a large multi-specialty 
clinic. The community nursing organization (CNO) sites 
completed development activities and implemented the 
demonstration in January 1994, with service delivery beginning 
February 1994.

                          Committee Provision

    The provision would extend the CNO demonstration for an 
additional period of 2 years, and the deadline for the report 
on the results of the demonstration would be not later than 6 
months before the end of the extension.

                MEDICARE COORDINATED CARE DEMONSTRATION

                              Present Law

    No provision.

                           Reason for Change

    A study sponsored by the Physician Payment Review 
Commission (PPRC) concluded that ``an effective case management 
program could help Medicare patients who are chronically ill or 
who are facing costly, complex treatment options. Based on 
experience of private payers, these Medicare patients would 
receive more appropriate medical care and Medicare would 
experience lower claims cost relative to the current program, 
which lacks a coordination of care function.''

                          Committee Provision

    The Secretary would be required to establish a 
demonstration program to evaluate methods such as case 
management and other models of coordinated care that improve 
the quality of care and reduce Medicare expenditures for 
beneficiaries with chronic illnesses enrolled in traditional 
Medicare.
    The Secretary would be required to examine best practices 
in the private sector for coordinating care for individuals 
with chronic illnesses for one year and, using the results of 
the evaluation, establish at least nine demonstration projects 
(6 urban and 3 rural) within 24 months of the date of 
enactment.
    Not later than two years after implementation, the 
Secretary would be required to evaluate the demonstrations and 
submit a report to Congress. The evaluation would have to 
address, at a minimum, the cost-effectiveness of the 
demonstration projects, quality of care received by 
beneficiaries, beneficiary satisfaction, and provider 
satisfaction. If the evaluation showed the demonstration 
project to either reduce Medicare expenditures or to not 
increase Medicare expenditures while increasing the quality of 
care received by beneficiaries and increasing beneficiary 
satisfaction, the Secretary would continue the project in the 
demonstration sites, and could expand the number of 
demonstration sites to implement the program nationally. The 
Secretary would be required to submit a report to Congress 
every two years for as long as the demonstration project 
continued.
    In carrying out the demonstration projects, the Secretary 
would be required to provide that the aggregate payments in 
Medicare be no greater than what such payments would have been 
if the demonstration projects had not been implemented. Such 
sums as necessary would be authorized to be appropriated for 
the purpose of evaluating and reporting on the demonstrations.

               MEDICARE SUBVENTION DEMONSTRATION PROJECT

                              Present Law

    Under current law, Medicare is prohibited from reimbursing 
for any services provided by a Federal health care provider, 
unless the provider is determined by the Secretary of Health 
and Human Services to be providing services to the public 
generally as a community institution or agency or is operated 
by the Indian Health Service. In addition, Medicare is 
prohibited from making payment to any Federal health care 
provider who is obligated by law or contract to render services 
at the public expense.

                           Reasons for Change

    The Committee provision is intended to provide for greater 
access by Medicare-eligible military retirees to military 
treatment facilities (MTFs) operated by the Department of 
Defense, and greater access by veterans to medical centers 
operated by the Department of Veterans Affairs.

                          Committee Provision

    The Committee provision would establish two, three-year 
demonstration projects under which Medicare would reimburse the 
Department of Defense and the Department of Veterans Affairs 
for medical care provided to Medicare-eligible military 
retirees and veterans, respectively. The Secretary of Health 
and Human Services would enter into agreements with the 
Secretary of Defense and the Secretary of Veterans Affairs on 
the specifications of each demonstration project; these 
agreements would be transmitted to Congress prior to operation 
of the demonstration projects. Both demonstration projects 
permit Medicare payment for services on a fee-for-service basis 
and as a capitated payment for services provided in managed 
care organizations operated by each department. The Medicare 
outlays for both demonstrations are capped, and both 
departments would be required to maintain current levels of 
efforts.

                             Effective Date

    January 1, 1998.

                         CHAPTER 5: COMMISSIONS

 establishment of the national bipartisan commission on the future of 
                                medicare

                              Present Law

    No provision.

                           Reasons for Change

    In 1995, expenditures out of the Hospital Insurance (HI or 
Part A) Trust Fund exceeded all sources of revenues into the 
Trust Fund. The Medicare Trustees predict in their 1997 annual 
report that in 2001 Medicare will out-spend its revenues and 
spend down its current surplus, becoming insolvent with a $23.4 
billion shortfall. This shortfall grows rapidly to over one 
half trillion dollars in 2007. And, this is before the baby-
boomers begin to retire in 2010.
    In the long-term, demographic trends will continue to 
increase financial pressure on the HI Trust Fund, challenging 
its ability to maintain our promise to beneficiaries. Today, 
there are less than 40 million Americans who qualify to receive 
Medicare. By the year 2010, the number will be approaching 50 
million, and by 2020, it will be over 60 million. While these 
numbers are increasing, the number of workers supporting 
retirees will decrease. Today, there are almost four workers 
per retiree,but in 2030 there will be only about two per 
retiree.
    The National Bipartisan Commission on the Future of 
Medicare will serve as an essential catalyst, and ultimately 
lead to a solution that will preserve and protect the Medicare 
program for current beneficiaries, their children, 
grandchildren, and great-grandchildren.

                          Committee Provision

    The National Bipartisan Commission on the Future of 
Medicare will be established to:
          1. review and analyze the long-term financial 
        condition of both Medicare Trust Funds;
          2. identify problems that threaten the financial 
        integrity of both the Hospital Insurance (HI) and the 
        Supplementary Medical Insurance (SMI) Trust Funds;
          3. analyze potential solutions that ensure the 
        financial integrity and the provision of appropriate 
        benefits including the extent to which current Medicare 
        update indexes do not accurately reflect inflation;
          4. make recommendations to restore solvency of the HI 
        Trust Fund and the financial integrity of the SMI Trust 
        Fund through the year 2030;
          5. make recommendations for establishing the 
        appropriate financial structure of the program as a 
        whole;
          6. make recommendations for establishing the 
        appropriate balance of benefits covered and beneficiary 
        contributions;
          7. make recommendations for the time periods during 
        which the Commission's recommendations should be 
        implemented;
          8. make recommendations regarding the financing of 
        graduate medical education (GME), including 
        consideration of alternative broad-based sources of 
        funding for such education and funding for institutions 
        not currently eligible for Medicare GME support that 
        conduct approved graduate medical residencies, such as 
        children's hospitals;
          9. make recommendations on the feasibility of 
        allowing individuals between the age of 62 and Medicare 
        eligibility age to buy into the Medicare program; and
          10. make recommendations on the impact of chronic 
        disease and disability trends on future costs and 
        quality of services under the current benefit, 
        financing, and delivery system structure of the 
        Medicare program.
    The Commission will consist of 15 members, appointed in the 
following manner:
          3 by the President;
          6 by the House of Representatives (not more than 4 
        from the same political party);
          6 by the Senate (not more than 4 from the same 
        political party); and
          the Chairman will be designated by the joint 
        agreement of the Speaker of the House of 
        Representatives and the Majority Leader of the Senate.
    Members of the Commission may be appointed from both the 
public and private sector.
    The Commission must submit a report to the President and 
Congress no later than 12 months from the date of enactment.
    The Commission terminates 30 days after the report is 
submitted.
    Funding is authorized to be appropriated from both Medicare 
Trust Funds.

                             Effective Date

    Upon enactment.

                 the medicare payment review commission

                              Current Law

    The Prospective Payment Assessment Commission was 
established by Congress through the Social Security Act 
Amendments of 1983 (P.L. 98-21). The Commission is charged with 
reporting each year its recommendation of an update factor for 
PPS payment rates and for other changes in reimbursement 
policy. It is also required each year to submit a report to 
Congress which provides background information on trends in 
health care delivery and financing. The Physician Payment 
Review Commission was established by the Congress through the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (P.L. 
99-272). It was charged with advising and making 
recommendations to the Congress on methods to reform payment to 
physicians under the Medicare program. In subsequent laws, 
Congress mandated additional responsibilities relating to the 
Medicare and Medicaid programs as well as the health care 
system more generally.
    The law specified that both Commissions were to be 
appointed by the Director of the Office of Technology 
Assessment and funded through appropriations from the Medicare 
trust funds. In 1995, the Office of Technology Assessment was 
abolished. In May 1997, P.L.105-13 was enacted; this 
legislation extended the terms of those Commission members 
whose terms were slated to expire in 1997 to May 1, 1998.

                           Reason for Change

    Both the ProPAC, which is responsible for hospital and 
health facilities payment policy, and the PPRC, which is 
responsible for physician payment policy and other Part B 
issues, have assumed critically important roles in assisting 
Congress with oversight and policy making for the Medicare 
program. However, with fee-for-service payment policy becoming 
relatively mature after years of refinement, Congress will 
require guidance in the future primarily in the Medicare Choice 
area. This area will require evaluation and oversight best 
suited for a single commission which can view the Medicare 
program in terms of an integrated totality between Parts A and 
B.

                          Committee Provision

    The Medicare Payment Review Commission will be formed to 
replace the Physician Payment Review Commission and the 
Prospective Payment Assessment Commission. The new Medicare 
Payment Review Commission (MPRC) will submit an annual report 
to Congress containing an examination of issues affecting the 
Medicare program.
    The Commission will review, and make recommendations to 
Congress concerning, payment policies under both the Medicare 
Choice program and the Medicare fee-for-service program.

                               Membership

    The Commission will be composed of 15 members appointed by 
the Comptroller General. The members will include individuals 
with national recognition for their expertise in health finance 
and economics, actuarial science, health facility management, 
health plans and integrated delivery systems, reimbursement of 
health facilities, allopathic and osteopathic physicians, and 
other providers of services, and other related fields. The 
membership will also include representatives of consumers and 
the elderly.

    tax treatment of hospitals participating in provider-sponsored 
                             organizations

                              Present Law

    To qualify as a charitable tax-exempt organization 
described in Internal Revenue Code (the ``Code'') section 
501(c)(3), and organization must be organized and operated 
exclusively for religious, charitable, scientific, testing for 
public safety, literary, or educational purposes, or to foster 
international sports competition, or for the prevention of 
cruelty to children or animals. Although section 501(c)(3) does 
not specifically mention furnishing medical care and operating 
a nonprofit hospital, such activities have long been considered 
to further charitable purposes, provided that the organization 
benefits the community as a whole.
    No part of the net earnings of a 501(c)(3) organization may 
inure to the benefit of any private shareholder or individual. 
No substantial part of the activities of a 501(c)(3) 
organization may consist of carrying on propaganda, or 
otherwise attempting to influence legislation, and such 
organization may not participate in, or intervene in, any 
political campaign on behalf of (or in opposition to) any 
candidate for public office. In addition, under section 501(m), 
an organization described in section 501(c)(3) or 501(c)(4) is 
exempt from tax only if no substantial part of its activities 
consists of providing commercial-type insurance.
    A tax-exempt organization may, subject to certain 
limitations, enter into a joint venture or partnership with 
afor-profit organization without affecting its tax-exempt status. Under 
current ruling practice, the IRS examines the facts and circumstances 
of each arrangement to determine (1) whether the venture itself and the 
participation of the tax-exempt organization therein furthers a 
charitable purpose, and (2) whether the sharing of profits and losses 
or other aspects of the arrangement entail improper private inurement 
or more than incidental private benefit.
    Committee Provision. The proposal would provide that an 
organization shall not fail to be treated as organized and 
operated exclusively for a charitable purpose for purposes of 
Code section 501(c)(3) solely because a hospital which is owned 
and operated by such organization participates in a provider-
sponsored organization (``PSO'') (as defined in section 
1845(a)(1) of the Social Security Act), whether or not such PSO 
is exempt from tax. Thus, participation by a hospital in a PSO 
(whether taxable or tax-exempt) would be deemed to satisfy the 
first part of the inquiry under current IRS ruling practice.
    The proposal would not change present-law restrictions on 
private inurement and private benefit. However, the proposal 
would provide that any person with a material financial 
interest in such a PSO shall be treated as a private 
shareholder or individual with respect to the hospital for 
purposes of applying the private inurement prohibition in Code 
section 501(c)(3). Accordingly, the facts and circumstances of 
each PSO arrangement would be evaluated to determine whether 
the arrangement entails impermissible private inurement or more 
than incidental private benefit (e.g., where there is a 
disproportionate allocation of profits and losses to the non-
exempt partners, the tax-exempt partner provides property or 
services to the joint venture at less than fair market value, 
or a non-exempt partner receives more than reasonable 
compensation for the sale of property or services to the joint 
venture).
    The proposal would not change present-law restrictions on 
lobbying and political activities. In addition, restrictions of 
Code section 501(m) on the provision of commercial-type 
insurance would continue to apply.

                   Subtitle B--Prevention Initiatives

               enhanced coverage for mammography services

                              Present Law

    Under current law, Medicare provides coverage for screening 
mammograms. The frequency of coverage depends on the age and 
risk factors of the woman. For women ages 35-39, one test is 
authorized. For women ages 40-49, one mammogram is covered 
every 24 months, except an annual test is authorized for women 
at high risk for breast cancer. Annual mammograms are covered 
for women ages 50-64. For women aged 65 and over, Medicare 
covers one mammogram every 24 months. Medicare's Part B 
deductible and Part B coinsurance apply for these services.

                           Reasons for Change

    The Committee provision would expand Medicare's coverage 
rules for mammograms.

                          Committee Provision

    The Committee provision would authorize annual mammograms 
for all women ages 40 and over, and waive co-insurance payments 
for beneficiaries.

                             Effective Date

    January 1, 1998.

                 new coverage for colorectal screening

                              Present Law

    Medicare does not cover colorectal cancer screening 
procedures. Such services are only covered as diagnostic 
services.

                           Reasons for Change

    The Committee proposal would establish a new screening 
benefit for Medicare beneficiaries.

                          Committee Provision

    The Committee provision would authorize coverage of 
colorectal cancer screening tests, and provide the Secretary, 
after consultation with appropriate organizations, to determine 
which screening procedures shall be reimbursed, payment amounts 
or limits for each procedure, and the frequency of each 
procedure, with consideration for risk factors. The Committee 
provision would direct the Secretary to promulgate the 
regulation three months following date of enactment. The 
Committee notes the Administration's Medicare reform proposal 
contained a provision to provide coverage of preventive 
colorectal screening. The Committee expects that this provision 
will be implemented expeditiously.

                             Effective Date

    January 1, 1998.

                    diabetes self-management benefit

                              Present Law

    Medicare covers home blood glucose monitors and associated 
testing strips for certain diabetes patients. Home blood 
glucose monitors enable diabetics to measure their blood 
glucose levels and then alter their diets or insulin dosages to 
ensure that they are maintaining an adequate blood glucose 
level. Home glucose monitors and testing strips are covered 
under Medicare's durable medical equipment benefit. Coverage of 
home blood glucose monitors is currently limited to certain 
diabetics, formerly referred to as Type I diabetics, where: (1) 
the patient is an insulin-treated diabetic; (2) the patient is 
capable of being trained to use the monitor in an appropriate 
manner, or, in some cases, another responsible person is 
capable of being trained to use the equipment and monitor the 
patient to assure that the intended effect is achieved; and (3) 
the device is designed for home rather than clinical use.

                           Reasons for Change

    The Committee provision provides for improved diabetes 
management benefits.

                          Committee Provision

    The Committee provision would include among Medicare's 
covered benefits diabetes outpatient self-management training 
services. These services would include educational and training 
services furnished to an individual with diabetes by or under 
arrangements with a certified provider in an outpatient setting 
meeting certain quality standards. These services would be 
covered only if the physician who is managing the individual's 
diabetic condition certifies that the services are needed under 
a comprehensive plan of care to provide the individual with 
necessary skills and knowledge (including skills related to the 
self-administration of injectable drugs) to participate in the 
management of the individual's condition.
    Certified providers for these purposes would be defined as 
physicians or other individuals or entities that, in addition 
to providing diabetes outpatient self-management training 
services, provide other items or services reimbursed by 
Medicare. Providers would have to meet quality standards 
established by the Secretary. They would be deemed to have met 
the Secretary's standards if they meet standards originally 
established by the National Diabetes Advisory Board and 
subsequently revised by organizations who participated in the 
establishment of standards of the Board, or if they are 
recognized by an organization representing persons with 
diabetes as meeting standards for furnishing such services.
    In establishing payment amounts for diabetes outpatient 
self-management training provided by physicians and determining 
the relative value for these services, the Secretary would be 
required to consult with appropriate organizations, including 
organizations representing persons or Medicare beneficiaries 
with diabetes.
    In addition, the provision would extend Medicare coverage 
of blood glucose monitors and testing strips to Type II 
diabetics and without regard to a person's use of insulin (as 
determined under standards established by the Secretary in 
consultation with appropriate organizations). The provision 
would also reduce the national payment limit for testing strips 
by 10 percent beginning in 1998.
    The Secretary, in consultation with appropriate 
organizations, would be required to establish outcome measures 
for purposes of evaluating the improvement of the health status 
of Medicare beneficiaries with diabetes. The Secretary would 
also be required to submit recommendations to Congress from 
time to time on modifications to coverage of services for these 
beneficiaries.

                             Effective Date

    January 1, 1998.

                   COVERAGE OF BONE MASS MEASUREMENTS

                              Present Law

    Medicare does not have a uniform national policy for 
coverage of bone mass measurement.

                           Reason for Change

    Many Medicare coverage decisions are made locally by 
individual carriers, that is, contractors to the Medicare 
program who process claims for payment for Part B items and 
services. There is no consistent national policy regarding 
payment for bone mass measurement. Early detection of bone mass 
loss is important for women at high risk of developing 
osteoporosis.

                          Committee Provision

    The Committee provision would authorize coverage of bone 
mass measurement for the following high-risk individuals: an 
estrogen-deficient woman at clinical risk for osteoporosis; an 
individual with vertebral abnormalities; an individual 
receiving long-term glucocorticoid steroid therapy, an 
individual with primary hyperparathyroidism, and an individual 
being monitored to assess osteoporosis drug therapy.

                             Effective Date

    January 1, 1998.

                     Subtitle C--Rural Initiatives

                              Present Law

    The Medicare program includes a number of provisions to 
help rural seniors receive health services and for Medicare to 
pay fairly in rural areas.
    Athough the standardized amount under the Medicare 
Prospective Payment System (PPS) paid to hospitals is the same 
whether they are rural or urban, there are adjustments to that 
base payment that are lower for rural areas reflecting the 
lower cost of health care in rural America. The wage index, for 
example, in a rural area is often significantly lower than in 
an urban area.
    Certain rural hospitals do receive improved payments over 
other rural hospitals, or, they can also have greater 
flexibility than urban hospitals in their delivery of care. The 
following are some of the special rural hospital designations:
          1. Sole Community Hospitals (SCH): geographically 
        isolated hospitals that represent the only readily 
        available source of inpatient care in an area. SCHs are 
        paid the highest of three amounts: (1) payment based on 
        hospital-specific costs in 1982, updated to the current 
        year; (2) payment based on hospital-specific costs in 
        1987, updated to the current year; or (3) the PPS 
        payment for the hospital. About 60% of SCHs currently 
        receive payment based on their hospital-specific base 
        year costs (about 728 hospitals are SCHs).
          2. (Expired provision) Small rural Medicare Dependent 
        hospitals (MDHs): the designation of Medicare 
        dependent, small rural hospitals expired on September 
        30, 1994. These hospitals were reimbursed on the same 
        basis as sole community hospitals. MDHs were hospitals 
        with 100 beds or less located in a rural area and that 
        had more that 60% of its inpatient days attributable to 
        Medicare (in FY 1994, about 390 hospitals were MDHs). 
        Since the provision expired, these hospitals have been 
        receiving PPS payments.
          3. Rural Referral Centers (RRCs): relatively large 
        rural hospitals with at least 275 beds or that meet 
        specific criteria indicating that they receive a high 
        referral from other hospitals. (about 130 hospitals are 
        designated RRCs).
          4. Limited-Service Hospitals: under current law, 
        there are several demonstration projects that are in 
        place allowing hospitals in rural communities greater 
        flexibility in delivering care. There is also a grant 
        program to help states coordinate the type of care 
        delivered among limited service hospitals.
          a. Rural Health Care Transition Act: up to $50,000 
        per year available to nonprofit acute care hospitals in 
        rural areas with less than 100 beds. The grants can be 
        used for improvement of outpatient or emergency 
        services, recruitment of health professionals, or 
        development of alternative delivery systems (the 
        program is extended through FY 1997. In FY 1995, grants 
        were made to 129 facilities in 44 states).
          b. Medical Assistance Facility (MAF) Demonstration: 
        only in the State of Montana, a category of facilities 
        in remote rural areas that do not qualify as full-
        service hospitals but provide emergency services and 
        short-term inpatient care. Funding is through July 1, 
        2000.
          c. Essential Access Community Hospitals Demonstration 
        Projects (EACH/RPCH): Provides $25 million per year in 
        grants to establish rural networks for EACH/RPCHs. 
        RPCHs are facilities in rural areas that do not qualify 
        as full-service hospitals but provide temporary 
        inpatient care to patients requiring stabilization 
        prior to discharge or transfer to another hospital. 
        EACHs provide emergency and medical backup services to 
        RPCHs participating in the network (7 states: WV, CA, 
        CO, KS, NY, NC, and SD are participating in the 
        demonstration program).
          5. Rural Health Clinics (RHCs). The RHC program 
        provides Medicare and Medicaid reimbursement to health 
        clinics in underserved rural communities. Medicare 
        reimburses RHCs on the basis of their actual costs for 
        providing care. Once certified as an RHC, a clinic 
        remains eligible for cost reimbursement indefinitely, 
        even if the area it serves no longer qualifies as rural 
        or underserved.
          6. Telemedicine. Under a Health Care Financing 
        Administration (HCFA) demonstration, Medicare began 
        reimbursing telemedicine services in 1996 at five sites 
        in four states--North Carolina, West Virginia, Iowa and 
        Georgia. HCFA is analyzing the demonstration to 
        determine which telemedicine services should be covered 
        and how. Outside of the demonstration project, Medicare 
        reimburses only for certain physician services. HCFA 
        does not have the authority to reimburse all physician 
        consultations made with the use of telemedicine. 
        Medicare requires a face-to-face encounter in order to 
        cover consultation services, unless standard medical 
        practice does not require face-to-face contact as in 
        the case of radiology.

                           Reasons for Change

    Rural providers are often financially dependent on Medicare 
payments. The provisions assist rural areas to continue to 
provide high quality, cost effective access to health services.
    Since the Medicare physician fee schedules were established 
in 1989, the number of clinics participating in the RHC program 
has grown by over 30 percent a year to nearly 3,000. According 
to a November, 1996 Government Accounting Office (GAO) report, 
contrary to its original purpose, the RHC program is generally 
not focused on serving Medicare and Medicaid populations having 
difficulty obtaining primary care in isolated rural areas. 
Rather, the payments are being provided to RHCs that are 
financially viable clinics in suburban areas. Most RHCs are 
conversions of existing physician practices that generally do 
not need the RHC program payments to expand care to underserved 
portions of the area's population. According to GAO, at many of 
the RHCs, their providers receive extraordinarily high 
reimbursement for patient visits, as much as $214 for each 
patient visit at one clinic compared with an average of $37 
received by providers on the Medicare fee schedule.

                          Committee Provision

    The following rural provisions are included in the 
Chairman's Mark:
          1. A fourth reimbursement option is made available to 
        Sole Community Providers; it allows SCHs to choose an 
        alternative target amount based on costs in FY 1994 or 
        FY 1995.
          2. The Medicare Dependent Hospital (MDH) program will 
        be reinstated effective for cost reporting periods on 
        or after October 1, 1997. The same program with the 
        expired provisions setting out the criteria of rural 
        hospitals with 100 or less beds and 60 percent of 
        discharges or patient days will be used to identify 
        eligible hospitals. MDHs will receive Medicare payment 
        based on the expired provisions payment arrangement.
          3. A new Medicare rural hospital flexibility program 
        will be available to all states. (a) $25 million per 
        year in FY 1998-2002 is authorized for grants available 
        to states seeking to establish a network of access to 
        health care services in rural communities. (b) The 
        provision also creates a new single designation for 
        small rural limited-service hospitals known as Critical 
        Access Hospitals (CAHs). These hospitals must be state 
        certified, more than 35 miles from another hospital, 
        make available 24 hour emergency care services, and can 
        have up to 15 acute care inpatient beds (swing beds are 
        permitted) for providing care not to exceed 96 hours 
        (unless inclement weather or other emergency 
        conditions).
          Payment for inpatient and outpatient services 
        provided at CAHs will be made on the basis of 
        reasonable costs of providing such services. Such 
        payment will also continue for designated EACH, RPCH 
        hospitals in effect on September 30, 1997, as well as 
        for the MAF demonstration program.
          4. Rural Referral Centers (RRCs) can apply to the 
        Medicare Geographic Classification Review Board to be 
        reclassified for purposes of a wage index adjustment. 
        RRCs could apply without having to meet the wage 
        threshold requiring that the hospital's average hourly 
        wage (AHW) is at least 108% of the statewide rural AHW. 
        The Secretary shall make the adjustment required to 
        allow the change in wage indexes to occur in a budget 
        neutral manner. In addition, any hospital designated as 
        a RRC since fiscal year 1991 is permanently 
        grandfathered.
          5. Rural Health Clinics (RHCs). (a) Extends per-visit 
        payment limits applicable to independent rural health 
        clinics to provider-based clinic (with the exception of 
        clinics based in small rural hospitals with less than 
        50 beds). (b) Requires clinics have a quality assurance 
        and performance program as specified by the Secretary. 
        (c) Limits the nurse practitioner/physician assistant 
        (NP/PA) waiver to clinics already certified as RHCs. 
        Clinics seeking initial certification will be required 
        to meet the NP/PA staffing requirement. (d) Requires 
        triennial recertification of RHCs: (i) the Secretary 
        must certify that there are insufficient numbers of 
        needed health care practitioners in the clinic's area; 
        (ii) clinics that no longer meet the shortage area 
        requirement will be permitted to retain their 
        designation only if the Secretary determines that they 
        are essential to the delivery of primary care services 
        that would otherwise be unavailable in the area; and 
        (iii) rural health clinics currently owned and operated 
        by PA's will be grandfathered through 2002.
          6. Medicare reimbursement for telehealth services in 
        underserved rural areas.
                  a. The provision requires HCFA to reimburse 
                for telehealth services in underserved rural 
                areas, using the health professional shortage 
                area (HPSA) designation. Reimbursement 
                methodology would (i) provide a bundled payment 
                to be shared between the referring and 
                consulting health care provider that would be 
                no greater than the standard amount paid to the 
                consulting health care provider according to 
                HCFA's current fee schedule for face-to-face 
                encounters, and (ii) prohibit any reimbursement 
                for line charges or other facility fees. The 
                Secretary would also be required to study the 
                possibility for reimbursement for homebound or 
                nursing home-bound seniors.
                  b. The provision also authorizes $27 million 
                for a 5-year telemedicine demonstration project 
                for high-capacity computing and advanced 
                networks.
    The Committee is concerned that HCFA is not fully utilizing 
existing HCFA telemedicine demonstration projects. The 
Committee intends that HCFA provide full Medicare payments to 
all sites and providers affiliated with existing HCFA 
demonstration projects, regardless of whether the telemedicine 
equipment at those sites was purchased with HCFA funds or from 
other federal, state, or private funds.
    The Committee is also concerned that the current Medicare 
telemedicine demonstration does not include rural sites in the 
Western United States. Therefore, the Committee strongly 
recommends HCFA extend the demonstration to at least three 
additional sites located in rural regions of the Western United 
States. HCFA should use all sites and providers affiliated with 
the demonstration as well as other willing telemedicine 
providers within all participating states. To get a cross-
sampling of rural Western sites, the following criteria should 
be met:
    The first site--(1) is recognized by its state government 
as the primary telemedicine project of the state; (2) consists 
of a consortium of both public and private academic 
institutions, military establishments, health care providers, 
telecommunication carriers and Native organizations; (3) is in 
existence for at least three years; (4) attempts to unite 
health care facilities throughout the state; (5) exists in a 
state with communities and Native villages not accessible by 
roads due to extremes in geography and climate; and (6) exists 
in a state containing significant Native population.
    The second site--(1) is located in a frontier state with an 
at least two existing telehealth networks that emphasizes 
mental health care specialty services; (2) has prior experience 
working with other third-party payers both public and not-for-
profit; and (3) has an existing state-wide network of 
telehealth sites.
    The third site--(1) is located in a Northern Plains state 
serving a predominantly rural population; (2) offers a full 
range of specialty health care services; (3) includes at least 
one network with an emphasis on geriatric and long-term care; 
and (4) works with at least one mid-level practitioner to 
provide emergency care services.

                             Effective Date

    All provisions are effective in fiscal year 1998. The MDH 
program expires on September 30, 2002.

    Subtitle D--Anti-Fraud and Abuse Provisions and Improvements in 
                      Protecting Program Integrity

         CHAPTER 1--REVISIONS TO SANCTIONS FOR FRAUD AND ABUSE

AUTHORITY TO REFUSE TO ENTER INTO MEDICARE AGREEMENTS WITH INDIVIDUALS 
                   OR ENTITIES CONVICTED OF FELONIES

                              Present Law

    Section 1866 of the Social Security Act sets forth certain 
conditions under which providers may become qualified to 
participate in the Medicare program. The Secretary may refuse 
to enter into an agreement with a provider, or may refuse to 
renew or may terminate such an agreement, if the Secretary 
determines that the provider has failed to comply with 
provisions of the agreement, other applicable Medicare 
requirements and regulations, or if the provider has been 
excluded from participation in a health care program under 
section 1128 or 1128A of the Social Security Act. Section 1842 
of the Social Security Act permits physicians and suppliers to 
enter into agreements with the Secretary under which they 
become ``participating'' physicians or suppliers under the 
Medicare program.

                           Reasons for Change

    This provision would help protect against fraud and abuse 
in the Medicare program.

                          Committee Provision

    The provision would add a new section giving the Secretary 
authority to refuse to enter into an agreement, or refuse to 
renew or terminate an agreement, with a provider if the 
provider has been convicted of a felony under federal or state 
law for an offense which the Secretary determines is 
inconsistent with the best interests of program beneficiaries. 
This authority would extend to the Secretary's agreements with 
physicians or suppliers who become ``participating'' physicians 
or suppliers under the Medicare program. Similar provisions 
would apply to the Medicaid program.

                             Effective Date

    On enactment.

    EXCLUSION OF ENTITY CONTROLLED BY FAMILY MEMBER OF A SANCTIONED 
                               INDIVIDUAL

                              Present Law

    Section 1128 of the Social Security Act authorizes the 
Secretary of HHS to impose mandatory and permissive exclusions 
of individuals and entities from participation in the Medicare 
program, Medicaid program and programs receiving funds under 
the Title V Maternal and Child Health Services Block Grant, or 
the Title XX Social Services Block Grant. The Secretary may 
exclude any entity which the Secretary determines has a person 
with a direct or indirect ownership or control interest of 5 
percent or more in the entity or who is an officer, director, 
agent, or managing employee of the entity, where that person 
has been convicted of a specified criminal offense, or against 
whom a civil monetary penalty has been assessed, or who has 
been excluded from participation under Medicare or a state 
health care program. The Committee expects the Secretary to 
examine the facts and circumstances of each case carefully 
before applying this penalty.

                           Reasons for Change

    This provision would help protect against fraud and abuse 
in the Federal programs.

                          Committee Provision

    The provision would specify that if a person transfers an 
ownership or control interest in an entity to an immediate 
family member or to a member of the household of the person in 
anticipation of, or following, a conviction, assessment or 
exclusion against the person, that the entity may be excluded 
from participation in Federal health care programs on the basis 
of that transfer. The terms ``immediate family member'' and 
``member of the household'' are defined in this section.

          ADDITIONAL AUTHORITY TO IMPOSE CIVIL MONEY PENALTIES

                              Present Law

    Section 1128A of the Social Security Act sets forth a list 
of fraudulent activities relating to claims submitted for 
payments for items of services under a Federal health care 
program. Civil money penalties of up to $10,000 for each item 
or service may be assessed. In addition, the Secretary of HHS 
(or head of the department or agency for the Federal health 
care program involved) may also exclude the person involved in 
the fraudulent activity from participation in a Federal health 
care program, defined as any program providing health benefits, 
whether directly or otherwise, which is funded directly, in 
whole or in part, by the United States Government (other than 
the Federal Employees Health Benefits Program). Violations of 
the anti-kickback statute (sec. 1128B of the Social Security 
Act) are punishable only as criminal matters.

                           Reason for Change

    The provisions providing for a civil monetary penalty for 
either contracting with an excluded individual or furnishing 
items or services ordered by an excluded individual are 
intended to close loopholes in current law identified by the 
Inspector General of the Department of Health and Human 
Services by which individuals excluded from Federal health care 
programs continue to participate. The anti-kickback civil 
monetary penalty would provide an intermediate sanction, where 
such violations under current law may only be prosecuted as 
criminal offenses.

                          Committee Provision

    The provision would add a new civil money penalty for cases 
in which a person contracts with an excluded provider for the 
provision of health care items or services, where the person 
knows or should know that the provider has been excluded from 
participation in a Federal health care program. A civil money 
penalty is also added for cases in which a person provides a 
service ordered or prescribed by an excluded provider, where 
that person knows or should know that the provider has been 
excluded from participation in a Federal health care program. 
Lastly, a civil monetary penalty is provided for violations of 
the anti-kickback statute.
    The Committee notes that the two new civil monetary 
penalties for arranging or contracting with an excluded 
individual, or for providing items or services ordered or 
prescribed by an excluded individual, do not place an 
affirmative responsibility on a provider or supplier to 
determine the excluded status of any individual. Rather, only 
if a provider or supplier knows or should know of an 
individual's excluded status, that is, information has come to 
the attention of a provider or supplier regarding the excluded 
status of an individual and the provider or supplier acts with 
deliberate ignorance or reckless disregard of the individual's 
excluded status, the provider or supplier may be liable for a 
civil monetary penalty.

                             Effective Date

    On enactment.

        CHAPTER 2--IMPROVEMENTS IN PROTECTING PROGRAM INTERGRITY

       DISCLOSURE OF INFORMATION, SURETY BONDS, AND ACCREDITATION

                              Present Law

    Section 1834(a) of the Social Security Act establishes 
requirements for payments under Medicare for covered items 
defined as durable medical equipment. Home health agencies are 
required, under Section 1861(o) of the Social Security Act, to 
meet specified conditions in order to provide health care 
services under Medicare, including requirements, set by the 
Secretary, relating to bonding or establishing of escrow 
accounts, as the Secretary finds necessary for the effective 
and efficient operation of the Medicare program.

                           Reasons for Change

    This provision would help protect against fraud and abuse 
in the Medicare program.

                          Committee Provision

    The provision would require that suppliers of durable 
medical equipment provide the Secretary with full and complete 
information as to persons with an ownership or control interest 
in the supplier, or in any subcontractor inwhich the supplier 
has a direct or indirect 5 percent or more ownership interest, other 
information concerning such ownership or control, and a surety bond for 
at least $50,000. Home health agencies, comprehensive outpatient 
rehabilitation facilities, and rehabilitation agencies would also be 
required to provide a surety bond for at least $50,000. The Secretary 
may impose the surety bond requirement which applies to durable medical 
equipment suppliers to home health agencies, suppliers of ambulance 
services, and certain clinics that furnish medical and other health 
services (other than physicians'' services).
    The amendments with respect to suppliers of durable medical 
equipment would apply to equipment furnished on or after 
January 1, 1998. The amendments with respect to home health 
agencies would apply to services furnished on or after such 
date, and the Secretary of Health and Human Services (HHS) is 
directed to modify participation agreements with home health 
agencies to provide for implementation of these amendments on a 
timely basis. The amendments with respect to ambulance 
services, certain clinics, comprehensive outpatient 
rehabilitation facilities, and rehabilitation agencies would 
take effect on the date of enactment of this Act.
    The Committee provision would also authorize the Secretary 
to require durable medical equipment suppliers to be accredited 
or to meet equivalent standards.

                             Effective Date

    Various dates.

              PROVISION OF CERTAIN IDENTIFICATION NUMBERS

                              Present Law

    Section 1124 of the Social Security Act requires that 
entities participating in Medicare, Medicaid and the Maternal 
and Child Health Block Grant programs (including providers, 
clinical laboratories, renal disease facilities, health 
maintenance organizations, carriers and fiscal intermediaries), 
provide certain information regarding the identity of each 
person with an ownership or control interest in the entity, or 
in any subcontractor in which the entity has a direct or 
indirect 5 percent or more ownership interest. Section 1124A of 
the Social Security Act requires that providers under Part B of 
Medicare also provide information regarding persons with 
ownership or control interest in a provider, or in any 
subcontractor in which the provider has a direct or indirect 5 
percent or more ownership interest.

                           Reasons for Change

    This provision would help protect against fraud and abuse 
in the Medicare program.

                          Committee Provision

    The provision would require that all Medicare providers 
supply the Secretary with both the employer identification 
number and social security account number of each disclosing 
entity, each person with an ownership or control interest, and 
any subcontractor in which the entity has a direct or indirect 
5 percent or more ownership interest. The Secretary of Health 
and Human Services (HHS) is directed to transmit to the 
Commissioner of Social Security information concerning each 
social security account number and to the Secretary of the 
Treasury information concerning each employer identification 
number supplied to the Secretary for verification of such 
information. The Secretary would reimburse the Commissioner and 
the Secretary of the Treasury for costs incurred in performing 
the verification services required by this provision. The 
Secretary of HHS would report to Congress on the steps taken to 
assure confidentiality of social security numbers to be 
provided to the Secretary under this section. This section's 
reporting requirements would then become effective 90 days 
after submission of the Secretary's report to Congress on 
confidentiality of social security numbers.

                             Effective Date

    Generally on enactment.

IMPROVEMENT OF EXCLUSION AUTHORITY AND NON-DISCHARGEABILITY OF CERTAIN 
                                 DEBTS

                              Present Law

    Under the Bankruptcy Code, a provider can assert that any 
civil monetary penalty due to the Medicare program is 
discharged and does not survive the bankruptcy proceeding. 
Current law provides for various causes of exclusion from the 
Medicare program. However, several bankruptcy courts have held 
that a provider may not be excluded from Medicare during the 
pendency of a bankruptcy proceeding because of the court's 
automatic stay.

                           Reasons for Change

    Current law supports and sustains Medicare fraud and abuse 
by permitting providers to escape sanctions through the 
Bankruptcy Code.

                          Committee Provision

    The Committee provision would amend the Social Security Act 
to specify that any overpayment determined to have occurred due 
to fraud and civil monetary penalty amounts are not 
dischargeable under the Bankruptcy Code and that a bankruptcy 
court cannot bar exclusions from the Medicare program.

                             Effective Date

    On enactment.

                  IMPROVEMENTS IN PAYMENT METHODOLOGY

                              Present Law

    Under Part B, Medicare continues to pay for certain items 
or services on basis of reasonable charges. Such items or 
services include parenteral and enteral nutrition, dialysis 
equipment, certain medical supplies, and therapeutic shoes. The 
Secretary has a limited ``inherent reasonableness'' authority 
under Part B to adjust the amounts Medicare pays for any item 
or service that are either grossly excessive or deficient.

                           Reasons for Change

    Replacing reasonable charge methodologies with fee 
schedules would provide less variability and more appropriate 
payment for those items or services paid according to 
reasonable charges, and give providers more predictability of 
payment and promote greater efficiency in providing items and 
services. Improved flexibility in the application of the 
Secretary's inherent reasonableness authority would help ensure 
that Medicare pays an appropriate amount for medical items and 
services.

                          Committee Provision

    The Committee provision would permit the Secretary to 
replace reasonable charge methodologies by fee schedules. The 
Committee provision would also provide the Secretary with 
greater flexibility to determine the appropriateness of payment 
amounts under Part B (excluding physician services) and adjust 
payment amounts accordingly.

                             Effective Date

    On enactment.

             REQUIREMENT TO FURNISH DIAGNOSTIC INFORMATION

                              Present Law

    Diagnostic test and durable medical equipment providers may 
be required by the Secretary to provide certain diagnostic 
information with submission of a claim for payment. However, 
that information may be available only to the ordering 
physician or other health care practitioner.

                           Reason for Change

    Diagnostic test and durable medical equipment providers 
often do not have diagnostic information readily to them, 
thereby delaying submission of claims for payments or, in the 
absence of such information, resulting in a rejection of a 
claim for payment. Lack of diagnostic information can also 
impede certain program integrity activities.

                          Committee Provision

    The Committee provision would require physician and other 
health care practitioners to provide diagnostic information 
when ordering an item or service from a diagnostic test or 
durable medical equipment supplier.

                             Effective Date

    January 1, 1998.

  REPORT BY GENERAL ACCOUNTING OFFICE ON OPERATION OF FRAUD AND ABUSE 
                            CONTROL PROGRAM

                              Present Law

    The Health Insurance Portability and Accountability Act of 
1996 (HIPPA) required a report by the General Accounting Office 
(GAO) not later than January 1, 2000, 2002, and 2004, on the 
operation of a new Medicare fraud and abuse control program 
designed to improve investigation and prosecution of fraud 
against the Medicare program.

                           Reason for Change

    An earlier GAO report would be useful in providing an 
independent assessment of progress in combating fraud and abuse 
in the Medicare program.

                          Committee Provision

    The Committee provision would require the first GAO report 
no later than June 1, 1998.

                             Effective Date

    On enactment.

           COMPETITIVE BIDDING AUTHORITY FOR PART B SERVICES

                              Present Law

    Medicare does not use competitive bidding for the selection 
of providers authorized to provide covered services to 
beneficiaries.

                           Reasons for Change

    Medicare has the potential of achieving greater value in 
both price and quality for covered Part B medical items and 
services with the additional flexibility provided by 
competitive bidding. Both the General Accounting Office (GAO) 
and the Inspector General of the Department of Health and Human 
Services report that private payers using competitive 
acquisition strategies pay significantly less than Medicare for 
certain items. Competitive bidding may also increase quality 
because Medicare currently does not evaluate medical items and 
services for quality, but quality would be one factor the 
Secretary would be required to consider in a competitive 
acquisition process.

                          Committee Provision

    The Committee provision would provide the Secretary with 
the authority to acquire Part B covered medical items and 
services (except physician services) through a competitive 
bidding process.
    The Secretary would establish competitive acquisition areas 
for contract awards for specific items and services. The 
Secretary may limit the number of contractors in a competitive 
acquisition to the number needed to meet projected demand for 
items and services covered under the contracts. Additionally, 
the Secretary may not award a contract unless the Secretary 
finds the entity meets quality standards specified by the 
Secretary.
    Generally, the Secretary would be limited in the amount of 
payment for an item or services to the amount otherwise payable 
under an applicable fee schedule, unless the Secretary 
determines an additional amount is warranted by reason of 
technological innovation, quality improvement, or similar 
reasons specified by the Secretary.
    In using this broad, new authority, the Committee 
encourages the Secretary to carefully consider any effects on 
beneficiary choice and on rural areas.

                             Effective Date

    January 1, 1998.

            CHAPTER 3--CLARIFICATIONS AND TECHNICAL CHANGES

                OTHER FRAUD AND ABUSE RELATED PROVISIONS

                              Present Law

    Section 1128A of the Social Security Act provides for civil 
monetary penalties for offering inducements to any individual 
enrolled in a Federal health plan to order or receive any 
service from a particular provider. Section 1128D provides for 
safe harbors, advisory opinions, and fraud alerts as guidance 
regarding application of health care fraud and abuse sanctions. 
Section 1128E of the Social Security Act directs the Secretary 
of HHS to establish a national health care fraud and abuse data 
collection program for the reporting of final adverse actions 
against health care providers, suppliers, or practitioners.

                           Reasons for Change

    The Committee provision provides for certain technical 
corrections and improvements to the anti-fraud and abuse 
provisions enacted as part of the Health Insurance Portability 
and Accountability Act of 1996 (``HIPPA'').

                          Committee Provision

    The Committee provision would make certain technical 
changes in provisions added by the Health Insurance Portability 
and Accountability Act of 1996 (``HIPPA''). In addition, the 
Committee provision would clarify that Medicare SELECT 
insurance contracts do not violate section 1128A, as amended by 
HIPPA, and clarify the application of waivers provided under 
1128B(b)(3) to section 1128A(i)(6).
    The Committee provision would also provide that mandatory 
and permissive exclusions under section 1128 apply to any 
Federal health care program, defined as any program providing 
health benefits, whether directly or otherwise, which is funded 
directly, in whole or in part, by the United States Government 
(other than the Federal Employees Health Benefits Program).
    The Committee provision would provide for a civil money 
penalty of up to $25,000 to be imposed against a health plan 
that fails to report information on an adverse action required 
to be reported under the health care fraud and abuse data 
collection program established under HIPPA. The Committee 
provision would require the Secretary to publicize those 
government agencies which fail to report information on adverse 
actions as required.
     The application of exclusion authority under section 1128 
of the Social Security Act to federal programs would be 
effective on the date of enactment of this Act. The sanction 
provision for failure to report adverse action information as 
required under Section 1128E of the Social Security Act would 
apply to failures occurring on or after the date of the 
enactment of this Act. The other amendments made by this 
section would be effective as if included in the enactment of 
the Health Insurance Portability and Accountability Act of 
1996.

                             Effective Date

    Generally on enactment.

                Subtitle E--Prospective Payment Systems

                CHAPTER 1--PROVISIONS RELATING TO PART A

        LONG-TERM CARE AND REHABILITATION HOSPITALS (AND UNITS)

                              Present Law

    Rehabilitation and long-term care hospitals are two of the 
categories of hospitals not paid by the Medicare Prospective 
Payment System (PPS). These hospitals receive Medicare cost-
based payments with special rules. For a complete explanation 
of these payments, please refer to the section titled ``PPS-
Exempt Hospital Payments'' in Subtitle F--Provisions Relating 
to Part A.

                           Reasons for Change

    TEFRA payments are not suited, nor were they intended, to 
be applied over the long run. The Prospective Payment 
Assessment Commission (ProPAC) recommends replacing current 
TEFRA payments with a case-mix adjusted prospective payment 
system that would provide incentives for controlling costs.

                          Committee Provision

    (a) For rehabilitation hospitals and distinct-part units, 
the Secretary shall establish a case-mix adjusted Prospective 
Payment System (PPS), effective Fiscal Year 2001. Data will be 
collected from all facilities necessary for administering and 
evaluating such a system. The case-mix adjuster may reflect a 
patient classification system which assigns patients to groups 
primarily on the basis of functional status, modified by age 
and diagnosis.
    (b) For long-term care hospitals, the Secretary shall 
collect data in order to eventually establish a case-mix 
adjusted PPS. The Secretary shall develop a proposal for an 
adequate patient classification system which reflects the 
differences in patient resource use and costs among long-term 
care hospitals. The Secretary shall collect relevant data 
necessary for developing, administering, and evaluating such a 
system. The Secretary shall submit recommendations to the 
Congress no later than October 1, 1999.

                CHAPTER 2--PROVISIONS RELATING TO PART B

   Subchapter A--Payment for Hospital Outpatient Department Services

ELIMINATION OF FORMULA-DRIVEN OVERPAYMENTS (FDO) FOR CERTAIN OUTPATIENT 
                           HOSPITAL SERVICES

                              Present Law

    Medicare payments for hospital outpatient ambulatory 
surgery, radiology, and other diagnostic services equals the 
lesser of: (1) the lower of a hospital's reasonable costs or 
its customary charges, net of deductible and coinsurance 
amounts, or (2) a blended amount comprised of a cost portion 
and a fee schedule portion, net of beneficiary cost-sharing. 
Thecost portion of the blend is based on the lower of the 
hospital's costs or charges, net of beneficiary cost sharing, and the 
fee schedule portion is based, in part, on ambulatory surgery center 
payment rates or the rates for radiology and diagnostic services in 
other settings, net of beneficiary coinsurance. For cost reporting 
periods beginning on or after January 1, 1991, the hospital cost 
portion and the ASC cost portion are 42 percent and 58 percent, 
respectively.
    A hospital may bill a beneficiary for the coinsurance 
amount owed for the outpatient service provided. The 
beneficiary coinsurance is based on 20 percent of the 
hospital's submitted charges for the outpatient service, 
whereas Medicare usually pays based on the blend of the 
hospital's costs and the amount paid in other settings for the 
same service. This results in an anomaly whereby the amount a 
beneficiary pays in coinsurance does not equal 20 percent of 
the program's payment and does not result in a dollar-for-
dollar decrease in Medicare program payments.

                           Reasons for Change

    There is a flaw in the payment formula for certain hospital 
outpatient department services. As a result, Medicare overpays 
for such services because a beneficiary's coinsurance payments 
are not properly credited to reduce Medicare's allowed payment 
amounts.

                          Committee Provision

    The provision would require that beneficiary coinsurance 
amounts be deducted after the reimbursement calculation for 
hospital outpatient services, so that Medicare payments would 
reflect the full amount of the beneficiary coinsurance. 
Medicare's payment for hospital outpatient services would equal 
the blended amount less any amount the hospital may charge the 
beneficiary as coinsurance for services furnished during 
portions of cost reporting periods occurring on or after 
October 1, 1997.

                             Effective Date

    October 1, 1997.

 EXTENSION OF REDUCTIONS IN PAYMENTS FOR COSTS OF HOSPITAL OUTPATIENT 
                                SERVICES

                              Present Law

    a. Reduction in Payments for Capital-Related Costs.--
Hospitals receive payments for Medicare's share of capital 
costs associated with outpatient departments. The Omnibus 
Budget Reconciliation Act of 1993 (OBRA 93) extended a 10-
percent reduction in payments for the capital costs of 
outpatient departments through FY 1998.
    b. Reduction in Payments for Non-Capital-Related Costs.--
Certain hospital outpatient services are paid on the basis of 
reasonable costs. OBRA 93 extended a 5.8-percent reduction for 
those services paid on a cost-related basis through FY 1998.

                           Reasons for Change

    The Committee provision would establish more appropriate 
growth in payments.

                          Committee Provision

    a. Reduction in Payments for Capital-Related Costs.--The 
provision would extend the 10-percent reduction in payments for 
outpatient capital through FY 1999 and during FY 2000 before 
January 1, 2000.
    b. Reduction in Payments for Non-Capital-Related Costs.--
The 5.8-percent reduction for outpatient services paid on a 
cost basis would be extended through FY 1999 and during FY 2000 
before January 1, 2000.

                             Effective Date

    On enactment.

 PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT DEPARTMENT SERVICES

                              Present Law

    Medicare payments for hospital outpatient ambulatory 
surgery, radiology, and other diagnostic services equals the 
lesser of: (1) the lower of a hospital's reasonable costs or 
its customary charges, net of deductible and coinsurance 
amounts, or (2) a blended amount comprised of a cost portion 
and a fee schedule portion, net of beneficiary cost-sharing. 
The cost portion of the blend is based on the lower of the 
hospital's costs or charges, net of beneficiary cost sharing, 
and the fee schedule portion is based, in part, on ambulatory 
surgery center payment rates or the rates for radiology and 
diagnostic services in other settings, net of beneficiary 
coinsurance. For cost reporting periods beginning on or after 
January 1, 1991, the hospital cost portion and the ASC cost 
portion are 42 percent and 58 percent, respectively.

                           Reasons for Change

    The current payment methodology for hospital outpatient 
department services is complicated and confusing, and a 
prospective payment system would simplify determination of 
payment amounts. Moreover, the current payment methodology 
results in beneficiaries bearing an increasing percentage of 
the cost of many hospital outpatient department services.

                          Committee Provision

    The Committee provision would require the Secretary of 
Health and Human Services (HHS) to establish a prospective 
payment system for covered hospital outpatient department (OPD) 
services beginning in 1999. The Secretary would be required to 
develop a classification system for covered OPD services, such 
that services classified within each group would be comparable 
clinically and with respect to the use of resources. The 
Secretary would be required to establish relative payment rates 
for covered OPD services using 1997 hospital claimsand cost 
report data, and determine projections of the frequency of utilization 
of each such service or group of services in 1999. The Secretary would 
be required to determine a wage adjustment factor to adjust the 
portions of payment attributable to labor-related costs for relative 
geographic differences in labor and labor-related costs that would be 
applied in a budget neutral manner. The Secretary would be required to 
establish other adjustments as necessary to ensure equitable payments 
under the system. The Secretary would also be required to develop a 
method for controlling unnecessary increases in the volume of covered 
OPD services.
    For 1999, the Secretary would be required to establish a 
conversion factor for determining the Medicare OPD fee payment 
amounts for each covered OPD service (or group of services) 
furnished in 1999 so that the sum of the products of the 
Medicare OPD fee payment amounts and the frequencies for each 
service or group would be required to equal the total amounts 
estimated by the Secretary that would be paid for OPD services 
in 1999. In subsequent years, the Secretary would be required 
to establish a conversion factor for covered OPD services 
furnished in an amount equal to the conversion factor 
established for 1999 and applicable to services furnished in 
the previous year increased by the OPD payment increase factor. 
The increase factor would be equal to the hospital market 
basket (MB) percentage increase plus 3.5 percentage points.
    Hospitals OPD copayments would be limited to 20 percent of 
the national median of the charges for the service (or services 
within the group) furnished in 1997 updated to 1999 using the 
Secretary's estimate of charge growth during this period. The 
Secretary would be required to establish rules for the 
establishment of a copayment amount for a covered OPD service 
not furnished during 1997, based on its classification within a 
group of such services.
    The Secretary would be required to establish a procedure 
under which a hospital, before the beginning of a year 
(starting with 1999), could elect to reduce the copayment 
amount for some or all covered OPD services to an amount that 
is not less than 25 percent of the Medicare OPD fee schedule 
amount for the service involved, adjusted for relative 
differences in labor costs and other factors. A reduced 
copayment amount could not be further reduced or increased 
during the year involved, and hospitals could disseminate 
information on the reduction of copayment amount.
    The Secretary would be authorized periodically to review 
and revise the groups, relative payment weights, and the wage 
and other adjustments to take into account changes in medical 
practice, medical technology, the addition of new services new 
cost data, and other relevant information. Any adjustments made 
by the Secretary would be made in a budget neutral manner. If 
the Secretary determined that the volume of services paid for 
under this subsection increased beyond amounts established 
through those methodologies, the Secretary would be authorized 
to adjust the update to the conversion factor otherwise 
applicable in a subsequent year.
    The Committee provision would provide that the copayment 
for covered OPD services would be determined by the provisions 
of this bill instead of the standard 20-percent coinsurance 
other Part B services. The Committee provision would prohibit 
administrative or judicial review of the prospective payment 
system. The Committee provision would also provide for 
conforming amendments regarding approved ambulatory surgical 
center procedures performed in hospital OPDs, for radiology and 
other diagnostic procedures, and for other hospital outpatient 
services.
    The Committee provision would become effective for 
hospitals described in section 1886(d)(l)(B)(v) of the Social 
Security Act, beginning on January 1, 2000, and the Secretary 
would have the authority to establish a separate conversion 
factor for such hospitals.

                             Effective Date

    Generally January 1, 1999.

                    Subchapter B--Ambulance Services

                    PAYMENTS FOR AMBULANCE SERVICES

                              Present Law

    Payment for ambulance services provided by freestanding 
suppliers is based on reasonable charge screens developed by 
individual carriers based on local billings. Hospital or other 
provider-based ambulance services are paid on a reasonable cost 
basis; payment cannot exceed what would be paid to a 
freestanding supplier. Annual updates in payments for 
ambulances services are provided in regulation.

                           Reasons for Change

    The Committee provision would establish an improved payment 
methodology for ambulance services.

                          Committee Provision

    The Committee provision would specify payment rules for 
ambulance services for FY 1998 through FY 2002. For ambulance 
services paid on a reasonable cost basis, the annual increase 
in the costs recognized as reasonable would be limited to the 
percentage increase in the consumer price index reduced for FY 
1998 by 1 percent. Similarly, for ambulance services furnished 
on a reasonable charge basis, the annual increase in the 
charges recognized as reasonable would be limited to the 
percentage increase in the consumer price index reduced for FY 
1998 by 1 percent.
    The Committee provision would require the Secretary to 
establish a fee schedule for ambulance services through a 
negotiated rule-making process no later than January 1, 1999. 
In establishing the fee schedule, the Secretary would be 
required to: (1) establish mechanisms to control Medicare 
expenditure increases; (2) establish definitions for services; 
(3) consider appropriate regional and operational differences; 
(4) consideradjustments to payment rates to account for 
inflation and other relevant factors; and (5) phase-in the application 
of the payment rates in an efficient and fair manner. The Secretary 
would be required to assure that payments in FY 1999 under the fee 
schedule did not exceed the aggregate amount of payments which would 
have been made in the absence of the fee schedule. The annual increase 
in the payment amounts in each subsequent year would be limited to the 
increase in the consumer price index minus 1 percentage point. Medicare 
payments would equal 80 percent of the lesser of the fee schedule 
amount or the actual charge.
    The Committee provision would authorize payment for 
advanced life support (ALS) services provided by paramedic 
intercept service providers in rural areas. The ALS services 
would be provided as part of a two-tiered system in conjunction 
with one or more volunteer ambulance services. The volunteer 
ambulance service involved must be certified as qualified to 
provide the service, have a contractual agreement with the 
volunteer ambulance service providing the additional ALS 
intercept service, provide only basic life support services at 
the time of the intercept, and be prohibited by state law from 
billing for services. The ALS service provider must be 
certified to provide the services and bill all recipients (not 
just Medicare beneficiaries) for ALS intercept services.

                             Effective Date

    On enactment.

            CHAPTER 3--PROVISIONS RELATING TO PARTS A AND B

          Subchapter A--Payments to Skilled Nursing Facilities

                       PAYMENTS TO NURSING HOMES

                              Present Law

    Medicare pays skilled nursing facilities (SNFs) on a per 
day basis for reasonable costs, subject to per day cost limits. 
The limits are applied to the per day routine service costs 
only (nursing, room and board, administrative, and other 
overhead) of a facility. Routine cost limits are updated 
annually by the skilled nursing home market basket. OBRA 93 
eliminated the annual market basket update for SNF limits for 
cost reporting periods beginning in FY 1994 and FY 1995.
    Non-routine costs, such as therapy services (e.g., physical 
therapy, occupational therapy, and speech therapy services) are 
paid according to reasonable costs. There are no cost limits 
for non-routine costs. Medicare pays, under Part A and Part B, 
a variety of providers (i.e., nursing homes for facility-based 
therapists, independent therapists, therapy companies) for non-
routine services.
    Freestanding SNF routine cost limits are set at 112 percent 
of the mean per day routine costs. Hospital-based SNF routine 
cost limits are set at the limit for freestanding SNFs, plus 50 
percent of the difference between the freestanding limit and 
112 percent of the mean per day routine service costs of 
hospital-based SNFs.
    Payments for ancillary service and capital costs are 
unlimited, since both are paid on the basis of reasonable costs 
and neither are subject to limits.
    New providers are exempt from Medicare's routine cost 
limits for about their first three years of operation. During 
this period they receive full cost reimbursement for all 
routine services, as well as ancillary and capital costs.
    Under certain circumstances, Medicare permits exceptions 
payments for facilities that exceed their cost limits.
    Low volume SNFs (less than 1500 SNF days per year) may 
choose to be paid on a prospective payment basis at 105 percent 
of the mean. Low volume SNFs did not receive inflation updates 
for 1994 and 1995 prospective rates.
    There are no requirements for SNFs to monitor or bill for 
any Part B service delivered to a beneficiary when a Medicare 
beneficiary is residing at a SNF outside of the 100 days 
covered by Medicare.
    To research and develop a prospective payment system for 
SNF care, HCFA since 1984 has been sponsoring research on a 
patient classification system for Medicare SNF patients. 
Specifically, HCFA has sought to adapt to Medicare patients a 
classification system known as the Resource Utilization Groups 
(RUGs), which was developed originally for a Medicaid nursing 
home population and which used primarily functional disability 
scores for classifying patients. The version of RUGs that HCFA 
is currently testing for application to Medicare is known as 
RUGs-III is being tested in six states (Kansas, Maine, 
Mississippi, New York, South Dakota, and Texas). HCFA 
anticipates that 1,000 SNFs will be participating in the 
demonstration by the time enrollment closes in 1997.

                           Reasons for Change

    Medicare payments for skilled nursing facilities (SNF) grew 
over 28 percent for 1994-1995 according to CBO. Spending growth 
of nursing home care is unsustainable in the Medicare program. 
Providers are paid based on costs subject to certain limits for 
routine services, with no limits for non- routine services. 
Providers have no incentives to keep the cost growth of non-
routine services low.

                          Committee Provision

    The proposal extends the FY 1997 routine cost limits until 
a new Prospective Payment System (PPS) is established on July 
1, 1998:
    (a) The Secretary shall determine the standard federal 
payment rates for the SNF PPS based on cost reports beginning 
in fiscal year 1995, excluding cost reports from new SNFs 
exempted from cost limits, and excluding exceptions payments 
made to SNFs. The Secretary shall trend the rate forward by the 
market basket index of minus one percentage point for fiscal 
years 1996, 1997, and 1998.
    The standard federal payment rates shall be based on the 
average cost of SNF services and determined on a per diem basis 
with regional variation. The labor portion of the standard 
federal payment will be adjusted by an appropriate wage index.
    The standard federal payment rates will be adjusted to 
account for case-mix based on a resident classification system 
which reflects the relative resource needs of caring for 
different types of patients. The Secretary shall collect 
resident assessment data and other data in order to develop the 
case-mix adjuster.
    The standard federal payment rates will be updated annually 
by the market basket after fiscal year 1998.
    During the four year transition to a fully prospective 
system, a SNF's payment shall be based on a blend of the 
federal payment rate and the facility's specific rate. The 
facility specific rate will include all costs of skilled 
nursing services (including routine costs, ancillary costs, 
capital related costs, and all Part B services which will be 
covered under the new PPS) and will be based on the most recent 
settled cost report available, updated annually. For SNFs 
participating in the RUGS-III demonstration project, their base 
year facility specific rate will be equal to their 1997 RUG 
rate.
    The Secretary will have the authority to develop normative 
standards based on program data which reflects the overall 
practices of SNFs for comparable cases. The Secretary may 
adjust payments when a variation from the standards cannot be 
justified.
    As was the case for the development of the Medicare 
hospital PPS and physician payment reform, certain 
administrative or judicial review will not be permitted for the 
establishment of the SNF PPS. Administrative or judicial review 
will not be permitted for the determination of the federal per 
diem rates, including the computation of the standardized per 
diem rates and adjustments for case-mix; and for the transition 
for low-volume SNFs and rural hospitals providing SNF care with 
inpatient beds.
    (b) SNFs will be required to consolidate all bills to 
Medicare for all Part B services used by Medicare patients 
(with the exception of physician services). Payments for Part B 
services would have to be made to the facility. The Secretary 
is required to use applicable Part B payment methodologies in 
developing fee schedules for items and services subject to 
consolidated billing. The Secretary shall rely on new salary 
equivalency guidelines for physical therapy, occupational 
therapy, respiratory therapy, and speech language pathology in 
determining reasonable costs for such services.
    (c) New provider exemptions are eliminated for cost 
reporting periods beginning on or after July 1, 1998.
    (d) The Secretary shall conform payments to low volume 
nursing homes with the policies in these provisions.

                             Effective Date

    The new payment system will be effective July 1, 1998.

            Subchapter B--Home Health Services and Benefits

                    PAYMENT FOR HOME HEALTH SERVICES

                              Present Law

    Home health care services are primarily nursing services 
(e.g., cleaning and dressing a wound) or therapies (e.g., 
physical therapy) provided by a nurse or other health care 
worker in the home.
    There are no cost sharing requirements for beneficiaries 
for home health services.
    Medicare pays home health agencies the lower of their costs 
or a limit; there are no exemptions for new entrants. The 
limits are based on 112 percent of the average cost per visit 
for free-standing agencies for each of the six types of visits.
    Medicare's home health policies do not specify the duration 
of a visit.
    While the limits are computed at the service level, they 
are applied to aggregate agency costs. That is, an aggregate 
cost limit is set for each agency that equals the limit for 
each type of service multiplied by the number of visits of each 
type provided by that agency. There is an adjustment made to 
payments to reflect the regional variation of wages which is 
the same as the local hospital wage index.
    In OBRA 93, the per visit cost limits for home care were 
frozen for two years. The freeze meant that the cost limits set 
in 1993 could not be adjusted in 1994 and 1995 for inflation or 
wage cost increases. Cost limits were then recalculated for 
cost reporting periods beginning on or after July 1, 1996.
    Home health agencies can have their cost reimbursement 
payments paid to them from Medicare through periodic interim 
payments (PIPs). These lump sum payments are made several times 
a year based on anticipated costs incurred in order to help 
agencies with their cash flow. PIP payments are reconciled at 
the end of the cost reporting year between the Health Care 
Financing Administration and the agency.

                           Reasons for Change

    Medicare home health service utilization and costs are 
growing at an unsustainable rate for the Medicare program. 
ProPAC reports that from 1980-1994, persons using the home care 
benefit grew from 26 to 88 persons per 1,000 Medicare enrollees 
and from an average of 23 visits to an average of 65 visits per 
person using the home care benefit. From 1988 to 1996, 
Medicare's payments for home health services increased 37% on 
average every year.
    Medicare's current cost-based payment system for home care 
provides no incentive for providers or patients to be cost 
conscious.

                          Committee Provision

    The provision requires the Secretary toestablish a 
prospective payment system (PPS) for home health services and implement 
the system in FY 2000. Until the new PPS is in effect, an interim 
payment system will be in place.
    1. Interim payment for home health services for FY 1998-
1999. Reduces per visit cost limits to 105% of the national 
median of labor-related and nonlabor costs for freestanding 
home health agencies beginning in FY 1998. Home health agencies 
will be paid the lesser of: (a) their actual costs; (b) the per 
visit limits; or (c) a new agency-specific per beneficiary 
annual limit calculated from 1994 reasonable costs, updated by 
the home health market basket.
    The Secretary is required to expand research on a PPS for 
home health that ties prospective payments to a unit of 
service, including an intensive effort to develop a reliable 
case mix adjuster that explains a significant amount of 
variance in cost.
    2. To establish the PPS, the Secretary will compute a 
standard prospective payment amount that will initially be 
based on the most current audited cost report data available to 
the Secretary. For FY 2000, payment amounts under the 
prospective system will be computed in such a way that total 
payments equal amounts that would have been paid had the system 
not been in effect, but would also reflect a 15% reduction in 
cost limits and per beneficiary limits in effect September 30, 
1999. Payment amounts will be standardized in a manner that 
eliminates the effect of variations in relative case mix and 
wage levels among different home health agencies in a budget 
neutral manner. The new payment system will take into account 
regional differences or differences based on whether or not 
services are provided in an area. Beginning FY 2001, standard 
prospective payment amounts will be updated by the home health 
market basket index.
    3. With the implementation of the home health PPS, as was 
the case for the development of the Medicare hospital PPS and 
physician payment reform, certain administrative or judicial 
review will not be permitted. Administrative or judicial review 
will not be permitted for the establishment of the computation 
of the initial standard payment amounts and case-mix 
adjustments; the transition period (if any) for the prospective 
system; and the amount or types of exceptions to the 
prospective payment amounts.
    4. Beginning in FY 1998, payment for home health services 
will be based on the location of where home health services are 
furnished.
    5. Periodic interim payments are eliminated October 1, 1999 
with the implementation of the home health care PPS.

                          home health benefits

                              Present Law

    Payment for home health care is made from the Part A trust 
fund for all home health services except for those provided to 
individuals enrolled under Part B, but not entitled to receive 
benefits under Part A. Only about 1% of home health services 
are reimbursed under Part B.
    Eligibility and reimbursement policies are identical for 
home health services under Parts A and B. Although the original 
1965 home health care benefit required coinsurance, there 
currently is no coinsurance requirement and home health 
services are not counted towards the Part B deductible. The 
Part B deductible applies to all Medicare Part B benefits 
excluding home health care. All part B benefits, including 
current Part B home health care are included in the calculation 
of the Part B premium.
    Once beneficiaries qualify for the home health benefit, the 
program covers part-time or intermittent nursing care provided 
by or under the supervision of a registered nurse and part-time 
or intermittent home health aide services, among other 
services. Coverage guidelines issued by HCFA have defined part-
time and intermittent.
    In order to be eligible for home health care, a Medicare 
beneficiary must be confined to his or her home. The law 
specifies that this ``homebound'' requirement is met when the 
beneficiary has a condition that restricts the ability of the 
individual to leave home, except with the assistance of another 
individual or with the aid of a supportive device (such as 
crutches, a cane, a wheelchair, or a walker), or if the 
individual has a condition such that leaving his or her home is 
medically contraindicated. The law further specifies that while 
an individual does not have to be bedridden to be considered 
confined to home, the condition of the individual should be 
such that there exists a normal inability to leave home, that 
leaving home requires a considerable and taxing effort by the 
individual, and that absences from home are infrequent or of 
relatively short duration, or are attributable to the need to 
receive medical treatment.
    A Medicare beneficiary who is ``homebound'' is entitled to 
an unlimited number of home-based part-time nursing visits 
provided by or under the supervision of a nurse.

                           Reasons for Change

    The Medicare Hospital Insurance (HI or Part A) Trust Fund 
will be insolvent in 2001. The rapid and unsustainable level of 
growth in home health care has contributed significantly to the 
Trust Fund's impending fiscal straights. Redefining the home 
health benefit to a predominantly Medicare Supplemental Medical 
Insurance (SMI or Part B) Trust Fund benefit will help clarify 
and rationalize the current unlimited, and undefined aspects of 
the home health benefit.

                          Committee Provision

    (a) Beginning in 1998, the home health benefit will be 
redefined. The Part A benefit will be limited to 100 visits 
that follow a 3 day hospital stay, and the Part B benefit will 
include all other home health visits.
    (b) Beginning in 1998, the new Part B home health benefit 
will be paid partly from the Part A Trust Fund for a seven year 
phase-in period. For example, the newly defined Part B home 
health benefit will be paid 14% (1/7) from Part B and 86% (6/7) 
from Part A in FY 1998. The next year, payment will be 28% (2/
7) from Part B and 72% (5/7)from Part A, etc. The amount paid 
from Part B will be included in the Part B premium calculation 
each year, as is all other Part B spending.
    (c) Consistent with other Part B services, cost-sharing is 
established for Part B home health services at $5 per visit, 
billable on a monthly basis, capped at an annual amount equal 
to the annual hospital deductible.
    (d) Effective for services furnished on or after October 1, 
1997, the provision defines part-time and intermittent skilled 
nursing and home health aide services furnished any number of 
days per week as long as they are furnished (combined) less 
than 8 hours each day and 28 or fewer hours each week (or, 
subject to review on a case-by-case basis as to the need for 
care, less than 8 hours each day and 35 or fewer hours per 
week). For purposes of qualifying for Medicare's home health 
benefit because of a need for intermittent skilled nursing 
care, ``intermittent'' would mean skilled nursing care that is 
either provided or needed on fewer than 7 days each week, or 
less than 8 hours of each day of skilled nursing and home 
health aide services combined for periods of 21 days or less 
(with extensions for exceptional circumstances when the need 
for additional care is finite and predictable).
    (e) The Secretary shall conduct a study on the criteria 
that should be applied with regards to the determination of 
whether an individual is considered homebound for purposes of 
receiving the home health benefit. The Secretary shall report 
to Congress with specific recommendations no later than October 
1, 1998.
    (f) The Medicare Explanation of Benefits notice will 
include home health care benefits provided and billed for.
    (g) Seamless administration of the home health benefit is 
assured by (i) allowing beneficiaries the same appeals rights 
either under Part A or Part B ($100 in benefits must be in 
dispute), and (ii) requiring fiscal intermediaries to 
administer claims for all home health benefits.

               Subtitle F--Provisions Relating to Part A

                      pps hospital payment update

                              Present Law

    Since 1983, Medicare has paid hospitals for most inpatient 
services with a fixed, predetermined amount according to 
patient diagnosis. The payment system is called the Medicare 
Prospective Payment System (PPS).
    Medicare's PPS payments are updated each year for 
inflation. The inflation update is based on the projected 
increase in ``market basket index'' (MB), which estimates the 
prices of the goods and services hospitals buy to provide care.
    Since fiscal year (FY) 1986, Congress has repeatedly set 
the update factor at a level below the MB. In OBRA 1993, the 
update was set at:
          1. FY 1994--Rural hospitals: MB minus .55 percentage 
        points. Urban hospitals: MB minus 2.5 percentage 
        points.
          2. FY 1995--Rural hospitals: inflation update 
        necessary to eliminate the rural/urban differential. 
        Urban hospitals: MB minus 2.5 percentage points.
          3. FY 1996--MB minus 2 percentage points.
          4. FY 1997--MB minus 0.5 percentage points.
          5. FY 1998 and later years--Equal to the MB with no 
        reductions.

                           Reasons for Change

    In recent years, hospitals' cost growth has slowed while 
operating margins have improved to record levels. According to 
the Prospective Payment Assessment Commission (ProPAC), in FY 
1995 the average hospital Medicare PPS margin was 10%, and is 
anticipated to be about 12% in FY 1996, 14% in FY 1997, and 17% 
in FY 1998. The healthy operating margins reflect the 
difference between Medicare payments and the increasing 
efficiency attributed to the amount and timing of services 
furnished during inpatient stays. While margins have continued 
to improve, estimates of the proportion of hospitals with 
negative Medicare PPS margins has continued to decline. 
According to ProPAC, in FY 1995 34% of all hospitals had a 
negative Medicare PPS margin, the decline is anticipated to 
continue through next year to 19% of all hospitals.
    ProPAC recommends a zero update for the FY 1998 PPS update 
in order to adjust for increasing efficiencies reflected in 
hospitals' declining costs. ProPAC believes a zero update would 
allow hospitals to continue furnishing quality care to Medicare 
beneficiaries while simultaneously fulfilling Medicare's 
responsibility to act as a prudent purchaser.
    Hospital payments should be placed on a calendar year cycle 
because of the interaction with Regulatory Reform which will 
continue to delay the timely implementation of the hospital 
updates. Regulatory Reform requires that ``major'' rules have a 
60 day waiting period from the date the final rule is issued to 
the date of implementation. The Office of Management and Budget 
(OMB) determined that the September 1996 interim final rule for 
Prospective Payment System (PPS) regulations including all 
Medicare hospital payments constituted a ``major rule.'' As a 
``major rule'', the fiscal year 1997 PPS regulations could not 
be implemented for 60 days which would have caused a 30 day 
delay beyond the October 1st date Medicare usually provides 
hospitals with their annual payment inflation update. The 
Regulatory Reform bill was signed into law in March of 1996, 
and the Administration had ample time to notify agencies 
regarding compliance. The delay in payments could have been 
avoided had HCFA issued final regulations 60 days in advance of 
the October 1st date.
    Although Congress intervened to permit the regulations to 
go into effect in a timely manner, it appears that the Health 
Care Financing Administration has not altered the timing of the 
development of the PPS regulations which will again lead to a 
delay in implementation of the regulations beyond the October 
1st implementation date. In order to avert a perennial delay in 
the implementation of the PPS regulations, the implementation 
date should be moved to a calendar year cycle, which will 
correspond to the same timing for annual updates for physicians 
and most other Medicare Part B services.

                          Committee Provision

    Establishes a calendar year cycle for all hospital PPS 
payments. Hospital payments for fiscal year 1997 are continued 
until January 1, 1998, the first calendar year update. The 
annual market basket update for hospitals will equal MB minus 
2.5 percentage points in CY 1998, and MB minus 1 percentage 
point for each calendar year, 1999-2002.

                             Effective Date

    For discharges on or after October 1, 1997.

                   CAPITAL PAYMENTS FOR PPS HOSPITALS

                              Present Law

    Hospital capital expenses (the costs of building or 
acquiring facilities and major equipment) are paid for under 
the Prospective Payment System (PPS).
    Until fiscal year 1992, Medicare payments for capital costs 
were based on each hospital's actual expenses, subject to 
statutory percentage reductions. A 10-year transition to fully 
prospective payments began in FY 1992, during which capital 
payments are paid prospectively based on average capital costs 
per case in FY 1989, updated for inflation and other cost 
changes.
    From FY 1992 through FY 1995, the Health Care Financing 
Administration (HCFA) updated base payment rates using a moving 
average of capital cost increases in previous years. During 
this period, Congress required HCFA to adjust the payment rates 
in each year in a budget neutral manner so that anticipated 
aggregate capital payments would equal 90 percent of 
anticipated aggregate costs. This provision expired on 
September 30, 1995, resulting in a 22.6 percent increase in the 
Federal capital payment rate for FY 1996.
    The Secretary implements the capital provisions by 
regulation. Currently, there is no separate payment for 
property tax related capital costs. Medicare provides for a 
special exceptions process for certain major capital projects.

                           Reasons for Change

    Hospital inpatient capital payments grew 22.6 percent per 
discharge in FY 1996 due to expiring statutory provisions. 
According to HCFA, overall payments per discharge in FY 1997 
are expected to increase to 27.7% above what they would have 
been had the budget neutrality provision not expired in FY 
1996. In addition, ProPAC has stated that data indicate that 
the original base calculation for capital payments was 
overstated.
    Under current law, payments for transitional capital were 
reduced from 85% to 70% as an attempt to contain Medicare 
costs. Several hospitals across the country began construction 
or renovation projects and raised capital under the old rules 
for Medicare capital costs, but under current law are required 
to pay off their debts under the new (lower) Medicare capital 
reimbursement rates.

                          Committee Provision

    For discharges occurring on or after October 1, 1998 the 
Committee provision reinstates the original OBRA 1990 budget 
neutrality requirement (extended in OBRA 1993 for fiscal years 
1994 and 1995) through fiscal years 1998-2002 so that aggregate 
capital payments each year equal 90 percent of what payments 
would be under reasonable cost payments.
    The provision amends the exceptions process provided in 
federal regulation to include as eligible for an exception 
hospitals located in an urban area, with over 300 beds, and 
without regard to whether a hospital qualifies for additional 
disproportionate share hospital (DSH) payment amounts. The 
provision amends the project size requirement to require that a 
hospital's project costs must be at least 150% of its operating 
costs during the first 12-month cost reporting period beginning 
on or after October 1, 1991. The provision requires the minimum 
payment level for qualifying hospitals be equal to 85%. The 
provision requires that a hospital be considered to meet the 
requirement that the capital project involved be completed no 
later than the end of the hospital's last cost reporting period 
beginning before October 1, 2001, if: (1) the hospital had 
obtained a certificate of need for the project approved by the 
state or local planning authority by September 1, 1995, and (2) 
by September 1, 1995, the hospital has expended on the project 
at least $750,000 or 10% of the estimated cost of the project. 
Theprovision also requires that the additional payment that 
would otherwise be payable for the cost reporting period will be 
reduced by the amount (if any) by which the hospital's current year 
Medicare capital payments (excluding the hospital's capital-related DSH 
payments) exceeds the hospital's capital costs for such year.
    The provision requires the Secretary to implement the 
provision in a budget neutral manner not to exceed $50 million 
per year to ensure that the provision will not result in an 
increase in the total amount that would have otherwise been 
paid. The provision requires the Secretary to publish annually 
(beginning in 1999) in the Federal Register a description of 
the distributional impact of the application of this capital 
exception on hospitals which receive and do not receive a 
capital exception payment. The provision also provides a 
conforming amendment that requires the provision of capital 
exception payments.

                             Effective Date

    Discharges occurring on or after October 1, 1997.

                      PPS-EXEMPT HOSPITAL PAYMENTS

                              Present Law

    Not all hospitals paid by Medicare are paid by the 
Prospective Payment System (PPS). There are a number of special 
categories of hospitals that Medicare pays based on the 
hospitals' costs. These five types of hospitals are:
          1. Rehabilitation hospitals/rehabilitation units of 
        hospitals treat patients with injuries or conditions 
        who require extensive hospital-based therapy and who 
        can withstand at least 3 hours of therapy per day 
        (i.e., a patient in need of therapy must be healthy 
        enough to tolerate the minimum therapy required);
          2. Psychiatric hospitals/psychiatric units of 
        hospitals (e.g., patients with severe mental illnesses 
        that require hospital stays);
          3. Long-term care hospitals treat patients who on 
        average, require, 25 days or more of hospital care;
          4. Cancer hospitals limited by law in OBRA 1989 as 
        determined at that time by the National Cancer 
        Institute as research-based cancer hospitals; and
          5. Pediatric hospitals.
    Medicare will reimburse for only two of these types of 
facilities as distinct-part units within an acute care 
hospital. A PPS hospital can establish psychiatric or 
rehabilitation ``distinct units'' or wings, and the host 
hospital receives a separate reimbursement for patients 
undergoing treatment in those wings. A hospital may not create 
a PPS-exempt long-term care unit, it must completely separate 
the two forms of care so that the long-term care hospital is a 
``hospital within a hospital.''
    These types of hospitals are excluded by law from 
Medicare's PPS payments (PPS-exempt) and are paid on the basis 
of reasonable costs, subject to limits in the Tax Equity and 
Fiscal Responsibility Act of 1982 (TEFRA) rate of increase 
limits. The rate of increase limits are called ``TEFRA 
limits''.
    TEFRA payments for inpatient operating costs are based on 
each provider's current Medicare allowable costs per discharge 
or a target amount. A hospital's target amount is based on its 
inpatient operating costs per discharge in a base year, trended 
to the current year by an annual update factor. While payments 
must be for covered services, a new facility seeking to 
establish its TEFRA base-year ceiling is exempted from any 
limit.
    A facility with Medicare-allowable inpatient operating 
costs less than its ceiling (its target amount times the number 
of discharges) receives its costs plus an additional amount, 
known as the ``bonus'' payment, that is equal to half the 
difference between its ceiling and costs or 5 percent of its 
ceiling, whichever is less.
    A facility with Medicare-allowable inpatient operating 
costs above its ceiling receives a ``relief'' payment equal to 
its ceiling plus either 50 percent of the difference between 
its costs and ceiling or 10 percent of its ceiling, whichever 
is less.
    There are additional payments made for exceptions.
    OBRA 93 provided for an update factor to the TEFRA limits 
that range from zero to market basket minus 1.0 percentage 
point for fiscal years 1994-1997. A hospital with operating 
costs in FY 1990 that exceeded its TEFRA target amount by 10 
percent or more receives a full MB update, with partial 
reductions applied to hospitals near the threshold.
    PPS-exempt hospitals are paid for the reasonable costs of 
capital.

                           Reasons for Change

    TEFRA payments rely on historical costs to set target 
amounts that systematically reward certain facilities and 
penalize others.
    Newly certified facilities have no incentives under 
Medicare to restrain their costs. In fact, they have an 
incentive to come into TEFRA with high base year costs per 
case, thereby establishing a high target amount. These newly 
certified facilities are then essentially guaranteed cost 
reimbursement for their high costs, as long as they stay below 
their target amounts. According to ProPAC, in 1995, target 
amounts for Rehabilitation hospitals and units varied from a 
target amount of $8,585 representing the 10th percentile, to 
$95,930 maximum target amount paid to a hospital or unit for 
essentially the same discharge. For long-term care hospitals, 
in 1995, $4,612 represented the 10th percentile target amount, 
$84,995 the maximum target amount. The very wide divergence in 
payments per discharge can not be justified for either of these 
types of hospitals, other than the incentives rooted in a cost-
based reimbursement system.
    Fueled by the TEFRA payment incentives, the number of PPS-
exempt providers has grown rapidly since 1990, especially 
rehabilitation facilities and long-term care hospitals. 
Although the total number of facilities remains small, few 
other provider groups can match the growth seen in 
rehabilitation facilities and long-term care hospitals.
    The number of rehabilitation hospitals and units combined 
increased 26% from 1990 to 1995. The number of long-term care 
hospitals grew by 105% over that same period.

                          Committee Provision

    (a) The update will vary for hospitals above and below 
their target amounts for fiscal years 1998-2002. For hospitals 
(1) with costs that exceed their target amounts in fiscal year 
1995 by 10 percent or more, the update will equal the market 
basket; (2) that exceed their target, but by less than 10%, the 
update factor is the market basket minus .25 percentage points 
for each percentage point by which costs are less than 10% over 
the target, but it shall not be less than zero; (3) that are 
either at their target, or below (but not below 2/3 of the 
target amount for the hospital) the update factor would be the 
market basket minus 1.5 percentage points, but in no case less 
than zero; or (4) that do not exceed 2/3 of their target 
amount, the update factor would be 0.
    (b) Hospital capital payments for PPS-exempt hospitals are 
reduced by 15 percent for FY 1998-2002 (cancer and children's 
hospitals are exempted).
    (c) Bonus payments are reduced to the lesser of:
          (1) 10% of (the TARGET amount minus COSTS), or
          (2) 1% of COSTS.
    (d) Relief payments are altered so that they apply only to 
those facilities in greatest need (with costs that are at least 
10% above their target).
    (e) Target amounts are adjusted for existing rehabilitation 
hospitals, long-term care hospitals, and psychiatric hospitals. 
Hospitals with low target amounts will be adjusted so that they 
will not be less than 50 percent of the national average, and 
the maximum amount reimbursed will be limited to the 90th 
percentile of each category of hospitals' target amounts.
    Establishes new payment criteria for start-up facilities, 
so that target amounts do not exceed 130 percent of the 
national average. The Secretary shall calculate new provider 
base target amounts for each facility type using data from all 
providers within each category modified by geographic location, 
size, and patient characteristics that are related to resource 
use.
    (f) Permanently grandfathers long-term care hospitals that 
were established within a hospital prior to September 30, 1995.
    (g) Establishes a new category of PPS-exempt hospitals. 
Non-research cancer hospitals that were qualified as long-term 
care hospitals between 1991 and 1995 may qualify under the new 
designation. At least 50% of their discharges must be cancer 
related.
    (h) Makes technical correction for a National Cancer 
Institute designated comprehensive cancer center.

                             Effective Date

    Cost reports beginning on or after October 1, 1998.

                DISPROPORTIONATE SHARE HOSPITAL PAYMENTS

                              Present Law

    Under Medicare's Prospective Payment System (PPS), an extra 
payment is made for certain hospitals that serve a 
disproportionate share of low-income patients.
    The amount of the extra DSH payment for each hospital is 
based on a formula that considers certain hospital and patient 
factors. The factors considered in determining whether a 
hospital qualifies for a DSH payment adjustment include the 
number of beds, the disproportionate patient percentage, and 
the hospital's location. A hospital's disproportionate patient 
percentage is the sum of (1) the total number of inpatient days 
attributable to Federal Supplemental Security Income (SSI) 
beneficiaries divided by the total number of Medicare patient 
days, and (2) the number of Medicaid patient days divided by 
total patient days, expressed as a percentage. A hospital is 
classified as a DSH under any of the following circumstances:
          (1) If its disproportionate patient percentage equals 
        or exceeds:
                  (a) 15 percent for an urban hospital with 100 
                or more beds, or a rural hospital with 500 or 
                more beds (the latter is set by regulation);
                  (b) 30 percent for a rural hospital with more 
                than 100 beds and fewer than 500 beds or is 
                classified as a sole community hospital;
                  (c) 40 percent for an urban hospital with 
                fewer than 100 beds; or
                  (d) 45 percent for a rural hospital with 100 
                or fewer beds, or
          (2) if it is located in an urban area, has 100 or 
        more beds, and can demonstrate that, during its cost 
        reporting period, more than 30 percent of its net 
        inpatient care revenues are derived from State and 
        local government payments for care furnished toindigent 
payments. (This provision is intended to help hospitals in States that 
fund care for low-income patients through direct grants rather than 
expanded Medicaid programs.)
    For a hospital qualifying on the basis of (1)(a) above, if 
its disproportionate patient percentage is greater than 20.2 
percent, the applicable PPS payment adjustment factor is 5.88 
percent plus 82.5 percent of the difference between 20.2 
percent and the hospital's disproportionate patient percentage. 
If the hospital's disproportionate patient percentage is less 
than 20.2 percent, the applicable payment adjustment factor is 
equal to: 2.5 percent plus 65 percent of the difference between 
15 percent and the hospital's disproportionate patient 
percentage. If the hospital qualifies as a DSH on the basis of 
(1)(b), the payment adjustment factor is determined as follows:
          (a) if the hospital is classified as a rural referral 
        center, the payment adjustment factor is 4 percent plus 
        60 percent of the difference between the hospital's 
        disproportionate patient percentage and 30 percent;
          (b) if the hospital is a sole community hospital 
        (SCH) the adjustment factor is 10 percent;
          (c) if the hospital is classified as both a rural 
        referral center and a SCH, the adjustment factor is the 
        greater of 10 percent or 4 percent plus 60 percent of 
        the difference between the hospital's disproportionate 
        patient percentage and 30 percent; and
          (d) if the hospital is not classified as either a SCH 
        or a rural referral center, the payment adjustment 
        factor is 4 percent.
If the hospital qualifies on the basis of (1)(c), the 
adjustment factor is equal to 5 percent. If the hospital 
qualifies on the basis of (1)(d), the adjustment factor is 4 
percent. If the hospital qualifies on the basis of (2) above, 
the payment adjustment factor is 35 percent.

                           Reasons for Change

    It is more difficult for rural hospitals to qualify for 
Medicare DSH payments because the threshold is much higher for 
rural than urban hospitals, even if they treat the same number 
of low-income individuals. The Prospective Payment Assessment 
Commission (ProPAC) supports applying a uniform threshold to 
all hospitals.
    ProPAC also recommends that Medicare DSH payments should 
reflect the additional costs of services provided to low-income 
groups in both inpatient and outpatient settings, and uninsured 
and underinsured patients as reflected by uncompensated and 
charity care.
    According to ProPAC, DSH payments have grown rapidly since 
fiscal year 1989, increasing almost fourfold from $1.1 billion 
to $4.3 billion in 1996. This acceleration is largely due to 
legislative changes that raised the DSH payment rate for some 
hospitals.

                          Committee Provision

    From October 1, 1997 to January 1, 1999, apply current 
formula with a 4% reduction in the DSH adjustment. This will 
reduce DSH payments to hospitals by 4%.
    For Calendar Years 1999-2002, the Secretary will continue 
to apply an additional 4% reduction in the DSH payment 
adjustment.
    On January 1, 1999, the Secretary must establish a new 
formula that takes into account Medicaid, Medicare SSI, and 
uncompensated/charity care. This new formula will have one 
threshold for all hospitals. In each year, the Secretary must 
implement the new formula in a budget neutral manner in order 
to achieve the same savings that would have been achieved with 
the old formula under the provisions above.

                             Effective Date

    Cost reporting periods beginning on or after October 1, 
1997.

                CAPITAL ASSETS SALE EQUAL TO BOOK VALUE

                              Present Law

    Medicare provides for establishing an appropriate allowance 
for depreciation and for interest on capital indebtedness and a 
return on equity capital when a hospital or skilled nursing 
facility has undergone a change of ownership. The valuation of 
the asset is the lesser of the allowable acquisition costs of 
the asset to the owner of record, or the acquisition cost of 
such asset to the new owner.

                           Reasons for Change

    There is increasing evidence that intangible losses that do 
not have any true value associated to them are being included 
in the sale of facilities because Medicare will currently 
reimburse for these ``paper'' losses.

                           Committee Provision

    Establishes the value of a capital asset at the time of 
change of ownership at the book value of the asset. The 
Committee provision also applies this valuation to providers of 
services other than hospitals and skilled nursing facilities, 
and eliminates return on equity.

                             Effective Date

    After the third month beginning after the date of enactment 
of this Act.

                  GRADUATE MEDICAL EDUCATION PAYMENTS

                              Present Law

    Since the inception of the Medicare program in 1965, 
Medicare has reimbursed teaching hospitals for certain costs 
associated with approved graduate medical education 
(GME)programs. GME is a period of clinical education of physicians 
after graduation from medical school. Physicians-in-training are called 
``interns'' or ``residents.'' Since enactment of the hospital 
prospective payment system (PPS) in the early 1980's, Medicare has made 
two specific GME payments to teaching hospitals: direct and indirect 
medical education payments.
    (a) Direct Medical Education (DME) Payments.--DME payments 
reimburse a teaching hospital for the costs of a resident's 
salary, benefits, and certain overhead associated with 
operating a teaching program. The DME payment is calculated as 
the product of three factors: (1) The adjusted number of full-
time residents; (2) the Medicare patient load of the hospital 
(the fraction of the hospital's total number of inpatient days 
the Medicare beneficiaries represent); and an amount per 
resident (which reflects each teaching hospital's allowed DME 
costs per resident in 1984 adjusted for inflation).
    (b) Indirect Medical Education (IME) Payments.--IME 
payments reimburse teaching hospitals for certain other costs 
associated with physician training, such as the additional 
tests or procedures that may be ordered by a resident. For IME, 
Medicare pays teaching hospitals an additional percentage of 
each Medicare beneficiary's hospital bill by increasing the 
diagnosis-related group (DRG) payment by approximately 7.7 
percent for each 10 percent increment in a hospital's ratio of 
interns and residents to hospital beds.
    (c) Direct and Indirect Medical Education Payments for 
Managed Care Organizations.--Teaching hospitals do not receive 
a direct payment from Medicare for either DME and IME payments 
for beneficiaries enrolled in HMOs. Instead, such payments are 
included in the monthly amount Medicare pays to HMOs.

                           Reason for Change

    (a) Direct Medical Education (DME) Payments.--The number of 
U.S. medical school graduates filling residency positions in 
teaching hospitals has remained relatively constant, while the 
total number of resident positions have grown sharply in recent 
years. Expert testimony has suggested that Medicare's unlimited 
reimbursement of additional resident positions has 
substantially fueled this growth, and contributed to a 
generally acknowledged surplus in the physician workforce. 
However, it is also believed rural areas have physician 
shortages, in part because residency programs are rarely 
located in rural areas which would create ties and attachments 
to rural communities.
    (b) Indirect Medical Education (IME) Payments.--The 
Prospective Payment Assessment Commission (ProPAC) has advised 
Congress that Medicare is paying more than Medicare's share of 
hospitals' costs for IME, and that this amount should be 
reduced. In addition, current law limits ME payments to 
hospital departments, which provides a disincentive to train 
residents in ambulatory care settings where medical care is 
increasingly provided.
    (c) Direct and Indirect Medical Education Payments for 
Managed Care Organizations.--At present, there is no assurance 
that the portion of the monthly Medicare payment to HMOs 
attributed to direct and indirect medical education is actually 
paid to teaching hospitals. Moreover, payment of graduate 
medical education subsidies by Medicare directly to teaching 
hospitals for HMO enrollees would permit teaching hospitals to 
be more competitive in negotiating rates with HMOs and other 
managed care organizations.

                          Committee Provision

    (a) Direct Medical Education (DME) Payments.--The Committee 
provision would provide that the number of allopathic and 
osteopathic interns and residents reimbursed by Medicare could 
not exceed the number of interns and residents reported on a 
hospital's cost report for the period ending December 31, 1996. 
Subject to this limit, for cost reporting periods beginning on 
or after October 1, 1997, the Committee provision provides for 
calculating the number of FTEs as the average of the cost 
period and the preceding cost period; for each subsequent year, 
the cost period and the two preceding cost periods. The 
Committee provision also would permit DME payments to Federally 
qualified health centers (FQHCs) and rural health clinics 
(RHCs) with approved medical residency training programs.
    (b) Indirect Medical Education (IME) Payments.--The 
Committee provision would reduce the additional payment 
adjustment for IME from 7.7 percent for each 10 percent 
increment in the ratio of interns and residents to beds to:
          1. Fiscal year 1998: 7.0 percent, and
          2. Fiscal year 1999: 6.5 percent,
          3. Fiscal year 2000: 6.0 percent,
          4. Fiscal year 2001: 5.5 percent and after, for each 
        10 percent increment in the ratio of interns/residents 
        to beds.
    For purposes of computing the intern-and-resident to bed 
ratio, the Committee would limit the number of interns and 
residents to the total number of residents and interns in a 
hospital or non-hospital setting reported on the hospital's 
cost report for the period ending December 31, 1996. This 
provision would be effective for discharges occurring after 
October 1, 1997. Subject to this limit, for hospital's first 
cost-reporting period beginning on or after October 1, 1997, 
the number of FTE residents and interns for payment purposes 
would equal the average of the actual FTE resident and intern 
count for the cost reporting period and the preceding year's 
cost reporting period. For the cost reporting period beginning 
October 1, 1998, and each subsequent cost reporting period, 
subject to certain limits, the total number of FTE residents 
and interns for payment purposeswould equal the average of the 
actual FTE resident count for the cost reporting period and the 
preceding two year's cost reporting periods.
    The Committee provision would permit that time spent by an 
intern or resident in patient care activities under an approved 
medical residency training program at a non-hospital setting 
shall be counted towards FTEs if the hospitals incurs all or 
substantially all the costs for training in that setting.
    (c) Direct and Indirect Medical Education Payments for 
Medicare Choice Organizations.--The Committee provision would 
provide that care provided by teaching hospitals to Medicare 
beneficiaries enrolled in managed care organizations would be 
recognized in the formulas for direct and indirect graduate 
medical education payments in proportion to the annual carve 
out of such amounts from payments to Medicare Choice 
organizations.
    (d) Other Provisions.--The Committee provision would 
authorize the Secretary to approve DME and IME payments to 
facilities which had not previously had a Medicare approved 
graduate medical education program and to annually increase 
such payments for a period of no more than 5 years, and to 
increase such payments to facilities with programs less than 5 
years old for a period of 5 years following establishment of 
the program. The Secretary would be limited by the difference 
in number of positions reimbursed or counted in the current 
calendar year and the previous calendar year. The Secretary 
shall give special consideration to facilities that meet rural 
underserved needs.
    The Committee provision would also authorize the Secretary 
to establish consortia demonstration projects which demonstrate 
innovative graduate medical education and payment methods. The 
purposes of the consortia demonstration projects are varied, 
such as encouraging the participation of payers, public and 
private, to further supplement Medicare's funding for the extra 
costs associated with graduate medical education. The Committee 
encourages the Secretary to give special consideration to 
applications for consortia demonstration projects that 
emphasize rural primary care with training experience in 
community-based settings; geriatrics; participation by other 
payers that supplements Medicare funding for graduate medical 
education, and the use of telehealth and computer technologies 
to supervise and support residents in community-based training 
settings.

                             Effective Date

    Cost reporting periods beginning on or after October 1, 
1997.

              ELIMINATE ADD-ONS FOR OUTLIERS (DSH AND GME)

                              Present Law

    Medicare provides outlier payments to hospitals that are 
intended to protect them from the risk of large financial 
losses associated with cases having exceptionally high costs or 
unusually long hospital stays.
    Outlier payments are meant to be self-funded as a 
percentage of all hospital payments. Every year, the Secretary 
of Health and Human Services establishes an outlier payment 
funding pool of 5% to 6% of all the anticipated hospital 
payments for that year.
    Beginning in FY 1998, the length of stay outlier policy 
will terminate, and hospitals will receive outlier payments 
only for very high cost cases. For each diagnosis related group 
(DRG), a specific dollar loss threshold is set, and outlier 
payments are calculated based on the amount by which a 
hospital's costs exceed this loss threshold. For teaching and 
disproportionate share hospitals, however, their estimated cost 
for each case is reduced by the amount of the hospital's IME 
and DSH payment adjustments. The amount by which the estimated 
cost exceeds the outlier threshold thus is less for a case 
treated at a teaching or disproportionate share hospital, 
resulting in lower outlier payments. The lower outlier payment 
amount is then increased by the hospital's IME and DSH 
adjustments, but this generally is not enough to offset the 
loss in outlier payments resulting from the reduced cost 
estimate for the case.

                           Reasons for Change

    Teaching and DSH adjustments are now made on top of the DRG 
plus the outlier payment which means the Medicare program is 
spending more on IME and DSH for outlier cases than is 
warranted.

                          Committee Provision

    Changes the ways that IME and DSH payments are calculated 
for cost outlier cases. The IME and DSH adjustments will be 
made to the base payment amount, not to the outlier portion of 
a hospital's payment. The provision would result in teaching 
and disproportionate share hospitals being treated like all 
other hospitals in the calculation of outlier payment amounts. 
Their estimated costs per case would not be reduced by their 
IME and DSH payments, and an additional IME or DSH adjustment 
would not be added to these payments.

                             Effective Date

    The provision would apply to discharges occurring after 
September 30, 1997.

                      TREATMENT OF TRANSFER CASES

                              Present Law

    Medicare adjusts its payment to a hospital which has 
transferred a patient to another hospital. In these cases, the 
diagnosis related group (DRG) payment to the hospital 
``sending'' a patient to a second hospital is reduced because 
the ``sending'' hospital did not complete the term of care for 
the patient.
    In a transfer situation, full payment is made for a 
patient's stay to the second hospital which completes the 
patient's hospital care and then discharges the patient. The 
``sending'' hospital is paid a per diem rate for each day of 
the stay; total per diem payments are not to exceed the full 
DRG payment that would have been made if the patient had 
beendischarged without being transferred.
    This transfer policy is only applicable when an acute care 
hospital transfers a patient to another acute care hospital.

                           Reasons for Change

    Present law does not apply to patients discharged from a 
hospital to a skilled nursing facility, home health agency or 
to a Prospective Payment System-exempted (PPS-exempt) hospital 
or distinct unit. The Committee provision will curb the current 
``double dipping'' trend of hospitals moving Medicare patients 
early on in their course of treatment to an alternative health 
care setting (often a separate wing or floor of the same 
facility) while still receiving the full hospital DRG payment.

                          Committee Provision

    Discharges from an acute care hospital to a PPS-exempt 
hospital or unit, a skilled nursing facility, (after April, 
1998, discharges to home health care), will be considered 
``transfers'' for payment purposes.

                                BAD-DEBT

                              Present Law

    Certain hospital and other provider bad debts are 
reimbursed by Medicare on an allowable cost basis. To be 
qualified for reimbursement, the debt must be related to 
covered services and derived from deductible and coinsurance 
amounts left unpaid by Medicare beneficiaries. The provider 
must be able to establish that reasonable collection efforts 
were made and that sound business judgement established that 
there was no likelihood of recovery at any time in the future.

                           Reasons for Change

    The payment of hospitals' Medicare-related bad debt is a 
legacy of hospital cost-based reimbursement. Under the current 
prospective payment system, bad debts should be considered a 
cost of doing business. Providers under Part B of the Medicare 
program are not reimbursed for bad debt.

                          Committee Provision

    Reduces bad debt payments to providers by 25 percent for 
cost reporting periods beginning during FY 1998; 40 percent for 
cost reporting periods beginning in FY 1999; and 50 percent for 
subsequent cost reporting periods.

                        FLOOR ON AREA WAGE INDEX

                              Present Law

    As part of the methodology for determining payments to 
hospitals under the Medicare prospective payment system (PPS), 
the Secretary is required to adjust a portion of the 
standardized amounts for area differences in hospital wage 
levels by a factor reflecting the relative hospital wage level 
in the geographic area of the hospital compared to the national 
average wage level.

                           Reason for Change

    Insures that the wage index in urban areas is at least 
equal to that of rural areas in a state.

                          Committee Provision

    For discharges occurring on or after October 1, 1997, the 
area wage index applicable for any hospital which is located in 
an urban area can not be less than the average of the area wage 
indices applicable to hospitals located in rural areas in the 
state in which the hospital is located. The Secretary is 
required to make any adjustments in the wage index in a budget 
neutral manner.

               INCREASE BASE PAYMENT RATE TO PUERTO RICO

                              Present Law

    Hospitals in Puerto Rico are paid in a similar manner to 
hospitals paid on the United States mainland, however, they are 
paid a much lower amount. The lower payments are largely 
attributed to the dramatically lower prevailing wage in Puerto 
Rico. For hospital capital payments, Puerto Rico receives a 
special payment for capital which is lower than what most 
hospitals on the US mainland receive.
    Puerto Rico hospital payments are based on a different 
standardized amount. The Puerto Rican standardized amount is a 
blend of 75% of the local average cost of treating a patient in 
Puerto Rico and 25% of a national amount (this is not the same 
as the national standardized amount).

                           Reasons for Change

    In 1995, Puerto Rico's urban hospitals had an average 
inpatient PPS margin of -4%, while mainland United States 
hospitals had an average 10.7% margin.

                          Committee Provision

    Increases payments to Puerto Rico's hospitals by altering 
the blended formula for the standardized amount from the 75% 
local rate, 25% Federal rate to a 50%/50% blend.

             PERMANENT EXTENSION OF HEMOPHILIA PASS-THROUGH

                              Present Law

    Medicare made additional payments for the costs of 
administering blood clotting factor to Medicare beneficiaries 
with hemophilia admitted for hospital stays where the clotting 
factor was furnished between June 19, 1990 and September 30, 
1994.

                           Reasons for Change

    Due to increases in the cost of clotting factor resulting 
from the increase in AIDs prevalence in the blood supply, in 
1989, Congress changed the way Medicare paid for inpatient 
costs of clotting factor by providing an add-on to the PPS 
payment rates. This change was initially limited to 18 months 
and then subsequently extended through FY 1994.

                          Committee Provision

    Permanently reinstates Medicare's additional payments for 
the costs of administering blood clotting factor to Medicare 
beneficiaries with hemophilia admitted forhospital stays where 
the clotting factor was furnished. Reaches back to September 30, 1994, 
and makes the provision permanent.

                     PAYMENTS FOR HOSPICE SERVICES

                              Present Law

    Medicare covers hospice care for terminally ill 
beneficiaries with a life expectancy of 6 months or less. 
Persons electing Medicare's hospice benefit are covered for 
four benefit periods: two 90-day periods, a subsequent 30-day 
period, and a final period of unlimited duration.
    At the beginning of the first 90-day period when a Medicare 
beneficiary elects hospice, both the individual's attending 
physician and the hospice physician must certify in writing 
that the beneficiary is terminally ill not later than 2 days 
after hospice is initiated (or, verbally not later than 2 days 
after care is initiated and in writing not later than 8 days 
after care has begun).
    Medicare covers hospice care, in lieu of most other 
Medicare benefits. Payment for hospice care is based on one of 
four prospectively determined rates, which correspond to four 
different levels of care, each day a beneficiary is under the 
care of the hospice. The four categories are routine home care, 
continuous home care, inpatient respite care, and general 
inpatient care. The prospective payment rates are updated 
annually by the hospital market basket index (MB).
    Hospice services are defined in Medicare statute to include 
nursing care; physical and occupational therapy and speech 
language pathology services; medical social services; home 
health aide services; medical supplies (including drugs and 
biologicals) and medical appliances; physician services; short-
term inpatient care (including both respite care and procedures 
necessary for pain control and acute and chronic symptom 
management); and counseling. Beneficiaries electing hospice 
waive coverage to most Medicare services when the services they 
need are not related to the terminal illness.
    Medicare law requires that hospices routinely provide 
directly substantially all of certain specified services, often 
referred to as core services. Physician services are among 
these core services. HCFA has defined ``directly'' to require 
that services be provided by hospice employees.
    Hospices generally bill Medicare on the basis of location 
of the home office, rather than where service is actually 
delivered.
    Medicare law provides financial relief to beneficiaries and 
providers for certain services for which Medicare payment would 
otherwise be denied. Medicare payment under this ``limitation 
of liability'' provision is dependent on a finding that the 
beneficiary did not know and could not reasonably have been 
expected to know that services would not be covered on one of 
several bases (but not on the determination that an individual 
is not terminally ill).

                           Reasons for Change

    The hospice benefit should be altered to better reflect the 
needs of the terminally ill. The current benefit should be 
changed to provide hospices greater flexibility to deliver 
services, as well as clearer guidelines for patient 
certification. Patients who enroll in hospice care, yet who are 
not deemed to be terminally ill should not be penalized.

                          Committee Provision

    (a) Hospice benefit periods will be restructured to include 
two 90 day periods, followed by an unlimited number of 60 day 
periods. The medical director of the hospice will have to 
recertify at the beginning of the 60 day periods that the 
beneficiary is terminally ill. The provision will also allow 
greater flexibility in items and services provided in hospice 
care as long as they are part of the patient's plan of care. 
Hospices will be allowed to contract with physicians. Certain 
staffing requirements will be waived for rural hospices. 
Eliminates the specific time frame physicians must complete 
certification forms in order to admit a patient to hospice 
care.
    (b) Requires payment for hospice care furnished in an 
individual's home be based on the geographic location of the 
home.
    (c) Places limitations on hospice care liability for 
individuals who are not in fact terminally ill. Provides that 
Medicare beneficiaries do not have to pay for hospice care 
based on an incorrect diagnosis of terminal illness if the 
beneficiary did not know, and could not reasonable have been 
expected to know, that the diagnosis was in error. As is the 
case under current practice for other situations involving 
waiver of liability, a beneficiary has a favorable presumption 
of ignorance, while a provider of services does not.

                             Effective Date

    Cost reporting periods beginning on or after October 1, 
1997.

                    RELIGIOUS, NON-MEDICAL SERVICES

                              Present Law

    Since Medicare was first enacted, the program has covered 
the services furnished by Christian Science sanatoria under 
Part A of the program. In order to be a covered provider, the 
institution must be listed and certified by the First Church of 
Christ Scientist, of Boston, Massachusetts. A certified 
sanatorium qualifies as both a hospital and as a skilled 
nursing facility. Under Medicare, two separate types of 
benefits are payable: services received in an inpatient 
Christian Science sanatorium and extended care services in a 
sanatorium. Section 1861(e)(9) of the Social Security Act 
includes a Christian Science sanatorium in the definition of a 
hospital; 1861(y) defines extended care in a Christian Science 
skilled nursing facility. Under the Medicaid program, states 
have the option of coveringservices provided by Christian 
Scientist sanatoria and extended care facilities.

                           Reasons for Change

    The need for clarification of how the statute treats 
religious, non-medical institutions became evident after the 
current statutory provisions were successfully challenged in a 
Minnesota District Court which held that they violate the 
Establishment Clause of the Constitution as an impermissible 
sectarian preference. The Court's decision enjoined the 
Secretary from further implementation of the law, but the 
injunction was stayed until August.

                          Committee Provision

    This provision replaces existing law and provides for 
reimbursement of nursing services to individuals who decline to 
accept medical care due to sincerely held religious beliefs. 
The provision requires the Health Care Financing Administration 
(HCFA) to develop conditions of participation for religious, 
nonmedical institutions and to require that such conditions are 
met. The provision requires that HCFA develop the conditions of 
participation in a manner that will not exceed $20 million per 
year.

             Subtitle G--Provisions Relating to Part B Only

   CHAPTER 1--PAYMENTS FOR PHYSICIANS AND OTHER HEALTH CARE PROVIDERS

                   payments for physician's services

                              Present Law

    (a) Physician Fee Schedule.--Medicare pays for over 7,000 
physician services according to a fee schedule. The Medicare 
physician fee schedule uses two formulas: (1) one to calculate 
the fee for each service; and (2) another to annually revise or 
``update'' the fees.
    Under the fee schedule, each physician service is assigned 
relative value units (RVUs) that reflect three factors: 
physician work, practice expenses (i.e., office costs), and 
malpractice insurance costs. The RVUs for each service are 
adjusted for geographic variations in the costs of practicing 
medicine.
    To determine the Medicare fee payment for a physician 
service, the adjusted RVUs for that service are multiplied by a 
dollar amount called a ``conversion factor.'' There are 
currently three conversion factors, for (1) surgical services; 
(2) primary care services; and (3) other nonsurgical services. 
In 1997, the conversion factors were: $40.96 for surgical 
services; $35.77 for primary care services; and $33.85 for 
other nonsurgical services.
    Each year, unless Congress otherwise provides, a default 
formula is used to update each conversion factor. The default 
update is the sum of the Medicare Economic Index (MEI) (a 
measure of inflation) and a volume performance adjustment. If 
the volume performance adjustment is less than MEI, the update 
is positive; if less than MEI, the update is negative.
    The volume performance adjustment is intended to reward 
restraint in increases in the quantity of physician services 
provided to beneficiaries (so-called volume and intensity of 
services), and is a comparison of actual physician spending in 
a base period with an expenditure goal known as the Medicare 
Volume Performance Standard (MVPS). MVPS is calculated from 
changes in volume and intensity of services and certain other 
factors, based on data from the second-preceding fiscal year 
(e.g., 1995 data would be used to determine the 1997 update). 
The MVPS derived from this calculation is subject to a 
reduction known as the ``performance standard factor.'' The 
MVPS has a lower limit of MEI minus five percentage points.
    Anesthesia services are reimbursed according to a separate 
fee schedule, although that fee schedule also uses RVUs and a 
conversion factor. The anesthesia services conversion factor 
was $16.68 in 1997.
    (b) Resource-Based Methodology for Practice Expenses.--
Currently, practice expenses (i.e., the costs of running a 
doctor's office) are based on charges to the Medicare program 
before the enactment of the physician fee schedule in 1989, not 
the resources actually used in providing each physician 
service. However, a resource-based methodology for practice 
expenses was intended by the Omnibus Reconciliation Act of 1989 
(OBRA 1989), which established the physician fee schedule. In 
the Social Security Act Amendments of 1994, Congress instructed 
the Secretary of Health and Human Services to implement a 
resource- based methodology for practice expenses, to be 
implemented in 1998.

                           Reasons for Change

    (a) Physician Fee Schedule.--The Committee provision 
provides for a single conversion factor. A single conversion 
factor restores the integrity of the fee schedule. When the fee 
schedule was established, it was intended that each RVU should 
be worth the same amount across all physicians' services, and 
not by the category of physician service (i.e., surgical 
services, primary care services, and other non-surgical 
services). However, under current law, physician services 
assigned the same number of RVUs may be paid differing amounts. 
The Committee provision corrects this distortion of the 
physician fee schedule. A single conversion factor has been 
recommended by the Physician Payment Review Commission.
    (b) Resource-Based Methodology for Practice Expenses.--The 
resource-based practice expense methodology is expected to 
result in enhanced reimbursement for physician services 
provided in an office setting with undervalued office costs, 
and reduced reimbursement for services provided in a hospital 
or other health care facility (such as surgical procedures) 
with overvalued costs. To allow this redistribution to proceed 
in an orderly fashion, the Committee provision would provide 
for an extended transition period for implementation of the 
resource-based methodology for practice expenses.

                          Committee Provision

    (a) Physician Fee Schedule.--The Committee bill would 
provide for the establishment of a single conversion factor, 
rather than three conversion factors, effective January 1, 
1998. The provision would set the single conversion factor for 
1998 at the 1997 primary care conversion factor, updated to 
1998 by the Secretary's estimate of the weighted average of the 
three separate updates that would occur in the absence of the 
legislation.
    The Committee bill would modify the default update formula, 
effective for calendar year 1997. The update would equal the 
product of MEI and the update adjustment factor. The update 
adjustment factor would match spending on physician services to 
a cumulative sustainable growth rate. By November of each year, 
the Secretary will calculate the update adjustment factor for 
the succeeding year on the basis of a comparison between 
cumulative target spending (cumulated from annual sustainable 
growth rate calculations) and cumulative actual spending from a 
base year of July 1996 to June 1997. The annual sustainable 
growth rate would be calculated with the same factors as the 
current Medicare Volume Performance Standard (MVPS), except the 
factor of growth in historical volume and intensity of 
physician services is replaced with projected annual growth in 
real Gross Domestic Product (GDP) and the performance standard 
factor is eliminated.
    The update would be subject to upper and lower bounds. The 
update could be no greater than approximately MEI plus three 
percentage points, or less than MEI minus seven percentage 
points.
    The Committee provision specify that the conversion factor 
for anesthesia services would equal 46 percent of the 
conversion factor established for other services for 1998.
    (b) Resource-Based Methodology for Practice Expenses.--The 
Committee provision would provide a one-year delay in the 
implementation of the proposed rule for a resource-based 
methodology for practice expenses by the Health Care Financing 
Administration (HCFA) and a subsequent phase in of a rule over 
a subsequent three-year period, from January 1, 1999 through 
January 1, 2001. For 1998, the Committee bill would establish a 
special rule by which approximately 10 percent of the amount of 
money expected to be redistributed under practice expense 
reform would be subtracted from the practice expenses of 
physician services where practice RVUs exceed work RVUs by 110 
percent and added to the practice expenses of primary care 
services provided in a physician's office which have been 
determined to have been historically underpaid. Full 
implementation of practice expense reform would occur no later 
than 2001, with implementation in equal yearly proportions over 
this period.
    The Committee is aware and concerned that many issues have 
been raised about the resource-based practice expense 
methodology proposed by HCFA. To provide for an independent and 
objective review of these issues, the Committee provision would 
provide for a study within 6 months by the General Accounting 
Office. The GAO study is intended to be a thorough examination 
of the proposed rule on practice expenses. As part of this 
examination, the Committee expects that GAO will consult with 
organizations representing physicians and to address the issue 
of beneficiary access to medical services. The Committee 
provision would also direct the Secretary to solicit the 
individual views of physicians in the practice of surgical and 
non-surgical specialties, physicians in academic practice, and 
other appropriate experts. The Committee provision would direct 
the Secretary to report to the appropriate committees of 
jurisdiction the results of these consultations.
    The Committee expects the Secretary to carefully review 
both the GAO report and the information provided by the 
individual physicians and other experts. The Committee intends 
to review these reports carefully as well. If the Secretary 
determines that insufficient data exists to support the 
proposed rule, or finds other serious problems with the 
proposed rule, the Committee expects the Secretary to collect 
new data or take such other actions needed to correct any 
deficiencies, including a new study, before proceeding to a 
final rulemaking. In general, any new data collection or other 
action to correct deficiencies shall include the following: (1) 
direct and indirect cost accounting according to standard 
accounting principles; (2) physician associated costs of non-
physician staff, personnel, equipment and supplies used by a 
physician in the delivery of patient related service, 
regardless of site; and (3) inclusion of appropriate physician 
practices relevant to the provision of services to Medicare 
beneficiaries.

                             Effective Date

    Generally January 1, 1998.

  increased medicare reimbursement for nurse practitioners, clinical 
              nurse specialists, and physician assistants

                              Present Law

    (a) Payments for Nurse Practitioners and Clinical Nurse 
Specialists.--Separate payments are made for nurse practitioner 
(NP) services provided in collaboration with a physician, which 
are furnished in a nursing facility. Such payments equal 85 
percent of the physician fee schedule amount. Nurse 
practitioners and clinical nurse specialists (CNSs) are paid 
directly for services provided in collaboration with a 
physician in a rural area. Payment equals 75 percent of the 
physician fee schedule amount for services furnished in a 
hospital and 85 percent of the fee schedule amount for other 
services.
    (b) Payments for Physician Assistants.--Separate payments 
are made for physician assistant (PA) services when provided 
under the supervision of a physician: (1) in a hospital, 
skilled nursing or nursing facility, (2) as an assistant at 
surgery, or (3) in a rural area designated as a health 
professional shortage area.

                           Reasons for Change

    Expanded reimbursement of nurse practitioners, clinical 
nurse specialists, and physician assistants would enhance the 
availability of care in rural areas and of primary care 
services to Medicare beneficiaries generally.

                          Committee Provision

    (a) Payments for Nurse Practitioners and Clinical Nurse 
Specialists.--The provision would remove the restriction on 
settings. It would also provide that payment for NP and CNS 
services could only be made if no facility or other provider 
charges are paid in connection with the service. Payment would 
equal 80 percent of the lesser of either the actual charge or 
85 percent of the fee schedule amount for the same service if 
provided by a physician. For assistant-at-surgery services, 
payment would equal 80 percent of the lesser of either the 
actual charge or 85 percent of the amount that would be 
recognized for a physician serving as an assistant at surgery. 
The provision would authorize direct payment for NP and CNS 
services.
    The provision would clarify that a clinical nurse 
specialist is a registered nurse licensed to practice in the 
state and who holds a master's degree in a defined clinical 
area of nursing from an accredited educational institution.
    (b) Payments for Physician Assistants.--The Committee 
provision would remove the restriction on settings. The 
Committee provision would also provide that payment for PA 
services could only be made if no facility or other provider 
charges are paid in connection with the service. Payment would 
equal 80 percent of the lesser of either the actual charge or 
85 percent of the fee schedule amount for the same service if 
provided by a physician. For assistant-at-surgery services, 
payment would equal 80 percent of the lesser of either the 
actual charge or 85 percent of the amount that would be 
recognized for a physician serving as an assistant at surgery. 
The provision would further provide that the PA could be in an 
independent contractor relationship with the physician. 
Employer status would be determined in accordance with state 
law.

                             Effective Date

    January 1, 1998.

              CHIROPRACTIC SERVICES DEMONSTRATION PROJECT

                              Present Law

    Medicare covers chiropractic services involving manual 
manipulation of the spine to correct a subluxation demonstrated 
to exist by X-ray. Medicare regulations prohibit payment for 
the X-ray either if performed by a chiropractor or ordered by a 
chiropractor.

                           Reason for Change

    Current policy on coverage of services provided by 
chiropractors was enacted 20 years ago and does not reflect 
current subsequent developments in recognition of the value of 
chiropractic services. This demonstration will provide 
additional information on the cost effectiveness of services 
provided by chiropractors.

                          Committee Provision

    The Committee provision would direct the Secretary to 
establish a two-year demonstration project, beginning not later 
than one year after enactment, to examine methods under which 
access to chiropractic services by Medicare beneficiaries might 
be expanded on a cost-effective basis.
    The Secretary would conduct a demonstration with at least 
the following elements: (1) the effect of allowing doctors of 
chiropractic to order and be reimbursed for x-rays; (2) the 
effect of removing the x-ray requirement; (3) the effect of 
allowing chiropractors, within the scope of their licensure, to 
provide physicians services to beneficiaries; and (4) the cost 
effectiveness of allowing beneficiaries who are enrolled with a 
risk-based HMO to have direct access to chiropractors. Direct 
access would be defined as the ability of a beneficiary to go 
directly to a chiropractor without prior approval from a 
physician or other gatekeeper.
    The Committee provision would require that each of the 
demonstration elements to be examined in three or more rural 
areas, in three or more urban areas, and in three or more areas 
having a shortage of primary medical care professionals. The 
Secretary, in designing and conducting the demonstration, would 
be required to consult, on an ongoing basis, with 
chiropractors, organizations representing chiropractors, and 
representatives of Medicare beneficiary groups. The provision 
would require the Secretary to examine the direct access 
element described above with at least 10 Medicare HMOs that 
have voluntarily elected to participate in the demonstration; 
these HMOs would be eligible to receive a small incentive 
payment.
    The Secretary would be required to evaluate whether 
beneficiaries who use chiropractic services use fewer Medicare 
services overall, the overall costs effects of increased access 
to chiropractors, and beneficiary satisfaction with 
chiropractic services. The Secretary would be required to 
submit a preliminary report to Congress within two years of 
enactment and a final report by January 1, 2001 together with 
recommendations on each of the four elements noted above. The 
Secretary would be required to include specific legislative 
proposals for those items that the Secretary has found to be 
cost effective.
    As soon as possible after submission of the final report, 
the Secretary would begin payment for elements of the 
demonstration project proven cost effective for the Medicare 
program.

                             Effective Date

    January 1, 1998.

                  CHAPTER 2--OTHER PAYMENT PROVISIONS

          PAYMENTS FOR CLINICAL LABORATORY DIAGNOSTIC SERVICES

                              Present Law

    Since 1984, Medicare payments for clinical laboratory 
services have been made on the basis of local fee schedules 
established in areas designated by the Secretary. Beginning in 
1986, the fee for each laboratory service has been limited by a 
national cap amount, which is based on the median of all local 
fees established for that laboratory test during a base year. 
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) 
mandated a reduction in the national cap amounts in 1996 to 76 
percent of the median fee amount paid for each service in a 
base year.
    Current law provides that fee schedule amounts for 
laboratory services are updated each January 1 by the decrease 
or increase in the consumer price index for urban consumers 
(CPI-U). OBRA 93 eliminated this update for 1994 and 1995.

                           Reasons for Change

    The Committee provision would establish more appropriate 
growth in payments.

                           Committee Provision

    The Committee provision would reduce the inflation updates 
by two percentage points each year from January 1, 1998, 
through December 31, 2002. It would also lower the cap from 76 
percent of the median to 74 percent of the median beginning in 
1998.
    The Committee provision directs the Secretary of Health and 
Human Services to request the Institute of Medicine to conduct 
a study on Medicare Part B payments for clinical laboratory 
services, including the relationship between Medicare payments 
for laboratory services and access by beneficiaries to high 
quality services and new test procedures.

                             Effective Date

    January 1, 1998.

IMPROVING PROGRAM INTEGRITY AND CONSISTENCY IN THE CLINICAL LABORATORY 
                      DIAGNOSTIC SERVICES BENEFIT

                              Present Law

    Claims for payment for clinical laboratory diagnostic 
services, as other claims for payment under Medicare Part B, 
are processed by carriers, which are by statute health 
insurance companies under contract to the Health Care Financing 
Administration to conduct claims processing and certain program 
integrity activities. Carriers have a limited authority to 
establish coverage and payment rules.

                           Reasons for Change

    The Committee provision would provide for improved program 
integrity in the administration of the laboratory services 
benefit

                          Committee Provision

    The Committee provision would require the Secretary to 
divide the country into no more than 5 regions and designate a 
single carrier for each region to process laboratory claims no 
later than January 1, 1999. One of the carriers would be 
selected as a central statistical resource. The assignment of 
claims to a particular carrier would be based on whether the 
carrier serves the geographic area where the specimen was 
collected or other method selected by the Secretary.
    The Committee provision would require the Secretary, by 
July 1, 1998, to adopt uniform coverage, administration, and 
payment policies for lab tests using a negotiated rule-making 
process. The policies would be designed to promote uniformity 
and program integrity and reduce administrative burdens with 
respect to clinical diagnostic laboratory tests.
    The Committee provision would provide that during the 
period prior to the implementation of uniform policies, 
carriers could implement new local requirements under certain 
circumstances.
    The provision would permit the use of interim regional 
policies where a uniform national policy had not been 
established. The Secretary would establish a process under 
which designated carriers could collectively develop and 
implement interim national standards for up to 2 years.
    The Secretary would be required to conduct a review, at 
least every 2 years, of uniform national standards. The review 
would consider whether to incorporate or supersede interim 
regional or national policies.
    With regard to the implementation of new requirements in 
the period prior to the adoption of uniform policies, and the 
development of interim regional and interim national standards, 
carriers must provide advance notice to interested parties and 
allow a 45 day period for parties to submit comments on 
proposed modifications.
    The Committee provision would require the inclusion of a 
laboratory representative on carrier advisory committees. The 
Secretary would be required to consider nominations submitted 
by national and local organizations representing independent 
clinical labs.
    This Committee provision would exempt independent physician 
offices until the Secretary could provide that such offices 
would not be unduly burdened by billing responsibilities with 
more than one carrier.

                             Effective Date

    Generally on enactment.

                       DURABLE MEDICAL EQUIPMENT

                               Present Law

    The Omnibus Budget Reconciliation Act of 1987 (OBRA 1987) 
established six categories of durable medical equipment for 
purposes of determining fee schedules and making payments. 
Among these categories are home oxygen equipment, which is 
reimbursed on a regionally adjusted monthly payment amount. Fee 
schedule amounts for durable medical equipment are updated 
annually for inflation.

                           Reasons for Change

    Although the Committee bill would reduce the growth in 
expenditures on durable medical equipment, spending in this 
area is expected to remain among the fastest growing areas in 
the Medicare program. In the category of home oxygen equipment, 
the General Accounting Office has reported that a Medicare 
substantially overpays for home oxygen equipment compared to 
the Veteran's Administration, even when differences between the 
two programs are considered.

                          Committee Provision

    The Committee provision would reduce the update by two 
percentage points for all categories of DME, including 
orthotics and prosthetics and parenteral and enteral nutrients, 
supplies, and equipment, each year from January 1, 1998, 
through January 1, 2002.
    The Committee provision would provide for the monthly 
payment amount for home oxygen services to be reduced 25 
percent in 1998 and an additional 12.5 percent in 1999. The 
Committee provision would authorize the Secretary to create 
classes of oxygen equipment with differing payments, so long as 
there is no net increase in payments for home oxygen equipment. 
The Committee provision would also direct the Secretary to 
establish service standards and accreditation requirements for 
home oxygen providers. The Committee provision would direct the 
General Accounting Office to report within six months of 
enactment of this Act on access to home oxygen equipment, and 
direct the Secretary to arrange with peer review organizations 
established under section 1154 of the Social Security Act to 
evaluate access and quality of home oxygen equipment following 
enactment of this act. In addition, the Committee provision 
would require the Secretary to conduct a demonstration project 
of competitive bidding for home oxygen equipment.
    The Committee provision would permit beneficiaries to 
purchase upgraded or enhanced durable medical equipment (DME) 
in a simpler fashion. A DME supplier would be permitted to bill 
the Medicare program for the basic DME item, and receive an 
additional payment from the beneficiary for the amount of the 
difference between the Medicare payment and the cost of the 
enhanced item. The Committee provision provides for the 
promulgation by the Secretary of consumer protection 
regulations, at which time this provision becomes effective.

                             Effective Date

    Generally January 1, 1998.

                updates for ambulatory surgical services

                              Present Law

    Under current law, payments to ambulatory surgical centers 
are made on the basis of prospectively determined rates, 
determined by the Secretary for each covered procedure. 
Payments are updated annually for inflation.

                          Committee Provision

    The Committee bill would reduce updates for payments to 
ambulatory surgical centers by two percentage points each year 
for 1998 through 2002.

                             Effective Date

    January 1, 1998.

               payments for outpatient prescription drugs

                              Present Law

    Under current law, Medicare provides a very limited 
outpatient prescription drug benefit (however, Medicare 
generally pays for drugs provided to a beneficiary while in a 
hospital). With some exceptions, Medicare pays only for 
outpatient drugs that cannot be ``self-administered''--for 
example, drugs that must be administered directly by a 
physician in his office, such as intravenous drugs for cancer 
therapy; or require specialized equipment in the home, such as 
infusion therapy.

                           Reasons for Change

    Medicare pays ``reasonable charges'' for outpatient drugs, 
which in practice is the manufacturers' recommended price. The 
Inspector General of the Department of Health and Human 
Services has found that Medicare pays substantially more than 
most other payers for prescription drugs.

                          Committee Provision

    The Committee provision would specify that in any case 
where payment is not made on a cost or prospective payment 
basis, the payment could not exceed 95 percent of the average 
wholesale price, as specified by the Secretary. In any case, 
the amount payable for any drug or biological shall not exceed 
the amount paid on May 1, 1997, increased annually by consumer 
price index.
    The Secretary would be required to conduct such studies or 
surveys to determine the average wholesale price or other 
appropriate price of outpatient prescription drugs and report 
to Congress within six months following the date of enactment. 
If the Secretary further adjusts the payment amounts for 
outpatient prescription drugs, the Secretary is authorized to 
pay a dispensing fee to pharmacies.

                             Effective Date

    On enactment.

            CHAPTER 3--PART B PREMIUM AND RELATED PROVISIONS

                             part b premium

                              Present Law

    Part B of Medicare is a voluntary program for which 
beneficiaries pay a monthly premium. When Medicare was 
established in 1965, the Part B monthly premium was set at an 
amount to cover one-half of the Part B program costs, with the 
remainder of funding from general revenues.
    Under current law, Part B monthly premiums are required to 
cover 25 percent of Part B program costs. However, this 
provision expires effective for calendar year 1999. For 
subsequent years,increases in the Part B premium are limited to 
the cost-of-living adjustment for Social Security beneficiaries.

                           Reasons for Change

    The Committee provision would establish the policy that 
Part B premiums permanently cover 25 percent of Part B 
spending.

                          Committee Provision

    The Committee provision would establish permanently Part B 
monthly premiums in law at 25 percent of Part B program costs.

                             Effective Date

    January 1, 1998.

                    INCOME-RELATED PART B DEDUCTIBLE

                              Present Law

    Part B of Medicare is a voluntary program. Beneficiaries 
enrolled in Part B must pay the first $100 each year of the 
costs of Part B covered services. This deductible amount is the 
same for all beneficiaries regardless of income. The deductible 
amount has been increased only three times since the inception 
of the Medicare program: from 1966 to 1972 the deductible was 
$50; from 1973 to 1981, $60; and from 1982 to 1990, $75.

                           Reasons for Change

    There are many beneficiaries who can afford to pay more of 
Part B program costs, and taxpayers should not be asked to 
subsidize these beneficiaries. Moreover, a higher deductible 
would make beneficiaries more conscious of the costs of medical 
care, and encourage more prudent purchasing by beneficiaries of 
medical services. Savings from this provision would be applied 
to improving the financial status of the Part A (Hospital 
Insurance) Trust Fund.

                          Committee Provision

    The Committee provision would provide for an income-related 
Part B deductible for individuals with incomes over $50,000 and 
couples with incomes over $75,000. The Committee provision 
would increase the amount of the deductible over the current 
law amount of $100 by an amount equal to the amount Part B 
premiums would be increased if there were a straight line phase 
out of the Federal subsidy (currently 75 percent) for the Part 
B premium. For individuals, this phase out would occur over the 
income range of $50,000 to $100,000; for couples, $75,000 to 
$125,000.
    The Committee provision would require the Secretary to make 
an initial determination of the amount of an individual's 
adjusted gross income (AGI) by September 1 for the forthcoming 
year, and notify each beneficiary subject to an increased 
deductible. The beneficiary would have a 30-day period to 
provide information on the beneficiary's anticipated AGI and 
the Secretary would adjust the deductible amount. If it is 
subsequently determined that a beneficiary's deductible amount 
was too high and the beneficiary paid too much for medical 
services, the Secretary would provide for repayment of the 
difference. If the deductible amount was too low, and the 
beneficiary paid too little for medical services, the Secretary 
would seek recovery from the beneficiary.
    For beneficiaries enrolled in Medicare Choice 
organizations, the Secretary would reduce the monthly payment 
by an amount the Secretary determines (on the basis of 
actuarial value) to be the equivalent amount of the increase in 
the deductible for a beneficiary. The Committee provision would 
allow Medicare Choice organizations to recoup the amount of any 
payment reduction from a beneficiary.
    The Committee provision would require the Secretary to 
transfer amounts equal to the reduction in payments under this 
provision to the Part A (Hospital Insurance) Trust Fund.

                             Effective Date

    January 1, 1998.

            Subtitle H--Provisions Relating to Parts A and B

                 CHAPTER 1--SECONDARY PAYOR PROVISIONS

                       SECONDARY PAYOR PROVISIONS

                              Present Law

    (a) Secondary Payer Extensions.--Generally, Medicare is the 
``primary payer,'' that is, Medicare pays medical claims first, 
with an individual's private or other public insurance only 
responsible for claims not covered by Medicare. For certain 
Medicare beneficiaries, however, the beneficiary's employer's 
health insurance plan pays medical bills first (so-called 
``primary payer''), with Medicare paying for any gaps in 
coverage within Medicare's coverage limits (Medicare is the 
``secondary payer''). Medicare is the secondary payer to 
certain employer group health plans for: (1) aged beneficiaries 
(age 65 and over); (2) disabled beneficiaries, and (3) 
beneficiaries with end-stage renal disease (ESRD) during the 
first 18 months of a beneficiary's entitlement to Medicare on 
the basis of ESRD.
    The Medicare secondary payer provision regarding aged 
beneficiaries is permanent law. The Omnibus Budget 
Reconciliation Act of 1993 (OBRA 93) extended the law making 
Medicare the secondary payer for disabled and ESRD 
beneficiaries through October 1, 1998.
    (b) Data Match Program.--The Omnibus Budget Reconciliation 
Act of 1989 (OBRA 89) authorized a ``data match'' program to 
identify potential secondary payer situations. Medicare 
beneficiaries are matched against data collected by Internal 
Revenue Service and the Social Security Administration to 
identify cases in which a working beneficiary (or working 
spouse) may have employer-based health insurance coverage. 
Cases of incorrect Medicare payments are identified and 
recoveries of payments are sought. The authority for this 
program expires on September 30, 1998.
    (c) Recovery of Payments.--In many cases where Medicare 
secondary payer recoveries are sought, claims have never been 
filed with the primary payer. Identification of potential 
recoveries under the data match process typically takes several 
years--considerably in excess of the period many health plans 
allow for claims filing. A 1994 appeals court decision held 
that HCFA could not recover overpayments without regard to an 
insurance plan's filing requirements. A 1994 appeals court 
decision held that HCFA could not recover from third party 
administrators of self-insured plans.

                           Reasons for Change

    The Committee provision would provide for improved 
operation of the secondary payer program.

                          Committee Provision

    The Committee provision would:
    (a) Make permanent law that Medicare is the secondary payer 
for disabled beneficiaries who have employer-provided health 
insurance; and make permanent law and extend to 30 months the 
period of time employer health insurance is the primary payer 
for ESRD beneficiaries;
    (b) Make the data match program authority permanent law; 
and
    (c) Specify that the U.S. could seek to recover payments if 
the request for payments was submitted to the entity required 
or responsible to pay within three years from the date the item 
or service was furnished. This provision would apply 
notwithstanding any other claims filing time limits that may 
apply under an employer group health plan. The provision would 
apply to items and services furnished after 1990. The provision 
should not be construed as permitting any waiver of the 3-year 
requirement in the case of items and services furnished more 
than 3 years before enactment.
    The provision would permit recovery from third party 
administrators of primary plans. However, recovery would not be 
permitted where the third-party administrator would not be able 
to recover the amount at issue from the employer or group 
health plan for whom it provides administrative services due to 
the insolvency or bankruptcy of the employer or plan.
    The provision would clarify that the beneficiary is not 
liable in Medicare secondary payer recovery cases unless the 
benefits were paid directly to the beneficiary.

                             Effective Date

    Generally on enactment.

                      CHAPTER 2--OTHER PROVISIONS

             CONFORMING AGE FOR ELIGIBILITY UNDER MEDICARE

             TO RETIREMENT AGE FOR SOCIAL SECURITY BENEFITS

                              Present Law

    In 1983, Congress raised the eligibility age for Social 
Security old-age cash benefits from age 65 to age 67, to be 
phased in over a transition period from 2003 to 2027. However, 
under current law, the age of entitlement for Medicare remains 
unchanged at age 65.

                           Reasons for Change

    The Committee provision will establish a consistent 
national policy on eligibility for both Social Security old-age 
pension benefits and Medicare. Although this provision will not 
produce any savings that apply to the Committee's 
reconciliation instructions, this provision will improve the 
long-term solvency of the Hospital Insurance (Part A) Trust 
Fund.

                          Committee Provision

    The Committee provision amends the relevant sections of the 
Social Security Act to raise the age of eligibility for 
Medicare benefits from age 65 to age 67 over the years 2003 to 
2027 in the same increments as for Social Security old-age 
pensions as detailed in section 216(l)(1)) of the Social 
Security Act.

   INCREASE CERTIFICATION PERIOD FOR ORGAN PROCUREMENT ORGANIZATIONS

                              Present Law

    Section 1138(b) of the Social Security Act requires that 
the Secretary can make Medicare and Medicaid payments for organ 
procurement costs to organ procurement organizations (OPOs) 
operating under Section 371 of the Public Health Service Act, 
or having been certified or recertified by the Secretary within 
the previous 2 years as meeting certain requirements.

                           Reasons for Change

    OPOs compete during recertification periods for service 
areas. This competition involves massive data gathering and 
contracting for legal services in order to justify service 
areas.

                          Committee Provision

    The provision would amend current law to provide OPOs three 
years between certifications or recertifications if the 
Secretary deems the organizations as having a good record in 
meeting standards to be a qualified OPO.
    DIVISION 2--MEDICAID AND CHILDREN'S HEALTH INSURANCE INITIATIVES

                          Subtitle I--Medicaid

                      CHAPTER 1--MEDICAID SAVINGS

                          MANAGED CARE REFORMS

                              Present Law

    To control costs and improve the quality of care,states are 
increasingly delivering services to their Medicaid populations through 
Health Maintenance Organizations (HMOs) and other managed care 
arrangements. Medicaid programs use three main types of managed care 
arrangements. These vary according to the comprehensiveness of the 
services they provide and the degree to which they accept risk, and 
include Primary Care Case Management (PCCM), fully capitated Health 
Maintenance Organizations (HMOs) and Health Insuring Organizations 
(HIOs), and partially capitated Pre-Paid Health Plans (PHPs). Under 
PCCM a Medicaid beneficiary selects, or is assigned to a single primary 
care provider, which provides or arranges for all covered services and 
is reimbursed on a fee-for-service basis in addition to receiving a 
small monthly ``management'' fee. Fully capitated plans contract on a 
risk basis to provide beneficiaries with a comprehensive set of covered 
services in return for a monthly capitation payment. Partially 
capitated plans provide a less than comprehensive set of services on a 
risk basis; services not included in the contract are reimbursed on a 
fee-for-service basis. Under fully and partially capitated managed care 
arrangements, beneficiaries have a regular source of coordinated care 
and states have predictable, controlled spending per beneficiary. This 
is in contrast to the traditional fee-for-service arrangements used by 
Medicaid beneficiaries where Medicaid pays for each service used.
    The Medicaid statute contains several provisions that limit 
a state's ability to use managed care, including the freedom of 
choice, statewideness, and comparability requirements. These 
require that beneficiaries be free to receive services from the 
provider of their choice and that all covered benefits in a 
state plan be available throughout the state. States can bypass 
these requirements by establishing voluntary fully- or 
partially-capitated managed care plans. States are not, 
however, authorized to establish voluntary primary care case 
management (PCCM) programs. Voluntary managed care plans must 
meet other requirements that govern how Medicaid managed care 
plans operate. These include rules about solvency, enrollment 
practices, procedures for protecting beneficiaries' rights, and 
contracting arrangements of managed care plans.
    As a proxy for quality, current law requires that plans 
limit their enrollment of Medicaid and Medicare beneficiaries 
to no more than 75% of total enrollment (known as the ``75/25 
rule'). Publicly owned contracting plan, plans with more than 
25,000 enrollees that serve a designated ``medically 
underserved'' area and that previously participated in an 
approved demonstration project, or plans that have had a 
Medicaid contract for less than three years may obtain a waiver 
of this requirement if they are making continuous and 
reasonable efforts to comply with the 75% limit. In addition, 
for some HMOs, the 75/25 rule has been bypassed through state 
demonstration waivers or through specific federal legislation. 
Beneficiaries must be permitted to disenroll from a managed 
care plan without cause during the first month of enrollment 
and may disenroll at any time for cause. Enrollees may be 
locked into the same plan for up to six months if the plan is a 
federally qualified (HMO). States may also guarantee 
eligibility for up to six months for persons enrolled in 
federally qualified HMOs. States may not restrict access to 
family planning services under managed care.
    To mandate that a beneficiary enroll in a managed care 
entity, to operate a PCCM program, or to limit managed care 
services to a specific population or geographic area, a state 
must first obtain a waiver of the freedom-of-choice provision 
of Medicaid law. These renewable waivers, as authorized under 
section 1915(b) of Medicaid law, are initially good for two 
years. Most states have received waivers of federal law to 
implement managed care programs.

                           Reasons for Change

    The Committee provision permits states to mandate 
enrollment of individuals in managed care plans without the 
need for waivers.

                          Committee Provision

    The provision would give states the option of providing 
benefits through a managed care entity, including a PCCM 
program, without requiring a 1915(b) waiver of the 
statewideness, comparability, and freedom of choice 
requirements. States would be allowed to require that 
individuals eligible for medical assistance under the state 
plan enroll in a capitated managed care plan or with a primary 
care case manager. The provision would also eliminate the 75/25 
rule effective June 20, 1997. Individuals who are ``dually 
eligible'' for Medicare and Medicaid and ``special needs'' 
children cannot be required to enroll in managed care, but may 
do so on a voluntary basis.

                              Present Law

    All state contracts with a managed care organization must 
receive prior approval from the Secretary if expenditures are 
expected to be over $100,000.

                          Committee Provision

    The provision would raise the threshold for federal review 
of managed care contracts from $100,000 to $1,000,000.

                              Present Law

    In order to operate a PCCM system, states must obtain a 
waiver of the freedom-of-choice provision of Medicaid law. The 
waiver allows states to restrict the provider from whom a 
beneficiary can obtain services. Except in the case of an 
emergency, the beneficiary may obtain other services, such as 
specialty physician and hospital care, only with the 
authorization of the primary care provider. The aim of the 
program is to reduce the use of unnecessary services and 
provide better overall coordination of beneficiaries' care.

                           Reasons for Change

    The Committee provision would establish rules for using 
primary care case management.

                          Committee Provision

    The provision establishes a definition of PCCM, sets 
contractual requirements for PCCM arrangements, adds PCCM 
services to the list of Medicaid covered services, and repeals 
waiver authorization for PCCM.
    Primary Care Case Manager means a provider that has entered 
into a primary case management contract with the state agency 
and that is a physician, a physician group practice, or an 
entity employing or having other arrangements with physicians 
who provide case management services or, at state option, a 
nurse practitioner, a certified nurse-midwife, or a physician 
assistant.
    States would be permitted to mandate enrollment in PCCM or 
other managed care arrangements if a Medicaid beneficiary had a 
choice of at least two entities or managers and other 
conditions were met. States would be permitted to require 
beneficiaries to remain in a managed care arrangement for up to 
six months; states would also be permitted to guarantee six 
months of eligibility for enrollees. Prior to establishing a 
mandatory managed care requirement, a state would be required 
to provide for public notice and comment.
    The payment limit and actuarial soundness standards would 
be modified to require that capitated payment amounts be set at 
rates that have been determined, by an actuary meeting the 
standards of qualification and practice established by the 
Actuarial Standards Board, to be sufficient and not excessive 
with respect to the estimated costs of services provided.

                              Present Law

    The Medicaid statute includes a number of provisions 
intended to improve quality of care in prepaid programs and to 
protect beneficiaries. States are required to obtain an 
independent assessment of the quality of services furnished by 
contracting HMOs and pre-paid health plans (those offering a 
non-comprehensive set of services under partial capitation), 
using either a utilization and quality control peer review 
organization (PRO) under contract to the Secretary or another 
independent accrediting body. In addition, states are 
prohibited from contracting with an organization which is 
managed or controlled by, or has a significant subcontractual 
relationship with, individuals or entities potentially 
excludable from participating in Medicaid or Medicare. States 
are required to collect sufficient data on HMO enrollees'' 
encounters with physicians to identify the physicians 
furnishing services to Medicaid beneficiaries. As a proxy for 
quality, federal law requires that less than 75% of a managed 
care organization's enrollment must be Medicaid and Medicare 
beneficiaries. For some HMOs, the 75/25 rule has been bypassed 
through state demonstration waivers or through specific federal 
legislation. Some HMOs are federally qualified--determined by 
the Secretary to meet standards set forth in title XIII of the 
Public Health Service Act that includes quality standards.

                           Reasons for Change

    The Committee provision establishes quality standards 
including consumer protections.

                          Committee Provision

    The provision would require the state agency to develop and 
implement a quality assessment and improvement strategy 
consistent with standards that the Secretary shall monitor. 
These shall include standards for access to care so that 
covered services are available within reasonable time frames 
and in a manner that ensures continuity of care and adequate 
primary care and specialized services capacity. Procedures for 
monitoring and evaluating the quality and appropriateness of 
care and services to beneficiaries shall include requirements 
for provision of quality assurance data to the state using the 
data and information that the Secretary shall specify with 
respect to entities contracting under section 1876 or 
alternative data requirements approved by the Secretary; 
regular and periodic examination of the scope and content of 
the quality improvement strategy; and other aspects of care and 
service directly related to the improvement of quality of care 
including grievance procedures and marketing and information 
standards. Each year the Secretary shall conduct validation 
surveys of managed care organizations serving Medicaid 
beneficiaries to assure the quality and completeness of data 
reporting.
    Entities entering into such agreements shall be required to 
submit to the state agency information that demonstrates 
improvement in the care delivered to members; to maintain an 
internal quality assurance program consistent with standards 
the Secretary shall establish in regulations; to provide 
effective procedures for hearing and resolving grievances 
between the entity and its members; and that adequate provision 
is made with respect to the solvency, financial reporting, and 
avoidance of waste, fraud, and abuse by those entities.
    The PCCM contract shall provide for reasonable and adequate 
hours of operation including 24-hour availability of 
information, referral, and treatment with respect to medical 
emergencies; restriction of enrollment to individuals residing 
sufficiently near a service delivery site of the entity to be 
able to reach that site within a reasonable time using 
available and affordable modes of transportation; employment 
of, or contracts or other arrangements with sufficient numbers 
of physicians and other appropriate health care professionals 
to ensure that services under the contract can be furnished to 
enrollees promptly and without compromise to quality of care; 
prohibition on discrimination on the basis of health status or 
requirements for health services in enrollment, disenrollment, 
and reenrollment; and the right to terminate enrollment at any 
time for cause. In assuring beneficiaries' access to emergency 
care, the ``prudent layperson'' standard shall apply.
    Managed care plans would be required to pay affiliated 
providers in a timely manner for items and services provided to 
Medicaid beneficiaries. Payments to federally qualified health 
centers and rural health centers must be made on a cost 
basiscomparable to what other providers are paid.
    If a state uses an enrollment broker, the broker must be 
independent of any MCO or PCCM that provides coverage to 
Medicaid beneficiaries in that state.

              Subchapter B--Management Flexibility Reforms

 ELIMINATION OF BOREN AMENDMENT REQUIREMENTS FOR PROVIDER PAYMENT RATES

                              Present Law

    The Boren amendments require states to pay hospitals, 
nursing facilities, and intermediate care facilities for the 
mentally retarded (ICFs/MR) rates that are ``reasonable and 
adequate'' to cover the costs which must be incurred by 
``efficiently and economically operated facilities.'' In 
several states, providers and provider organizations challenged 
state policies in federal courts alleging that the state's 
procedures for reimbursement violated requirements of the Boren 
amendments. Following a Supreme Court decision that the 
amendments created enforceable rights for providers, a number 
of courts found that state systems failed to meet the test of 
``reasonableness'' and some states had to increase payments to 
these providers.

                           Reasons for Change

    The Committee provision would repeal the ``Boren 
Amendment'' provisions.

                          Committee Provision

    The provision would repeal the present law provisions for 
payments for hospital services, nursing facilities services, 
services of intermediate care facilities for the mentally 
retarded and home and community-based services. States would 
provide for a public notice process for reimbursement 
methodology and proposed payment rates for these institutional 
providers. Providers, beneficiaries, and their representatives, 
and other concerned individuals are to be given an opportunity 
to review proposed payment rates and the methodologies 
underlying the establishment of such rates. Such notice shall 
describe how the rate-setting methods used by the states will 
affect access to services, quality of services and safety of 
beneficiaries. Final payment rates, the methodologies 
underlying the establishments of such rates, and justifications 
for such rates that may take into account public comments 
received by the state (if any) shall be published in 1 or more 
daily newspapers of general circulation in the state or in any 
publication used by the state to publish state statutes or 
rules.
    Not later than four years after enactment of this act, the 
Secretary shall study the effect on access to services, the 
quality of services, and the safety of beneficiaries and submit 
a report to Congress with conclusions from the study, together 
with any recommendations.

      MEDICAID PAYMENT RATES FOR QUALIFIED MEDICARE BENEFICIARIES

                              Present Law

    State Medicaid programs are required to pay Medicare cost-
sharing charges for individuals who are beneficiaries under 
both Medicaid and Medicare (dual eligibles) and for qualified 
Medicare beneficiaries (QMBs). QMBs are individuals who have 
incomes not over 100% of the poverty level and who meet 
specified resources standards. The amount of required payment 
has been the subject of some controversy.
    State Medicaid programs frequently have lower payment rates 
for services than the rates that would be paid under Medicare. 
Program guidelines permit states to either (1) pay the full 
Medicare deductible and coinsurance amounts or (2) pay cost-
sharing charges only to the extent that the Medicare provider 
has not received the full Medicaid rate for an item or service. 
Some courts have forced state Medicaid programs to reimburse 
Medicare providers to the full Medicare allowable rates for 
services provided to QMBs and dually eligible individuals.

                           Reasons for Change

    The Committee provision would clarify that state Medicaid 
programs could limit Medicare cost-sharing to amounts that do 
not exceed Medicaid payment rates.

                          Committee Provision

    A state is not required to provide any payment for any 
expenses incurred relating to payment for a coinsurance or 
copayment for Medicare cost-sharing if the amount of the 
payment under title XVIII for the service exceeds the payment 
amount that otherwise would be made under the state plan. The 
amount of payment made under title XVIII plus the amount of 
payment (if any) under the state plan shall be considered to be 
payment in full for the service, the beneficiary shall not have 
any legal liability to make payment to the provider for the 
service, and any lawful sanction that may be imposed upon a 
provider for excess charges under this title or title XVIII 
shall apply to the imposition of any charge on the individual 
in such case. This shall not be construed as preventing payment 
of any Medicare cost-sharing by a Medicare supplemental policy 
on behalf of an individual.

              NO WAIVER REQUIRED FOR PROVIDER SELECTIVITY

                              Present Law

    Generally, Medicaid beneficiaries have freedom of choice of 
providers; they may obtain services from any person, 
institution, or organization that undertakes to provide the 
services and is qualified to perform the service. States may, 
under specified conditions, purchase laboratory services or 
medical devices through special arrangements such as a 
competitive bidding process. Otherwise, to restrict the 
providers from which a beneficiary may obtain services, a state 
must obtain a waiver of the freedom of choice requirement.

                          Committee Provision

    States would be permitted to enter into exclusive contracts 
with selected providers at negotiated rates without the need 
for a waiver.

  Subchapter C--Reduction of Disproportionate Share Hospital Payments

             DISPROPORTIONATE SHARE HOSPITAL (DSH) PAYMENTS

                              Present Law

    States are required to make adjustments to the payment 
rates of certain hospitals that treat large numbers of low 
income and Medicaid patients. The law sets minimum standards by 
which a hospital may qualify as a disproportionate share (DSH) 
hospital, and minimum payments to be made to those hospitals. 
States are generally free to exceed federal minimums in both 
designation and payments up to certain ceilings. Each year 
states are designated as either ``high'' DSH states or ``low'' 
DSH states based on the percentage of total medical assistance 
payments for DSH adjustments in the prior year. States making 
DSH payments in excess of 12% of medical assistance are 
designated ``high'' DSH and those paying less than 12% of 
medical assistance for DSH are designated as low DSH. Total 
disproportionate share payments to each state are limited to a 
published allotment amount that can be no more than 12% of 
medical assistance payments in states designated as ``low'' DSH 
states, and in states designated as ``high'' DSH states the 
amount of payments in 1992. Payments to individual hospitals 
may be no more than the cost of care provided to Medicaid 
recipients and individuals who have no health insurance or 
other third-party coverage for services during the year (net of 
non-disproportionate share Medicaid payments and other payments 
by uninsured individuals). A hospital may not be designated as 
a DSH hospital by a state unless it serves a minimum of 1% 
Medicaid clients among their caseload.

                           Reasons for Change

    Although the history of the DSH program dates back to 1981 
as part of the ``Boren amendment'' reforms, the cost of DSH 
payments did not become significant until 1990. Between 1990 
and 1995, federal and state DSH payments grew from $960 million 
to $19 billion or 1,879 percent. While DSH growth has 
moderated, both the HCFA actuaries and CBO analysts believe 
that DSH spending will again accelerate.
    While other methods of leveraging federal dollars appear to 
have been somewhat abated, some states have dramatically 
increased federal funding by making claims for services in 
mental health facilities.

                          Committee Provision

    This provision would lower the DSH allotments by imposing 
freezes, making graduated proportional reductions, and reducing 
payments by amounts claimed for mental health services.
    States would be restricted in providing DSH payments to 
Institutes for Mental Diseases (IMDs).
    DSH allotments for each state for years after 2002 would be 
equal to the allotment for the previous year multiplied by the 
percentage change in the consumer price index for medical 
services.
    A state must develop and report to the Secretary a 
methodology for prioritizing payments to disproportionate share 
hospitals, including children's hospitals, on the basis of the 
proportion of low-income and Medicaid patients served by such 
hospitals. The state shall provide an annual report to the 
Secretary describing the disproportionate share payments to 
high-volume disproportionate share hospitals.

              CHAPTER 2--EXPANSION OF MEDICAID ELIGIBILITY

 STATE OPTION TO PERMIT WORKERS WITH DISABILITIES TO BUY INTO MEDICAID

                              Present Law

    States must continue Medicaid coverage for ``qualified 
severely impaired individuals under the age of 65.'' These are 
disabled and blind individuals whose earnings reach or exceed 
the SSI benefit standard. (The current law threshold for 
earnings is $1,053 per month.) This special eligibility status 
applies as long as the individual (1) continues to be blind or 
have a disabling impairment; (2) except for earnings, continues 
to meet all the other requirements for SSI eligibility; (3) 
would be seriously inhibited from continuing or obtaining 
employment if Medicaid eligibility were to end; and (4) has 
earnings that are not sufficient to provide a reasonable 
equivalent of benefits from SSI, state supplementary payments 
(if provided), Medicaid, and publicly funded attendant care 
that would have been available in the absence of those 
earnings. To implement the fourth criterion, the Social 
Security Administration compares the individual's gross 
earnings to a ``threshold'' amount that represents average 
expenditures for Medicaid benefits for disabled SSI cash 
recipients in the individual's state of residence.

                          Committee Provision

    States would have the option of allowing disabled SSI 
beneficiaries with incomes up to 250% of poverty to ``buy 
into'' Medicaid by paying a premium. Premium levels would be on 
a sliding scale, based on the individual's income as determined 
by the state.

              12 MONTH CONTINUOUS ELIGIBILITY FOR CHILDREN

                          Committee Provision

    At the option of the state, the state may provide that a 
child may be eligible for benefits for 12 months' continuous 
coverage.

    CHAPTER 3--PROGRAMS OF ALL-INCLUSIVE CARE FOR THE ELDERLY (PACE)

         ESTABLISHMENT OF PACE PROGRAM AS MEDICAID STATE OPTION

                              Present Law

    OBRA 86 required the Secretary to grant waivers of certain 
Medicare and Medicaid requirements to not more than 10public or 
non-profit private community-based organizations to provide health and 
long-term care services on a capitated basis to frail elderly persons 
at risk of institutionalization. These projects, known as the Programs 
of All Inclusive Care for the Elderly, or PACE projects, were intended 
to determine whether an earlier demonstration program, ON LOK, could be 
replicated across the country. OBRA 90 expanded the number of 
organizations eligible for waivers to 15.

                          Committee Provision

    States would be permitted to offer PACE to Medicaid 
beneficiaries who were also eligible for Medicaid. The PACE 
provision is described in Medicare.

               CHAPTER 4--MANAGEMENT AND PROGRAM REFORMS

        ELIMINATION OF REQUIREMENT TO PAY FOR PRIVATE INSURANCE

                              Present Law

    States are required to identify cases in which it would be 
cost-effective to enroll a Medicaid-eligible individual in a 
private insurance plan and, as a condition of eligibility, 
require the individual to enroll in the plan.

                          Committee Provision

    Identification and enrollment requirements would be 
eliminated. States would continue to have the option of 
purchasing private insurance.

   ELIMINATION OF OBSTETRICAL AND PEDIATRIC PAYMENT RATE REQUIREMENTS

                              Present Law

    States are required to assure adequate payment levels for 
obstetrical and pediatric services. For this purpose, states 
must provide annual reports to the Secretary on their payment 
rates for these services.

                          Committee Provision

    These reporting requirements would be eliminated.

                  PHYSICIAN QUALIFICATION REQUIREMENTS

                              Present Law

    Medicaid law establishes special minimum qualifications for 
a physician who furnishes services to a child under age 21 or 
to a pregnant woman.

                          Committee Provision

    The current law provision would be repealed.

                   EXPANDED COST-SHARING REQUIREMENTS

                              Present Law

    States are permitted to impose nominal cost-sharing charges 
with certain exceptions. No charges may be imposed on services 
that are provided to children under age 18; related to 
pregnancy; provided to inpatients in hospitals, nursing 
facilities, ICFs/MR, or other medical institution if the 
patients are required to spend all their income for medical 
expenses except for the amount exempted for personal needs; or 
on services that are emergency, family planning, or hospice 
services. States may not impose cost-sharing charges on 
categorically needy enrollees in health maintenance 
organizations.

                           Reasons for Change

    Personal responsibility when participating in any public 
benefit program is vital and should be encouraged. Cost-sharing 
is an important method used to encourage use of primary and 
preventive care and discourage unnecessary or less economical 
care. Cost-sharing may discourage inappropriate use of services 
through inappropriate health care settings.
    As Medicaid coverage is extended to families which are not 
below the poverty level, cost-sharing can have a positive 
affect on participation. The Committee received testimony that 
cost-sharing helps overcome the stigma of Medicaid as a welfare 
program and increases the use of preventive services.

                          Committee Provision

    States would be permitted to impose limited cost-sharing on 
services provided to individuals whom federal law does not 
require the state to cover. No additional cost-sharing would be 
allowed for individuals who are required to be covered under 
federal law except as allowed under current law or any waiver 
granted to any state. States would be permitted to impose 
nominal copayments on HMO enrollees as allowed in fee-for-
service.
    If any charges are imposed under the state plan for cost-
sharing, such cost-sharing shall be pursuant to a public 
schedule and reflect economic factors, employment status, and 
family size. Total cost-sharing for a family with income less 
than 150 percent of the federal poverty level is subject to an 
annual limit of 3 percent of gross earnings less child care 
expenses. Total cost-sharing for a family with income greater 
than 150 percent but less than 200 percent of the poverty level 
is subject to an annual limit of 5 percent of gross earnings 
less child care expenses. Existing waivers, if any, which have 
been approved by the Secretary and may allow for greater cost-
sharing are not subject to this limit.
    Cost-sharing includes copayments, deductibles, coinsurance, 
enrollment fees, premiums, and other charges for the provision 
of health care goods and services.
    Cost-sharing charges cannot be counted as state 
expenditures for purposes of matching requirements.

                   PENALTY FOR FRAUDULENT ELIGIBILITY

                              Present Law

    A person who knowingly and willfully disposes of assets, 
including transfers to certain trusts, in order to obtain 
Medicaid eligibility for nursing home care is liable for 
acriminal fine and/or imprisonment, if the disposition of assets 
results in a period of ineligibility for such Medicaid benefits.

                          Committee Provision

    The provision would provide that a person who for a fee 
assists an individual to dispose of assets in order to obtain 
Medicaid eligibility for nursing home care would be subject to 
criminal liability if the individual disposes of assets and a 
period of ineligibility is imposed against such individual.

                 ELIMINATION OF WASTE, FRAUD, AND ABUSE

                          Committee Provision

    The Committee provides a number of reforms to eliminate 
waste, fraud, and abuse in the Medicaid program including a ban 
on spending for nonhealth related items not covered in the 
state plan. It requires disclosure of information and surety 
bond requirements for suppliers of durable medical equipment 
and home health agencies. The intent of the surety bond 
requirement is to prevent fraudulent providers and suppliers 
from entering the Medicaid program. Surety bonds should not be 
used to discriminate against minority providers and suppliers.

                        STUDY ON EPSDT BENEFITS

                              Present Law

    States are required to provide early and periodic 
screening, diagnostic, and treatment services (EPSDT) to 
Medicaid beneficiaries under age 21. Such services include 
screening, vision, dental, hearing services. A state is 
required to provide other necessary health care services to 
correct or ameliorate defects and conditions discovered by the 
screening services, whether or not the services are covered 
under the state's Medicaid plan.

                          Committee Provision

    Not later than one year after enactment, the Secretary, in 
consultation with governors, state Medicaid and maternal and 
child health director, the Institute of Medicine, beneficiaries 
and their representatives, and the American Academy of 
Pediatrics, would be required to provide for a study on EPSDT 
benefits.

                        CHAPTER 5--MISCELLANEOUS

                            INCREASED FMAPS

                              Present Law

    Under Medicaid law, the District of Columbia is treated as 
a state. Each state is required to pay 40% of the non-federal 
share of Medicaid expenditures. Under this rule, a state can 
require local jurisdictions to share in Medicaid costs. Each 
state must, however, assure that the lack of adequate funds 
from local sources will not result in diminished services in 
the state.
    The federal government shares in the cost of Medicaid items 
and services according to a statutory formula designed to pay a 
higher matching percentage to states with lower per capita 
incomes relative to the national average per capita income. The 
federal share of a state's expenditures for Medicaid items and 
services is called the federal medical assistance percentage 
(FMAP). The law establishes a minimum FMAP of 50% and a maximum 
of 83%. For the District and 11 states, the FMAP is 50%.

                           Reasons for Change

    The Committee will temporarily increase the federal share 
of the District's Medicaid program.

                          Committee Provision

    The FMAP for the District would be increased to 60% for 
each of the fiscal years 1998-2000.

                              Present Law

    The federal government shares in the cost of Medicaid items 
and services according to a statutory formula designed to pay a 
higher matching percentage to states with lower per capita 
incomes relative to the national average per capita income. The 
federal share is called the federal medical assistance 
percentage (FMAP). The law establishes a minimum FMAP of 50% 
and a maximum of 83% though currently, the highest match rate 
is 79%. For Alaska, 10 other states, and the District of 
Columbia, the match rate is 50%.

                          Committee Provision

    The FMAP for Alaska would be increased to 59.8% for each of 
fiscal years 1998-2000. This increase would be offset by a 
decrease in the proposed FMAP increase for the District of 
Columbia (to 60%).

                           Reasons for Change

    Alaska has higher costs of living. The national average 
FMAP is 59.8%.

                INCREASE IN PAYMENT CAPS FOR TERRITORIES

                              Present Law

    For the commonwealths and territories, the federal matching 
rate is 50 percent. The total amount which may be made is 
capped at annual maximum fixed amounts beginning in FY 1994 as 
specified in section 1108 of the Social Security Act. The 
limits are increased annually by the percentage increase in the 
medical care component of the consumer price index.
    Puerto Rico: $116,500,000 in FY 1994, rounded to the 
nearest $100,000. Virgin Islands: $3,837,000, rounded to the 
nearest $10,000.
    Guam: $3,685,000, rounded to the nearest $10,000.
    Northern Mariana Islands: $1,100,000, rounded to the 
nearest $10,000. American Samoa: $2,140,000, rounded to the 
nearest $10,000.

                           Reasons for Change

    The Committee provision will raise the current Medicaid 
caps on the territories.

                          Committee Provision

    For FY 1998 and each fiscal year thereafter, the caps are 
raised and indexed from the FY 1997 levels for the 
commonwealths and territories by the following amounts:
    Puerto Rico: $30 million.
    Virgin Islands: $750,000.
    Guam: $750,000.
    Northern Mariana Islands: $500,000.
    American Samoa: $500,000.
    The 50 percent match rate and indexing under current law 
are maintained.

                 COMMUNITY-BASED MENTAL HEALTH SERVICES

                          Committee Provision

    The Committee provides a definition for outpatient and 
intensive community-based mental health services to include 
psychiatric rehabilitation, day treatment, intensive in-home 
services for children, assertive community treatment, 
therapeutic out-of-home placements (excluding room and board), 
clinic services, partial hospitalization, and targeted case 
management.

   OPTIONAL MEDICAID COVERAGE OF CERTAIN CDC-SCREENED BREAST CANCER 
                                PATIENTS

                              Present Law

    Medicaid covers medically necessary services for 
beneficiaries who meet the program's categorical and financial 
requirements. The Centers for Disease Control and Prevention 
screens uninsured women for breast cancer.

                           Reasons for Change

    Uninsured women diagnosed with cancer have difficulty 
obtaining appropriate and timely treatment.

                          Committee Provision

    Medicaid eligibility standards would be expanded to include 
women who are under age 65, who have been diagnosed with breast 
cancer, and who have no health insurance coverage.

TREATMENT OF STATE TAXES IMPOSED ON CERTAIN HOSPITALS THAT PROVIDE FREE 
                                  CARE

                              Present Law

    States may not claim for federal matching payments state 
spending generated from provider-related donations or health 
care taxes that are not broad based. Health care provider-
specific taxes are not considered broad-based and, thus, may 
not be used to claim federal matching payments for Medicaid 
spending.

                          Committee Provision

    This provision would amend the definition of the term 
``broad-based health care related tax'' to specify that taxes 
that exclude hospitals which are exempt from taxation under 
Section 501(c)(3) of the Internal Revenue code and do not 
accept Medicaid or Medicare reimbursement would qualify for 
federal matching payments if used as state Medicaid spending. 
The provision would also prohibit states from claiming federal 
matching payments for state spending generated form health care 
taxes applied to these facilities.

             TREATMENT OF VETERANS' PENSIONS UNDER MEDICAID

                              Present Law

    Generally, Medicaid beneficiaries in nursing homes 
contribute most of their incomes to the cost of care except for 
an allowance for a dependent in the community. Medicaid law 
requires that at least $30 per month be reserved from an 
institutionalized recipient's income as a personal allowance 
for items and services not included in the institution's 
charges. By law, Veterans'' Administration pension payments to 
a Medicaid beneficiary who is in a nursing home are limited to 
$90 per month and the full amount of the payment (except for a 
dependent allowance) is protected for personal needs. This 
statutory provision expires Sept. 30, 1997.

                          Committee Provision

    The amendment would allow State Veterans Homes to collect 
from Medicaid eligible veteran residents amounts in excess of 
$90.00 per month to defray the cost of care, but excluding 
amounts of income attributable to a dependent.

                             EFFECTIVE DATE

                          Committee Provision

    Except as otherwise specifically provided, the provisions 
of and amendments by this subtitle shall apply on and after 
October 1, 1997. There is an extension for state law amendment 
for a state that has a two-year legislative session.

          Subtitle J--Children's Health Insurance Initiatives

        ESTABLISHMENT OF CHILDREN'S HEALTH INSURANCE INITIATIVES

                              Present Law

    Medicaid, Title XIX of the Social Security Act, provides 
almost 21 million children with health coverage. States 
choosing to participate in the Medicaid program are required to 
cover children in families who would have qualified to receive 
AFDC under the program rules in effect on August 22, 1996; 
children under age 6 in families with income below 133% of the 
federal poverty level; and children under age 14 in families 
with income below 100% of the federal poverty level. Coverage 
for children between the ages of 14 and 18 and in families with 
income below 100% of the federal poverty level is being phased-
in through 2002. States also have the option to cover other 
categories of low-income children under Medicaid and many have 
done so. The costs of providing Medicaid coverage are shared 
bythe states and the federal government. The federal share is 
determined by a formula that takes into account the average per capita 
income in the state relative to the national average. States with lower 
per capita incomes have higher federal matching rates. These federal 
matching rates range from a floor of 50% to almost 80%. All 50 states 
currently participate in Medicaid.
    The Maternal and Child Health Block Grant is authorized 
under Title V of the Social Security Act to improve the health 
of all mothers and children consistent with the goals 
established under the Public Health Service Act. The program 
makes block grants to states to enable them to coordinate 
programs, develop systems, and provide a broad range of direct 
health services. The major component of the MCH block grant 
requires states to contribute $3 for every $4 of federal block 
grant funds collected.

                          Committee Provision

    The provision would establish a new title of the Social 
Security Act, Title XXI, Child Health Insurance Initiatives. 
The new title would provide an entitlement to states for funds 
for 1998 through 2007 to expand access to health insurance for 
eligible children. Participating states would be required to 
extend Medicaid coverage to children under age 19 in families 
with income below 100% of the federal poverty level and to 
assure that funds provided under this section cover low-income 
children before covering higher income children. Total funding 
authorized and appropriated under this provision would be $2.5 
billion in 1998, $3.2 billion in 1999, $3.2 billion in 2000, 
$3.2 billion in 2001, $3.9 billion in 2002, and for each of the 
fiscal years 2003 through 2007, $4.58 billion and would be 
available without fiscal year limitation. Participating states 
would choose whether to receive their allotted funds through 
Medicaid or another program meeting the requirement of Title 
XXI and would be required to use 1% of their allotted funds for 
Medicaid outreach and public awareness campaigns to encourage 
employers to provide health insurance for children.
    States participating in Title XXI would be required to 
submit to the Secretary, no later than March 31 of any fiscal 
year (or, in the case of fiscal year 1998, October 1, 1997), an 
outline that identifies which option the State intends to use 
to provide coverage under this section (Medicaid or other 
qualified program), describes how such coverage shall be 
provided, and includes other information as the Secretary may 
require. The outline would also include: (a) the eligibility 
standards for the program, (b) the methodologies to be used to 
determine eligibility, (c) the procedures to be used to ensure 
only eligible children receive benefits and that the 
establishment of a program under this section does not reduce 
the number of children who currently have insurance coverage, 
and (d) a description of how the state would ensure that 
Indians are served by a program under this title.
    The funds would be distributed in the following manner. 
States would receive 1% of their allotted funds prior to the 
beginning of the fiscal year for the purpose of conducting 
outreach activities. During the year, the states would receive 
quarterly payments in an amount equal to the Federal Medicaid 
medical assistance percentage of the cost of providing health 
insurance coverage for an eligible low-income child and any 
applicable bonuses based on estimates by the states. The 
Secretary could increase or reduce payments as necessary to 
adjust for any overpayment or underpayment for prior quarters.
    The remaining child health allotment funds would be divided 
into two pools: a basic allotment pool and a new coverage 
incentive pool. In 1998, the basic allotment pool would be 
comprised of 85% of funds remaining after subtracting the costs 
of the Medicaid expansions for children under age 19, the 
Medicaid 12 months continuous eligibility option and the 
increase in enrollment as a result of the 1% outreach 
requirement from total authorized funds. The remaining funds 
would become the new coverage incentive pool. For years 
thereafter, the Secretary would make annual adjustments to the 
size of the two pools in order to provide sufficient basic 
allotments and new coverage incentives.
    A set aside of .25% of the basic allotment pool would be 
established for the territories. The rest of the basic 
allotment pool would be allotted to each state based on the 
average percentage of all children in families with income 
below 200% of poverty that reside in the state during the three 
fiscal years beginning on October 1, 1992 (as reported in the 
Current Population Surveys of March 1994, 1995 and 1996). 
Amounts allotted to a state would be available the state for a 
period of three years beginning with the fiscal year for which 
the allotment made.
    States would be eligible for bonus payments for the number 
of low income children covered under either Medicaid or other 
state-run health insurance programs who are not in a required 
Medicaid coverage group during 1996 in an amount equal to 5% of 
the cost of providing health insurance coverage. This 5% bonus 
would come from the state's basic allotment pool. Performance 
bonus payments in an amount of 10% of the cost of providing 
health insurance coverage for newly covered children in excess 
of those covered in 1996 would also be available with funds 
coming from the new coverage incentive pool.
    States extending coverage for previously uninsured children 
could purchase employer-sponsored health insurance on behalf of 
eligible children or provide for insurance through other plans. 
If a state chooses to provide health insurance under plans 
other than employer-sponsored plan, it must provide for health 
insurance coverage that is at least the actuarial equivalent of 
those provided under the Federal Employees Health Benefits 
Program plans as provided in that state and must be certified 
by the Secretary as meeting this standard.
    Total amounts paid to a state under this title would not be 
allowed to exceed 85% of the total cost of a state program 
conducted under this title. Funds under the non-Medicaid 
optioncould be used to subsidize the payment of employee contributions 
for health insurance for a dependent child under an employer sponsored 
plan or to provide an FEHBP equivalent plan.
    States would not be eligible to receive funds under this 
title unless, in fiscal year 1998, state spending on children's 
health care is no less than the amounts spent in 1996. For 
years thereafter, states spending on children's health care 
must be no less than such spending in 1996 increased by a 
Medicaid child population growth factor as determined by the 
Secretary.
    Funds may not be used to cover the costs of abortions 
except in cases of rape or incest or when necessary to save the 
women's life. No more than 10% of funds under this title would 
be allowed for the administrative costs of the program.
    Provisions of Title IV of the Personal Responsibility and 
Work Opportunity Reconciliation Act of 1996, prohibiting the 
receipt of public benefits for certain legal immigrants for a 
period of five years, would not be applied to benefits provided 
under this section.
    Under this program the Secretary would not approve any 
amount in excess of a state's allotment and would make 
adjustments in the federal share of the costs to ensure the 
caps are not exceeded. The title would not establish an 
entitlement for individuals to any health insurance or 
assistance or services provided by a state program. A state 
would be allowed to adjust the applicable eligibility criteria 
or other program characteristics if the state determines that 
funds allotted are not sufficient to provide health insurance 
coverage for all low-income children.
    The following sections of Title XI would apply to States' 
Child Health Assistance Insurance Programs as they do under 
Title XIX: Section 1116 relating to administrative and judicial 
review, Section 1124 relating to disclosure of ownership and 
related information, Section 1126 relating to disclosure of 
information about certain convicted individuals, Section 1128A 
relating to criminal penalties for certain additional charges, 
Section 1128B(d) relating to criminal penalties, and Section 
1132 relating to periods within which claims must be filed, 
Section 1902(a)(4)(C) relating to conflict of interest 
standards, Section 1903(e) relating to limitations on payment, 
Section 1903(w) relating to limitations on provider taxes and 
donations, Section 1905(a)(B) relating to exclusion of care or 
services for individuals under the age of 65 in IMDs from the 
definition of medical assistance, Section 1921 relating to 
state licensure, Sections 1902(a)(25), 1912(a)(1)(A), and 
1903(o) relating to third party liability.
    Participating states would be required to provide an annual 
assessment of the operation of the program funded under this 
title that includes a description of the progress made in 
providing health insurance coverage for low income children. 
The Secretary would be required to submit to Congress an annual 
report and evaluation of the State programs based on the annual 
assessment and would include any conclusions and 
recommendations the Secretary considers appropriate.

                             Effective Date

    October 1, 1997.
            DIVISION 3--INCOME SECURITY AND OTHER PROVISIONS

 Subtitle K--Income Security, Welfare-To-Work Grant Program, and Other 
                               Provisions

                       CHAPTER 1--INCOME SECURITY

      SSI ELIGIBILITY FOR ALIENS RECEIVING SSI ON AUGUST 22, 1996

                              Present Law

    SSI. The Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (P.L. 104-193) bars most ``qualified 
aliens'' from Supplemental Security Income (SSI) for the Aged, 
Blind, and Disabled (sec. 402(a)). Current recipients must be 
screened for continuing eligibility during a 1-year period 
after enactment of the welfare law (i.e., by August 22, 1997). 
The pending Fiscal Year 1997 supplemental appropriations bill 
would extend this date until September 30, 1997.
    Medicaid. States may exclude ``qualified aliens'' who 
entered the United States before enactment of the welfare law 
(August 22, 1996) from Medicaid beginning January 1, 1997 (sec. 
402(b)). Additionally, to the extent that legal immigrants'' 
receipt of Medicaid is based only on their eligibility for SSI, 
some will lose Medicaid because of their ineligibility for SSI.
    Definitions and exemptions. ``Qualified aliens'' are 
defined by P.L. 104-193 (as amended by P.L. 104-208) as aliens 
admitted for legal permanent residence (i.e., immigrants), 
refugees, aliens paroled into the United States for at least 1 
year, aliens granted asylum or related relief, and certain 
abused spouses and children.
    Certain ``qualified aliens'' are exempted from the SSI bar 
and the State option to deny Medicaid, as well as from certain 
other restrictions. These groups include: (1) refugees for 5 
years after admission and asylees 5 years after obtaining 
asylum; (2) aliens who have worked, or may be credited with, 40 
``qualifying quarters.'' As defined by P.L. 104-193, a 
``qualifying quarter'' is a 3-month work period with sufficient 
income to qualify as a social security quarter and, with 
respect to periods beginning after 1996, during which the 
worker did not receive Federal means-based assistance (Sec. 
435). The ``qualifying quarter'' test takes into account work 
performed by the alien, the alien's parent while the alien was 
under age 18, and the alien's spouse (provided the alien 
remains married to the spouse or the spouse is deceased); and 
(3) veterans, active duty members of the armed forces, and 
their spouses and unmarried dependent children.

                          Committee Provision

    Legal noncitizens who were receiving SSI benefits on August 
22, 1996 (the date of enactment of the welfare reform law) 
would remain eligible for SSI, despite underlying restrictions 
in the Personal Responsibility and Work Opportunity Act. This 
section also specifies that Cuban and Haitian entrants are to 
be considered qualified aliens, thereby continuing the SSI and 
Medicaid eligibility of those who were receiving SSI benefits 
on August 22, 1996.

                             Effective Date

    August 22, 1996.

    EXTENSION OF ELIGIBILITY PERIOD FOR REFUGEES AND CERTAIN OTHER 
        QUALIFIED ALIENS FROM 5 TO 7 YEARS FOR SSI AND MEDICAID

                              Present Law

    Current law provides a 5-year exemption from: (1) the bar 
against SSI and Food Stamps; and (2) the provision allowing 
States to deny ``qualified aliens'' access to Medicaid, TANF, 
and Social Services Block Grant for three groups of aliens 
admitted for humanitarian reasons. These groups are: (1) 
refugees, for 5 years after entry; (2) asylees, for 5 years 
after being granted asylum; and (3) aliens whose deportation is 
withheld on the grounds of likely persecution upon return, for 
5 years after such withholding.

                           Reasons for Change

    The Committee proposal would extend the 5 year exemption 
period to allow sufficient time to assimilate into the country.

                          Committee Provision

    This change would lengthen the period during which welfare 
eligibility is guaranteed to refugees, asylees, and aliens 
whose deportation has been withheld from 5 years to 7 years. 
Cuban and Haitian entrants would also be covered by this 
provision.

                             Effective Date

    August 22, 1996.

  SSI ELIGIBILITY FOR PERMANENT RESIDENT ALIENS WHO ARE MEMBERS OF AN 
                              INDIAN TRIBE

                          Committee Provision

    Restrictions on SSI eligibility under welfare reform do not 
apply to permanent resident aliens who are members of an Indian 
tribe.

   SSI ELIGIBILITY FOR DISABLED LEGAL ALIENS IN THE UNITED STATES ON 
                            AUGUST 22, 1996

                          Committee Provision

    Disabled legal aliens residing in the United States on 
August 22, 1996 will be eligible for SSI benefits if they apply 
for such benefits on or before September 30, 1997.

  EXEMPTION FROM RESTRICTION ON SSI PROGRAM PARTICIPATION BY CERTAIN 
       RECIPIENTS ELIGIBLE ON THE BASIS OF VERY OLD APPLICATIONS

                          Committee Provision

    Restrictions on SSI benefits shall not apply to any 
individual who is receiving benefits under such program after 
July 1996 on the basis of an application filed before January 
1, 1979 and with respect to whom the Commissioner of Social 
Security lacks clear and convincing evidence that such 
individual is an alien ineligible for such benefits.

               REINSTATEMENT OF ELIGIBILITY FOR BENEFITS

                          Committee Provision

    This provision reinstates the linkage between SSI benefits 
and Medicaid.

EXEMPTION FOR CHILDREN WHO ARE LEGAL ALIENS FROM 5-YEAR BAN ON MEDICAID 
                              ELIGIBILITY

                          Committee Provision

    The limitation on Medicaid eligibility shall not apply to 
any alien lawfully residing in any state who has not attained 
the age of 19 but only with respect to such alien's eligibility 
for medical assistance under a state plan.

                             EFFECTIVE DATE

                          Committee Provision

    The amendments made by this chapter shall take effect as if 
they were included in the enactment of title IV of the Personal 
Responsibility and Work Opportunity Act of 1996.

                CHAPTER 2--WELFARE-TO-WORK GRANT PROGRAM

                  ESTABLISH ``WELFARE TO WORK'' GRANTS

                              Present Law

    The law combines recent Federal funding levels for three 
repealed programs (AFDC, Emergency Assistance, and JOBS) into a 
single block grant ($16.5 billion annually through Fiscal Year 
2002). Each State is entitled to the sum it received for these 
programs in a recent year, but no part of the TANF grant is 
earmarked for any program component, such as benefits or work 
programs. The law also provides an average of $2.3 billion 
annually in a child care block grant.

                           Reasons for Change

    The Committee proposal will establish a new ``Welfare to 
Work'' grant program.

                          Committee Provision

    After reserving 1 percent of each year's appropriation for 
Indian tribes and .5 percent for evaluation by the Secretary of 
HHS, the remainder of each year's appropriation is divided into 
two grant funds. The first fund is used for grants to states 
and is allocated by a formula based equally on each state's 
share of the national poor population, unemployed workers, and 
adults receiving assistance under the Temporary Assistance for 
Needy Families block grant. There will be a smallstate minimum 
of 0.5 percent. The second fund is used to support proposals submitted 
by political subdivisions of states that are determined by the 
Secretary of Health and Human Services to hold promise for helping 
long-term welfare recipients enter the workforce.
    Formula grants from the first fund are to be provided to 
States for the purpose of initiating projects that aim to place 
long-term welfare recipients in the workforce. Governors must 
distribute at least 85 percent of the state allotment to local 
jurisdictions within the state in which poverty and 
unemployment rates are above the state average. These funds 
must be distributed in accord with a formula devised by the 
governor that bases at least 50 percent of its allocation 
weight on poverty and may also include two additional factors, 
welfare recipients who have received benefits for 30 or more 
months and unemployment. Any local jurisdiction that, under 
this formula, would be allotted less than $100,000 will not 
receive any funds; these funds will instead revert to the 
governor. Governors may use up to 15 percent of the state 
allocation, plus any amounts remitted from local jurisdictions 
that would be allotted less than $100,000, to fund projects 
designed to help long-term recipients enter the workforce.
    Competitive grants are awarded in FY 1998 and FY 2000, 
although approved projects can receive funds from the Secretary 
every year and have 3 years to spend funds once obligated, on 
the basis of the likelihood that program applicants can 
successfully make long-term placements of welfare-dependent 
individuals into the workforce. The Secretary must select 
projects that show promise in: (1) expanding the base of 
knowledge about welfare-to-work programs for the least job 
ready; (2) moving the least job ready recipients into the labor 
force; and (3) moving the least job ready recipients into the 
labor force even in labor markets that have a shortage of low-
skill jobs. Other factors the Secretary, at her discretion, may 
use to select projects include: history of success in moving 
individuals with multiple barriers into work; evidence of 
ability to leverage private, State, and local resources; use of 
State and local resources that exceed the required match; plans 
to coordinate with other organizations at the local and State 
level; and use of current or former welfare recipients as 
mentors, case managers, or service providers. Any political 
subdivision of a state may apply for funds. Not less than 30 
percent shall be awarded to rural areas. The Secretary cannot 
award grants unless the TANF agency has approved the grant 
application. Further, the Secretary must terminate funds for a 
project upon a determination that the TANF agency is not 
adhering to the agreement. Awards to each project must be based 
on the Secretary's determination of the amount needed for the 
project to be successful. Allowable activities include job 
creation, on-the-job training, contracts with public or private 
providers of employment services, job vouchers, and job support 
services. The Secretary must include several required outcome 
measures in the evaluation study and must report on program 
outcomes to Congress in 1999 and 2001.
    Funds under both the competitive grants and the formula 
grants can be spent only for job creation through public or 
private sector employment wage subsidies, on-the-job training, 
contracts with public or private providers of readiness, 
placement, and post-employment services, job vouchers for 
placement, readiness, and post-employment services, and job 
support services (not including child care) if such services 
are not otherwise available. Any entity receiving funds under 
either grant must expend at least 90 percent of the money on 
recipients who have received benefits for at least 30 months, 
who suffer from multiple barriers to employment, or are within 
12 months of a mandatory time limit on benefits. States must 
provide a 33 percent match of federal funds and must comply 
with the 75 percent maintenance of effort requirements in TANF.
    The Secretary shall also reserve $100 million to add to the 
``High Performance Bonus'' amount in FY 2003 for states which 
are most successful in increasing the earnings of long-term 
welfare recipients or of those who are at risk of long-term 
welfare dependency.
    Funds available under this program are $.75 billion for 
fiscal year 1998, $1.15 billion for fiscal year 1999, and $1.0 
billion for fiscal year 2000. The Secretary must include 
several specific measures, such as success in job placements, 
in her evaluation of the program. In addition, the Secretary 
must submit a progress report to Congress in 1999 and a final 
report in 2001.

                             Effective Date

    Date of enactment (funds are available beginning in fiscal 
year 1998).

                  NONDISPLACEMENT IN WORKER ACTIVITIES

                              Present Law

    A TANF recipient may fill a vacant employment position. 
However, no adult in a work activity that is funded in whole or 
in part by federal funds shall be employed or assigned when 
another person is on layoff from the same or any substantially 
equivalent job; or if the employer has ended the employment of 
any regular employee or otherwise caused an involuntary 
reduction of his workforce in order to fill the vacancy so 
created with a TANF recipient. These provisions shall not 
preempt or supersede any state or local law that provides 
greater protection against displacement.

                          Committee Provision

    A participant in a work activity pursuant to this section 
shall not displace (including a partial displacement, such as a 
reduction in the hours of nonovertime work, wages, or 
employment benefits) any individual who, as of the date of the 
participation, is an employee.
    A participant in a work activity shall not be employed in a 
job when any other individual is on layoff from the same or any 
substantially equivalent job; when the employer has 
terminatedthe employment of any regular employee or otherwise reduced 
the workforce of the employer with the intention of filling the vacancy 
so created with the participant; or which is created in a promotional 
line that will infringe in any way upon the promotional opportunities 
of employed individuals.

                         ENROLLMENT FLEXIBILITY

                              Present Law

    The Secretary is provided with authority to waive 
provisions of law, with authority to approve a variety of 
demonstration projects, and with authority to enter into 
contracts with entities other than public entities.

                           Reasons for Change

    The Committee provision would encourage innovation in 
enrolling individuals for a variety of federal, state, and 
local benefit programs for which they may be eligible.

                          Committee Provision

    A state plan to consolidate and automate the administration 
of low-income benefit programs, including Medicaid and to 
competitively contract for the administration of such programs 
that was submitted to the Secretary of Health and Human 
Services prior to June 1, 1997 shall be deemed by the Secretary 
to be approved.
    The state is required to take necessary steps to safeguard 
the privacy, confidentiality, and protections of individuals 
provided under law. The state is required to take necessary 
steps to provide that all protections for individuals seeking 
benefits including appeals and grievances as provided by law 
are ensured.

CLARIFICATION OF A STATE'S ABILITY TO SANCTION AN INDIVIDUAL RECEIVING 
                ASSISTANCE UNDER TANF FOR NONCOMPLIANCE

                              Present Law

    The Personal Responsibility and Work Opportunity 
Reconciliation Act provides that states may penalize welfare 
recipients by reduction of benefits. For example, the PRWO 
provides that states shall not be prohibited from sanctioning 
welfare recipients who test positive for use of controlled 
substances. Further, if a parent fails to cooperate in 
establishing paternity or in establishing, modifying, or 
enforcing a child support order, and the individual does not 
qualify for a good cause exception, the state must reduce the 
family's benefit by at least 25 percent and may reduce it to 
zero.

                           Reasons for Change

    The Administration has interpreted the Fair Labor Standards 
Act as applying to workfare programs under the TANF law. This 
interpretation will require that workfare participants receive 
a benefit that at least equals the federal minimum wage rate 
multiplied by their required hours of work. Reduction in the 
benefit of a workfare participant for noncompliance with 
program rules might violate the federal minimum wage.

                          Committee Provision

    The amendment provides that, notwithstanding any minimum 
wage requirement, states will not be prohibited from 
sanctioning a workfare participant for noncompliance even if 
that sanction reduces the benefit below the minimum wage 
equivalent.

                  CHAPTER 3--UNEMPLOYMENT COMPENSATION

     INCREASE IN FEDERAL UNEMPLOYMENT ACCOUNT CEILING AND SPECIAL 
        DISTRIBUTION TO STATES FROM THE UNEMPLOYMENT TRUST FUND

                              Present Law

    FUTA taxes are credited to Federal accounts in the 
Unemployment Trust Fund in proportions that are set by statute. 
Funds are held in reserve in these accounts to provide Federal 
spending authority for certain purposes. The Employment 
Security Administration Account (ESAA) funds Federal and State 
administration of the UI program. The Extended Unemployment 
Compensation Account (EUCA) finances the Federal share of 
extended UI benefits. The Federal Unemployment Account (FUA) 
provides authority for loans to States with insolvent UI 
benefit accounts. Each of these accounts has a statutory 
ceiling. ESAA's balance after the end of a fiscal year is 
reduced to 40% of the prior-year appropriation from ESAA. 
Excess funds are transferred to EUCA and/or FUA. The ceilings 
on EUCA and FUA are set as a percent of total wages in 
employment covered by UI. The current ceilings are 0.5% of 
wages for EUCA and 0.25% of wages for FUA. If all three 
accounts reach their ceilings, excess funds are distributed 
among the 53 State benefit accounts in the Unemployment Trust 
Fund, after repayment of any outstanding general revenue 
advances to FUA and EUCA. These transfers to the State accounts 
are termed ``Reed Act transfers'' after the name of the 
legislation that authorized this use of excess FUTA funds. The 
Department of Labor projects that Reed Act transfers will be 
triggered beginning in Fiscal Year 2000 under present law.

                           Reasons for Change

    The Committee provision would increase the Federal 
Unemployment Account ceiling from 0.25 percent to 0.50 percent 
of covered wages.

                          Committee Provision

    The provision would double the Federal Unemployment Account 
ceiling from 0.25 percent to 0.50 percent of covered wages, 
effective at the beginning of fiscal year 2002. In addition, 
for each of fiscal years 2000, 2001, and 2002, if Federal 
account ceilings are reached, an annual total of no more than 
$100 million in Reed Act transfers are to be made from Federal 
UI accounts to State accounts for use by States in 
administering their UI programs. (Annual amounts in excess of 
$100 million are to accrue to the Federal Unemployment Account, 
notwithstanding the continued 0.25 percent ceiling). Funds are 
to be distributed among the States in the same manner 
asadministrative funds from the Federal account are allocated.

                             Effective Date

    The increase in the Federal Unemployment Account ceiling is 
to occur on October 1, 2001; special distributions are made 
beginning in fiscal year 2000, based on account balances at the 
end of the preceding fiscal year.

             CLARIFYING PROVISION RELATING TO BASE PERIODS

                               Present Law

    Federal law establishes broad guidelines for the operation 
of State unemployment insurance (UI) programs but leaves most 
of the details of eligibility and benefits to State 
determination. One of these general Federal guidelines calls 
for States to use administrative methods that ensure full 
payment of UI benefits ``when due.'' All States meet this 
requirement with program rules that the U.S. Department of 
Labor has found to be in compliance. In complying with the 
``when due'' clause, States must decide what ``base period'' to 
use in measuring a claimant's wage history for the purpose of 
determining individual eligibility and benefit entitlement. 
States have generally used a base period consisting of the 
first 4 of the last 5 completed calendar quarters. However, 
several States that use this base period also use an 
``alternative base period,'' usually the last 4 completed 
calendar quarters. This alternative base period is used for 
claimants who are found to be ineligible because their earnings 
were too low in the regular base period. Although current State 
base periods have Department of Labor approval, a Federal court 
in Illinois, in the case of Pennington v. Doherty, ruled that 
the State of Illinois is not in compliance with the ``when 
due'' clause because it could use a more recent base period, 
which would benefit a significant number of claimants. This 
case may be appealed further. If left standing, it will apply 
only to three States: Illinois, Indiana, and Wisconsin. 
However, similar suits have been filed in other States, and 
they could lead to a de facto national rules change based on 
judicial action.

                           Reasons for Change

    The Committee provision clarifies that states have full 
discretion in setting their own unemployment insurance base 
periods for determining eligibility for unemployment insurance 
benefits.

                           Committee Provision

    The provision reinforces current policy by affirming that 
States have complete authority to set their own base periods 
used in determining individuals' eligibility for unemployment 
insurance benefits. According to the Congressional Budget 
Office, failing to make this change could result in 41 States 
being required to adopt alternative base periods at a cost of 
$400 million annually in added UI benefits plus increased 
administrative costs. CBO assumes that States would increase 
their revenue collections (by raising payroll taxes) to cover 
any increase in benefit outlays.

                             Effective Date

    This section shall apply for purposes of any period 
beginning before, on, or after the date of enactment of this 
Act.

           TREATMENT OF CERTAIN SERVICES PERFORMED BY INMATES

                               Present Law

    Federal law requires UI coverage for most nongovernmental 
employment, and employers have to pay taxes under the Federal 
Unemployment Tax Act (FUTA) for their employees. Federal law 
also requires state UI programs to cover jobs in state and 
local government agencies. Each governmental employer 
reimburses the state UI program for the cost of any 
unemployment benefits paid to its workers.
    Federal law does except certain employment from this 
mandatory coverage. One exception permits states to exclude 
from coverage services performed for a governmental agency by 
inmates of custodial or penal institutions. However, any work 
performed by inmates by private employers through work-release 
programs or other cooperative arrangements between prison 
authorities and private employers does not come under this 
exception. Further, there is no exception to FUTA coverage of 
private employers for jobs held by inmates of penal 
institutions. Thus, it is possible for a prison inmate on work-
release to earn UI coverage that may be used to claim UI 
benefits, if the inmate, when released, is unemployed and 
available for work.

                           Reasons for Change

    The Committee provision exempts services performed by 
inmates who participate in prison work programs from 
unemployment taxes and benefits.

                          Committee Provisions

    The Committee provision will prevent the payment of 
unemployment compensation benefits to former prisoners who 
became ``unemployed'' when they were released and were no 
longer participating in a prison work program. Inmates who 
provide services directly to the prison are already exempt from 
unemployment taxes. This would extend the same treatment to 
inmates who participate in other work programs while in prison.

            Subtitle M--Welfare Reform Technical Corrections

                  WELFARE REFORM TECHNICAL CORRECTIONS

                           Reasons for Change

    The Committee provision makes approximately 200 technical 
and conforming amendments to the ``Personal Responsibility and 
Work Opportunity Act of 1996,'' (P.L. 104-193).

                           Committee Provision

    The Committee adopts H.R. 1048, the ``Welfare Reform 
Technical Corrections Act of 1997,'' as amended by deleting all 
provisions relating to Title II of the Social Security Act. It 
is further amended by the following provision to remove teen 
parents attending school from the limit on vocational 
education.

   REMOVE TEEN PARENTS ATTENDING SCHOOL FROM THE LIMIT ON VOCATIONAL 
                               EDUCATION

                               Present Law

    The law restricts to 20 percent the proportion of persons 
in all families and in two-parent families who may be treated 
as engaged in work for a month by reason of participating in 
vocational educational training, or if single teenage household 
heads without a high school diploma, by reason of satisfactory 
attendance at secondary school or participation in education 
directly related to employment. The law also requires all 
unmarried parents under age 18 who did not complete high school 
to participate in education as a condition of eligibility for 
TANF.

                            Reason for Change

    In some states the number of teen parents who must attend 
school in order to receive TANF is so large that the state's 
ability to use vocational education training is significantly 
reduced. Further, states want the additional flexibility to 
promote vocational education for adults as a means of promoting 
eventual self-sufficiency.

                           Committee Provision

     Remove single heads of household under age 20 from the 
calculation of the limit on the number of persons that are 
permitted to meet the work requirement through vocational 
educational activity.
         DIVISION 4--EARNED INCOME CREDIT AND OTHER PROVISIONS

             Subtitle L--Earned Income and Other Provisions

                    CHAPTER 1--EARNED INCOME CREDIT

             DESCRIPTION OF EARNED INCOME CREDIT PROVISIONS

                              Present Law

In general
    Certain eligible low-income workers are entitled to claim a 
refundable earned income credit (EIC) (sec. 32 of the Internal 
Revenue Code of 1986 (``Code'')). A refundable credit is a 
credit that not only reduces an individual's tax liability but 
allows refunds to the individual in excess of income tax 
liability. The amount of the credit an eligible individual may 
claim depends upon whether the individual has one, more than 
one, or no qualifying children, and is determined by 
multiplying the credit rate by the individual's earned income 
up to an earned income amount. (Note: In the case of a married 
individual who files a joint return with his or her spouse, the 
income for purposes of these tests is the combined income of 
the couple.)
    The maximum amount of the credit is the product of the 
credit rate and the earned income amount. The credit is reduced 
by the amount of alternative minimum tax (``AMT'') the taxpayer 
owes for the year. The EIC is phased out above certain income 
levels. For individuals with earned income or modified adjusted 
gross income (``modified AGI'), in excess of the beginning of 
the phaseout range, the maximum credit amount is reduced by the 
phaseout rate multiplied by the amount of earned income (or 
modified AGI, if greater) in excess of the beginning of the 
phaseout range.
    For individuals with earned income (or modified AGI, if 
greater) in excess of the end of the phaseout range, no credit 
is allowed. Modified AGI means AGI, but for this purpose does 
not include the following amounts: (1) net capital losses (if 
greater than zero); (2) net losses from trusts and estates; (3) 
net losses from nonbusiness rents and royalties; and (4) 50 
percent of the net losses from business, computed separately 
with respect to sole proprietorships (other than in farming), 
sole proprietorships in farming, and other businesses. Amounts 
attributable to a business that consists of the performance of 
services by the taxpayer as an employee are not taken into 
account for purposes of (4).
    The parameters for the EIC for 1997 are given in the 
following table:

                 EARNED INCOME CREDIT PARAMETERS (1997)                 
------------------------------------------------------------------------
                                   Two or more      One           No    
                                    qualifying   qualifying   qualifying
                                     children      child       children 
------------------------------------------------------------------------
Credit rate (percent)............        40.00        34.00         7.65
Earned income amount.............       $9,140       $6,500       $4,340
Maximum credit...................       $3,656       $2,210         $332
Phaseout begins..................      $11,930      $11,930       $5,430
Phaseout rate (percent)..........        21.06        15.98         7.65
Phaseout ends....................      $29,290      $25,760       $9,770
------------------------------------------------------------------------

    Under present law, an individual is not eligible for the 
earned income credit if the aggregate amount of ``disqualified 
income'' of the taxpayer for the taxable year exceeds $2,250. 
Disqualified income is the sum of: (1) interest (taxable and 
tax-exempt); (2) dividends; (3) net rent and royalty income (if 
greater than zero); (4) capital gain net income; and (5) net 
passive income (if greater than zero) that is not self-
employment income. The $2,250 threshold is indexed for 
inflation.
    The earned income amount and the phaseout amount are 
indexed for inflation.

Earned income

    Under present law, earned income means the sum of (1) 
wages, salaries, tips, and other employee compensation, and (2) 
the amount of the taxpayer's net earnings from self employment 
for the taxable year, determined without regard to the 
deduction for one-half of the taxpayer's self-employment taxes 
(Code sec. 164(f)). For purposes of this definition, earned 
income is computed without regard to any community property 
laws, pension and annuity payments are not treated as earned 
income, certain amounts relating to nonresident aliens are 
disregarded, and no amount received by inmates for services in 
penal institutions is treated as earned income.

Eligible individual

    Under present law, an individual is an eligible individual 
entitled to claim the EIC for a year if
          (1) the individual has a qualifying child for the 
        taxable year, or
          (2) the individual does not have a qualifying child, 
        but satisfies the following requirements:
                  (i) the individual's principal place of abode 
                is in the United States for more than \1/2\ of 
                the year,
                  (ii) the individual (or, if the individual is 
                married, either the individual or the 
                individual's spouse) has attained age 25, but 
                has not attained age 65 before the close of the 
                year, and
                  (iii) the individual is not a dependent for 
                whom a dependency exemption is allowed on 
                another taxpayer's return for a taxable year 
                beginning in the same calendar year as the 
                taxable year of the individual.
    An individual is not an eligible individual for the year if 
the individual (1) is a qualifying child of another taxpayer, 
(2) claims any exclusion from income under Code section 911 for 
citizens or residents living abroad, (3) is a nonresident alien 
individual for any portion of the year unless the individual is 
treated as a U.S. resident for the year under Code section 
6013, or (4) does not include the individual's taxpayer 
identification number (``TIN'') or the individual's spouse's 
TIN on the tax return.

Qualifying child

    A qualifying child must meet a relationship test, an age 
test, an identification test, and a residence test. Under the 
relationship and age tests, an individual is eligible for the 
EIC with respect to another person only if that other person: 
(1) is a son, daughter, or adopted child (or a descendent of a 
son, daughter, or adopted child); a stepson or stepdaughter; or 
a foster child of the taxpayer (a foster child is defined as a 
person whom the individual cares for as the individual's child; 
it is not necessary to have a placement through a foster care 
agency); and (2) is under the age of 19 at the close of the 
taxable year (or is under the age of 24 at the end of the 
taxable year and was a full-time student during the taxable 
year), or is permanently and totally disabled. Also, if the 
qualifying child is married at the close of the year, the 
individual may claim the EIC for that child only if the 
individual may also claim that child as a dependent.
    To satisfy the identification test, an individual must 
include on their tax return the name, age, and TIN of each 
qualifying child.
    The residence test requires that a qualifying child must 
have the same principal place of abode as the taxpayer for more 
than one-half of the taxable year (for the entire taxable year 
in the case of a foster child), and that this principal place 
of abode must be located in the United States. For purposes of 
determining whether a qualifying child meets the residence 
test, the principal place of abode shall be treated as in the 
United States for any period during which a member of the Armed 
Forces is stationed outside the United States while serving on 
extended active duty.

Advance payment

    An individual with qualifying children may elect to receive 
the credit on an advance basis by furnishing an advance payment 
certificate to his or her employer. For such an individual, the 
employer makes an advance payment of the credit at the time 
wages are paid. The amount of advance payment allowable in a 
taxable year is limited to 60 percent of the maximum credit 
available to an individual with one qualifying child.

TIN requirement

    Under present law, for purposes of determining who is an 
eligible individual and who is a qualifying child, a TIN means 
a social security number issued to an individual by the Social 
Security Administration other than a social security number 
issued pursuant to clause (II) (or that portion of clause (III) 
that relates to clause (II)) of section 205(c)(2)(B)(i) of the 
Social Security Act relating to the issuance of a Social 
Security number to an individual applying for or receiving 
Federally funded benefits.

Mathematical or clerical errors

    The IRS may summarily assess additional tax due as a result 
of a mathematical or clerical error without sending the 
taxpayer a notice of deficiency and giving the taxpayer an 
opportunity to petition the Tax Court. If an individual fails 
to provide a correct TIN, such omission is treated as a 
mathematical or clerical error. Also, if an individual who 
claims the EIC with respect to net earnings from self 
employment fails to pay the proper amount of self-employment 
tax on such net earnings, the failure is treated as a 
mathematical or clerical error for purposes of the amount of 
EIC claimed.
    Where the IRS uses the summary assessment procedure for 
mathematical or clerical errors, the taxpayer must be given an 
explanation of the asserted error and a period of 60 days to 
request that the IRS abate its assessment. The IRS may not 
proceed to collect the amount of the assessment until the 
taxpayer has agreed to it or has allowed the 60-day period for 
objecting to expire. If the taxpayer files a request for 
abatement of the assessment specified in the notice, the IRS 
must abate the assessment. Any reassessment of the abated 
amount is subject to the ordinary deficiency procedures.
    The request for abatement of the assessment is the only 
procedure a taxpayer may use prior to paying the assessed 
amount in order to contest an assessment arising out of a 
mathematical or clerical error. Once the assessment is 
satisfied, however, the taxpayer may file a claim for refund if 
he or she believes the assessment was made in error.

                          Committee Provisions

A. Deny EIC Eligibility for Prior Acts of Recklessness or Fraud

                              Present Law

    The accuracy-related penalty, which is imposed at a rate of 
20 percent, applies to the portion of any underpayment that is 
attributable to (1) negligence, (2) any substantial 
understatement of income tax, (3) any substantial valuation 
overstatement, (4) any substantial overstatement of pension 
liabilities, or (5) any substantial estate or gift tax 
valuation understatement (sec. 6662). Negligence includes any 
careless, reckless, or intentional disregard of rules or 
regulations, as well as any failure to make a reasonable 
attempt to comply with the provisions of the Code.
    The fraud penalty, which is imposed at a rate of 75 
percent, applies to the portion of any underpayment that is 
attributable to fraud (sec. 6663).
    Neither the accuracy-related penalty nor the fraud penalty 
is imposed with respect to any portion of an underpayment if it 
is shown that there was a reasonable cause for that portion and 
that the taxpayer acted in good faith with respect to that 
portion.

                           Reasons for Change

    The Committee believes that taxpayers who fraudulently 
claim the EIC or recklessly or intentionally disregard EIC 
rules or regulations should be penalized for doing so.

                           Committee Proposal

    A taxpayer who fraudulently claims the EIC would be 
ineligible to claim the EIC for a subsequent period of 10 
years. In addition, a taxpayer who erroneously claims the EIC 
due to reckless or intentional disregard of rules or 
regulations would be ineligible to claim the EIC for a 
subsequent period of two years. These sanctions would be in 
addition to any other penalty imposed under present law. The 
determination of fraud or of reckless or intentional disregard 
of rules or regulations would be made in a deficiency 
proceeding (which would provide for judicial review).

                             Effective Date

    The proposal would be effective for taxable years beginning 
after December 31, 1996.

B. Recertification Required When Taxpayer Found to be Ineligible for 
        EIC in Past

                              Present Law

    If an individual fails to provide a correct TIN and claims 
the EIC, such omission is treated as a mathematical or clerical 
error. Also, if an individual who claims the EIC with respect 
to net earnings from self employment fails to pay the proper 
amount of self-employment tax on such net earnings, the failure 
is treated as a mathematical or clerical error for purposes of 
the amount of EIC claimed. Generally, taxpayers have 60 days in 
which they can either provide a correct TIN or request that the 
IRS follow the current-law deficiency procedures. If a taxpayer 
fails to respond within this period, he or she must file an 
amended return with a correct TIN or clarify that any self-
employment tax has been paid in order to obtain the EIC 
originally claimed.
    The IRS must follow deficiency procedures when 
investigating other types of questionable EIC claims. Under 
these procedures, contact letters are first sent to the 
taxpayer. If the necessary information is not provided by the 
taxpayer, a statutory notice of deficiency is sent by certified 
mail, notifying the taxpayer that the adjustment will be 
assessed unless the taxpayer files a petition in Tax Court 
within 90 days. If a petition is not filed within that time and 
there is no other response to the statutory notice, the 
assessment is made and the EIC is denied.

                           Reasons for Change

    The Committee believes that the requirement of additional 
information to determine EIC eligibility is prudent for 
taxpayers who have incorrectly claimed the EIC in the past.

                           Committee Proposal

    A taxpayer who has been denied the EIC as a result of 
deficiency procedures would be ineligible to claim the EIC in 
subsequent years unless evidence of eligibility for the credit 
is provided by the taxpayer. To demonstrate current 
eligibility, the taxpayer would be required to meet evidentiary 
requirements established by the Secretary of the Treasury. 
Failure to provide this information when claiming the EIC would 
be treated as a mathematical or clerical error. If a taxpayer 
is recertified as eligible for the credit, the taxpayer would 
not be required to provide this information in the future 
unless the IRS again denies the EIC as a result of a deficiency 
procedure. Ineligibility for the EIC under the proposal would 
be subject to review by the courts.

                             Effective Date

    The proposal would be effective for taxable years beginning 
after December 31, 1996.

C. Due Diligence Requirements for Paid Preparers

                               Present Law

    There are several penalties that apply in the case of an 
understatement of tax that is caused by an income tax return 
preparer. First, if any part of an understatement of tax on a 
return or claim for refund is attributable to a position for 
which there was not a realistic possibility of being sustained 
on its merits and if any person who is an income tax return 
preparer with respect to such return or claim for refund knew 
(or reasonably should have known) of such position and such 
position was not disclosed or was frivolous, then that return 
preparer is subject to a penalty of $250 with respect to that 
return or claim (sec. 6694(a)). The penalty is not imposed if 
there is reasonable cause for the understatement and the return 
preparer acted in good faith.
    In addition, if any part of an understatement of tax on a 
return or claim for refund is attributable to a willful attempt 
by an income tax return preparer to understate the tax 
liability of another person or to any reckless or intentional 
disregard of rules or regulations by an income tax return 
preparer, then the income tax return preparer is subject to a 
penalty of $1,000 with respect to that return or claim (sec. 
6694(b)).
    Also, a penalty for aiding and abetting the understatement 
of tax liability is imposed in cases where any person aids, 
assists in, procures, or advises with respect to the 
preparation or presentation of any portion of a return or other 
document if (1) the person knows or has reason to believe that 
the return orother document will be used in connection with any 
material matter arising under the tax laws, and (2) the person knows 
that if the portion of the return or other document were so used, an 
understatement of the tax liability of another person would result 
(sec. 6701).
    Additional penalties are imposed on return preparers with 
respect to each failure to (1) furnish a copy of a return or 
claim for refund to the taxpayer, (2) sign the return or claim 
for refund, (3) furnish his or her identifying number, (4) 
retain a copy or list of the returns prepared, and (5) file a 
correct information return (sec. 6695). The penalty is $50 for 
each failure and the total penalties imposed for any single 
type of failure for any calendar year are limited to $25,000.

                           Reasons for Change

    The Committee believes that more thorough efforts by return 
preparers are important to improving EIC compliance.

                           Committee Proposal

    Return preparers would be required to fulfill certain due 
diligence requirements with respect to returns they prepare 
claiming the EIC. The penalty for failure to meet these 
requirements is $100. This penalty would be in addition to any 
other penalty imposed under present law.

                             Effective Date

    The proposal would be effective for taxable years beginning 
after December 31, 1996.

                 CHAPTER 2--INCREASE IN THE PUBLIC DEBT

                     STATUTORY DEBT LIMIT INCREASE

    In addition to the spending and revenue reconciliation 
bills, the Senate Finance Committee has been reconciled with 
increasing the statutory limit on the public debt to $5.950 
trillion. The current debt ceiling of $5.5 trillion is expected 
to be reached in early 1998. The Chairman's mark includes the 
required increase to $5.950 trillion.
    It is assumed that the $5.950 trillion limit will be 
sufficient to allow the government to operate until sometime in 
late 1999. The debt limit bill has been included in the 
spending reconciliation instructions to the Finance Committee.

                        CHAPTER 3--MISCELLANEOUS

        REGARDING THE ACCURACY OF THE CONSUMER PRICE INDEX (CPI)

    Inclusion of S. Res. 50 into the Chairman's mark. S. Res. 
50 expresses the Sense of the Senate that the current CPI does 
not accurately reflect true changes in the cost of living. It 
refers to the Boskin Commission report which concluded that the 
Consumer Price Index overstates the cost of living in the U.S. 
by 1.1 percentage points.

          Resolved, That it is the sense of the Senate that all 
        cost- of-living adjustments required by statute should 
        accurately reflect the best available estimate of 
        changes in the cost of living.
        
        
               congressional budget office cost estimate

Reconciliation recommendations of the Senate Committee on Governmental 
        Affairs (Title VI)

    Summary: Title VI would make a number of changes affecting 
the retirement and health insurance programs for federal 
employees and annuitants. It would also end a payment currently 
required from the Treasury to the United States Postal Service, 
as well as require the sale of two government properties. In 
total, these provisions would reduce on-budget direct spending 
by $3.0 billion, increase off-budget outlays by $44 million, 
realize asset sale receipts of $540 million, and increase 
federal revenues by $1.8 billion over the 1998-2002 period. 
Part of these savings would result from increasing the amount 
of retirement costs charged to agency appropriations by a total 
of $2.9 billion over the 1998-2002 period.
    This title contains no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act of 1995 (UMRA) and 
would impose no costs on state, local, and tribal governments. 
By increasing contributions required of federal employees to 
the civilian retirement system, the legislation would impose a 
private-sector mandate with a cost exceeding the statutory 
threshold.
    Estimated cost to the Federal Government: The estimated 
impact of the reconciliation recommendations of the Senate 
Committee on Governmental Affairs on direct spending and 
revenues through 2002 is shown in the following table. Tables 
in the basis of estimate provide more detail on the various 
subtitles, and the appendix table displays the budgetary 
effects through 2007.
    The outlay impacts of changes proposed in Title VI fall in 
budget functions 370 (commerce and housing credit), 550 
(health), and 950 (undistributed offsetting receipts).

   ESTIMATED EFFECTS OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS ON   
                                          DIRECT SPENDING AND REVENUES                                          
----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal years, in millions of dollars--     
                                                           -----------------------------------------------------
                                                              1997     1998     1999     2000     2001     2002 
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
Repeal of Transitional Appropriation for the U.S. Postal                                                        
 Service:                                                                                                       
    On-Budget.............................................        0      -35      -34      -33      -32      -31
    Off-Budget............................................        0       35        9        0        0        0
                                                           -----------------------------------------------------
      Total Budget........................................        0        0      -25      -33      -32      -31
                                                           =====================================================
Increase Agency Contributions to CSRS and FSRDS...........        0     -597     -580     -563     -548     -565
Modify Government Contributions under FEHB................        0        0       -5       -7       -7       -8
                                                           =====================================================
Total, Direct Spending:                                                                                         
    On-Budget.............................................        0     -632     -619     -603     -587     -604
    Off-Budget............................................        0       35        9        0        0        0
                                                           -----------------------------------------------------
      Total Budget........................................        0     -597     -610     -603     -587     -604
                                                           =====================================================
                                                 ASSET SALES \1\                                                
                                                                                                                
Governors Island, New York................................        0        0        0        0        0     -500
Union Station Air Rights..................................        0        0        0        0        0      -40
                                                           -----------------------------------------------------
      Total, Asset Sales..................................        0        0        0        0        0     -540
                                                           =====================================================
                                                    REVENUES                                                    
                                                                                                                
Increase Employee Contributions to CSRS, FERS, FSRDS, and                                                       
 FSPS.....................................................        0        0      208      413      551     598 
----------------------------------------------------------------------------------------------------------------
\1\ Based on criteria established in the 1998 budget resolution, CBO has determined that proceeds from the asset
  sales in this bill should be counted in the budget totals for purposes of Congressional scoring. Under the    
  Balanced Budget Act, however, proceeds from asset sales are not counted in determining compliance with the    
  discretionary spending limits or pay-as-you-go requirements.                                                  
                                                                                                                
Note.--Components may not add to totals because of rounding.                                                    

Basis of estimate

            Subtitle A, Civil Service
    The committee recommends changes in law affecting civilian 
employees of the federal government as well as enrollees in the 
Federal Employees Health Benefits (FEHB) program. The changes 
would affect the contributions made by both the employee and 
the employing agency for retirement and health benefits.
    Employing Agency Contributions for Civilian Retirement. 
Subtitle A would increase the contribution rates paid by 
federal agencies on behalf of their employees. CBO estimates 
that offsetting receipts (collections by the civilian 
retirement trust funds) would increase by $597 million in 1998 
and $2.9 billion over the five-year period.
    Under the Civil Service Retirement System (CSRS) and the 
Foreign Service Retirement and Disability System (FSRDS), each 
federal agency matches the employee contribution of 7.0, 7.5, 
or 8.0 percent, depending on the type of employee. Under the 
Federal Employees Retirement System (FERS) and the Foreign 
Service Pension System (FSPS), the agency contributes an amount 
equal to a percentage of basic pay which, when added to the 
employee contribution, equals the normal cost of FERS. The 
normal cost is the percentage of an employee's salary required 
to be contributed each year over the employee's working career 
to fully finance, with interest, all retirement benefits. The 
current normal cost for FERS used to determine most agency 
contributions is 12.2 percent and is scheduled to decline to 
11.4 percent for most agencies in fiscal year 1998. Because 
employee contributions cover 0.8 percent of the normal cost, 
most agencies now contribute 11.4 percent of each employee's 
salary to FERS; the contribution will fall to 10.6 percent in 
1998. Agencies that employ those workers with special 
retirement provisions, like Congressional employees, Members of 
Congress, firefighters, and law enforcement personnel, are 
required to pay a higher percentage of salary to the retirement 
system, because these personnel have more costly retirement 
benefits and a greater normal cost.
    This legislation would increase matching contributions for 
CSRS and FSRDS by non-postal agencies by raising the 
contribution rate by 1.51 percentage points (to 8.51 percent 
for most employees) in October 1997, and an additional 0.09 
percentage points in October 2001. In October 2002, the rate 
would return to its current level. Agency contributions are 
recorded as offsetting receipts of the retirement trust fund. 
Since CSRS and FSRDS are closed systems (federal employees 
hired after January 1, 1984, are covered under FERS and FSPS), 
CBO expects the increase in contributions to decline each year 
after 1998. The legislation would maintain agency contributions 
for FERS and FSPS at current levels, despite the fact that 
employee contributions are being increased.

                            ESTIMATED BUDGETARY EFFECTS OF SUBTITLE A, CIVIL SERVICE                            
----------------------------------------------------------------------------------------------------------------
                                                            By fiscal years, in millions of dollars--           
                                               -----------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
Spending Under Current Law:                                                                                     
    Receipts of Employer Contributions to                                                                       
     Civilian Retirement......................    -16,366    -16,913    -17,160    -17,886    -18,520    -19,368
    Federal Employees Health Benefits.........      3,920      4,165      4,474      4,907      5,256      5,655
    Postal Service:                             .........  .........  .........  .........  .........  .........
        On-Budget.............................         36         35         34         33         32         31
        Off-Budget............................      1,380      2,654       -964     -1,262       -532        224
                                               -----------------------------------------------------------------
          Total Budget........................      1,416      2,689       -930     -1,229       -500        255
Proposed Changes:                                                                                               
    Increase Agency Contributions to CSRS and                                                                   
     FSRDS by 1.51 percent in October 1997 and                                                                  
     an additional 0.09 percent in October                                                                      
     2001.....................................          0       -597       -580       -563       -548       -565
    Government Contributions under FEHB.......          0          0         -5         -7         -7         -8
    Repeal of Transitional Appropriation for                                                                    
     the U.S. Postal Service:                   .........  .........  .........  .........  .........  .........
        On-Budget.............................          0        -35        -34        -33        -32        -31
        Off-Budget............................          0         35          9          0          0          0
                                               -----------------------------------------------------------------
          Total Budget........................          0          0        -25        -33        -32        -31
                                               -----------------------------------------------------------------
          Total Proposed Changes..............          0       -597       -610       -603       -587       -604
Spending Under Title VI:                                                                                        
    Receipts of Employer Contributions to                                                                       
     Civilian Retirement......................    -16,366    -17,510    -17,740    -18,449    -19,068    -19,933
    Federal Employees Health Benefits.........      3,920      4,165      4,469      4,900      5,249      5,647
    Post Service:                               .........  .........  .........  .........  .........  .........
        On-Budget.............................         36          0          0          0          0          0
        Off-Budget............................      1,380      2,689       -955     -1,262       -532       -224
                                               -----------------------------------------------------------------
          Total Budget........................      1,416      2,689       -955     -1,262       -532        224
                                                                                                                
                                                    REVENUES                                                    
                                                                                                                
Increase Employee Contributions to CSRS,FERS,                                                                   
 FSRDS, and FSPS by 0.25 percent in January                                                                     
 1999, an additional 0.15 percent in January                                                                    
 2000, and another 0.1 percent in January 2001  .........  .........        208        413        551        598
----------------------------------------------------------------------------------------------------------------

    Employee Contributions for Civilian Retirement. This 
legislation would also increase contributions by federal 
employees to the civilian retirement systems. CBO estimates 
that revenue from additional employee contributions would total 
$208 million in 1999 and $1.8 billion over the 1999-2002 
period.
    Under current law, most workers covered by CSRS and FSRDS 
contribute 7 percent of their basis pay to the retirement trust 
fund but pay no Social Security taxes. Employees covered by 
FERS and FSPS pay 6.2 percent in Social Security taxes (up to 
the ceiling on Social Security taxable wages) and 0.8 percent 
to the retirement trust fund. Certain groups of employees 
contribute slightly more for federal retirement coverage and in 
turn receive more generous benefits. Law enforcement personnel, 
firefighters, air traffic controllers, and Congressional 
employees contribute 7.5 percent of salary to CSRS. Members of 
Congress and certain judicial officials contribute 8 percent. 
Employees with special retirement provisions pay an extra 0.5 
percent of pay if enrolled in FERS or FSPS.
    The legislation would set the contribution rate at 7.5 
percent for all CSRS and FSRDS employees (except Congressional 
staff, firefighters, and law enforcement personnel, whose 
contribution rates would rise to 8 percent, and Members of 
Congress and certain judges and magistrates, whose rates would 
rise to 8.5 percent). FERS employees would also fact the 0.5 
percent contribution hike. These increases in contribution 
rates would be phased in over three years: 0.25 percentage 
points in January 1999, another 0.15 percentage points in 2000, 
and 0.1 percentage points in 2001. The contribution rates would 
remain 0.5 percentage points higher than under current law 
until the end of calendar year 2002, at which time the rates 
would return to their current level.
    Based on data from the Office of Personnel Management 
(OPM), CBO estimates that the fiscal year 1997 payroll base 
covered by CSRS and FERS is $80 billion for non-postal 
employees and about $25 billion for postal employees. This 
estimates uses CBO's baseline projection of General Schedule 
pay raises--which run about 3.0 percent annually--to project 
the payroll base after 1997. CSRS and FERS each currently cover 
about one-half of federal payroll. CBS estimates that the 
percentage of total payroll covered by CSRS will decline by 2 
to 3 percentage points each year, while the FERS payroll will 
grow at the same rate.
    Government Contributions to Federal Employees Health 
Benefits. This portion of the bill modifies the procedures for 
determining the share of health insurance premiums that the 
federal government pays on behalf of its employees and 
retirees. The FEHB program provides health insurance coverage 
for 4 million workers and annuitants, as well as their 4.6 
million dependents and survivors. The payments on behalf of 
annuitants are considered direct spending and payments for 
employees are funded out of annul appropriations for the 
agencies that employ them. In 1997, the FEHB costs for 
annuitants are estimated to be $3.9 billion.
    The current formula used to calculate the federal share of 
premiums is based on the costs of five plans currently in the 
FEHB package and a ``phantom'' plan that acts as a placeholder 
for a former plan. The dollar amount of the maximum federal 
contribution is computed as 60 percent of the average costs of 
these six plans. However, in no plan can the federal 
contribution exceed 75 percent of the premium. The law 
establishing the current formula expires in 1999.
    The committee's recommendations would change the dollar 
limit on the federal contribution to 72 percent of the weighted 
average of the premiums of all plans to which federal workers 
and annuitants subscribe. CBO estimates the new formula would 
establish a maximum contribution that would be very slightly 
lower than under the current formula. CBO estimates that the 
direct spending savings from the provisions would amount to 
less than $10 million annually through 2002.
    Postal Service Transitional Payments. Under current law, 
the United States Postal Service (USPS) receives a mandatory 
appropriation for compensation to individuals who sustained 
injuries while employed by the former Post Office Department. 
This legislation would terminate this annual payment, effective 
October 1, 1997.
    CBO estimates that enacting this legislation would reduce 
on-budget direct spending by $35 million in fiscal year 1998, 
and that annual savings would decline to $31 million by fiscal 
year 2002. The USPS would have to continue to pay the costs 
that have been covered by the appropriation out of its own 
revenues. Thus, this legislation would cost the USPS, and off-
budget agency, $35 million in fiscal year 1998. Consistent with 
CBO's projections, we expect that the USPS would recover the 
additional cost of the transitional expenses by raising postal 
rates, which we assume will occur January 1, 1999. The net 
budgetary impact, combining on-budget and off-budget effects, 
would be zero for fiscal year 1998, savings of $25 million in 
1999, and savings averaging $32 million annually for fiscal 
years 2000 through 2002.
            Subtitle B--GSA Property Sales
    Sale of Governors Island, New York. Section 6011 would 
direct the General Services Administration (GSA) to sell at 
fair market value all federal land and property located on 
Governors Island in New York Harbor. The bill would grant new 
York City and New York State a right of first offer to purchase 
all or part of the island. Proceeds from the sale would be 
deposited in the general fund of the U.S. Treasury as 
miscellaneous receipts. Based on information obtained from 
local agencies, GSA, and others, CBO estimates that selling the 
172-acre island would generate offsetting receipts of about 
$500 million. Because the bill would prohibit the sale of this 
property before fiscal year 2002, we estimate that the $500 
million would be deposited into the Treasury in that year. We 
estimate that until thenthe federal government would spend 
about $10 million annually to maintain the island, assuming 
appropriation of the necessary amounts. Such costs would be incurred 
under current law in 1998, but the costs for continued maintenance 
after 1998 are not likely to occur in the absence of this legislation.
    Until recently, Governors Island was used by the U.S. Coast 
Guard as a major command center. That agency is in the process 
of closing the facility. Current plans call for relocation and 
certain restoration activities to be completed by the end of 
1998. Disposition of the site under existing law is uncertain 
and could include transfers to other federal agencies, 
conveyances at no cost to nonfederal agencies for public 
benefit uses, donations to nonprofit groups for homeless 
shelters, or sale. (Disposal of the island may not be possible 
without Congressional approval). In any event, CBO believes 
that the federal government would realize little or no money 
from disposal of the island in the absence of legislation. 
Enacting section 6011 would ensure that the island would be 
sold rather than given away or retained by the federal 
government.
    The value of Governors Island cannot be determined 
precisely in the absence of formal appraisals, which have not 
yet been conducted. Based on available information, we estimate 
that sale of this asset would generate about $500 million. The 
proceeds would depend on whether disposal would occur in one 
transaction or as a combination of partial sales and on a 
variety of other factors, including future economic conditions 
and local zoning decisions. Thus, the government could receive 
considerably less than $500 million or as such as $1 billion. 
Moreover, conditions that might be imposed on the sale by 
federal agencies could delay or prevent any sale from taking 
place, as could expectations of restrictive zoning 
requirements.
    Finally, until the island is sold, GSA and the Coast Guard 
would have to maintain the property and provide for security, 
transportation,and utilities. Based on information provided by 
the affected agencies and assuming appropriation of the 
necessary amounts, we estimate that costs for these purposes 
would total about $10 million annually, beginning in 1999.
    Union Station Air Rights. Section 6012 would compel Amtrak 
to convey the air rights that it owns behind the District of 
Columbia's Union Station to the Administrator of the General 
Services administration. The Administrator would then be 
required to sell these air rights and other air rights that the 
federal government owns behind Union Station.
    CBO estimates that selling the 16.5 acres of rights would 
yield $40 million in asset sale receipts in fiscal year 2002. 
This estimate assumes that Amtrak would convey its air rights 
to the federal government so they can be sold. If Amtrak does 
not convey the air rights on or before December 31, 1997, the 
bill would prohibit Amtrak from obligating any of its federal 
grant money after March 1, 1998.
    Estimated impact on State, local, and tribal governments: 
Title VI contains no intergovernmental mandates as defined in 
UMRA and would impose no costs on state, local, or tribal 
governments.
    The bill provides the city and state of New York the right 
of first refusal in the purchase of Governors Island. Should 
either entity, or the two in partnership, choose to acquire the 
property in whole, CBO estimates that it would cost them 
approximately $500 million.
    Estimated impact on the private sector: Title VI would 
impose a new private-sector mandate as defined in UMRA by 
increasing the contributions required of federal employees to 
the civilian retirement systems. Contributions to the civilian 
retirement systems, which are compulsory withholdings made by 
the government, are equivalent to a tax on the wages of federal 
employees and are classified as a revenue in the federal 
budget. Therefore, the increase in required contributions 
constitutes a new enforceable duty and represents a private-
sector mandate under UMRA. CBO estimates that the direct costs 
of the new private-sector mandate in Subtitle A would be $1.9 
billion form January 1999 until January 2003, at which time 
contribution rates would return to their current level. The 
following table shows the direct costs of increasing mandatory 
retirement contributions by federal employees.

                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                     1998     1999     2000     2001     2002     2003    Total 
----------------------------------------------------------------------------------------------------------------
Direct costs of increasing employee contributions                                                               
 to CSRS, FERS, FSRDS and FSPS...................        0      208      413      551      598      153    1,923
----------------------------------------------------------------------------------------------------------------

    Estimate prepared by--Federal Cost: Civilian Retirement--
Paul Cullinan; Federal Employees Health Benefits--Jeffrey 
Lemieux; Governors Island--Deborah Reis; Union Station Air 
Rights--Clare Doherty. Impact on State, Local, and Tribal 
Government: Theresa Gullo, Impact on the Private Sector: 
Matthew Eyles.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                          ESTIMATED BUDGETARY EFFECTS OF RECOMMENDATIONS OF SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS, 1998-2007                         
                                                         [By fiscal year in millions of dollars]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                  1998      1999      2000      2001      2002      2003      2004      2005      2006      2007    1998-2002  1998-2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     DIRECT SPENDING                                                                    
                                                                                                                                                        
Increase Agency Contributions                                                                                                                           
 to CSRS and FSRDS by 1.51                                                                                                                              
 percent in October 1997 and                                                                                                                            
 an additional 0.09 percent in                                                                                                                          
 October 2002 \1\.............      -597      -580      -563      -548      -565         0         0         0         0         0      -2853      -2853
Government Contributions under                                                                                                                          
 FEHB.........................         0        -5        -7        -7        -8        -9        -9       -10       -11       -12        -28        -78
                               =========================================================================================================================
Repeal of Transitional                                                                                                                                  
 Appropriation for the U.S.                                                                                                                             
 Postal Service:                                                                                                                                        
    On-budget.................       -35       -34       -33       -32       -31       -30       -29       -28       -27       -26       -165       -305
    Off-budget................        35         9         0         0         0         0         0         0         0         0         44         44
                               -------------------------------------------------------------------------------------------------------------------------
      Total budget............         0       -25       -33       -32       -31       -30       -29       -28       -27       -26       -121       -261
                               =========================================================================================================================
Direct Spending Total:                                                                                                                                  
    On-budget.................      -632      -619      -603      -587      -604       -39       -38       -38       -38       -38      -3045      -3236
    Off-budget................        35         9         0         0         0         0         0         0         0         0         44         44
                               -------------------------------------------------------------------------------------------------------------------------
      Total budget............      -597      -610      -603      -587      -604       -39       -38       -38       -38       -38      -3001      -3192
                               =========================================================================================================================
                                                                                                                                                        
                                                                     ASSET SALES \2\                                                                    
                                                                                                                                                        
Sale of Governors Island......         0         0         0         0      -500         0         0         0         0         0       -500       -500
Sale of Air Rights at Union                                                                                                                             
 Station......................         0         0         0         0       -40         0         0         0         0         0        -40        -40
                                                                                                                                                        
                                                                        REVENUES                                                                        
                                                                                                                                                        
Increase Employee                                                                                                                                       
 Contributions to CSRS and                                                                                                                              
 FERS by 0.25 percent in                                                                                                                                
 January 1999, an additional                                                                                                                            
 0.15 percent in January 2000,                                                                                                                          
 another 0.1 percent in                                                                                                                                 
 January 2001 \3\.............  ........       208       413       551       598       153         0         0         0         0       1770       1923
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimates for this policy in the Bipartisan Budget Agreement were CBO's reestimates of the 1.51 percent increase under the President's FY98 Budget  
  assumptions for pay raises, and totalled $2.933 billion over five years. The savings were $597 million in 1998, $591 million in 1999, $586 million in 
  2000, $582 million in 2001, and $577 million in 2002.                                                                                                 
\2\ Based on criteria established in the 1998 budget resolution, CBO has determined that proceeds from the asset sales in this title should be counted  
  in the budget totals for the purposes of Congressional scoring. Under the Balanced Budget Act, however, proceeds from asset sales are not counted in  
  determining compliance with the discretionary spending limits or the pay-as-you-go requirement.                                                       
\3\ Estinates for this policy in the Bipartisan Budget Agreement were those presented in the President's 1998 Budget. Those estimates indicated         
  additional revenues of $1,829 billion over the five-year period, with $214 million in 1999, $423 million in 2000, $571 million in 2001, and $621      
  million in 2002.                                                                                                                                      
                                                                                                                                                        
Note. Components may not add to totals because of rounding.                                                                                             

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                        Reconciliation--Title VI

                          purpose and summary

    To comply with the instructions of the conference agreement 
on the concurrent budget resolution (H. Con. Res. 84), which 
instructs the Committee on Governmental Affairs to report 
changes in law within its jurisdiction that provide savings in 
direct spending and revenues totaling $5.456 billion over the 
five-year period, FY 1998 to FY 2002, the committee makes the 
following legislative recommendations:
          (1) Increase Civil Service Retirement System (CSRS) 
        Agency Contributions by 1.51 percent beginning October 
        1997 through September 2001, and 1.6 percent in FY 
        2002.
          (2) Increase Employee Contributions to CSRS and the 
        Federal Employees Retirement System (FERS) by 0.25 
        percent in January 1999, and additional 0.15 percent in 
        January 2000, and another 0.10 percent in January 2001, 
        with the cumulative .5 percent retained for 2002.
          (3) Reform the formula for computation of the 
        government's share of Federal Employees Health Benefit 
        Program (FEHBP).
          (4) Repeal of Transitional Appropriation for the U.S. 
        Postal Service for workers compensation.
          (5) Asset Sales to include: (a) Governors Island, New 
        York, and (b) Air Rights at Union Station, Washington, 
        D.C.

                       section-by-section summary

            Subtitle A--Civil Service and Postal Provisions

Section 6001. Increased contributions to Federal civilian retirement 
        systems
    (1) All Federal agencies, except for the United States 
Postal Service, would be required to increase their payment to 
the Civil Service Retirement and Disability Fund for each 
individual employee enrolled in the Civil Service Retirement 
System (CSRS). For the first four fiscal years, 1998 through 
2001, contributions are increased by 1.51 percent each year 
above the percentage an agency is now contributing. For the 
fiscal year 2002, the contribution is increased to 1.6 percent 
in order to meet the specific direct spending target for the 
year 2002. However, if it is determined that the CBO scoring 
for this policy change will be based on the assumption of the 
President's pay raises in future years, the committee 
recommends that the contribution rate remain at 1.51 percent 
for 2002.
    The 1.51 percent increase in employer contributions does 
not apply to the United States Postal Service which currently 
contributes the full actuarial cost of each employee's 
retirement under CSRS.
    There is no increase in the agency contribution for the 
Federal Employees Retirement System (FERS) because that plan is 
actuarially fully funded.
    (2) The legislation further requires increased individual 
employee contributions. The increase in employee contributions 
to CSRS will apply to all employees participating in that 
system including Members of Congress, congressional employees, 
law enforcement officers, firefighters, Capital Police, 
bankruptcy judges, judges for the U.S. Court of Appeals for the 
Armed Forces, U.S. magistrates, Claims Courts judges, and 
employees of the United States Postal Service. The increased 
contribution shall also apply to individuals participating in 
the Central Intelligence Agency or Foreign Service retirement 
systems.
    The amount deducted from basic pay for an individual 
participating in CSRS will be increased above the level in 
effect on the date of enactment by .25 percent in 1999, by an 
additional .15 percent in 2000, and by an additional .10 
percent in 2001. The increase will then remain constant at .5 
percent through 2002.
    The repayment for any military service between January 1, 
1999, and December 31, 2002, for which an employee or a Member 
of Congress would like to receive retirement credit under CSRS, 
would be at the contribution rate in effect for employees 
during the period for which such credit is provided.
    Likewise, the legislation provides that repayment for any 
covered volunteer service between January 1, 1999, and December 
31, 2002, for which an employee or Member of Congress would 
like to receive retirement credit under CSRS would be at the 
contribution rate in effect for employees during the period for 
which such credit is provided.
    The legislation also requires increased employee 
contributions from all employees participating in the Federal 
Employees Retirement System (FERS), including members of 
Congress, congressional employees, law enforcement officers, 
firefighters, Capital Police, bankruptcy judges, judges for the 
U.S. Court of Appeals for the Armed Forces, U.S. magistrates, 
Claims Court judges, and employees of the United States Postal 
Service. The increased contribution shall also apply to 
individuals participating in the Central Intelligence Agency or 
Foreign Service retirement systems. These employees are 
required to increase their contributions to FERS by .25 percent 
in 1999, an additional .15 percent in 2000, and by an 
additional .10 percent in 2001. The increase in the 
contribution over the percentage an employee currently pays 
into the system will then remain at .5 percent through 2002.
    This subsection provides that repayment for any military 
service between January 1, 1999, and December 31, 2002, for 
which an employee or Member of Congress would like to receive 
retirement credit under FERS would reflect the increased 
employee contributions resulting in the following repayment 
percentages: calender year 1999, 3.25 percent; calender year 
2000, 3.4 percent; calender years 2001-2002, 3.5 percent.
    In addition, this subsection provides that the repayment 
for any covered volunteer service between January 1, 1999 and 
December 31, 2002 for which an employee or Member of Congress 
would like to receive retirement credit under FERS would 
reflect the increased employee contributions resulting in the 
following repayment percentages: calender year 1999, 3.25 
percent; calender year 2000, 3.4 percent; calender years 2001-
2002, 3.5 percent.
    This subsection also prohibits agencies from reducing their 
contribution to FERS for each individual employee by a 
percentage equal to any percentage increase in individual 
employee contributions. Under current law, agency contributions 
would automatically decrease with any increase in employee 
contributions. The section prohibits the Postal Service and all 
other Federal agencies from reducing their contributions to 
FERS.
    The effective date for the increased contributions for 
employees and agencies is the first day of the first pay period 
beginning on or after January 1, 1999.

Section 6002. Government contributions under the Federal Employees 
        Health Benefits Program

    The Federal Employee Health Benefit Program (FEHBP) ``Fair 
Share'' formula language contained in the Committee's 
reconciliation language serves as a replacement for the 
outdated ``Big Six'' Phantom formula, set to expire in 1999. 
Rather than extending the Phantom formula for a third time, the 
Committee, assisted by the Office of Personnel and Management 
(OPM), devised a new weighted average formula that maintains 
the current government share of approximately 72 percent of the 
premium (with the enrollee paying the remainder).
    The Fair Share formula is based upon a determination of the 
average of the subscription charges in effect on the beginning 
date of each contract year with respect to Self Only and Family 
enrollments (including Postal Service enrollees). This is done 
by weighting the premiums of each currently participating and 
continuing plan by the actual distribution of enrollees by plan 
and option as reflected in the most recent semi-annual 
enrollment report that has been produced by OPM.
    After the average Self Only and Family premiums have been 
determined, each is multiplied by 72 percent to set the maximum 
dollar government contribution. The formulation continues the 
75 percent limitation on the actual government contribution to 
any specific plan. That limit preserves the cost sharing 
principle that has existed in the program since 1974, promoting 
cost-conscious plan selection by assuring that enrollees always 
pay some amount toward the cost of their insurance. The 72 
percent maximum government contribution in combination with the 
75 percent cap results in an average government contribution of 
roughly 71 percent, and is intended to mirror the distribution 
under current law.
    The Fair Share formulation is tied to the reality of the 
FEHBP, not to an artificial index. Because it takes actual 
premiums and enrollee choice into complete account, it will 
always be an accurate reflection of what is occurring within 
the FEHBP. It will not be affected by plan mergers, 
withdrawals, enrollment gains or losses, or the experience of a 
single plan, any of which can significantly affect a 
contribution formula based on a small number of plans. The 
effective date is the first day of the contract year that 
begins in 1999. Use of the Fair Share formula results in a 
budget savings of $28 million, as scored by the Congressional 
Budget Office (CBO).
            Background and Need for Legislation
    Under current law, the government's share of FEHBP premiums 
is determined independently for Family and Self Only coverage. 
By law, the federal contribution is based on a two-part 
formula, generally referred to as the ``Big Six'' formula. The 
first part of the formula limits the government's contribution 
to a flat dollar amount equal to 60 percent of the simple 
average of the premiums for the high-option benefits offered by 
six plans: two government-wide plans, the two largest Health 
Maintenance Organizations (HMOs), and the two largest 
government organization plans. The second part of the formula 
further limits the government's contribution to 75 percent of 
the premium for the plan selected by the enrollee. Thus, 
enrollees pay at least 25 percent of the total premium of the 
plan in which they enroll.
    Until 1990, the two government-wide high-option plans were 
Blue Cross/Blue Shield and Aetna. However, in 1990, Aetna 
dropped out of the FEHBP altogether. In order to prevent 
Aetna's withdrawal from causing premiums to be based on 60 
percent of the simple average of the premiums in the remaining 
five plans (which would have decreased the government's share 
and increased the enrollees'' share), Congress enacted 
legislation establishing a ``proxy'' plan (sometimes referred 
to as the ``phantom'' plan) with a premium calculated as if the 
Aetna high-option plan were still part of the program. This 
phantom plan was originally authorized through 1993, but in 
that year Congress extended it through 1998, with a one percent 
reduction in the proxy plan premium in 1997 and 1998.
    If current law is allowed to expire and a Big Five, simple 
average formula becomes the ``default'' formula in 1999, the 
government's costs would decrease and enrollee costs would 
increase. That is, costs would be shifted from the federal 
government to employees and retirees. The Office of Management 
and Budget (OMB) estimates that the reduction in the 
government's costs would be roughly $1 billion in calendar year 
1999. Currently, on average, the government pays 71 percent of 
total premium costs. Under a Big Five simple average formula, 
the government's share would be about 67 percent, on average.
    The Committee believes it is necessary to establish in law 
a new formula--specifically, the Fair Share formula--designed 
not only to modernize the current formula, but to avoid the 
large reduction in the government contribution, and the 
attendant increase in cost to the enrollee, which will occur in 
1999 if current law is allowed to expire.

Section 6003. Repeal of authorization of transitional appropriations 
        for the United States Postal Service

    This section of the legislation repeals the permanent 
authorization of transitional appropriations for the United 
States Postal Service workers'' compensation. Under the 1970 
Postal Reorganization Act, Post Office Department employees who 
were already receiving workers compensation payments remained 
the responsibility of the federal government. The United States 
Postal Service would instead be required to assume payment 
without federal reimbursement. The five-year cost savings is 
$165 million.

                     Subtitle B--GSA Property Sales

Section 6011. Sale of Governors Island, New York

    This section requires the Administrator of the General 
Services Administration to sell Governors Island, New York, at 
fair market value. The sale is scheduled to occur in the year 
2002. The State of New York and the City of New York are given 
the right of first offer to purchase all or part of the 
property. The proceeds of the sale will be deposited in the 
general fund of the U.S. Treasury and credited as miscellaneous 
receipts.
    Governors Island is located in New York City harbor, south 
of Manhattan and west of Brooklyn. It houses the largest Coast 
Guard facility in the world, Support Center New York, which 
provides support for commands stationed on the island. The 172-
acre island is surrounded by a seawall and is reached by ferry 
from Manhattan.

Section 6012. Sale of air rights

    The Administrator of General Services is authorized and 
directed to sell, before the end of fiscal year 2002, at fair 
market value, the air rights north of Union Station, 
Washington, DC. There are approximately 16.3 acres of air 
rights, or air space above train tracks that could be developed 
into commercial property, with parking. In 1992 these air 
rights were valued by an appraisal performed for GSA at 
$50,000,000. This figure is net of any cost to build a 
platform, or lid, which is necessary to support the development 
of a building.
    These air rights are bounded on the south by Union Station, 
on the east by the CSX property and Second St. NE., on the 
north by K St. NE. and on the west by 1st St. NE. The H St. NE. 
overpass cuts through the air rights, running east-west. These 
air rights are currently owned by the Department of 
Transportation, and AMTRAK. AMTRAK is required to transfer, at 
no cost, its air rights, estimated to be approximately 10.6 
acres, to the Department of Transportation. The Administrator 
of General Services would then sell the air rights in a manner 
to be determined.


                            ADDITIONAL VIEWS

    The Democratic members of the State Labor and Human 
Resources Committee unanimously opposed that part of Section 
7103 of the Chairman's mark that mandates the payment of an 
Administrative Cost Allowance to guaranty agencies. The 
majority's proposal changes current law by transforming a 
discretionary payment of an Administrative Cost Allowance (ACA) 
to guarantly agencies into a coporate entitlement. This issue 
was specifically discussed during the negotiations that 
resulted in the budget agreement, and was rejected.
    The Democratic members view the inclusion of this section 
as an unnecessary corporate entitlement and as contrary to the 
budget deal. Money for an Administrative Cost Allowance has 
been appropriated and has been paid to guaranty agencies by the 
Department of Education, rendering this language unnecessary. 
Senator Dodd proposed an amendment to strike that section of 
the majority's proposal, which was defeated by a vote of 10 to 
8, along party lines.
    The majority's discussion of guaranty agency budgets should 
not be understood as reflecting Congress's rationale for the 
payments. The payments have not been based on a thorough 
analysis by the Committee of guaranty agencies' needs, 
functions, past use of funds, future use of funds, or other 
sources of funds.
    The majority's determination to create a corporate 
entitlement contrasted with the Democrats' desire to reduce 
costs for student. Senator Kennedy introduced an amendment that 
would have reduce the origination fees on student loans by 2%. 
This amendment was fully paid for by reducing the federal 
insurance rates paid on defaults and by reducing the retention 
allowance for guaranty agencies. Proposals to reduce certain 
insurance rates and retention allowances were included in the 
Republicans' reconciliation proposal of 1995. Senator Kennedy's 
amendment was defeated along party lines, by a vote of 10 to 8. 
To accommodate the majority's desire to mandate the payment of 
the ACA, Senator Kennedy then proposed to modify his amendment 
by including the payment of the ACA while still providing these 
immediate benefits for students. This was also defeated along 
party lines, by a vote of 10 to 8.
    The majority opposed these changes by stating that the 
structure of the guaranty agencies would be reconsidered during 
the upcoming reauthorization of the Higher Education Act. The 
Chairman also stated that payment of the ACA would be 
reconsidered during the reauthorization process. Even so, 
amendment offered by Senator Harkin that would have limited the 
provision regarding ACA to one year--the expected time for the 
reauthorization--was defeated, again along strict party lines. 
The Committee did unanimously accept Senator Harkin's amendment 
to restrict the use of interest on the restricted accounts from 
the guaranty agency reserves to activities to prevent student 
defaults.
    The Democratic members were reassured by the Chairman's 
statement that all payments to guaranty agencies would be 
reviewed during the reauthorization of the Higher Education 
Act. In light of this assurance and in the spirit of the 
bapartisan budget agreement, the majority of the Democrats 
voted for final passage of the Chairman's mark, by a margin of 
7-1.


               congressional budget office cost estimate

Reconciliation Recommendations of the Senate Committee on Labor and 
        Human Resources (Title VII)

    Summary: Title VII of the reconciliation bill would make 
three changes in the federal administrative costs and federal 
cash management of the student loan programs, which under 
current law are expected to guarantee or issue about 40 million 
new loans totaling $160 billion over the next five years. The 
revisions to the program would leave program eligibility and 
loan capital financing unchanged. In combination, the proposed 
changes would lower program costs by $239 million in 1998 and 
$1.8 billion over the 1998-2002 period.
    This title contains no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act of 1995 (UMRA). 
Public institutions of higher education could lose federal 
subsidies totaling up to $20 million in fiscal year 1998 and 
$155 million over the 1998-2002 period. This title contains no 
private-sector mandates as defined in UMRA.
    Estimated cost to the Federal Government: CBO estimates the 
committee's proposals would reduce federal outlays by $239 
million in 1998, $1.1 billion in 2002, and $1.8 billion over 
the 1998-2002 period. The estimated budgetary impact of these 
proposals over the 1998-2002 period is shown in the following 
table. The appendix table shows the budgetary effects through 
2007.
    The budgetary impact of Title VII falls within budget 
function 500 (education, training, employment, and social 
services).

   ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON LABOR AND HUMAN  
                                                    RESOURCES                                                   
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                             1997     1998     1999     2000     2001     2002  
----------------------------------------------------------------------------------------------------------------
Spending current law:                                                                                           
    Budget authority.....................................    1,009    3,911    3,567    3,367    3,418     3,533
    Estimated outlays....................................      578    3,378    3,325    3,162    3,138     3,223
Proposed changes: Section 7001--guaranty agency reserves:                                                       
    Budget authority.....................................  .......  .......  .......  .......  .......    -1,028
    Estimated outlays....................................  .......  .......  .......  .......  .......    -1,028
Section 7002--direct loan processing fee:                                                                       
    Budget authority.....................................  .......      -35      -35      -40      -40       -45
    Estimated outlays....................................  .......      -20      -30      -35      -35       -40
Section 7003--section 458 funds:                                                                                
    Budget authority.....................................  .......     -421     -140      -45        0         0
    Estimated outlays....................................  .......     -219     -203     -120      -50       -12
      Subtotal, proposed changes:                                                                               
    Budget authority.....................................  .......     -456     -175      -85      -40    -1,073
    Estimated outlays....................................  .......     -239     -233     -155      -85    -1,080
Spending under reconciliation recommendations:                                                                  
    Budget authority.....................................    1,009    3,455    3,392    3,282    3,378     2,460
    Estimated outlays....................................      578    3,139    3,092    3,007    3,053     2,143
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: Management and Recovery of Reserves. 
Section 7001 of this bill would require that the 36 guaranty 
agencies currently participating in the guaranteed student loan 
program return $1.028 billion of their cash reserve funds to 
the federal government in 2002. The net cash reserves held by 
guaranty agencies have been growing in recent years due to 
recent changes in law that expanded borrowing levels and 
resulted in increased premium collections and lower default 
claims. As of September 1996, these agencies had combined net 
cash reserves of just over $2 billion. The amount to be 
recalled exceeds the amount needed by these agencies to operate 
over the next five years. The bill would recall more of the 
funds from agencies with proportionately larger cash reserves. 
The CBO estimate assumes that the agencies would continue to 
receive insurance premiums, reinsurance payments, and federal 
administrative cost allowances, which are all provided for 
under current law. If these revenues were to be diminished, CBO 
would reassess the likelihood that the recall target could be 
attained.
    Repeal of Direct Loan Origination Fees to Institutions of 
Higher Education. Section 7002 would eliminate the separate per 
loan federal subsidy to schools or alternate originators to 
process applications for direct student loans. Direct payments 
to schools have been prohibited in the last two appropriations 
bills, allowing payment only to alternate originators. 
Eliminating these mandated payments would save $20 million in 
1998 and $160 million over the 1998-2002 period. The proposal 
would not prevent the Secretary of Education from using funds 
available under the capped administrative entitlement fund 
(Section 458 moneys) to pay either schools or alternate 
originators to process the applications for direct student 
loans.
    Funds for Administrative Expenses. The Department of 
Education's Section 458 capped administrative entitlement fund 
would be reduced by $604 million over the five-year period to a 
new five-hear total of $3.1 billion. Section 7003 would set new 
annual limits for this fund at $532 million in 1998, $610 
million in 1999, $705 million in 2000, and $750 million in 2001 
and 2002. The current five-year cumulative ceiling would be 
eliminated, and funds would be available for obligation until 
expended.
    Estimated impact on State, local, and tribal governments: 
This title contains no intergovernmental mandates as defined in 
UMRA. Enactment of this title would eliminate the requirement 
that the federal government help cover the cost of originating 
direct student loans. CBO estimates that public institutions of 
higher education could lose federal subsidies totaling up to 
$20 million in fiscal year 1998 and $115 million over the 1998-
2002 period.
    Estimated impact on the private sector: Enactment of Title 
VII would impose no private-sector mandates as defined under 
UMRA.
    Estimate prepared by: Federal Cost: Deborah Kalcevic, 
Impact on State, Local, and Tribal Governments: Marc Nicole, 
Impact on Private Sector: Bruce Vavrichek.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

      APPENDIX TABLE: ESTIMATED BUDGETARY EFFECTS OF TITLE VII; RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON LABOR AND HUMAN RESOURCES     
                                                        [In millions of dollars, by fiscal year]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               1998-2007
                                                            1998     1999     2000    2001     2002     2003    2004    2005    2006    2007      Total 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CHANGES IN DIRECT SPENDING                                                               
Student loans:                                                                                                                                          
    Estimated budget authority..........................     -456     -175      -85     -40    -1,073     -45     -50     -50     -55     -55     -2,084
    Estimated outlays...................................     -239     -233     -155     -85    -1,080     -42     -45     -45     -50     -50     -2,024
--------------------------------------------------------------------------------------------------------------------------------------------------------

 Budget Reconciliation Bill Provisions Affecting Federal Student Loan 
Programs as Passed by the Committee on Labor and Human Resources--June 
                                11, 1997

  (Assumes Enactment Prior to October 1, 1997 and Assumes All Changes 
                       Effective Upon Enactment)

            SAVINGS OVER 5 YEARS (1998-2002)=$1.792 BILLION

    The budget agreement approved by the Senate reflects the 
strong bipartisan support for education. The agreement provides 
for $35 billion in education related tax provisions, and 
assumes increased Federal support for Special Education, Head 
Start, and funding for literacy programs. The budget agreement 
supports providing an additional $7.6 billion for Pell Grants 
allowing the maximum grant to grow from $2,700 to $3,000.
    In addition, the subsidy for student loans is assumed to 
grow from $3.9 billion in 1998 to $4.1 billion in 2002. This 
will support growth in Federal student loan volume from $28.8 
billion in 1998 to $35.8 billion in 2002.

Summary of submission

    The Senate Budget Resolution requires $1.792 billion in 
savings over five years from mandatory spending under the 
jurisdiction of the Committee on Labor and Human Resources. The 
savings required by the agreement and submitted by the 
Committee will not increase costs, reduce benefits, or limit 
access to loans for students and their families. In accordance 
with the budget agreement, this proposal attempts to maintain 
an equitable balance in the savings that are taken from the 
Federal Family Education Loan Program (FFEL) and the federal 
direct lending program (FDLP).
    The budget submission approved by the Committee on Labor 
and Human Resources was approved by a vote of 17-1. It achieves 
the required savings by recalling $1.028 billion in excess 
guaranty agency reserves, eliminating the $10 direct loan 
origination fee and reducing the Department of Education's 
entitlement for the administration of the federal student loan 
programs by $604 million.

     Section-By-Section Analysis of Labor Committee Reconciliation 
                               Submission

Section 7001: Management and recovery of guaranty agency reserves

            Equitable shares
    The Committee's proposal requires that the guaranty 
agencies return $1.028 billion of their current excess cash 
reserves to the Federal Treasury in Fiscal Year 2002. The 
Secretary shall require each guaranty agency to return excess 
reserve funds based on each agency's equitable share. This 
share will be calculated based upon the excess reserve funds 
held by the agency as of September 30, 1996. For the purposes 
of determining each agency's equitable share, the calculation 
of the reserve ratio will include transfers of the liabilities 
to each agency of the outstanding loans from the merged 
agencies as well as transfers of the reserves from the merged 
agencies. The Secretary will then calculate the equitable 
shares by requiring each agency with a reserve ratio in excess 
of 1.12% to return reserves above 1.12%. In addition, each 
agency will also return an equal percentage of their remaining 
reserves until the total reserve return of $1.028 billion is 
achieved.
    The formula used to determine an agency's equitable share 
is designed to avoid jeopardizing the viability of those 
agencies with fewer excess cash reserves. The failure to 
maintain a well functioning program would result in students' 
experiencing disruption or difficulty in obtaining federal 
student loans.
            Restricted accounts
    Each agency shall establish a restricted account of its own 
choosing with approval from the Secretary. Each agency shall, 
consistent with current law, invest the reserves placed within 
the restricted accounts in obligations issued or guaranteed by 
the United States or in other similarly low-risk securities.
    An amendment offered by Senator Harkin and adopted by the 
Committee during markup limits guaranty agency use of interest 
earnings from these accounts to activities to reduce student 
loan defaults.
            Orderly recall
    This section establishes a timetable for the orderly recall 
of the $1.028 billion in excess guaranty agency reserves over 
the next five years. In each of the five years covered under 
this agreement, 20% of the total amount recalled shall be 
placed in the restricted accounts. In FY 1998, each agency with 
cash reserves in excess of 2% will contribute the amount in 
excess of 2% to its restricted account. The Secretary of 
Education will, in addition, require each agency to contribute 
an equal proportion of its equitable share to the restricted 
accounts until 20% of the $1.028 billion to be recalled under 
this section has been transferred into the restricted accounts. 
In each of fiscal years1999-2002, each agency shall transfer 
one-fourth of the total amount remaining of its equitable share into 
its restricted account. If, on September 1, 2002, the total amount 
contained within the restricted accounts is less than $1.028 billion, 
the Secretary shall require the return of the amount of the shortage 
from other reserve funds held by guaranty agencies.
    The formula provided in the Committee's budget submission 
upholds the Committee's commitment to require guaranty agencies 
to annually deposit into a restricted account 20% of the $1.028 
billion in excess cash reserves. However, the formula is 
designed to specifically address the concern that a uniform 
annual recall of 20% of the excess reserves from each 
individual agency may be too drastic a reduction for certain 
agencies to withstand. An across-the-board recall of 20% of 
excess reserves could risk placing certain agencies in 
questionable financial standing which could disrupt student 
access to federal loans through the FFEL program.
            Limitations on recall authority
    In order to ensure that sufficient reserve funds will be 
available to fulfill the purposes of this section, restrictions 
have been placed on the Secretary's recall authority during the 
five year period covered by the budget agreement. The Secretary 
may not recall additional excess reserves under 422 (g)(1)(A) 
of the Higher Education Act and any other reserve funds 
returned under other authorities within subsection (g)(1) shall 
be transferred to the restricted accounts and applied toward 
the amount recalled in the Section 7001.
            Minimum reserve ratio
    From 1994-1996 the minimum reserve level which each 
guaranty agency was required to maintain increased from .5% to 
1.1%. The minimum reserve level that must be maintained by each 
guaranty agency is returned to .5%.

Section 7002: Elimination of the direct lending loan origination 
        payment

    The authority to make the Federal payment of $10 per loan 
to schools and/or alternative originators that make direct 
loans is repealed. This repeal extends for five years a 
provision currently contained within the FY 1997 Labor, HHS, 
Education and Related Agencies Appropriations Bill and will 
provide savings of $160 million over five years.

Section 7003. Reductions in section 458 expenditures

    The bipartisan budget agreement preserves a commitment to 
maintaining two viable student loan programs and calls upon the 
Committee on Labor and Human Resources to ``achieve an 
equitable balance of savings between the direct student loan 
program and the guaranteed student loan program.'' In order to 
preserve this balance, $604 million in savings are required 
from the Department of Education's entitlement account to 
administer the federal direct lending program. The Department 
will continue to receive $3.2 billion in this account over the 
next five years.
    Section 458 of the Higher Education Act provides funds to 
the Secretary of Education for the administration of the direct 
lending and FFEL programs as well as the administrative cost 
allowance paid to guaranty agencies. Amendments to the Higher 
Education Act enacted in 1993 provided mandatory spending 
authority of $750 million for this account in FY 1998. The 
current funding baseline for this account provides over $3.9 
billion over the next five years. This level of funding is not 
needed in view of the current and projected volume for the 
direct lending program, which is lower than initially 
estimated. Accordingly, the Labor and Human Resources Committee 
proposal reduces authority for direct lending administration 
expenditures in Section 458.
    In accordance with current law, the payment of 
administrative costs allowances to guaranty agencies are to be 
provided by the Department of Education from funds available in 
Section 458. In order to ensure that the savings required under 
Section 7003 are not redirected by the Department of Education 
to the FFEL program, and to ensure that the ``equitable balance 
in savings'' is maintained between the two programs, the 
Committee has included a provision limiting ACA payments to .85 
basis points and capping these expenditures to ensure the 
timely continued payment of the administrative cost allowance 
to guaranty agencies.
    The allegation has been raised by the Administration that 
the ACA payments constitute a new and unnecessary corporate 
entitlement. This allegation is not true. Section 428(f) of the 
Higher Education Act provided for the payment of ACA for any 
fiscal year prior to 1994 on the basis of 1% of every new loan 
insured by a guaranty agency during the fiscal year. In the 
1993 Budget Reconciliation Act, the payment of ACA was 
incorporated into section 458 of the Higher Education Act. 
Conference report language accompanying the reconciliation act 
(P.L. 103-66) directed the Department to pay ``on a timely 
basis . . . an amount equivalent to that . . . received under 
the administrative cost allowance provision . . . And that the 
payment will come from the administrative funds provided under 
section 458''. In 1994 and 1995 the Department of Education 
paid the guaranty agencies an annual fee equal to 1% of the new 
loans insured by the agencies in that year. P.L. 104-134, 
providing FY 1996 appropriations, and P.L. 104-208, providing 
FY 1997 appropriations, reduced the ACA payment to .85% and 
capped these expenditures at $170 million in FY96 and $150 
million in FY97. The CBO cost estimate which accompanies this 
report assumes that guaranty agencies will continue to receive 
``insurance premiums, reinsurance payments, and federal 
administrative cost allowances, which are all provided for 
under current law. If these revenues were to be diminished, CBO 
would reassess the likelihood that the recall target could be 
attained.''
    Consistent with current appropriations law, the 
administrative cost allowance paid to the guaranty agencies out 
of this account will be reduced to .85% of every new loan. In 
order to preserve the balance between the savings drawn from 
the direct lending program and the savings drawn from the FFEL 
program these payments will be capped at $170 million in each 
of Fiscal Years 1998 and 1999. ACA payments will be capped 
atthe current CBO baseline of $150 million in each of Fiscal Years 
2000, 2001, and 2002.
    In the absence of changes to the structure of guaranty 
agencies, the Committee believes current law and procedure for 
the payment of administrative cost allowances to guaranty 
agencies are necessary.
    The guaranteed student loan program (FFEL) serves 80% of 
the institutions of higher education in this country and 
provides over 60% of total student loan volume. In light of the 
importance of this program to students, and the fact that 
nearly one-half of the guaranty agency reserves are being 
recalled, the Committee believes that these ACA payments must 
be stabilized. Failure to stabilize these payments could 
jeopardize the viability of smaller agencies and jeopardize the 
reserve fund recall that is authorized under section 7001.

Section 7004. Extension of student aid programs

    This section provides for a simple extension of three 
provisions of the Higher Education Act dealing with loan 
programs. These extensions are required for Congressional 
Budget Office scoring purposes.


               congressional budget office cost estimate

Reconciliation Recommendations of the Senate Committee on Veterans' 
        Affairs (Title VIII)

    Summary: Title VIII would extend through 2002 provisions of 
the Omnibus Reconciliation Act of 1990 (OBRA) that affect 
programs for veterans, make the authority of the Department of 
Veterans Affairs to spend certain receipts subject to 
appropriations, and round down cost-of-living adjustments 
(COLAs) for veterans' disability compensation. CBO estimates 
the recommendations would reduce direct spending by $247 
million in 1998 and about $3.8 billion over the 1998-2002 
period; they would raise spending subject to appropriations by 
$543 million in 1998 and $3.1 billion over the five-year 
period. The recommendations contain no intergovernmental or 
private-sector mandates as defined in the Unfunded Mandates 
Reform Act of 1995 (UMRA), but they would increase Medicaid 
costs for state governments beginning in fiscal year 1999.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the committee's recommendations over the 
fiscal years 1998 through 2002 is shown in Table 1. The 
projected impact over 10 years is shown in Table 6, which 
appears at the end of this estimate.

Receipts for Medical Care

    The committee's recommendations contain provisions that 
would extend the authority of the Department of Veterans 
Affairs (VA) to collect certain receipts and would replace 
current permanent authority to spend certain receipts with 
authority to spend receipts subject to annual appropriation. 
The combined budgetary effects are shown in Table 2. In total, 
these provisions would reduce direct spending by $1.7 billion 
over the 1998-2002 period, and they would raise spending 
subject to appropriation by $3.1 billion over the five-year 
period.
    Hospital Per Diems and Medical Care Copayments. Section 
8021 would extend through September 30, 2002, VA's authority to 
collect per diem payments for inpatient hospitalizations and 
nursing home care and other copayments for medical services 
provided to certain veterans. Under current law, veterans are 
subject to these copayments if they have no service-connected 
disability or a disability rated as less than 10 percent 
disabling, have high enough income, and are treated for a 
nonservice-connected ailment. Extending these provisions of 
law, which expire on September 30, 1998, would result in 
collections of about $2 million in 1999 and $11 million over 
the 1999-2002 period.

                   TABLE 1.--ESTIMATED BUDGETARY IMPACT OF TITLE VIII, FISCAL YEARS 1998-2002                   
                                    (By fiscal year, in millions of dollars)                                    
----------------------------------------------------------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                                VETERANS PROGRAMS                                               
Spending under current law for veterans                                                                         
 programs\1\:                                                                                                   
    Estimated budget authority................     39,126     41,323     43,484     44,649     45,826     47,043
    Estimated outlays.........................     39,445     41,793     43,378     46,287     43,920     46,971
Proposed changes in direct spending:                                                                            
    Estimated budget authority................          0       -159     -1,111     -1,156     -1,206     -1,259
    Estimated outlays.........................          0       -247     -1,072     -1,198     -1,160     -1,256
Proposed changes in spending, subject to                                                                        
 appropriations:                                                                                                
    Estimated authorization level.............          0        604        615        639        666        694
    Estimated outlays.........................          0        543        608        636        663        691
Spending under Title VIII for veterans                                                                          
 programs:                                                                                                      
    Estimated budget authority................     39,126     41,768     42,988     44,132     45,286     46,478
    Estimated outlays.........................     39,445     42,089     42,914     45,725     43,423     46,406
                                                                                                                
                                                    MEDICAID                                                    
Spending under current law for Medicaid:                                                                        
    Estimated budget authority................     98,599    105,308    113,619    122,861    132,792    143,783
    Estimated outlays.........................     98,599    105,308    113,619    122,861    132,792    143,783
Proposed changes:                                                                                               
    Estimated budget authority................          0          0        282        280        283        292
    Estimated outlays.........................          0          0        282        280        283        292
Spending under Title VIII for Medicaid:                                                                         
    Estimated budget authority................     98,599    105,308    113,901    123,141    133,075    144,075
    Estimated outlays.........................     98,599    105,308    113,901    123,141    133,075    144,075
                                                                                                                
                                    TOTAL PROPOSED CHANGES IN DIRECT SPENDING                                   
                                                                                                                
    Estimated budget authority................          0       -159       -829       -876       -923       -967
    Estimated outlays.........................          0       -247       -790       -918       -877       -964
----------------------------------------------------------------------------------------------------------------
Note: The budgetary impact of the recommendations would fall under budget function 700 (Veterans' affairs) and  
  550 (health).                                                                                                 
\1\ CBO's baseline for budget function 7000 with adjustments for anticipated inflation.                         

    In addition, this section would extend through September 
30, 2002, VA's authority to collect copayments for outpatient 
medications that are prescribed for nonservice-connected 
conditions. The copayment would apply to all veterans, except 
those who have service-connected disability rated at 50 percent 
or more or whose income falls below a certain threshold. CBO 
estimates that these collections would amount to about $36 
million in 1999 and $152 million over the 1999-2002 period.
    Medical Care Cost Recovery. Section 8022 would extend 
through September 30, 2002, VA's authority to collect from 
third-party insurers the cost of treating veterans with a 
service-connected disability for nonservice-connected ailments. 
CBO estimates that collectionswould amount to about $195 
million in 1999 and $829 million over five years, based on VA's recent 
experience and adjustments for anticipated inflation.
    Medical Care Collections Fund. Action 8023 would replace 
VA's permanent authority to spend some of the medical care 
collections with the authority to spend all medical care 
collections subject to annual appropriation. Eliminating VA's 
authority under current law would save about $641 million in 
direct spending over the 1998-2002 period. Authorizing the 
appropriation of all amounts that VA would collect over that 
period would cost about $3.1 billion.
    Income Verification. Section 8014 would allow VA to use 
data from the IRS to verify the incomes of veterans receiving 
benefits from VA, including medical care. Under current law, 
veterans whose income falls below a certain level qualify for 
free medical treatment. Veterans who receive free treatment, 
but are later found to be ineligible through income 
verification, could be charged the standard Medicare deductible 
($760) for the first 90 days of care, and a $10 daily 
copayment. These payments revert to the Treasury as mandatory 
receipts. CBO estimates that VA would collect about $17 million 
in 1999 and $71 million over the 1999-2002 period as a result 
of this extension of its authority to verify incomes.

                 TABLE 2.--BUDGETARY IMPACT OF PROPOSED CHANGES AFFECTING VETERANS MEDICAL CARE                 
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
Net receipts under current law from medical                                                                     
 care:                                                                                                          
    Estimated budget authority................       -466       -485       -242       -252       -262       -273
    Estimated outlays.........................       -466       -485       -242       -252       -262       -273
Proposed changes:                                                                                               
    Estimated budget authority................          0       -118       -373       -387       -404       -422
    Estimated outlays.........................          0       -118       -373       -387       -404       -422
Net receipts under title VIII from medical                                                                      
 care:                                                                                                          
    Estimated budget authority................       -466       -603       -615       -639       -666       -695
    Estimated outlays.........................       -466       -603       -615       -639       -666       -695
                                                                                                                
                                        SPENDING SUBJECT TO APPROPRIATION                                       
                                                                                                                
Spending under current law for medical care:                                                                    
    Estimated authorization level \1\.........     17,013     17,622     18,228     18,856     19,511     20,194
    Estimated outlays.........................     17,005     17,934     18,033     18,618     19,264     19,938
Proposed changes:                                                                                               
    Estimated authorization level.............          0        604        615        639        666        694
    Estimated outlays.........................          0        543        608        636        663        691
Spending under title VIII for medical care:                                                                     
    Estimated authorization level.............     17,013     18,226     18,843     19,495     20,177     20,888
    Estimated outlays.........................     17,005     18,477     18,641     19,254     19,927     20,629
----------------------------------------------------------------------------------------------------------------
\1\ CBO's baseline with adjustments for anticipated infation.                                                   

Housing

    Veterans housing would be affected by four provisions. As 
shown in Table 3, these provisions would reduce direct spending 
by $1.0 billion over the 1998-2002 period.
    Home Loan Fees. Section 8032 would raise the origination 
fee on direct loans and section 8012 would extend through 2002 
two provisions of law pertaining to the veterans home loan 
program that expire on September 30, 1998. VA often acquires 
property when a guaranteed loan goes into foreclosure and 
issues a new direct loan (called a vendee loan) when the 
property is sold. Section 8032 would raise the fee on vendee 
loans, from 1 percent to 2.25 percent of the loan amount, to 
match the premium charged by the Federal Housing 
Administration. CBO estimates that collections would rise by 
about $13 million a year.
    Under one provision that would be extended, VA would charge 
certain veterans a fee of 0.75 percent of the total loan 
amount. CBO estimates this provision would affect about 
$209,000 loans each year and raise collections by about $150 
million a year. Under current law, veterans can reuse their 
home loan guarantee benefit if their previous debt has been 
paid in full. The second provision of this section would 
require VA to collect a fee of 3 percent ofthe total loan 
amount from veterans who reuse this benefit. CBO estimates this fee 
would apply to about 30,000 loans each year and raise collections by 
about $57 million a year.
    Withholding of Payments and Benefits. Section 8033 would 
permit VA to collect certain loan guarantee debts by reducing 
any federal salary or federal income tax return refund due to a 
veteran or surviving spouse. Under current law, before VA could 
use these means, either it would have to obtain the written 
consent of the debtor or the debt would have to be due to a 
court determination. Based on information from VA, CBO 
estimates this provision would raise collections by $90 million 
in 1998 from a stock of loans that originated several years 
ago. There would be no effect after 1998 because this provision 
does not apply to debts from the home loan program as it 
currently operates.
    Liquidation Sales. Section 8013 would extend from 1998 
through 2002 a provision of law that requires VA to consider 
the losses it might incur when selling a property acquired 
through foreclosure. Under current law, VA follows a formula 
defined in statute to decide whether to acquire the property or 
pay off the loan guarantee instead. The formula requires 
appraisals that may be valid at the time they are made, but do 
not account for changes in market conditions that may occur 
while VA prepares to dispose of the property. This provision 
would require VA to take account of losses from changes in 
housing prices that the appraisal does not capture. Losses of 
this type might be prevalent when housing prices are 
particularly volatile or if appraisals were biased for other 
reasons. Since 1978, VA has suffered a resale loss every year 
except 1993 and 1994. Recent losses average about $2,500 per 
home. Assuming this provision applies to approximately 2,000 
homes each year, CBO estimates it would save $5 million a year.
    Enhanced Loan Asset Sales. Section 8011 would extend from 
December 31, 1997, through December 31, 2002, VA's authority to 
guarantee the real estate mortgage conduits (REMICs) that are 
used to market vendee loans. Vendee loans are issued to the 
buyers of properties that VA acquires through foreclosures. VA 
then sells these loans on the secondary mortgage market by 
using REMICs. By guaranteeing the certificates issued on a pool 
of loans, VA obtains a better price but also assumes some risk.
    Because recent history indicates that receipts would 
increase by about 0.3 percent of sales, CBO estimates that this 
provision would save about $5 million a year based on sales of 
$1.6 billion. If this provision were not enacted, VA could 
market vendee loans under other provisions of law. 
Nevertheless, this provision would permit VA to realize a 
better price for a package of vendee loans than if it used a 
REMIC program of the Government National Mortgage Association.

                TABLE 3.--BUDGETARY IMPACT OF PROPOSED CHANGES TO THE VETERANS HOME LOAN PROGRAM                
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Spending under current law for veterans                                                                         
 housing programs:                                                                                              
    Estimated budget authority................       -627        145        296        310        311        308
    Estimated outlays.........................       -695         71        229        252        256        261
Proposed changes:                                                                                               
    Estimated budget authority................          0        -16       -233       -232       -229       -224
    Estimated outlays.........................          0       -106       -233       -232       -229       -224
Spending under title VIII for veterans housing                                                                  
 programs                                                                                                       
    Estimated budget authority................       -627        129         63         78         82         84
    Estimated outlays.........................       -695        -35         -4         20         27         37
----------------------------------------------------------------------------------------------------------------

Pensions

    Veterans pensions would be affected by two provisions. As 
shown in Table 4, these provisions would reduce direct spending 
for veterans' pensions and increase spending for Medicaid, 
resulting in a net spending reduction of $0.7 billion over the 
1999-2002 period.
    Pension Limitation for Medicaid-Eligible Veterans in 
Nursing Homes. Section 8015 would extend from September 30, 
1998, to September 30, 2002, the expiration date on a provision 
of law that sets a $90 per month limit on pensions for any 
veteran without a spouse or child, or for any survivor of a 
veteran, who is receiving Medicaid coverage in a Medicaid-
approved nursing home. It also allows the beneficiary to retain 
the pension instead of having to use it to defray nursing home 
costs.
    Based on VA's experience under current law, this estimate 
assumes that the extension of the expiration date would affect 
approximately 16,000 veterans and 27,000 survivors. According 
to VA, average savings were about $12,000 for veterans and 
$8,000 for survivors in 1996. Higher Medicaid payments to 
nursing homes would offset some of the savings credited to VA. 
New savings would increase from $129 million in 1999 to $174 
million in 2002.
    Income Verification. Current law authorizes VA to acquire 
information on income reported to the Internal Revenue Service 
(IRS) to verify income reported by recipients of VA 
pensionbenefits. This authorization expires on September 30, 1998. 
Section 8014 would extend the expiration date to September 30, 2002. 
This estimate is based on VA's recent experience, which has shown that 
about $4 million in new savings is achieved annually through this 
income match. Savings would grow from $4 million in 1999 to $16 million 
in 2002 as a new cohort of veterans becomes subject to income 
verification each year.

                       TABLE 4.--BUDGETARY IMPACT OF PROPOSED CHANGES TO VETERANS PENSIONS                      
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                VETERANS PENSIONS                                               
Spending under current law, for veterans pensions:                                                              
    Estimated budget authority......................     2,975     2,975     3,427     3,454     3,513     3,608
    Estimated outlays...............................     2,975     2,989     3,399     3,751     3,203     3,604
Proposed changes:                                                                                               
    Estimated budget authority......................         0         0      -452      -454      -463      -483
    Estimated outlays...............................         0         0      -415      -491      -426      -482
Spending under title VIII for veterans pensions:                                                                
    Estimated budget authority......................     2,975     2,975     2,975     3,000     3,050     3,125
    Estimated outlays...............................     2,975     2,989     2,984     3,049     2,777     3,122
                                                                                                                
                                                    MEDICAID                                                    
Spending under current law for Medicaid:                                                                        
    Estimated budget authority......................    98,599   105,308   113,619   122,861   132,792   143,783
    Estimated outlays...............................    98,599   105,308   113,619   122,861   132,792   143,783
Proposed changes:                                                                                               
    Estimated budget authority......................         0         0       282       280       283       292
    Estimated outlays...............................         0         0       282       280       283       292
Spending under title VIII for Medicaid:                                                                         
    Estimated budget authority......................    98,599   105,308   113,901   123,141   133,075   144,075
    Estimated outlays...............................    98,599   105,308   113,901   123,141   133,075   144,075
                                                                                                                
                                    TOTAL PROPOSED CHANGES IN DIRECT SPENDING                                   
                                                                                                                
    Estimated budget authority......................         0         0      -170      -174      -180      -191
    Estimated outlays...............................         0         0      -133      -211      -143      -190
----------------------------------------------------------------------------------------------------------------

Compensation

    The budget resolution baseline assumes that monthly 
payments of disability compensation to veterans and monthly 
payments of dependency and indemnity compensation (DIC) to 
their survivors are increased by the same cost-of-living 
adjustment (COLA) payable to Social Security recipients. The 
results of the adjustments are rounded to the nearest dollar. 
Section 8031 would require VA to round down, to the next lower 
dollar, adjustments to disability compensation and DIC through 
2002. CBO estimated the savings from this provision using the 
current table of monthly benefits and the number of 
beneficiaries assumed in the baseline. As shown in Table 5, 
savings from this section would be about $23 million in 1998, 
growing to $128 million in 2002.
    Estimated impact on State, local, and tribal governments: 
This title contains no intergovernmental mandates as defined in 
UMRA. It would, however, increase Medicaid costs for state 
governments. CBO estimates that states would spend an 
additional $213 million for the Medicaid program in fiscal year 
1999 and an additional $857 million between 1999 and 2002. 
Under UMRA, these costs would not be considered costs of a 
mandate because states have the flexibility to offset them by 
reducing their programmatic or financial responsibilities 
elsewhere in the Medicaid program.

                     TABLE 5.--BUDGETARY IMPACT OF PROPOSED CHANGES TO VETERANS COMPENSATION                    
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
Spending under current law for veterans                                                                         
 compensation:                                                                                                  
    Estimated budget authority................     16,082     16,742     17,366     17,809     18,243     18,680
    Estimated outlays.........................     15,942     16,687     17,314     19,257     16,723     18,643
Proposed changes:                                                                                               
    Estimated budget authority................          0        -25        -53        -83       -110       -130
    Estimated outlays.........................          0        -23        -51        -88       -101       -128
Spending under title VIII for veterans                                                                          
 compensation:                                                                                                  
    Estimated budget authority................     16,082     16,717     17,313     17,726     18,133     18,550
    Estimated outlays.........................     15,942     16,664     17,263     19,169     16,622     18,515
----------------------------------------------------------------------------------------------------------------

    The proposal would extend until September 30, 2002, the 
limitation on the monthly pension that certain veterans in 
nursing homes could receive. Under current law, this limitation 
will expire on September 30, 1998. The effect of the extension 
would be to require the Medicaid program to continue covering 
100 percent of the nursing home expenses of certain veterans 
after fiscal year 1998. Under current law, the Department of 
Veterans Affairs and the veterans themselves would have paid 
these costs.
    Estimated impact on the private sector: This bill would 
impose no new private-sector mandates as defined in UMRA.
    Estimate prepared by: Federal Cost: Shawn Bishop (medical 
care), Sunita D'Monte (housing), and Mary Helen Petrus 
(compensation and pension). Impact on State, local, and tribal 
governments: Marc Nicole. Impact on the private sector: Rachel 
Schmidt.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

 TABLE 6.-ESTIMATED BUDGETARY EFFECTS OF TITLE VIII, FISCAL YEARS 1998-2007; RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON VETERANS' AFFAIRS
                                                        [In millions of dollars, by fiscal year]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               1998-2007
                                     1998      1999       2000       2001       2002       2003       2004       2005       2006       2007      Total  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              CHANGES IN VETERANS PROGRAMS                                                              
Medical care receipts:                                                                                                                                  
    Estimated budget authority...     -118       -373       -387       -404       -422       -145       -151       -157       -163       -170     -2,490
    Estimated outlays............     -118       -373       -387       -404       -422       -145       -151       -157       -163       -170     -2,490
Housing:                                                                                                                                                
    Estimated budget authority...      -16       -233       -232       -229       -224          0          0          0          0          0       -934
    Estimated outlays............     -106       -233       -232       -229       -224          0          0          0          0          0     -1,024
Pensions:                                                                                                                                               
    Estimated budget authority...        0       -452       -454       -463       -483          0          0          0          0          0     -1,852
    Estimated outlays............        0       -415       -491       -426       -482          0          0          0          0          0     -1,814
Compensation:                                                                                                                                           
    Estimated budget authority...      -25        -53        -83       -110       -130          0          0          0          0          0       -401
    Estimated outlays............      -23        -51        -88       -101       -128          0          0          0          0          0       -391
    Total veterans programs:                                                                                                                            
        Estimated budget                                                                                                                                
         authority...............     -159     -1,111     -1,156     -1,206     -1,259       -145       -151       -157       -163       -170     -5,677
        Estimated outlays........     -247     -1,072     -1,198     -1,160     -1,256       -145       -151       -157       -163       -170     -5,719
                                                                                                                                                        
                                                                   CHANGES IN MEDICAID                                                                  
                                                                                                                                                        
Estimated budget authority.......        0        282        280        283        292          0          0          0          0          0      1,137
Estimated outlays................        0        282        280        283        292          0          0          0          0          0      1,137
                                                                                                                                                        
                                                             TOTAL CHANGE IN DIRECT SPENDING                                                            
                                                                                                                                                        
Estimated budget authority.......     -159       -829       -876       -923       -967       -145       -151       -157       -163       -170     -4,640
Estimated outlays................     -247       -790       -918       -877       -964       -145       -151       -157       -163       -170     -4,582
                                                                                                                                                        
                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATION                                                      
Veterans' medical care:                                                                                                                                 
    Estimated budget authority...      604        615        639        666        694        429        446        465        483        503      5,544
    Estimated outlays............      543        608        636        663        691        456        447        463        481        501      5,488
--------------------------------------------------------------------------------------------------------------------------------------------------------

                     Title VIII--Veterans' Programs

                              introduction

    Section 104 of the Concurrent Resolution on the Budget for 
Fiscal Year 1998, H. Con. Res. 84, requires that the Senate 
Committee on Veterans' Affairs report changes in laws within 
its jurisdiction that would reduce outlays by $681,000,000 in 
fiscal year 2002 and by $2,733,000,000 in fiscal years 1998 
through 2002.
    On June 12, 1997, the Committee met in open session and, by 
a recorded vote of 11-0, agreed to recommend legislation that 
would reduce the deficit by $2,733,000,000 in fiscal years 1998 
through 2002, and by $681,000,000 in fiscal year 2002.
    On June 19, 1997, the Director of the Congressional Budget 
Office (CBO) transmitted to the Chairman of the Committee on 
Veterans' Affairs, Senator Arlen Specter, a letter estimating 
the outlay savings which would be achieved by enactment of each 
of the measures outlined in this report. Those estimates are 
specified below.

              subtitle a--extension of current authorities

    1. Extension of Enhanced Loan Asset Sale Authority. Section 
8011 of the Committee legislation would amend section 
3720(h)(2) of title 38, United States Code, to extend the 
current authorization period of that provision to December 31, 
2002.
    Section 3720(h) authorizes VA to guarantee the timely 
payment of principal and interest to purchasers of real estate 
mortgage investment conduits (REMICs). REMICs are used to 
``bundle'' and market to investors a number of vendee loan 
notes--that is, notes on loans financing the purchase of real 
estate acquired by VA due to veterans' defaults on VA-
guaranteed home loans (see discussion below)--so that they may 
be sold for cash under favorable terms. Under this authority, 
VA guarantees to REMIC purchasers that principal and interest 
will be paid timely. That assurance facilitates the marketing 
of REMIC securities and enhances their value in the 
marketplace. It thus increases the return to the Treasury when 
such securities are sold.
    VA's authority to guarantee the timely payment of principal 
and interest under section 3720(h) expires on December 31, 
1997. Section 8011 would extend the expiration date of that 
authority to December 31, 2002.
Savings/Revenue
    According to CBO, enactment of section 8011 would reduce 
the deficit by $25 million in outlays in fiscal years 1998--
2002, and by $5 million in outlays in fiscal year 2002.
    2. Extension of Home Loan Fees. Section 8012 of the 
Committee legislation would amend section 3729(a)(4) of title 
38, United States Code, to extend the current authorization 
period of that provision to October 1, 2002.
    Section 3729 of title 38, United States Code, specifies 
fees that will be paid by borrowers who obtain home purchase 
loans guaranteed, insured, or made by VA.
    For borrowers obtaining the first such loan, fees generally 
range from 0.50% to 2.0% of the loan amount, depending on the 
amount of down payment to be paid by the borrower and the type 
of military or naval service (active duty vs. selected reserve) 
upon which eligibility for home loan benefits is based. 
Pursuant to subsection (a)(4) of section 3729, an additional 
fee of 0.75% is added to the fees set forth in section 3729, 
except as otherwise specified, for ``first use'' loans closed 
between September 30, 1993, and October 1, 1998.
    With respect to borrowers obtaining subsequent housing 
assistance loans, section 3729 specifies that the fee to be 
charged shall be 3.0% of the total loan amount. This provision 
applies to loans which close between September 30, 1993 and 
October 1, 1998.
    As noted, the above-summarized fee schedules apply to home 
loans closed between September 30, 1993, and October 1, 1998. 
Section 8012 would extend the expiration date of those fee 
schedules to October 1, 2002.
Savings/Revenue
    According to CBO, enactment of section 8012 would reduce 
the deficit by $822 million in outlays over fiscal years 1998--
2002, and by $199 million in outlays in fiscal year 2002.
    3. Extension of Procedures Applicable to Liquidation Sales 
on Defaulted Home Loans Guaranteed by VA. Section 8013 of the 
Committee legislation would amend section 3732(c)(11) of title 
38, United States Code, to extend the current authorization 
period of that provision to October 1, 2002.
    Section 3732 specifies that VA has two options when a 
property, the financing of which is guaranteed under the VA 
Home Loan Guaranty Program, goes into foreclosure. VA may 
simply pay off the guaranty. Alternatively, VA may elect to 
purchase the property securing the loan in default and resell 
it if VA concludes that a resale of the property would be less 
costly to VA than a simple payment of the guaranty and would 
be, therefore, more advantageous to the Government.
    The provisions of law authorizing VA to elect to exercise 
the latter option of acquiring and reselling the property when 
it is to VA's advantage are set out in subsection (c) of 
section3732. Subsection (c), however, applies only with respect 
to properties financed with VA-guaranteed home loans which close before 
October 1, 1998. Section 8013 would extend the authorization period of 
subsection (c) to loans closed before October 1, 2002.

Savings/Revenue

    According to CBO, enactment of section 8013 would reduce 
the deficit by $20 million in outlays in fiscal years 1998-
2002, and by $5 million in outlays in fiscal year 2002.
    4. Extension of Income Verification Authorities. Section 
8014 of the Committee legislation would amend section 5317(g) 
of title 38, United States Code, to extend the current 
expiration date of that provision to September 30, 2002.
    Eligibility for certain benefits and medical services 
provided by VA is means tested--that is, eligibility for those 
benefits and medical services is governed by, among other 
variables, the potential beneficiary's annual income. Under 
section 5317(g) of title 38, United States Code, VA is 
authorized to verify income data furnished to VA by the 
applicant for benefits or medical services by accessing income-
relevant records of the Department of Health and Human 
Services/Social Security Administration and the Department of 
the Treasury/Internal Revenue Service.
    As is noted above, VA's income verification authority, as 
specified in titles 26 and 38 of U.S. Code, expires on 
September 30, 1998. Section 8014 would extend that expiration 
date to September 30, 2002.

Savings/Revenue

    According to CBO, enactment of section 8014 would reduce 
the deficit by $40 million in outlays with respect to benefits, 
and $71 million in outlays with respect to medical services, 
over fiscal years 1998-2002, and by $16 million in outlays with 
respect to benefits, and $19 million in outlays with respect to 
medical services, in fiscal year 2002.
    5. Extension of Limitation on Pension for Certain 
Recipients of Medicaid-Covered Nursing Home Care. Section 8015 
of the Committee legislation would amend section 5503(f)(7) of 
title 38, United States Code, to extend the current expiration 
date of that provision to September 30, 2002.
    Section 5503(f) of title 38, United States Code, specifies 
that VA beneficiaries receiving Medicaid-financed nursing home 
care shall not be entitled to receive VA pension payments in 
excess of $90 per month if the beneficiary has no spouse or 
dependent child. In the absence of such a limit, pension 
beneficiaries without dependents would not ultimately receive a 
higher monthly benefit even though their initial pension 
payment would exceed $90. Rather, their pension payments, 
beyond a small monthly personal allowance (approximately $45 in 
most States), would be forfeited to pay for their nursing home 
care. Thus, VA pension payments would effectively fund Medicaid 
obligations in the absence of section 5503(f).
    Under the terms of section 5503(f), VA pension payments, 
under the circumstances outlined above, are reduced to $90 per 
month. However, the $90 payment is ``protected.'' That is, VA 
pension may not be tapped to pay for Medicaid-provided care. In 
effect, while VA beneficiaries receive a reduced pension 
payment under section 5503(f), they are allowed to retain all 
of that payment notwithstanding State-imposed personal 
allowance limits. Thus, their position is better, from a 
monthly cash flow standpoint, than it would have been absent 
section 5503(f).
    Section 5503(f) is currently scheduled to expire on 
September 30, 1998. Section 8015 would extend that expiration 
date to September 30, 2002.

Savings/Revenue

    According to CBO, enactment of section 8015 would reduce 
the deficit by $637 million in outlays over fiscal years 1998-
2002, and by $174 million in outlays in fiscal year 2002.

          SUBTITLE B--COPAYMENT AND MEDICAL CARE COST RECOVERY

    1. Extension of Authority To Require That Certain Veterans 
to Make Copayments in Exchange for Receiving Hospital and 
Medical Care. Section 8021(a) of the Committee legislation 
would amend an existing provision of law in section 8013(e) of 
the Omnibus Budget Reconciliation Act of 1990, Public Law 101-
508, 38 U.S.C. Sec. 1710 note (``OBRA '90''), to extend the 
current expiration date of that provision to September 30, 
2002.
    Current law provides that veterans who are not eligible for 
VA care on a priority basis under subsections (a)(1) and (a)(2) 
of section 1710 of title 38, United States Code, may receive 
care from VA to the extent resources and facilities are 
available if they agree to make copayments for such care. In 
OBRA '90, Congress added to the already existing Medicare 
deductible-based copayment requirements a requirement that 
veterans pay an additional per diem charge of $5 for nursing 
home care and $10 for hospital care. Prior to enactment of OBRA 
'90, veterans not eligible for priority care from VA paid only 
full or partial Medicare deductibles as specified in subsection 
(f). OBRA '90 also eliminated distinctions among non-service-
connected veterans with incomes above the ``means-test'' basis 
for priority eligibility for hospital care and medical services 
under subsection (a)(2) of section 1710, thereby requiring that 
allsuch veterans make copayments.
    The OBRA '90 requirements that VA charge per diems and 
collect copayments from all non-service-connected veterans with 
income above the ``means-test'' limit are currently scheduled 
to expire on September 30, 1998. Section 8021(a) would extend 
that expiration date to September 30, 2002.

Savings/Revenue

    According to CBO, enactment of section 8021(a) would result 
in collections of $11 million in fiscal years 1999-2002.
    2. Extension of Authority To Require That Certain Veterans 
to Make Copayments in Exchange for Receiving Outpatient 
Medications. Section 8021(b) of the Committee legislation would 
amend section 1722A of title 38, United States Code, to extend 
the current expiration date of that provision to September 30, 
2002.
    Section 1722A of title 38, United States Code, specifies 
that, except as itemized below, veterans who receive outpatient 
medical care from the Department of Veterans Affairs (VA) for 
the treatment of non-service-connected disabilities or medical 
conditions are required to pay $2.00 for each 30-day supply of 
medications furnished by VA in connection with that treatment. 
Two classes of veteran-patient are exempted from this copayment 
requirement: veterans having a service-connected disability 
rated at 50% or higher; and veterans having an annual income 
which equals, or is less than, the maximum amount they would be 
eligible to receive under VA's pension program, 38 U.S.C. 
Sec. 1521, were they eligible for benefits under that program.
    The $2 copayment requirement, which was originally enacted 
as part of OBRA '90, is currently scheduled to expire on 
September 30, 1998. Section 8021(b) would extend that 
expiration date to September 30, 2002.

Savings/Revenue

    According to CBO, enactment of section 8021(b) would result 
in collections of $152 million in fiscal years 1999-2002.
    3. Extension of Authority for Medical Care Cost Recovery. 
Section 8022 of the Committee legislation would amend section 
1729(a)(2)(E) of title 38, United States Code, to extend the 
current authorization date of that provision to October 1, 
2002.
    Section 1729 of title 38, United States Code, authorizes 
VA, when it furnishes medical services to certain veteran-
patients for non-service-connected disabilities and medical 
conditions, to collect the reasonable cost of providing such 
services from third party payers, generally, the veteran-
patient's health plan or health insurance carrier, if any. This 
provision applies to, among other categories of care, care for 
non-service-connected disabilities and medical conditions 
sustained by veteran-patients who have service-connected 
disabilities, but only with respect to treatment provided 
before October 1, 1998.
    As is noted, VA authority to recover costs from the third 
party payers, if any, of service-connected veterans applies 
only with respect to treatment provided before October 1, 1998. 
Section 8022 would extend that authorization period until 
October 1, 2002.

Savings/Revenue

    According to CBO, enactment of section 8022 would result in 
collections of $829 million in fiscal years 1999-2002.
    4. Retention by VA of Medical Care Receipts. Section 8023 
of the Committee legislation would authorize VA to retain funds 
collected under the authorities specified in sections 8021 and 
8022, and to spend such monies on VA medical care.
    Under current law, copayments and receipts from health care 
plans and insurance carriers are remitted to the United States 
Treasury. Section 8023 would authorize VA, for the first time, 
to retain such funds. The provision would provide for maximum 
incentives for collecting such funds by mandating that all such 
monies be remitted to the Veterans Integrated Service Network 
(``VISN'') which had collected them.
    It is the Committee's judgment that such receipts will be 
maximized if the collecting VISN has a full incentive to pursue 
such funds aggressively. Consistent with this judgment, it is 
the Committee's expectation that VA headquarters will remit 
funds to the VISNs promptly. It is the Committee's expectation, 
further, that VA headquarters will not reduce the allocation of 
other funds made available to the VISNs to account for a VISNs 
relative success in collecting medical care cost recovery 
receipts. If funds are not retained by the VISN--and reductions 
in other funding streams to offset medical care cost recovery 
receipts would be the functional equivalent of nonretention of 
such receipts--the VISNs will not perform their collection 
mission as required.

Savings/Revenue

    According to CBO, enactment of section 8023 would result in 
savings of $641 in direct spending outlays in fiscal years 
1998-2002, and $139 million in direct spending outlays in 
fiscal year 2002.

                       SUBTITLE C--OTHER MATTERS

    1. Rounding Down of Cost-of-Living Adjustments in 
Compensation and DIC Rates. Section 8031 of the 
Committeelegislation would require that cost-of-living adjustments made 
to VA disability compensation, and dependency and indemnity 
compensation (DIC), payments under chapters 11 and 13 of title 38, 
United States Code, for fiscal years 1998 through 2002 would be rounded 
down.
    Monthly payments made by VA under chapters 11 and 13 of 
title 38, United States Code, are in whole dollar amounts. 
While such monthly payments are not ``automatically'' adjusted, 
or indexed, to reflect increases (or decreases) in the cost-of-
living, typically they are adjusted annually to reflect such 
increases. The budget baseline assumes that when monthly 
amounts paid to VA beneficiaries are so recomputed (by 
multiplying the prior year's payment amount by a percentage 
amount supplied by the United States Department of Labor to 
reflect its estimate of the prior year's increase in the cost 
of living), the products of those mathematical computations 
will be rounded ``normally'' when they are adjusted to whole 
dollar amounts. That is, the baseline assumes that if the 
recomputed monthly payment amount is a fractional dollar amount 
of $0.50 or more, it will be rounded up to the next higher 
dollar amount, and if it is a fractional dollar amount of $0.49 
or less, it will be rounded down to the next lower dollar 
amount.
    Section 8031 requires that such recalculations of 
compensation and DIC payments made for fiscal years 1998 
through 2002 will be rounded down to the next lower whole 
dollar amount irrespective of the fractional dollar amount 
which is yielded when the prior year's payment amount is 
multiplied by the cost-of-living index increase. Thus, some 
beneficiaries would receive $1 per month less in benefits than 
they might have otherwise received under the budget baseline 
assumption of ``normal'' rounding. Section 8031 also specifies 
that, for fiscal years 1996 through 2002, the fractional 
increase in monthly benefit amounts will not be more than the 
percentage increase granted to recipients of benefits under 
title II of the Social Security Act, 42 U.S.C. Sec. 401 et seq.

Savings/Revenue

    According to CBO, enactment of section 8031 would reduce 
the deficit by $391 million in outlays in fiscal years 1998-
2002, and by $128 million in outlays in fiscal year 2002.
    2. Increase in Home Loan Fees for the Purchase of 
Repossessed Homes from VA. Section 8032 of the Committee 
legislation would amend section 3729 of title 38, United States 
Code, to increase fees charged by VA for VA financing to 
purchasers of properties acquired by VA due to default. This 
section would increase that fee from 1.0 to 2.25 percent of the 
total loan amount.
    Fees charged by VA in connection with the Home Loan 
Guarantee program are specified in section 3729 of title 38, 
United States Code. Under current law, the fee charged for VA 
financing of sales of VA-acquired properties is 1.0% of the 
total loan amount.
    Section 8032 would increase the fee charged by VA for 
financing of sales of VA-acquired properties to 2.25%.

Savings/Revenue

    According to CBO, enactment of section 8032 would reduce 
the deficit by $67 million in outlays in fiscal years 1998-
2002, and by $15 million in outlays in fiscal year 2002.
    3. Withholding of Payments and Benefits. Section 8033 of 
the Committee legislation would amend section 3726 of title 38, 
United States Code, to authorize VA to refer certain loan 
guaranty debts to the Internal Revenue Service for offset of 
income tax refunds, and in cases where the debtor is a Federal 
employee, to the debtor's employing agency for salary offset.
    Under current law, Federal agencies other than VA are 
restricted from assisting VA in collecting one type of debt to 
VA--loan guaranty debts. Other agencies may not withhold or 
offset payments to veterans to satisfy that type of debt to VA 
unless the debtor consents in writing or a court has determined 
the debtor is liable to VA for the debt. By contrast, other 
debts to VA may be offset by other Federal agencies.
    Section 8033 would authorize VA, with appropriate notice to 
the debtor and after affording an opportunity for the debtor to 
request forbearance or a waiver of the debt, to refer loan 
guaranty debts, like other debts, to the IRS and, where 
applicable, to the debtor's employing Federal agency for 
offset.

Savings/Revenue

    According to CBO, enactment of section 8033 would reduce 
the deficit by $90 million in outlays in fiscal years 1998-
2002.
                F. Rollcall Vote in the Budget Committee

    Rollcall vote on the Domenici motion to report the 
reconciliation measure to the Senate was as follows:
        Yeas: 19                      Nays: 3
Domenici                            Hollings
Grassley                            Sarbanes
Nickles1                 Durbin1
Gramm
Bond
Gorton
Gregg1
Snowe1
Abraham
Frist1
Grams
Smith
Lautenberg
Conrad1
Boxer1
Murray1
Wyden
Feingold
Johnson

    1Indicates the Senator voted by proxy.