[House Report 114-156]
[From the U.S. Government Publishing Office]


114th Congress    }                                   {        Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                   {       114-156

======================================================================



 
                 LTCH TECHNICAL CORRECTION ACT OF 2015

                                _______
                                

 June 16, 2015.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted 
                             the following

                              R E P O R T

                        [To accompany H.R. 2580]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2580) to provide for a technical change to the 
Medicare long-term care hospital moratorium exception, and for 
other purposes, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
 I. SUMMARY AND BACKGROUND............................................2
        A. PURPOSE AND SUMMARY...................................     2
        B. BACKGROUND AND NEED FOR LEGISLATION...................     2
        C. LEGISLATIVE HISTORY...................................     3
II. EXPLANATION OF THE BILL...........................................3
III.VOTES OF THE COMMITTEE............................................4

IV. BUDGET EFFECTS OF THE BILL........................................4
        A. Committee Estimates of Budgetary Effects..............     4
        B. Statement Regarding New Budget Authority and Tax 
            Expenditures Budget Authority........................     5
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................     5
 V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE........7
        A. Committee Oversight Findings and Recommendations......     7
        B. Statement of General Performance Goals and Objectives.     7
        C. Information Relating to Unfunded Mandates.............     7
        D. Congressional Earmarks, Limited Tax Benefits, and 
            Limited Tariff Benefits..............................     7
        E. Duplication of Federal Programs.......................     8
        F. Disclosure of Directed Rule Makings...................     8
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............8
        A. Text of Existing Law Amended or Repealed by the Bill, 
            as Reported..........................................     8
        B. Changes in Existing Law Proposed by the Bill, as 
            Reported.............................................   124

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``LTCH Technical Correction Act of 
2015''.

SEC. 2. TECHNICAL CHANGE TO THE MEDICARE LONG-TERM CARE HOSPITAL 
                    MORATORIUM EXCEPTION.

  (a) In General.--Section 114(d) of the Medicare, Medicaid, and SCHIP 
Extension Act of 2007 (42 U.S.C. 1395ww note), as amended by sections 
3106(b) and 10312(b) of Public Law 111-148, section 1206(b)(2) of the 
Pathway for SGR Reform Act of 2013 (division B of Public Law 113-67), 
and section 112 of the Protecting Access to Medicare Act of 2014, is 
amended, in paragraph (7), by striking ``The moratorium under paragraph 
(1)(A)'' and inserting ``Any moratorium under paragraph (1)'' in the 
matter preceding subparagraph (A).
  (b) Effective Date.--The amendment made by subsection (a) shall take 
effect as if included in the enactment of section 112 of the Protecting 
Access to Medicare Act of 2014.

SEC. 3. MODIFICATION TO MEDICARE LONG-TERM CARE HOSPITAL HIGH COST 
                    OUTLIER PAYMENTS.

  Section 1886(m) of the Social Security Act (42 U.S.C. 1395ww(m)) is 
amended by adding at the end the following new paragraph:
          ``(7) Treatment of high cost outlier payments.--
                  ``(A) Adjustment to the standard federal payment rate 
                for estimated high cost outlier payments.--Under the 
                system described in paragraph (1), for fiscal years 
                beginning on or after October 1, 2016, the Secretary 
                shall reduce the standard Federal payment rate as if 
                the estimated aggregate amount of high cost outlier 
                payments for standard Federal payment rate discharges 
                for each such fiscal year would be equal to 8 percent 
                of estimated aggregate payments for standard Federal 
                payment rate discharges for each such fiscal year.
                  ``(B) Limitation on high cost outlier payment 
                amounts.--Notwithstanding subparagraph (A), the 
                Secretary shall set the fixed loss amount for high cost 
                outlier payments such that the estimated aggregate 
                amount of high cost outlier payments made for standard 
                Federal payment rate discharges for fiscal years 
                beginning on or after October 1, 2016, shall be equal 
                to 99.0625 percent of 8 percent of estimated aggregate 
                payments for standard Federal payment rate discharges 
                for each such fiscal year.
                  ``(C) Waiver of budget neutrality.--Any reduction in 
                payments resulting from the application of subparagraph 
                (B) shall not be taken into account in applying any 
                budget neutrality provision under such system.
                  ``(D) No effect on site neutral high cost outlier 
                payment rate.--This paragraph shall not apply with 
                respect to the computation of the applicable site 
                neutral payment rate under paragraph (6), except for 
                the standard Federal payment rate portion of blended 
                payment rates determined under subparagraph 
                (B)(iii)(II) of such paragraph.''.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 2580, as ordered reported by the Committee 
on Ways and Means on June 2, 2015, would provide for a 
technical fix that would allow qualifying long-term care 
hospitals (LTCH) to expand beds during the current law 
moratorium. The bill would also off-set the cost of the bed 
expansion by reducing the size of the current law LTCH outlier 
pool and adjusting the current law fixed loss amount for 
discharges that qualify for outlier payments.

                 B. Background and Need for Legislation

    On May 29, 2015, Rep. Charles Boustany (R-LA) introduced 
H.R. 2580, a bill to provide for a technical fix that would 
allow qualifying LTCHs to expand beds during the current law 
moratorium. The Committee on Ways and Means received the sole 
referral for the bill because the bill includes Medicare 
provisions that fall within the jurisdiction of the Committee, 
including relevant provisions of the Social Security Act (SSA).
    The Committee has a concern with the current law LTCH 
moratorium; including the lack of an exception process for 
those LTCHs who were mid-build when the original LTCH 
moratorium was signed into law.

                         C. Legislative History


Background 

    H.R. 2580 was introduced on May 29, 2015, and was referred 
to the Committee on Ways and Means.

Committee hearings

    On May 19, 2015, the Subcommittee on Health of the House 
Committee on Ways and Means held a hearing to specifically 
examine competition in the Medicare program, including the use 
of moratoria. Further, on June 14, 2013, the Subcommittee on 
Health of the House Committee on Ways and Means held a hearing 
to specifically examine the status of post-acute care in the 
Medicare program.

Committee action

    The Committee on Ways and Means marked up H.R. 2580 on June 
2, 2015, and ordered the bill favorably reported.

                      II. EXPLANATION OF THE BILL


                 LTCH Technical Correction Act of 2015


                              PRESENT LAW

    The current law LTCH moratorium was created by section 1206 
Bipartisan Budget Act (BBA) of 2013 (P.L. 113-67). Beginning 
January 1, 2015 through September 30, 2017, section 1206 
established the LTCH moratorium. Specifically, section 1206 
modified section 114(d) of the Medicare, Medicaid and SCHIP 
Extension Act of 2007 (P.L. 110-173), as amended by sections 
3106(b) and 10312(b) of the Affordable Care Act (P.L. 111-148).
    Three months after the Bipartisan Budget Act (BBA) of 2013 
(P.L. 113-67) was signed into law, Congress further modified 
the LTCH moratorium with section 112 of the Protecting Access 
to Medicare Act (PAMA) Act of 2014 (P.L. 113-93). Beginning 
April 1, 2014, section 112 allowed for an exception process to 
the new building moratorium for those LTCHs that met the 
following criteria, prior to April 1, 2014: (1) has entered the 
Centers for Medicare & Medicaid Services (CMS) defined 
qualifying period to receive a Medicare provider number; (2) 
has a binding agreement with a party for construction and has 
expended a minimum of $2.5 million; or (3) has obtained an 
approved certificate of need in a state where one is required.
    Using its broad authority under the Social Security Act 
(SSA), CMS has established an annual ``pool'' of payments that 
is set aside to reimburse LTCH outlier cases. The standard 
Federal LTCH payment rate is reduced on an annual basis to fund 
the LTCH outlier pool. Historically, CMS has set the annual 
LTCH outlier pool at 8 percent. In order for an LTCH discharge 
to qualify for an outlier payment, the discharge has to meet 
the CMS derived'' ``fixed loss amount'' for high cost outlier 
payments. For fiscal year 2015, CMS proposed a fixed loss 
amount of $14,972 for LTCHs (compared to a fixed loss amount of 
$25,799 for general acute hospitals). If the LTCH discharge 
cost exceeds the fixed loss amount in a given fiscal year, 
rather than receive the LTCH diagnosis related group (DRG) pre-
fixed amount, the LTCH is reimbursed 80 percent of cost above 
the fixed loss amount for the discharge. When CMS sets the 
outlier pool percentage each year, the percentage interacts 
with the fixed loss amount.

                           REASONS FOR CHANGE

    The Committee intended for the change made with section 112 
of the Protecting Access to Medicare Act (PAMA) Act of 2014 
(P.L. 113-93) to provide for an exception process that applied 
to both new building and expansion of beds. Due to a 
legislative drafting error, the exception process was not 
included for expansion of beds. Therefore, H.R. 2580 calls for 
a technical fix to the current law LTCH moratorium exception 
process.

                       EXPLANATION OF PROVISIONS

    H.R. 2580, as amended, would allow for an exception process 
for the current law LTCH bed expansion moratorium and would 
off-set the cost of the bed expansion by reducing the size of 
the current law LTCH outlier pool from 8 percent to 7.925 
percent and adjusting the current law fixed loss amount for 
LTCH discharges that qualify for outlier payments.

                             EFFECTIVE DATE

    H.R. 2580 would become effective on the date of its 
enactment.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statements are made 
concerning the votes of the Committee on Ways and Means in its 
consideration of the bill, H.R. 2580, the LTCH Technical 
Correction Act of 2015, on June 2, 2015.
    H.R. 2580 was ordered favorably reported by a unanimous 
voice vote (with a quorum being present).

                     IV. BUDGET EFFECTS OF THE BILL


              A. Committee Estimates of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the revenue provisions 
of the bill, H.R. 2580, as reported: the Committee agrees with 
the estimate prepared by the Congressional Budget Office (CBO), 
which is included below as Insert A.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states H.R. 
2580, as reported, would not increase direct spending over the 
2016-2025 period.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the Congressional Budget Office (CBO), the 
following statement by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 15, 2015.
Hon. Paul Ryan,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2580, the LTCH 
Technical Correction Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Kevin 
McNellis.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 2580--LTCH Technical Correction Act of 2015

    Summary: H.R. 2580 would lift a moratorium in current law 
that prohibits existing long-term care hospitals (LTCHs) from 
increasing the number of beds in their facilities. The bill 
would also reduce the total amount of payments made to LTCHs by 
modifying the current payment system for patients with very 
high costs.
    Over the 2016-2025 period, CBO estimates that lifting the 
moratorium would increase Medicare spending by $47 million and 
that modifying the payment system for high-cost outliers in 
LTCHs would reduce Medicare spending by $48 million; the net 
reduction in direct spending would total $1 million.
    H.R. 2580 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 2580 is shown in the following table. 
The costs of this legislation fall within budget function 570 
(Medicare).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  By fiscal year, in millions of dollars--
                                                   -----------------------------------------------------------------------------------------------------
                                                     2016    2017    2018    2019    2020    2021    2022    2023    2024    2025   2016-2020  2016-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          CHANGES IN DIRECT SPENDING (OUTLAYSa)
 
Technical Change to Medicare Long-Term Care              6      27      12       2       0       0       0       0       0       0        47         47
 Hospital Moratorium Exception....................
Modification to Medicare Long-Term Care Hospital         0      -4      -4      -5      -5      -5      -6      -6      -6      -7       -18        -48
 Outlier Payments.................................
 
                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING
 
Impact on Deficit.................................       6      23       8      -3      -5      -5      -6      -6      -6      -7        29        -1
--------------------------------------------------------------------------------------------------------------------------------------------------------
aBudget authority equals outlays.

    Basis of estimate: Under current law, existing LTCHs are 
prohibited from increasing the number of beds in their 
facilities until October 1, 2017. H.R. 2580 would lift that 
moratorium. The bill would also reduce payments to LTCHs for 
patients for whom the hospital incurs extremely high costs. 
Assuming enactment near the beginning of fiscal year 2016, CBO 
estimates that enacting H.R. 2580 would reduce net direct 
spending for Medicare by $1 million over the 2016-2025 period.
    CBO estimates that lifting the moratorium on expansion 
would enable some LTCHs to admit more patients who, under 
current law, will be treated in other acute and post-acute 
settings. Analyses by the Medicare Payment Advisory Commission 
(MedPAC) have found that Medicare's payment rates for services 
furnished in an LTCH are higher than its payment rates for 
substitute services furnished by short-stay hospitals, skilled 
nursing facilities, or home health agencies.\1\ CBO estimates 
that paying the higher LTCH rates for some services would 
increase Medicare spending by $47 million over the 2016-2025 
period.
---------------------------------------------------------------------------
    \1\See, for example, Medicare Payment Advisory Commission, March 
2014 Report to the Congress: Medicare Payment Policy, Chapter 11: Long-
Term Care Hositals, (March 2014), http://medpac.gov/documents/reports/
mar14_ch11.pdf?sfvrsn=0.
---------------------------------------------------------------------------
    H.R. 2580 would also modify how payment rates for patients 
with very high costs are determined. Under current law, CMS has 
the authority to make a payment adjustment for LTCH cases that 
are high-cost outliers. That adjustment is designed to be 
budget neutral: Payment rates for all LTCH cases are reduced by 
a specified percentage, and the Secretary adjusts the criteria 
for identifying outlier cases so that the full amount of that 
payment reduction is expected to be distributed to LTCHs in the 
form of outlier payments. For fiscal year 2015, the Secretary 
reduced the payment rates for all LTCH cases by 8 percent and 
established outlier criteria that she estimated would 
distribute the full 8 percent to LTCHs for outlier cases.
    The bill would require the Secretary to reduce the payment 
rate for all LTCH cases by 8 percent, but would require the 
Secretary to set outlier criteria that she expects would result 
in no more than 7.925 percentage points of that reduction being 
paid for high-cost cases. CBO estimates that provision would 
reduce Medicare spending by $48 million over the 2016-2025 
period.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in direct spending that are subject 
to those pay-as-you-go procedures are shown in the following 
table.

            CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2580, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON JUNE 2, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              By fiscal year, in millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                             2015    2016    2017    2018    2019    2020    2021    2022    2023    2024    2025   2016-2020  2016-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact............       0       6      23       8      -3      -5      -5      -6      -6      -6      -7        29         -1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: H.R. 2580 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal costs: Kevin McNellis; Impact 
on state, local, and tribal governments: J'nell Blanco Suchy; 
Impact on the private sector: Amy Petz.
    Estimate approved by: Holly Harvey, Deputy Assistant 
Director for Budget Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee concluded that it was appropriate and timely to 
enact the sections included in the bill, as reported.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee states that the 
primary purpose of H.R. 2580, as reported, is to protect 
Medicare beneficiaries and strengthen the Medicare program.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

  D. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill, and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   E. Duplication of Federal Programs

    In compliance with Sec. 3(g)(2) of H. Res. 5 (114th 
Congress), the Committee states that no provision of the bill 
establishes or reauthorizes: (1) a program of the Federal 
Government known to be duplicative of another Federal program; 
(2) a program included in any report from the Government 
Accountability Office to Congress pursuant to section 21 of 
Public Law 111-139; or (3) a program related to a program 
identified in the most recent Catalog of Federal Domestic 
Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                 F. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED


  A. Text of Existing Law Amended or Repealed by the Bill, as Reported

    In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

          MEDICARE, MEDICAID, AND SCHIP EXTENSION ACT OF 2007




           *       *       *       *       *       *       *
TITLE I--MEDICARE

           *       *       *       *       *       *       *


SEC. 114. LONG-TERM CARE HOSPITALS.

  (a) [Omitted Amendatory]
  (b) Study and Report on Long-Term Care Hospital Facility and 
Patient Criteria.--
          (1) In general.--The Secretary of Health and Human 
        Services (in this section referred to as the 
        ``Secretary'') shall conduct a study on the 
        establishment of national long-term care hospital 
        facility and patient criteria for purposes of 
        determining medical necessity, appropriateness of 
        admission, and continued stay at, and discharge from, 
        long-term care hospitals.
          (2) Report.--Not later than 18 months after the date 
        of the enactment of this Act, the Secretary shall 
        submit to Congress a report on the study conducted 
        under paragraph (1), together with recommendations for 
        such legislation and administrative actions, including 
        timelines for implementation of patient criteria or 
        other actions, as the Secretary determines appropriate.
          (3) Considerations.--In conducting the study and 
        preparing the report under this subsection, the 
        Secretary shall consider--
                  (A) recommendations contained in a report to 
                Congress by the Medicare Payment Advisory 
                Commission in June 2004 for long-term care 
                hospital-specific facility and patient criteria 
                to ensure that patients admitted to long-term 
                care hospitals are medically complex and 
                appropriate to receive long-term care hospital 
                services; and
                  (B) ongoing work by the Secretary to evaluate 
                and determine the feasibility of such 
                recommendations.
  (c) Payment for Long-Term Care Hospital Services.--
          (1) Delay in application of 25 percent patient 
        threshold payment adjustment.--The Secretary shall not 
        apply, for cost reporting periods beginning on or after 
        July 1, 2007,--
                  (A) for a 9-year period, section 412.536 of 
                title 42, Code of Federal Regulations, or any 
                similar provision, to freestanding long-term 
                care hospitals or to a long-termcare hospital, 
                or satellite facility, that as of December29, 
                2007, was co-located with an entity that is a 
                provider-based, off-campus location of a 
                subsection (d) hospital whichdid not provide 
                services payable under section 1886(d) ofthe 
                Social Security Act at the off-campus location; 
                and
                  (B) such section or section 412.534 of title 
                42, Code of Federal Regulations, or any similar 
                provisions, to a long-term care hospital 
                identified by the amendment made by section 
                4417(a) of the Balanced Budget Act of 1997 
                (Public Law 105-33).
          (2) Payment for hospitals-within-hospitals.--
                  (A) In general.--Payment to an applicable 
                long-term care hospital or satellite facility 
                which is located in a rural area or which is 
                co-located with an urban single or MSA dominant 
                hospital under paragraphs (d)(1), (e)(1), and 
                (e)(4) of section 412.534 of title 42, Code of 
                Federal Regulations, shall not be subject to 
                any payment adjustment under such section if no 
                more than 75 percent of the hospital's Medicare 
                discharges (other than discharges described in 
                paragraph (d)(2) or (e)(3) of such section) are 
                admitted from a co-located hospital.
                  (B) Co-located long-term care hospitals and 
                satellite facilities.--
                          (i) In general.--Payment to an 
                        applicable long-term care hospital or 
                        satellite facility which is co-located 
                        with another hospital shall not be 
                        subject to any payment adjustment under 
                        section 412.534 of title 42, Code of 
                        Federal Regulations, if no more than 50 
                        percent of the hospital's Medicare 
                        discharges (other than discharges 
                        described in paragraph (c)(3) of such 
                        section) are admitted from a co-located 
                        hospital.
                          (ii) Applicable long-term care 
                        hospital or satellite facility 
                        defined.--In this paragraph, the term 
                        ``applicable long-term care hospital or 
                        satellite facility'' means a hospital 
                        or satellite facility that is subject 
                        to the transition rules under section 
                        412.534(g) of title 42, Code of Federal 
                        Regulations or that is described in 
                        section 412.22(h)(3)(i) of such title.
                  (C) Effective date.--Subparagraphs (A) and 
                (B) shall apply to cost reporting periods 
                beginning on or after October 1, 2007 (or July 
                1, 2007, in the case of a satellite facility 
                described in section 412.22(h)(3)(i) of title 
                42, Code of Federal Regulations) for a 9-year 
                period.
          (3) No application of very short-stay outlier 
        policy.--The Secretary shall not apply, for the 5-year 
        period beginning on the date of the enactment of this 
        Act, the amendments finalized on May 11, 2007 (72 
        Federal Register 26904, 26992) made to the short-stay 
        outlier payment provision for long-term care hospitals 
        contained in section 412.529(c)(3)(i) of title 42, Code 
        of Federal Regulations, or any similar provision.
          (4) No application of one-time adjustment to standard 
        amount.--The Secretary shall not, for the 5-year period 
        beginning on the date of the enactment of this Act, 
        make the one-time prospective adjustment to long-term 
        care hospital prospective payment rates provided for in 
        section 412.523(d)(3) of title 42, Code of Federal 
        Regulations, or any similar provision.
  (d) Moratorium on the Establishment of Long-Term Care 
Hospitals, Long-Term Care Satellite Facilities and on the 
Increase of Long-Term Care Hospital Beds in Existing Long-Term 
Care Hospitals or Satellite Facilities.--
          (1) In general.--During the 5-year period (and for 
        the period beginning on the date of the enactment of 
        paragraph (7) of this subsection and ending September 
        30, 2017) beginning on the date of the enactment of 
        this Act, the Secretary shall impose a moratorium for 
        purposes of the Medicare program under title XVIII of 
        the Social Security Act--
                  (A) subject to paragraph (2), on the 
                establishment and classification of a long-term 
                care hospital or satellite facility, other than 
                an existing long-term care hospital or 
                facility; and
                  (B) subject to paragraph (3), on an increase 
                of long-term care hospital beds in existing 
                long-term care hospitals or satellite 
                facilities.
          (2) Exception for certain long-term care hospitals.--
        The moratorium under paragraph (1)(A) shall not apply 
        to a long-term care hospital that as of the date of the 
        enactment of this Act--
                  (A) began its qualifying period for payment 
                as a long-term care hospital under section 
                412.23(e) of title 42, Code of Federal 
                Regulations, on or before the date of the 
                enactment of this Act;
                  (B) has a binding written agreement with an 
                outside, unrelated party for the actual 
                construction, renovation, lease, or demolition 
                for a long-term care hospital, and has 
                expended, before the date of the enactment of 
                this Act, at least 10 percent of the estimated 
                cost of the project (or, if less, $2,500,000); 
                or
                  (C) has obtained an approved certificate of 
                need in a State where one is required on or 
                before the date of the enactment of this Act.
          (3) Exception for bed increases during moratorium.--
                  (A) In general.--Subject to subparagraph (B), 
                the moratorium under paragraph (1)(B) shall not 
                apply to an increase in beds in an existing 
                hospital or satellite facility if the hospital 
                or facility obtained a certificate of need for 
                an increase in beds that is in a State for 
                which such certificate of need is required and 
                that was issued on or after April 1, 2005, and 
                before December 29, 2007, or if the hospital or 
                facility--
                          (i) is located in a State where there 
                        is only one other long-term care 
                        hospital; and
                          (ii) requests an increase in beds 
                        following the closure or the decrease 
                        in the number of beds of another long-
                        term care hospital in the State.
                  (B) No effect on certain limitation.--The 
                exception under subparagraph (A) shall not 
                effect the limitation on increasing beds under 
                sections 412.22(h)(3) and 412.22(f) of title 
                42, Code of Federal Regulations.
          (4) Existing hospital or satellite facility 
        defined.--For purposes of this subsection, the term 
        ``existing'' means, with respect to a hospital or 
        satellite facility, a hospital or satellite facility 
        that received payment under the provisions of subpart O 
        of part 412 of title 42, Code of Federal Regulations, 
        as of the date of the enactment of this Act.
          (5) Judicial review.--There shall be no 
        administrative or judicial review under section 1869 of 
        the Social Security Act (42 U.S.C. 1395ff), section 
        1878 of such Act (42 U.S.C. 1395oo), or otherwise, of 
        the application of this subsection by the Secretary.
          (6) Limitation on application of exceptions.--
        Paragraphs (2) and (3) shall not apply during the 
        period beginning on the date of the enactment of 
        paragraph (7) of this subsection and ending September 
        30, 2017.
          (7) Additional exception for certain long-term care 
        hospitals.-- shall not apply to a long-term care 
        hospital that--
                  (A) began its qualifying period for payment 
                as a long-term care hospital under section 
                412.23(e) of title 42, Code of Federal 
                Regulations, on or before the date of enactment 
                of this paragraph;
                  (B) has a binding written agreement as of the 
                date of the enactment of this paragraph with an 
                outside, unrelated party for the actual 
                construction, renovation, lease, or demolition 
                for a long-term care hospital, and has 
                expended, before such date of enactment, at 
                least 10 percent of the estimated cost of the 
                project (or, if less, $2,500,000); or
                  (C) has obtained an approved certificate of 
                need in a State where one is required on or 
                before such date of enactment.
  (e) Long-Term Care Hospital Payment Update.--
          (1) [Omitted Amendatory]
          (2) Delayed effective date.--Subsection (m)(2) of 
        section 1886 of the Social Security Act, as added by 
        paragraph (1), shall not apply to discharges occurring 
        on or after July 1, 2007, and before April 1, 2008.
  (f) Expanded Review of Medical Necessity.--
          (1) In general.--The Secretary of Health and Human 
        Services shall provide, under contracts with one or 
        more appropriate fiscal intermediaries or medicare 
        administrative contractors under section 1874A(a)(4)(G) 
        of the Social Security Act (42 U.S.C. 1395kk-
        1(a)(4)(G)), for reviews of the medical necessity of 
        admissions to long-term care hospitals (described in 
        section 1886(d)(1)(B)(iv) of such Act) and continued 
        stay at such hospitals, of individuals entitled to, or 
        enrolled for, benefits under part A of title XVIII of 
        such Act consistent with this subsection. Such reviews 
        shall be made for discharges occurring on or after 
        October 1, 2007.
          (2) Review methodology.--The medical necessity 
        reviews under paragraph (1) shall be conducted on an 
        annual basis in accordance with rules specified by the 
        Secretary. Such reviews shall--
                  (A) provide for a statistically valid and 
                representative sample of admissions of such 
                individuals sufficient to provide results at a 
                95 percent confidence interval; and
                  (B) guarantee that at least 75 percent of 
                overpayments received by long-term care 
                hospitals for medically unnecessary admissions 
                and continued stays of individuals in long-term 
                care hospitals will be identified and recovered 
                and that related days of care will not be 
                counted toward the length of stay requirement 
                contained in section 1886(d)(1)(B)(iv) of the 
                Social Security Act (42 U.S.C. 
                1395ww(d)(1)(B)(iv)).
          (3) Continuation of reviews.--Under contracts under 
        this subsection, the Secretary shall establish an error 
        rate with respect to such reviews that could require 
        further review of the medical necessity of admissions 
        and continued stay in the hospital involved and other 
        actions as determined by the Secretary.
          (4) Termination of required reviews.--
                  (A) In general.--Subject to subparagraph (B), 
                the previous provisions of this subsection 
                shall cease to apply for discharges occurring 
                on or after October 1, 2010.
                  (B) Continuation.--As of the date specified 
                in subparagraph (A), the Secretary shall 
                determine whether to continue to guarantee, 
                through continued medical review and sampling 
                under this paragraph, recovery of at least 75 
                percent of overpayments received by long-term 
                care hospitals due to medically unnecessary 
                admissions and continued stays.
          (5) Funding.--The costs to fiscal intermediaries or 
        medicare administrative contractors conducting the 
        medical necessity reviews under paragraph (1) shall be 
        funded from the aggregate overpayments recouped by the 
        Secretary of Health and Human Services from long-term 
        care hospitals due to medically unnecessary admissions 
        and continued stays. The Secretary may use an amount 
        not in excess of 40 percent of the overpayments 
        recouped under this paragraph to compensate the fiscal 
        intermediaries or Medicare administrative contractors 
        for the costs of services performed.
  (g) Implementation.--For purposes of carrying out the 
provisions of, and amendments made by, this title, in addition 
to any amounts otherwise provided in this title, there are 
appropriated to the Centers for Medicare & Medicaid Services 
Program Management Account, out of any money in the Treasury 
not otherwise appropriated, $35,000,000 for the period of 
fiscal years 2008 and 2009.

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                          SOCIAL SECURITY ACT


TITLE XVIII--HEALTH INSURANCE FOR THE AGED AND DISABLED

           *       *       *       *       *       *       *



Part E--Miscellaneous Provisions

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          payment to hospitals for inpatient hospital services

  Sec. 1886. (a)(1)(A)(i) The Secretary, in determining the 
amount of the payments that may be made under this title with 
respect to operating costs of inpatient hospital services (as 
defined in paragraph (4)) shall not recognize as reasonable (in 
the efficient delivery of health services) costs for the 
provision of such services by a hospital for a cost reporting 
period to the extent such costs exceed the applicable 
percentage (as determined under clause (ii)) of the average of 
such costs for all hospitals in the same grouping as such 
hospital for comparable time periods.
  (ii) For purposes of clause (i), the applicable percentage 
for hospital cost reporting periods beginning--
          (I) on or after October 1, 1982, and before October 
        1, 1983, is 120 percent;
          (II) on or after October 1, 1983, and before October 
        1, 1984, is 115 percent; and
          (III) on or after October 1, 1984, is 110 percent.
  (B)(i) For purposes of subparagraph (A) the Secretary shall 
establish case mix indexes for all short- term hospitals, and 
shall set limits for each hospital based upon the general mix 
of types of medical cases with respect to which such hospital 
provides services for which payment may be made under this 
title.
  (ii) The Secretary shall set such limits for a cost reporting 
period of a hospital--
          (I) by updating available data for a previous period 
        to the immediate preceding cost reporting period by the 
        estimated average rate of change of hospital costs 
        industry-wide, and
          (II) by projecting for the cost reporting period by 
        the applicable percentage increase (as defined in 
        subsection (b)(3)(B)).
  (C) The limitation established under subparagraph (A) for any 
hospital shall in no event be lower than the allowable 
operating costs of inpatient hospital services (as defined in 
paragraph (4)) recognized under this title for such hospital 
for such hospital's last cost reporting period prior to the 
hospital's first cost reporting period for which this section 
is in effect.
  (D) Subparagraph (A) shall not apply to cost reporting 
periods beginning on or after October 1, 1983.
  (2) The Secretary shall provide for such exemptions from, and 
exceptions and adjustments to, the limitation established under 
paragraph (1)(A) as he deems appropriate, including those which 
he deems necessary to take into account--
          (A) the special needs of sole community hospitals, of 
        new hospitals, of risk based health maintenance 
        organizations, and of hospitals which provide atypical 
        services or essential community services, and to take 
        into account extraordinary circumstances beyond the 
        hospital's control, medical and paramedical education 
        costs, significantly fluctuating population in the 
        service area of the hospital, and unusual labor costs,
          (B) the special needs of psychiatric hospitals and of 
        public or other hospitals that serve a significantly 
        disproportionate number of patients who have low income 
        or are entitled to benefits under part A of this title, 
        and
          (C) a decrease in the inpatient hospital services 
        that a hospital provides and that are customarily 
        provided directly by similar hospitals which results in 
        a significant distortion in the operating costs of 
        inpatient hospital services.
  (3) The limitation established under paragraph (1)(A) shall 
not apply with respect to any hospital which--
          (A) is located outside of a standard metropolitan 
        statistical area, and
          (B)(i) has less than 50 beds, and
          (ii) was in operation and had less than 50 beds on 
        the date of the enactment of this section.
  (4) For purposes of this section, the term ``operating costs 
of inpatient hospital services'' includes all routine operating 
costs, ancillary service operating costs, and special care unit 
operating costs with respect to inpatient hospital services as 
such costs are determined on an average per admission or per 
discharge basis (as determined by the Secretary), and includes 
the costs of all services for which payment may be made under 
this title that are provided by the hospital (or by an entity 
wholly owned or operated by the hospital) to the patient during 
the 3 days (or, in the case of a hospital that is not a 
subsection (d) hospital, during the 1 day) immediately 
preceding the date of the patient's admission if such services 
are diagnostic services (including clinical diagnostic 
laboratory tests) or are other services related to the 
admission (as defined by the Secretary). Such term does not 
include costs of approved educational activities, a return on 
equity capital, or, other capital-related costs (as defined by 
the Secretary for periods before October 1, 1987). In applying 
the first sentence of this paragraph, the term ``other services 
related to the admission'' includes all services that are not 
diagnostic services (other than ambulance and maintenance renal 
dialysis services) for which payment may be made under this 
title that are provided by a hospital (or an entity wholly 
owned or operated by the hospital) to a patient--
          (A) on the date of the patient's inpatient admission; 
        or
          (B) during the 3 days (or, in the case of a hospital 
        that is not a subsection (d) hospital, during the 1 
        day) immediately preceding the date of such admission 
        unless the hospital demonstrates (in a form and manner, 
        and at a time, specified by the Secretary) that such 
        services are not related (as determined by the 
        Secretary) to such admission.
  (b)(1) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, if the operating costs of inpatient 
hospital services (as defined in subsection (a)(4)) of a 
hospital (other than a subsection (d) hospital, as defined in 
subsection (d)(1)(B) and other than a rehabilitation facility 
described in subsection (j)(1)) for a cost reporting period 
subject to this paragraph--
          (A) are less than or equal to the target amount (as 
        defined in paragraph (3)) for that hospital for that 
        period, the amount of the payment with respect to such 
        operating costs payable under part A on a per discharge 
        or per admission basis (as the case may be) shall be 
        equal to the amount of such operating costs, plus--
                  (i) 15 percent of the amount by which the 
                target amount exceeds the amount of the 
                operating costs, or
                  (ii) 2 percent of the target amount,
        whichever is less;
          (B) are greater than the target amount but do not 
        exceed 110 percent of the target amount, the amount of 
        the payment with respect to those operating costs 
        payable under part A on a per discharge basis shall 
        equal the target amount; or
          (C) are greater than 110 percent of the target 
        amount, the amount of the payment with respect to such 
        operating costs payable under part A on a per discharge 
        or per admission basis (as the case may be) shall be 
        equal to (i) the target amount, plus (ii) in the case 
        of cost reporting periods beginning on or after October 
        1, 1991, an additional amount equal to 50 percent of 
        the amount by which the operating costs exceed 110 
        percent of the target amount (except that such 
        additional amount may not exceed 10 percent of the 
        target amount) after any exceptions or adjustments are 
        made to such target amount for the cost reporting 
        period;
plus the amount, if any, provided under paragraph (2), except 
that in no case may the amount payable under this title (other 
than on the basis of a DRG prospective payment rate determined 
under subsection (d)) with respect to operating costs of 
inpatient hospital services exceed the maximum amount payable 
with respect to such costs pursuant to subsection (a).
  (2)(A) Except as provided in subparagraph (E), in addition to 
the payment computed under paragraph (1), in the case of an 
eligible hospital (described in subparagraph (B)) for a cost 
reporting period beginning on or after October 1, 1997, the 
amount of payment on a per discharge basis under paragraph (1) 
shall be increased by the lesser of--
          (i) 50 percent of the amount by which the operating 
        costs are less than the expected costs (as defined in 
        subparagraph (D)) for the period; or
          (ii) 1 percent of the target amount for the period.
  (B) For purposes of this paragraph, an ``eligible hospital'' 
means with respect to a cost reporting period, a hospital--
          (i) that has received payments under this subsection 
        for at least 3 full cost reporting periods before that 
        cost reporting period, and
          (ii) whose operating costs for the period are less 
        than the least of its target amount, its trended costs 
        (as defined in subparagraph (C)), or its expected costs 
        (as defined in subparagraph (D)) for the period.
  (C) For purposes of subparagraph (B)(ii), the term ``trended 
costs'' means for a hospital cost reporting period ending in a 
fiscal year--
          (i) in the case of a hospital for which its cost 
        reporting period ending in fiscal year 1996 was its 
        third or subsequent full cost reporting period for 
        which it receives payments under this subsection, the 
        lesser of the operating costs or target amount for that 
        hospital for its cost reporting period ending in fiscal 
        year 1996, or
          (ii) in the case of any other hospital, the operating 
        costs for that hospital for its third full cost 
        reporting period for which it receives payments under 
        this subsection,
increased (in a compounded manner) for each succeeding fiscal 
year (through the fiscal year involved) by the market basket 
percentage increase for the fiscal year.
  (D) For purposes of this paragraph, the term ``expected 
costs'', with respect to the cost reporting period ending in a 
fiscal year, means the lesser of the operating costs of 
inpatient hospital services or target amount per discharge for 
the previous cost reporting period updated by the market basket 
percentage increase (as defined in paragraph (3)(B)(iii)) for 
the fiscal year.
  (E)(i) In the case of an eligible hospital that is a hospital 
or unit that is within a class of hospital described in clause 
(ii) with a 12-month cost reporting period beginning before the 
enactment of this subparagraph, in determining the amount of 
the increase under subparagraph (A), the Secretary shall 
substitute for the percentage of the target amount applicable 
under subparagraph (A)(ii)--
          (I) for a cost reporting period beginning on or after 
        October 1, 2000, and before September 30, 2001, 1.5 
        percent; and
          (II) for a cost reporting period beginning on or 
        after October 1, 2001, and before September 30, 2002, 2 
        percent.
  (ii) For purposes of clause (i), each of the following shall 
be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (iv) of such 
        subsection.
  (3)(A) Except as provided in subparagraph (C) and succeeding 
subparagraphs and in paragraph (7)(A)(ii), for purposes of this 
subsection, the term ``target amount'' means, with respect to a 
hospital for a particular 12-month cost reporting period--
          (i) in the case of the first such reporting period 
        for which this subsection is in effect, the allowable 
        operating costs of inpatient hospital services (as 
        defined in subsection (a)(4)) recognized under this 
        title for such hospital for the preceding 12-month cost 
        reporting period, and
          (ii) in the case of a later reporting period, the 
        target amount for the preceding 12-month cost reporting 
        period,
increased by the applicable percentage increase under 
subparagraph (B) for that particular cost reporting period.
  (B)(i) For purposes of subsection (d) and subsection (j) for 
discharges occurring during a fiscal year, the ``applicable 
percentage increase'' shall be--
          (I) for fiscal year 1986, \1/2\ percent,
          (II) for fiscal year 1987, 1.15 percent,
          (III) for fiscal year 1988, 3.0 percent for hospitals 
        located in a rural area, 1.5 percent for hospitals 
        located in a large urban area (as defined in subsection 
        (d)(2)(D)), and 1.0 percent for hospitals located in 
        other urban areas,
          (IV) for fiscal year 1989, the market basket 
        percentage increase minus 1.5 percentage points for 
        hospitals located in a rural area, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals located in a large urban area, and the market 
        basket percentage increase minus 2.5 percentage points 
        for hospitals located in other urban areas,
          (V) for fiscal year 1990, the market basket 
        percentage increase plus 4.22 percentage points for 
        hospitals located in a rural area, the market basket 
        percentage increase plus 0.12 percentage points for 
        hospitals located in a large urban area, and the market 
        basket percentage increase minus 0.53 percentage points 
        for hospitals located in other urban areas,
          (VI) for fiscal year 1991, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.7 percentage 
        point for hospitals located in a rural area,
          (VII) for fiscal year 1992, the market basket 
        percentage increase minus 1.6 percentage points for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.6 percentage 
        point for hospitals located in a rural area,
          (VIII) for fiscal year 1993, the market basket 
        percentage increase minus 1.55 percentage point for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.55 for 
        hospitals located in a rural area,
          (IX) for fiscal year 1994, the market basket 
        percentage increase minus 2.5 percentage points for 
        hospitals located in a large urban or other urban area, 
        and the market basket percentage increase minus 1.0 
        percentage point for hospitals located in a rural area,
          (X) for fiscal year 1995, the market basket 
        percentage increase minus 2.5 percentage points for 
        hospitals located in a large urban or other urban area, 
        and such percentage increase for hospitals located in a 
        rural area as will provide for the average standardized 
        amount determined under subsection (d)(3)(A) for 
        hospitals located in a rural area being equal to such 
        average standardized amount for hospitals located in an 
        urban area (other than a large urban area),
          (XI) for fiscal year 1996, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals in all areas,
          (XII) for fiscal year 1997, the market basket 
        percentage increase minus 0.5 percentage point for 
        hospitals in all areas,
          (XIII) for fiscal year 1998, 0 percent,
          (XIV) for fiscal year 1999, the market basket 
        percentage increase minus 1.9 percentage points for 
        hospitals in all areas,
          (XV) for fiscal year 2000, the market basket 
        percentage increase minus 1.8 percentage points for 
        hospitals in all areas,
          (XVI) for fiscal year 2001, the market basket 
        percentage increase for hospitals in all areas,
          (XVII) for fiscal year 2002, the market basket 
        percentage increase minus 0.55 percentage points for 
        hospitals in all areas,
          (XVIII) for fiscal year 2003, the market basket 
        percentage increase minus 0.55 percentage points for 
        hospitals in all areas,
          (XIX) for each of fiscal years 2004 through 2006, 
        subject to clause (vii), the market basket percentage 
        increase for hospitals in all areas; and
          (XX) for each subsequent fiscal year, subject to 
        clauses (viii), (ix), (xi), and (xii), the market 
        basket percentage increase for hospitals in all areas.
  (ii) For purposes of subparagraphs (A) and (E), the 
``applicable percentage increase'' for 12-month cost reporting 
periods beginning during--
          (I) fiscal year 1986, is 0.5 percent,
          (II) fiscal year 1987, is 1.15 percent,
          (III) fiscal year 1988, is the market basket 
        percentage increase minus 2.0 percentage points,
          (IV) a subsequent fiscal year ending on or before 
        September 30, 1993, is the market basket percentage 
        increase,
          (V) fiscal years 1994 through 1997, is the market 
        basket percentage increase minus the applicable 
        reduction (as defined in clause (v)(II)), or in the 
        case of a hospital for a fiscal year for which the 
        hospital's update adjustment percentage (as defined in 
        clause (v)(I)) is at least 10 percent, the market 
        basket percentage increase,
          (VI) for fiscal year 1998, is 0 percent,
          (VII) for fiscal years 1999 through 2002, is the 
        applicable update factor specified under clause (vi) 
        for the fiscal year, and
          (VIII) subsequent fiscal years is the market basket 
        percentage increase.
  (iii) For purposes of this subparagraph, the term ``market 
basket percentage increase'' means, with respect to cost 
reporting periods and discharges occurring in a fiscal year, 
the percentage, estimated by the Secretary before the beginning 
of the period or fiscal year, by which the cost of the mix of 
goods and services (including personnel costs but excluding 
nonoperating costs) comprising routine, ancillary, and special 
care unit inpatient hospital services, based on an index of 
appropriately weighted indicators of changes in wages and 
prices which are representative of the mix of goods and 
services included in such inpatient hospital services, for the 
period or fiscal year will exceed the cost of such mix of goods 
and services for the preceding 12-month cost reporting period 
or fiscal year.
  (iv) For purposes of subparagraphs (C) and (D), the 
``applicable percentage increase'' is--
          (I) for 12-month cost reporting periods beginning 
        during fiscal years 1986 through 1993, the applicable 
        percentage increase specified in clause (ii),
          (II) for fiscal year 1994, the market basket 
        percentage increase minus 2.3 percentage points 
        (adjusted to exclude any portion of a cost reporting 
        period beginning during fiscal year 1993 for which the 
        applicable percentage increase is determined under 
        subparagraph (I)),
          (III) for fiscal year 1995, the market basket 
        percentage increase minus 2.2 percentage points, and
          (IV) for fiscal year 1996 and each subsequent fiscal 
        year, the applicable percentage increase under clause 
        (i).
  (v) For purposes of clause (ii)(V)--
          (I) a hospital's ``update adjustment percentage'' for 
        a fiscal year is the percentage by which the hospital's 
        allowable operating costs of inpatient hospital 
        services recognized under this title for the cost 
        reporting period beginning in fiscal year 1990 exceeds 
        the hospital's target amount (as determined under 
        subparagraph (A)) for such cost reporting period, 
        increased for each fiscal year (beginning with fiscal 
        year 1994) by the sum of any of the hospital's 
        applicable reductions under subclause (V) for previous 
        fiscal years; and
          (II) the ``applicable reduction'' with respect to a 
        hospital for a fiscal year is the lesser of 1 
        percentage point or the percentage point difference 
        between 10 percent and the hospital's update adjustment 
        percentage for the fiscal year.
  (vi) For purposes of clause (ii)(VII) for a fiscal year, if a 
hospital's allowable operating costs of inpatient hospital 
services recognized under this title for the most recent cost 
reporting period for which information is available--
          (I) is equal to, or exceeds, 110 percent of the 
        hospital's target amount (as determined under 
        subparagraph (A)) for such cost reporting period, the 
        applicable update factor specified under this clause is 
        the market basket percentage;
          (II) exceeds 100 percent, but is less than 110 
        percent, of such target amount for the hospital, the 
        applicable update factor specified under this clause is 
        0 percent or, if greater, the market basket percentage 
        minus 0.25 percentage points for each percentage point 
        by which such allowable operating costs (expressed as a 
        percentage of such target amount) is less than 110 
        percent of such target amount;
          (III) is equal to, or less than 100 percent, but 
        exceeds \2/3\ of such target amount for the hospital, 
        the applicable update factor specified under this 
        clause is 0 percent or, if greater, the market basket 
        percentage minus 2.5 percentage points; or
          (IV) does not exceed \2/3\ of such target amount for 
        the hospital, the applicable update factor specified 
        under this clause is 0 percent.
  (vii)(I) For purposes of clause (i)(XIX) for fiscal years 
2005 and 2006, in a case of a subsection (d) hospital that does 
not submit data to the Secretary in accordance with subclause 
(II) with respect to such a fiscal year, the applicable 
percentage increase under such clause for such fiscal year 
shall be reduced by 0.4 percentage points. Such reduction shall 
apply only with respect to the fiscal year involved, and the 
Secretary shall not take into account such reduction in 
computing the applicable percentage increase under clause 
(i)(XIX) for a subsequent fiscal year.
  (II) For fiscal years 2005 and 2006, each subsection (d) 
hospital shall submit to the Secretary quality data (for a set 
of 10 indicators established by the Secretary as of November 1, 
2003) that relate to the quality of care furnished by the 
hospital in inpatient settings in a form and manner, and at a 
time, specified by the Secretary for purposes of this clause, 
but with respect to fiscal year 2005, the Secretary shall 
provide for a 30-day grace period for the submission of data by 
a hospital.
  (viii)(I) For purposes of clause (i) for fiscal year 2007 and 
each subsequent fiscal year, in the case of a subsection (d) 
hospital that does not submit, to the Secretary in accordance 
with this clause, data required to be submitted on measures 
selected under this clause with respect to such a fiscal year, 
the applicable percentage increase under clause (i) for such 
fiscal year shall be reduced by 2.0 percentage points (or, 
beginning with fiscal year 2015, by one-quarter of such 
applicable percentage increase (determined without regard to 
clause (ix), (xi), or (xii))). Such reduction shall apply only 
with respect to the fiscal year involved and the Secretary 
shall not take into account such reduction in computing the 
applicable percentage increase under clause (i) for a 
subsequent fiscal year, and the Secretary and the Medicare 
Payment Advisory Commission shall carry out the requirements 
under section 5001(b) of the Deficit Reduction Act of 2005.
  (II) Each subsection (d) hospital shall submit data on 
measures selected under this clause to the Secretary in a form 
and manner, and at a time, specified by the Secretary for 
purposes of this clause. The Secretary may require hospitals to 
submit data on measures that are not used for the determination 
of value-based incentive payments under subsection (o).
  (III) The Secretary shall expand, beyond the measures 
specified under clause (vii)(II) and consistent with the 
succeeding subclauses, the set of measures that the Secretary 
determines to be appropriate for the measurement of the quality 
of care (including medication errors) furnished by hospitals in 
inpatient settings.
  (IV) Effective for payments beginning with fiscal year 2007, 
in expanding the number of measures under subclause (III), the 
Secretary shall begin to adopt the baseline set of performance 
measures as set forth in the November 2005 report by the 
Institute of Medicine of the National Academy of Sciences under 
section 238(b) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003.
  (V) Effective for payments for fiscal years 2008 through 
2012, the Secretary shall add other measures that reflect 
consensus among affected parties and, to the extent feasible 
and practicable, shall include measures set forth by one or 
more national consensus building entities.
  (VI) For purposes of this clause and clause (vii), the 
Secretary may replace any measures or indicators in appropriate 
cases, such as where all hospitals are effectively in 
compliance or the measures or indicators have been subsequently 
shown not to represent the best clinical practice.
  (VII) The Secretary shall establish procedures for making 
information regarding measures submitted under this clause 
available to the public. Such procedures shall ensure that a 
hospital has the opportunity to review the data that are to be 
made public with respect to the hospital prior to such data 
being made public. The Secretary shall report quality measures 
of process, structure, outcome, patients' perspectives on care, 
efficiency, and costs of care that relate to services furnished 
in inpatient settings in hospitals on the Internet website of 
the Centers for Medicare & Medicaid Services.
  (VIII) Effective for payments beginning with fiscal year 
2013, with respect to quality measures for outcomes of care, 
the Secretary shall provide for such risk adjustment as the 
Secretary determines to be appropriate to maintain incentives 
for hospitals to treat patients with severe illnesses or 
conditions.
  (IX)(aa) Subject to item (bb), effective for payments 
beginning with fiscal year 2013, each measure specified by the 
Secretary under this clause shall be endorsed by the entity 
with a contract under section 1890(a).
  (bb) In the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible 
and practical measure has not been endorsed by the entity with 
a contract under section 1890(a), the Secretary may specify a 
measure that is not so endorsed as long as due consideration is 
given to measures that have been endorsed or adopted by a 
consensus organization identified by the Secretary.
  (X) To the extent practicable, the Secretary shall, with 
input from consensus organizations and other stakeholders, take 
steps to ensure that the measures specified by the Secretary 
under this clause are coordinated and aligned with quality 
measures applicable to--
          (aa) physicians under section 1848(k); and
          (bb) other providers of services and suppliers under 
        this title.
  (XI) The Secretary shall establish a process to validate 
measures specified under this clause as appropriate. Such 
process shall include the auditing of a number of randomly 
selected hospitals sufficient to ensure validity of the 
reporting program under this clause as a whole and shall 
provide a hospital with an opportunity to appeal the validation 
of measures reported by such hospital.
  (ix)(I) For purposes of clause (i) for fiscal year 2015 and 
each subsequent fiscal year, in the case of an eligible 
hospital (as defined in subsection (n)(6)(A)) that is not a 
meaningful EHR user (as defined in subsection (n)(3)) for an 
EHR reporting period for such fiscal year, three-quarters of 
the applicable percentage increase otherwise applicable under 
clause (i) (determined without regard to clause (viii), (xi), 
or (xii)) for such fiscal year shall be reduced by 33\1/3\ 
percent for fiscal year 2015, 66\2/3\ percent for fiscal year 
2016, and 100 percent for fiscal year 2017 and each subsequent 
fiscal year. Such reduction shall apply only with respect to 
the fiscal year involved and the Secretary shall not take into 
account such reduction in computing the applicable percentage 
increase under clause (i) for a subsequent fiscal year.
  (II) The Secretary may, on a case-by-case basis, exempt a 
subsection (d) hospital from the application of subclause (I) 
with respect to a fiscal year if the Secretary determines, 
subject to annual renewal, that requiring such hospital to be a 
meaningful EHR user during such fiscal year would result in a 
significant hardship, such as in the case of a hospital in a 
rural area without sufficient Internet access. In no case may a 
hospital be granted an exemption under this subclause for more 
than 5 years.
  (III) For fiscal year 2015 and each subsequent fiscal year, a 
State in which hospitals are paid for services under section 
1814(b)(3) shall adjust the payments to each subsection (d) 
hospital in the State that is not a meaningful EHR user (as 
defined in subsection (n)(3)) in a manner that is designed to 
result in an aggregate reduction in payments to hospitals in 
the State that is equivalent to the aggregate reduction that 
would have occurred if payments had been reduced to each 
subsection (d) hospital in the State in a manner comparable to 
the reduction under the previous provisions of this clause. The 
State shall report to the Secretary the methodology it will use 
to make the payment adjustment under the previous sentence.
  (IV) For purposes of this clause, the term ``EHR reporting 
period'' means, with respect to a fiscal year, any period (or 
periods) as specified by the Secretary.
  (x)(I) The Secretary shall develop standard Internet website 
reports tailored to meet the needs of various stakeholders such 
as hospitals, patients, researchers, and policymakers. The 
Secretary shall seek input from such stakeholders in 
determining the type of information that is useful and the 
formats that best facilitate the use of the information.
  (II) The Secretary shall modify the Hospital Compare Internet 
website to make the use and navigation of that website readily 
available to individuals accessing it.
  (xi)(I) For 2012 and each subsequent fiscal year, after 
determining the applicable percentage increase described in 
clause (i) and after application of clauses (viii) and (ix), 
such percentage increase shall be reduced by the productivity 
adjustment described in subclause (II).
  (II) The productivity adjustment described in this subclause, 
with respect to a percentage, factor, or update for a fiscal 
year, year, cost reporting period, or other annual period, is a 
productivity adjustment equal to the 10-year moving average of 
changes in annual economy-wide private nonfarm business multi-
factor productivity (as projected by the Secretary for the 10-
year period ending with the applicable fiscal year, year, cost 
reporting period, or other annual period).
  (III) The application of subclause (I) may result in the 
applicable percentage increase described in clause (i) being 
less than 0.0 for a fiscal year, and may result in payment 
rates under this section for a fiscal year being less than such 
payment rates for the preceding fiscal year.
  (xii) After determining the applicable percentage increase 
described in clause (i), and after application of clauses 
(viii), (ix), and (xi), the Secretary shall reduce such 
applicable percentage increase--
          (I) for each of fiscal years 2010 and 2011, by 0.25 
        percentage point;
          (II) for each of fiscal years 2012 and 2013, by 0.1 
        percentage point;
          (III) for fiscal year 2014, by 0.3 percentage point;
          (IV) for each of fiscal years 2015 and 2016, by 0.2 
        percentage point; and
          (V) for each of fiscal years 2017, 2018, and 2019, by 
        0.75 percentage point.
The application of this clause may result in the applicable 
percentage increase described in clause (i) being less than 0.0 
for a fiscal year, and may result in payment rates under this 
section for a fiscal year being less than such payment rates 
for the preceding fiscal year.
  (C) In the case of a hospital that is a sole community 
hospital (as defined in subsection (d)(5)(D)(iii)), subject to 
subparagraphs (I) and (L), the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the applicable percentage increases 
                applied to such hospital under this paragraph 
                for cost reporting periods after the base cost 
                reporting period and up to and including such 
                first 12-month cost reporting period,
          (ii) with respect to a later cost reporting period 
        beginning before fiscal year 1994, the target amount 
        for the preceding 12-month cost reporting period, 
        increased by the applicable percentage increase under 
        subparagraph (B)(iv) for discharges occurring in the 
        fiscal year in which that later cost reporting period 
        begins,
          (iii) with respect to discharges occurring in fiscal 
        year 1994, the target amount for the cost reporting 
        period beginning in fiscal year 1993 increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv), or
          (iv) with respect to discharges occurring in fiscal 
        year 1995 and each subsequent fiscal year, the target 
        amount for the preceding year increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv).
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (D) For cost reporting periods ending on or before September 
30, 1994, and for cost reporting periods occurring on or after 
October 1, 1997, and before October 1, 2017, in the case of a 
hospital that is a medicare-dependent, small rural hospital (as 
defined in subsection (d)(5)(G)), subject to subparagraph (K), 
the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the applicable percentage increases 
                applied to such hospital under this paragraph 
                for cost reporting periods after the base cost 
                reporting period and up to and including such 
                first 12-month cost reporting period, or
          (ii) with respect to a later cost reporting period 
        beginning before fiscal year 1994, the target amount 
        for the preceding 12-month cost reporting period, 
        increased by the applicable percentage increase under 
        subparagraph (B)(iv) for discharges occurring in the 
        fiscal year in which that later cost reporting period 
        begins,
          (iii) with respect to discharges occurring in fiscal 
        year 1994, the target amount for the cost reporting 
        period beginning in fiscal year 1993 increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv), and
          (iv) with respect to discharges occurring during 
        fiscal year 1998 through fiscal year 2017, the target 
        amount for the preceding year increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv).
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (E) In the case of a hospital described in clause (v) of 
subsection (d)(1)(B), the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the sum of the applicable percentage 
                increases applied to such hospital under this 
                paragraph for cost reporting periods after the 
                base cost reporting period and up to and 
                including such first 12-month cost reporting 
                period, or
          (ii) with respect to a later cost reporting period, 
        the target amount for the preceding 12-month cost 
        reporting period, increased by the applicable 
        percentage increase under subparagraph (B)(ii) for that 
        later cost reporting period.
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (F)(i) In the case of a hospital (or unit described in the 
matter following clause (v) of subsection (d)(1)(B)) that 
received payment under this subsection for inpatient hospital 
services furnished during cost reporting periods beginning 
before October 1, 1990, that is within a class of hospital 
described in clause (iii), and that elects (in a form and 
manner determined by the Secretary) this subparagraph to apply 
to the hospital, the target amount for the hospital's 12-month 
cost reporting period beginning during fiscal year 1998 is 
equal to the average described in clause (ii).
  (ii) The average described in this clause for a hospital or 
unit shall be determined by the Secretary as follows:
          (I) The Secretary shall determine the allowable 
        operating costs for inpatient hospital services for the 
        hospital or unit for each of the 5 cost reporting 
        periods for which the Secretary has the most recent 
        settled cost reports as of the date of the enactment of 
        this subparagraph.
          (II) The Secretary shall increase the amount 
        determined under subclause (I) for each cost reporting 
        period by the applicable percentage increase under 
        subparagraph (B)(ii) for each subsequent cost reporting 
        period up to the cost reporting period described in 
        clause (i).
          (III) The Secretary shall identify among such 5 cost 
        reporting periods the cost reporting periods for which 
        the amount determined under subclause (II) is the 
        highest, and the lowest.
          (IV) The Secretary shall compute the averages of the 
        amounts determined under subclause (II) for the 3 cost 
        reporting periods not identified under subclause (III).
  (iii) For purposes of this subparagraph, each of the 
following shall be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (III) Hospitals described in clause (iii) of such 
        subsection.
          (IV) Hospitals described in clause (iv) of such 
        subsection.
          (V) Hospitals described in clause (v) of such 
        subsection.
  (G)(i) In the case of a qualified long-term care hospital (as 
defined in clause (ii)) that elects (in a form and manner 
determined by the Secretary) this subparagraph to apply to the 
hospital, the target amount for the hospital's 12-month cost 
reporting period beginning during fiscal year 1998 is equal to 
the allowable operating costs of inpatient hospital services 
(as defined in subsection (a)(4)) recognized under this title 
for the hospital for the 12-month cost reporting period 
beginning during fiscal year 1996, increased by the applicable 
percentage increase for the cost reporting period beginning 
during fiscal year 1997.
  (ii) In clause (i), a ``qualified long-term care hospital'' 
means, with respect to a cost reporting period, a hospital 
described in clause (iv) of subsection (d)(1)(B) during each of 
the 2 cost reporting periods for which the Secretary has the 
most recent settled cost reports as of the date of the 
enactment of this subparagraph for each of which--
          (I) the hospital's allowable operating costs of 
        inpatient hospital services recognized under this title 
        exceeded 115 percent of the hospital's target amount, 
        and
          (II) the hospital would have a disproportionate 
        patient percentage of at least 70 percent (as 
        determined by the Secretary under subsection 
        (d)(5)(F)(vi)) if the hospital were a subsection (d) 
        hospital.
  (H)(i) In the case of a hospital or unit that is within a 
class of hospital described in clause (iv), for a cost 
reporting period beginning during fiscal years 1998 through 
2002, the target amount for such a hospital or unit may not 
exceed the amount as updated up to or for such cost reporting 
period under clause (ii).
  (ii)(I) In the case of a hospital or unit that is within a 
class of hospital described in clause (iv), the Secretary shall 
estimate the 75th percentile of the target amounts for such 
hospitals within such class for cost reporting periods ending 
during fiscal year 1996, as adjusted under clause (iii).
  (II) The Secretary shall update the amount determined under 
subclause (I), for each cost reporting period after the cost 
reporting period described in such subclause and up to the 
first cost reporting period beginning on or after October 1, 
1997, by a factor equal to the market basket percentage 
increase.
  (III) For cost reporting periods beginning during each of 
fiscal years 1999 through 2002, subject to subparagraph (J), 
the Secretary shall update such amount by a factor equal to the 
market basket percentage increase.
  (iii) In applying clause (ii)(I) in the case of a hospital or 
unit, the Secretary shall provide for an appropriate adjustment 
to the labor-related portion of the amount determined under 
such subparagraph to take into account differences between 
average wage-related costs in the area of the hospital and the 
national average of such costs within the same class of 
hospital.
  (iv) For purposes of this subparagraph, each of the following 
shall be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (III) Hospitals described in clause (iv) of such 
        subsection.
  (I)(i) Subject to subparagraph (L), for cost reporting 
periods beginning on or after October 1, 2000, in the case of a 
sole community hospital there shall be substituted for the 
amount otherwise determined under subsection (d)(5)(D)(i), if 
such substitution results in a greater amount of payment under 
this section for the hospital--
          (I) with respect to discharges occurring in fiscal 
        year 2001, 75 percent of the amount otherwise 
        applicable to the hospital under subsection 
        (d)(5)(D)(i) (referred to in this clause as the 
        ``subsection (d)(5)(D)(i) amount'') and 25 percent of 
        the rebased target amount (as defined in clause (ii));
          (II) with respect to discharges occurring in fiscal 
        year 2002, 50 percent of the subsection (d)(5)(D)(i) 
        amount and 50 percent of the rebased target amount;
          (III) with respect to discharges occurring in fiscal 
        year 2003, 25 percent of the subsection (d)(5)(D)(i) 
        amount and 75 percent of the rebased target amount; and
          (IV) with respect to discharges occurring after 
        fiscal year 2003, 100 percent of the rebased target 
        amount.
  (ii) For purposes of this subparagraph, the ``rebased target 
amount'' has the meaning given the term ``target amount'' in 
subparagraph (C) except that--
          (I) there shall be substituted for the base cost 
        reporting period the 12-month cost reporting period 
        beginning during fiscal year 1996;
          (II) any reference in subparagraph (C)(i) to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after October 1, 2000; 
        and
          (III) applicable increase percentage shall only be 
        applied under subparagraph (C)(iv) for discharges 
        occurring in fiscal years beginning with fiscal year 
        2002.
  (iii) In no case shall a hospital be denied treatment as a 
sole community hospital or payment (on the basis of a target 
rate as such as a hospital) because data are unavailable for 
any cost reporting period due to changes in ownership, changes 
in fiscal intermediaries, or other extraordinary circumstances, 
so long as data for at least one applicable base cost reporting 
period is available.
  (J) For cost reporting periods beginning during fiscal year 
2001, for a hospital described in subsection (d)(1)(B)(iv)--
          (i) the limiting or cap amount otherwise determined 
        under subparagraph (H) shall be increased by 2 percent; 
        and
          (ii) the target amount otherwise determined under 
        subparagraph (A) shall be increased by 25 percent 
        (subject to the limiting or cap amount determined under 
        subparagraph (H), as increased by clause (i)).
  (K)(i) With respect to discharges occurring on or after 
October 1, 2006, in the case of a medicare-dependent, small 
rural hospital, for purposes of applying subparagraph (D)--
          (I) there shall be substituted for the base cost 
        reporting period described in subparagraph (D)(i) the 
        12-month cost reporting period beginning during fiscal 
        year 2002; and
          (II) any reference in such subparagraph to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after October 1, 2006.
  (ii) This subparagraph shall only apply to a hospital if the 
substitution described in clause (i)(I) results in an increase 
in the target amount under subparagraph (D) for the hospital.
  (L)(i) For cost reporting periods beginning on or after 
January 1, 2009, in the case of a sole community hospital there 
shall be substituted for the amount otherwise determined under 
subsection (d)(5)(D)(i) of this section, if such substitution 
results in a greater amount of payment under this section for 
the hospital, the subparagraph (L) rebased target amount.
  (ii) For purposes of this subparagraph, the term 
``subparagraph (L) rebased target amount'' has the meaning 
given the term ``target amount'' in subparagraph (C), except 
that--
          (I) there shall be substituted for the base cost 
        reporting period the 12-month cost reporting period 
        beginning during fiscal year 2006;
          (II) any reference in subparagraph (C)(i) to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after January 1, 2009; 
        and
          (III) the applicable percentage increase shall only 
        be applied under subparagraph (C)(iv) for discharges 
        occurring on or after January 1, 2009.
  (4)(A)(i) The Secretary shall provide for an exception and 
adjustment to (and in the case of a hospital described in 
subsection (d)(1)(B)(iii), may provide an exemption from) the 
method under this subsection for determining the amount of 
payment to a hospital where events beyond the hospital's 
control or extraordinary circumstances, including changes in 
the case mix of such hospital, create a distortion in the 
increase in costs for a cost reporting period (including any 
distortion in the costs for the base period against which such 
increase is measured). The Secretary may provide for such other 
exemptions from, and exceptions and adjustments to, such method 
as the Secretary deems appropriate, including the assignment of 
a new base period which is more representative, as determined 
by the Secretary, of the reasonable and necessary cost of 
inpatient services and including those which he deems necessary 
to take into account a decrease in the inpatient hospital 
services that a hospital provides and that are customarily 
provided directly by similar hospitals which results in a 
significant distortion in the operating costs of inpatient 
hospital services. The Secretary shall announce a decision on 
any request for an exemption, exception, or adjustment under 
this paragraph not later than 180 days after receiving a 
completed application from the intermediary for such exemption, 
exception, or adjustment, and shall include in such decision a 
detailed explanation of the grounds on which such request was 
approved or denied.
  (ii) The payment reductions under paragraph (3)(B)(ii)(V) 
shall not be considered by the Secretary in making adjustments 
pursuant to clause (i). In making such reductions, the 
Secretary shall treat the applicable update factor described in 
paragraph (3)(B)(vi) for a fiscal year as being equal to the 
market basket percentage for that year.
  (B) In determining under subparagraph (A) whether to assign a 
new base period which is more representative of the reasonable 
and necessary cost to a hospital of providing inpatient 
services, the Secretary shall take into consideration--
          (i) changes in applicable technologies and medical 
        practices, or differences in the severity of illness 
        among patients, that increase the hospital's costs;
          (ii) whether increases in wages and wage-related 
        costs for hospitals located in the geographic area in 
        which the hospital is located exceed the average of the 
        increases in such costs paid by hospitals in the United 
        States; and
          (iii) such other factors as the Secretary considers 
        appropriate in determining increases in the hospital's 
        costs of providing inpatient services.
  (C) Paragraph (1) shall not apply to payment of hospitals 
which is otherwise determined under paragraph (3) of section 
1814(b).
  (5) In the case of any hospital having any cost reporting 
period of other than a 12-month period, the Secretary shall 
determine the 12-month period which shall be used for purposes 
of this section.
  (6) In the case of any hospital which becomes subject to the 
taxes under section 3111 of the Internal Revenue Code of 1954, 
with respect to any or all of its employees, for part or all of 
a cost reporting period, and was not subject to such taxes with 
respect to any or all of its employees for all or part of the 
12-month base cost reporting period referred to in subsection 
(b)(3)(A)(i), the Secretary shall provide for an adjustment by 
increasing the base period amount described in such subsection 
for such hospital by an amount equal to the amount of such 
taxes which would have been paid or accrued by such hospital 
for such base period if such hospital had been subject to such 
taxes for all of such base period with respect to all its 
employees, minus the amount of any such taxes actually paid or 
accrued for such base period.
  (7)(A) Notwithstanding paragraph (1), in the case of a 
hospital or unit that is within a class of hospital described 
in subparagraph (B) which first receives payments under this 
section on or after October 1, 1997--
          (i) for each of the first 2 cost reporting periods 
        for which the hospital has a settled cost report, the 
        amount of the payment with respect to operating costs 
        described in paragraph (1) under part A on a per 
        discharge or per admission basis (as the case may be) 
        is equal to the lesser of--
                  (I) the amount of operating costs for such 
                respective period, or
                  (II) 110 percent of the national median (as 
                estimated by the Secretary) of the target 
                amount for hospitals in the same class as the 
                hospital for cost reporting periods ending 
                during fiscal year 1996, updated by the 
                hospital market basket increase percentage to 
                the fiscal year in which the hospital first 
                received payments under this section, as 
                adjusted under subparagraph (C); and
          (ii) for purposes of computing the target amount for 
        the subsequent cost reporting period, the target amount 
        for the preceding cost reporting period is equal to the 
        amount determined under clause (i) for such preceding 
        period.
  (B) For purposes of this paragraph, each of the following 
shall be treated as a separate class of hospital:
          (i) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (ii) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (iii) Hospitals described in clause (iv) of such 
        subsection.
  (C) In applying subparagraph (A)(i)(II) in the case of a 
hospital or unit, the Secretary shall provide for an 
appropriate adjustment to the labor-related portion of the 
amount determined under such subparagraph to take into account 
differences between average wage-related costs in the area of 
the hospital and the national average of such costs within the 
same class of hospital.
  (c)(1) The Secretary may provide, in his discretion, that 
payment with respect to services provided by a hospital in a 
State may be made in accordance with a hospital reimbursement 
control system in a State, rather than in accordance with the 
other provisions of this title, if the chief executive officer 
of the State requests such treatment and if--
          (A) the Secretary determines that the system, if 
        approved under this subsection, will apply (i) to 
        substantially all non- Federal acute care hospitals (as 
        defined by the Secretary) in the State and (ii) to the 
        review of at least 75 percent of all revenues or 
        expenses in the State for inpatient hospital services 
        and of revenues or expenses for inpatient hospital 
        services provided under the State's plan approved under 
        title XIX;
          (B) the Secretary has been provided satisfactory 
        assurances as to the equitable treatment under the 
        system of all entities (including Federal and State 
        programs) that pay hospitals for inpatient hospital 
        services, of hospital employees, and of hospital 
        patients;
          (C) the Secretary has been provided satisfactory 
        assurances that under the system, over 36-month periods 
        (the first such period beginning with the first month 
        in which this subsection applies to that system in the 
        State), the amount of payments made under this title 
        under such system will not exceed the amount of 
        payments which would otherwise have been made under 
        this title not using such system;
          (D) the Secretary determines that the system will not 
        preclude an eligible organization (as defined in 
        section 1876(b)) from negotiating directly with 
        hospitals with respect to the organization's rate of 
        payment for inpatient hospital services; and
          (E) the Secretary determines that the system requires 
        hospitals to meet the requirement of section 
        1866(a)(1)(G) and the system provides for the exclusion 
        of certain costs in accordance with section 1862(a)(14) 
        (except for such waivers thereof as the Secretary 
        provides by regulation).
The Secretary cannot deny the application of a State under this 
subsection on the ground that the State's hospital 
reimbursement control system is based on a payment methodology 
other than on the basis of a diagnosis-related group or on the 
ground that the amount of payments made under this title under 
such system must be less than the amount of payments which 
would otherwise have been made under this title not using such 
system. If the Secretary determines that the conditions 
described in subparagraph (C) are based on maintaining payment 
amounts at no more than a specified percentage increase above 
the payment amounts in a base period, the State has the option 
of applying such test (for inpatient hospital services under 
part A) on an aggregate payment basis or on the basis of the 
amount of payment per inpatient discharge or admission. If the 
Secretary determines that the conditions described in 
subparagraph (C) are based on maintaining aggregate payment 
amounts below a national average percentage increase in total 
payments under part A for inpatient hospital services, the 
Secretary cannot deny the application of a State under this 
subsection on the ground that the State's rate of increase in 
such payments for such services must be less than such national 
average rate of increase.
  (2) In determining under paragraph (1)(C) the amount of 
payment which would otherwise have been made under this title 
for a State, the Secretary may provide for appropriate 
adjustment of such amount to take into account previous 
reductions effected in the amount of payments made under this 
title in the State due to the operation of the hospital 
reimbursement control system in the State if the system has 
resulted in an aggregate rate of increase in operating costs of 
inpatient hospital services (as defined in subsection (a)(4)) 
under this title for hospitals in the State which is less than 
the aggregate rate of increase in such costs under this title 
for hospitals in the United States.
  (3) The Secretary shall discontinue payments under a system 
described in paragraph (1) if the Secretary--
          (A) determines that the system no longer meets the 
        requirements of subparagraphs (A), (D), and (E) of 
        paragraph (1) and, if applicable, the requirements of 
        paragraph (5), or
          (B) has reason to believe that the assurances 
        described in subparagraph (B) or (C) of paragraph (1) 
        (or, if applicable, in paragraph (5)) are not being (or 
        will not be) met.
  (4) The Secretary shall approve the request of a State under 
paragraph (1) with respect to a hospital reimbursement control 
system if--
          (A) the requirements of subparagraphs (A), (B), (C), 
        (D), and (E) of paragraph (1) have been met with 
        respect to the system, and
          (B) with respect to that system a waiver of certain 
        requirements of title XVIII of the Social Security Act 
        has been approved on or before (and which is in effect 
        as of) the date of the enactment of the Social Security 
        Amendments of 1983, pursuant to section 402(a) of the 
        Social Security Amendments of 1967 or section 222(a) of 
        the Social Security Amendments of 1972.
With respect to a State system described in this paragraph, the 
Secretary shall judge the effectiveness of such system on the 
basis of its rate of increase or inflation in inpatient 
hospital payments for individuals under this title, as compared 
to the national rate of increase or inflation for such 
payments, with the State retaining the option to have the test 
applied on the basis of the aggregate payments under the State 
system as compared to aggregate payments which would have been 
made under the national system since October 1, 1984, to the 
most recent date for which annual data are available.
  (5) The Secretary shall approve the request of a State under 
paragraph (1) with respect to a hospital reimbursement control 
system if--
          (A) the requirements of subparagraphs (A), (B), (C), 
        (D), and (E) of paragraph (1) have been met with 
        respect to the system;
          (B) the Secretary determines that the system--
                  (i) is operated directly by the State or by 
                an entity designated pursuant to State law,
                  (ii) provides for payment of hospitals 
                covered under the system under a methodology 
                (which sets forth exceptions and adjustments, 
                as well as any method for changes in the 
                methodology) by which rates or amounts to be 
                paid for hospital services during a specified 
                period are established under the system prior 
                to the defined rate period, and
                  (iii) hospitals covered under the system will 
                make such reports (in lieu of cost and other 
                reports, identified by the Secretary, otherwise 
                required under this title) as the Secretary may 
                require in order to properly monitor assurances 
                provided under this subsection;
          (C) the State has provided the Secretary with 
        satisfactory assurances that operation of the system 
        will not result in any change in hospital admission 
        practices which result in--
                  (i) a significant reduction in the proportion 
                of patients (receiving hospital services 
                covered under the system) who have no third-
                party coverage and who are unable to pay for 
                hospital services,
                  (ii) a significant reduction in the 
                proportion of individuals admitted to hospitals 
                for inpatient hospital services for which 
                payment is (or is likely to be) less than the 
                anticipated charges for or costs of such 
                services,
                  (iii) the refusal to admit patients who would 
                be expected to require unusually costly or 
                prolonged treatment for reasons other than 
                those related to the appropriateness of the 
                care available at the hospital, or
                  (iv) the refusal to provide emergency 
                services to any person who is in need of 
                emergency services if the hospital provides 
                such services;
          (D) any change by the State in the system which has 
        the effect of materially reducing payments to hospitals 
        can only take effect upon 60 days notice to the 
        Secretary and to the hospitals the payment to which is 
        likely to be materially affected by the change; and
          (E) the State has provided the Secretary with 
        satisfactory assurances that in the development of the 
        system the State has consulted with local governmental 
        officials concerning the impact of the system on public 
        hospitals.
The Secretary shall respond to requests of States under this 
paragraph within 60 days of the date the request is submitted 
to the Secretary.
  (6) If the Secretary determines that the assurances described 
in paragraph (1)(C) have not been met with respect to any 36-
month period, the Secretary may reduce payments under this 
title to hospitals under the system in an amount equal to the 
amount by which the payment under this title under such system 
for such period exceeded the amount of payments which would 
otherwise have been made under this title not using such 
system.
  (7) In the case of a State which made a request under 
paragraph (5) before December 31, 1984, for the approval of a 
State hospital reimbursement control system and which request 
was approved--
          (A) in applying paragraphs (1)(C) and (6), a 
        reference to a ``36-month period'' is deemed a 
        reference to a ``48-month period'', and
          (B) in order to allow the State the opportunity to 
        provide the assurances described in paragraph (1)(C) 
        for a 48-month period, the Secretary may not 
        discontinue payments under the system, under the 
        authority of paragraph (3)(A) because the Secretary has 
        reason to believe that such assurances are not being 
        (or will not be) met, before July 1, 1986.
  (d)(1)(A) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, the amount of the payment with 
respect to the operating costs of inpatient hospital services 
(as defined in subsection (a)(4)) of a subsection (d) hospital 
(as defined in subparagraph (B)) for inpatient hospital 
discharges in a cost reporting period or in a fiscal year--
          (i) beginning on or after October 1, 1983, and before 
        October 1, 1984, is equal to the sum of--
                  (I) the target percentage (as defined in 
                subparagraph (C)) of the hospital's target 
                amount for the cost reporting period (as 
                defined in subsection (b)(3)(A), but determined 
                without the application of subsection (a)), and
                  (II) the DRG percentage (as defined in 
                subparagraph (C)) of the regional adjusted DRG 
                prospective payment rate determined under 
                paragraph (2) for such discharges;
          (ii) beginning on or after October 1, 1984, and 
        before October 1, 1987, is equal to the sum of--
                  (I) the target percentage (as defined in 
                subparagraph (C)) of the hospital's target 
                amount for the cost reporting period (as 
                defined in subsection (b)(3)(A), but determined 
                without the application of subsection (a)), and
                  (II) the DRG percentage (as defined in 
                subparagraph (C)) of the applicable combined 
                adjusted DRG prospective payment rate 
                determined under subparagraph (D) for such 
                discharges; or
          (iii) beginning on or after April 1, 1988, is equal 
        to
                  (I) the national adjusted DRG prospective 
                payment rate determined under paragraph (3) for 
                such discharges, or
                  (II) for discharges occurring during a fiscal 
                year ending on or before September 30, 1996, 
                the sum of 85 percent of the national adjusted 
                DRG prospective payment rate determined under 
                paragraph (3) for such discharges and 15 
                percent of the regional adjusted DRG 
                prospective payment rate determined under such 
                paragraph, but only if the average standardized 
                amount (described in clause (i)(I) or clause 
                (ii)(I) of paragraph (3)(D)) for hospitals 
                within the region of, and in the same large 
                urban or other area (or, for discharges 
                occurring during a fiscal year ending on or 
                before September 30, 1994, the same rural, 
                large urban, or other urban area) as, the 
                hospital is greater than the average 
                standardized amount (described in the 
                respective clause) for hospitals within the 
                United States in that type of area for 
                discharges occurring during such fiscal year.
  (B) As used in this section, the term ``subsection (d) 
hospital'' means a hospital located in one of the fifty States 
or the District of Columbia other than--
          (i) a psychiatric hospital (as defined in section 
        1861(f)),
          (ii) a rehabilitation hospital (as defined by the 
        Secretary),
          (iii) a hospital whose inpatients are predominantly 
        individuals under 18 years of age,
          (iv)(I) a hospital which has an average inpatient 
        length of stay (as determined by the Secretary) of 
        greater than 25 days, or
          (II) a hospital that first received payment under 
        this subsection in 1986 which has an average inpatient 
        length of stay (as determined by the Secretary) of 
        greater than 20 days and that has 80 percent or more of 
        its annual medicare inpatient discharges with a 
        principal diagnosis that reflects a finding of 
        neoplastic disease in the 12-month cost reporting 
        period ending in fiscal year 1997, or
          (v)(I) a hospital that the Secretary has classified, 
        at any time on or before December 31, 1990, (or, in the 
        case of a hospital that, as of the date of the 
        enactment of this clause, is located in a State 
        operating a demonstration project under section 
        1814(b), on or before December 31, 1991) for purposes 
        of applying exceptions and adjustments to payment 
        amounts under this subsection, as a hospital involved 
        extensively in treatment for or research on cancer,
          (II) a hospital that was recognized as a 
        comprehensive cancer center or clinical cancer research 
        center by the National Cancer Institute of the National 
        Institutes of Health as of April 20, 1983, that is 
        located in a State which, as of December 19, 1989, was 
        not operating a demonstration project under section 
        1814(b), that applied and was denied, on or before 
        December 31, 1990, for classification as a hospital 
        involved extensively in treatment for or research on 
        cancer under this clause (as in effect on the day 
        before the date of the enactment of this subclause), 
        that as of the date of the enactment of this subclause, 
        is licensed for less than 50 acute care beds, and that 
        demonstrates for the 4-year period ending on December 
        31, 1996, that at least 50 percent of its total 
        discharges have a principal finding of neoplastic 
        disease, as defined in subparagraph (E), or
          (III) a hospital that was recognized as a clinical 
        cancer research center by the National Cancer Institute 
        of the National Institutes of Health as of February 18, 
        1998, that has never been reimbursed for inpatient 
        hospital services pursuant to a reimbursement system 
        under a demonstration project under section 1814(b), 
        that is a freestanding facility organized primarily for 
        treatment of and research on cancer and is not a unit 
        of another hospital, that as of the date of the 
        enactment of this subclause, is licensed for 162 acute 
        care beds, and that demonstrates for the 4-year period 
        ending on June 30, 1999, that at least 50 percent of 
        its total discharges have a principal finding of 
        neoplastic disease, as defined in subparagraph (E);
and, in accordance with regulations of the Secretary, does not 
include a psychiatric or rehabilitation unit of the hospital 
which is a distinct part of the hospital (as defined by the 
Secretary). A hospital that was classified by the Secretary on 
or before September 30, 1995, as a hospital described in clause 
(iv) shall continue to be so classified notwithstanding that it 
is located in the same building as, or on the same campus as, 
another hospital.
  (C) For purposes of this subsection, for cost reporting 
periods beginning--
          (i) on or after October 1, 1983, and before October 
        1, 1984, the ``target percentage'' is 75 percent and 
        the ``DRG percentage'' is 25 percent;
          (ii) on or after October 1, 1984, and before October 
        1, 1985, the ``target percentage'' is 50 percent and 
        the ``DRG percentage'' is 50 percent;
          (iii) on or after October 1, 1985, and before October 
        1, 1986, the ``target percentage'' is 45 percent and 
        the ``DRG percentage'' is 55 percent; and
          (iv) on or after October 1, 1986, and before October 
        1, 1987, the ``target percentage'' is 25 percent and 
        the ``DRG percentage'' is 75 percent.
  (D) For purposes of subparagraph (A)(ii)(II), the 
``applicable combined adjusted DRG prospective payment rate'' 
for discharges occurring--
          (i) on or after October 1, 1984, and before October 
        1, 1986, is a combined rate consisting of 25 percent of 
        the national adjusted DRG prospective payment rate, and 
        75 percent of the regional adjusted DRG prospective 
        payment rate, determined under paragraph (3) for such 
        discharges; and
          (ii) on or after October 1, 1986, and before October 
        1, 1987, is a combined rate consisting of 50 percent of 
        the national adjusted DRG prospective payment rate, and 
        50 percent of the regional adjusted DRG prospective 
        payment rate, determined under paragraph (3) for such 
        discharges.
  (E) For purposes of subclauses (II) and (III) of subparagraph 
(B)(v) only, the term ``principal finding of neoplastic 
disease'' means the condition established after study to be 
chiefly responsible for occasioning the admission of a patient 
to a hospital, except that only discharges with ICD-9-CM 
principal diagnosis codes of 140 through 239, V58.0, V58.1, 
V66.1, V66.2, or 990 will be considered to reflect such a 
principal diagnosis.
  (2) The Secretary shall determine a national adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in fiscal year 1984 involving inpatient hospital services of a 
subsection (d) hospital in the United States, and shall 
determine a regional adjusted DRG prospective payment rate for 
such discharges in each region, for which payment may be made 
under part A of this title. Each such rate shall be determined 
for hospitals located in urban or rural areas within the United 
States or within each such region, respectively, as follows:
          (A) Determining allowable individual hospital costs 
        for base period.--The Secretary shall determine the 
        allowable operating costs per discharge of inpatient 
        hospital services for the hospital for the most recent 
        cost reporting period for which data are available.
          (B) Updating for fiscal year 1984.--The Secretary 
        shall update each amount determined under subparagraph 
        (A) for fiscal year 1984 by--
                  (i) updating for fiscal year 1983 by the 
                estimated average rate of change of hospital 
                costs industry-wide between the cost reporting 
                period used under such subparagraph and fiscal 
                year 1983 and the most recent case-mix data 
                available, and
                  (ii) projecting for fiscal year 1984 by the 
                applicable percentage increase (as defined in 
                subsection (b)(3)(B)) for fiscal year 1984.
          (C) Standardizing amounts.--The Secretary shall 
        standardize the amount updated under subparagraph (B) 
        for each hospital by--
                  (i) excluding an estimate of indirect medical 
                education costs (taking into account, for 
                discharges occurring after September 30, 1986, 
                the amendments made by section 9104(a) of the 
                Medicare and Medicaid Budget Reconciliation 
                Amendments of 1985), except that the Secretary 
                shall not take into account any reduction in 
                the amount of additional payments under 
                paragraph (5)(B)(ii) resulting from the 
                amendment made by section 4621(a)(1) of the 
                Balanced Budget Act of 1997 or any additional 
                payments under such paragraph resulting from 
                the application of section 111 of the Medicare, 
                Medicaid, and SCHIP Balanced Budget Refinement 
                Act of 1999, of section 302 of the Medicare, 
                Medicaid, and SCHIP Benefits Improvement and 
                Protection Act of 2000, or the Medicare 
                Prescription Drug, Improvement, and 
                Modernization Act of 2003,
                  (ii) adjusting for variations among hospitals 
                by area in the average hospital wage level,
                  (iii) adjusting for variations in case mix 
                among hospitals, and
                  (iv) for discharges occurring on or after 
                October 1, 1986, excluding an estimate of the 
                additional payments to certain hospitals to be 
                made under paragraph (5)(F), except that the 
                Secretary shall not exclude additional payments 
                under such paragraph made as a result of the 
                enactment of section 6003(c) of the Omnibus 
                Budget Reconciliation Act of 1989, the 
                enactment of section 4002(b) of the Omnibus 
                Budget Reconciliation Act of 1990, the 
                enactment of section 303 of the Medicare, 
                Medicaid, and SCHIP Benefits Improvement and 
                Protection Act of 2000, or the enactment of 
                section 402(a)(1) of the Medicare Prescription 
                Drug, Improvement, and Modernization Act of 
                2003.
          (D) Computing urban and rural averages.--The 
        Secretary shall compute an average of the standardized 
        amounts determined under subparagraph (C) for the 
        United States and for each region--
                  (i) for all subsection (d) hospitals located 
                in an urban area within the United States or 
                that region, respectively, and
                  (ii) for all subsection (d) hospitals located 
                in a rural area within the United States or 
                that region, respectively.
        For purposes of this subsection, the term ``region'' 
        means one of the nine census divisions, comprising the 
        fifty States and the District of Columbia, established 
        by the Bureau of the Census for statistical and 
        reporting purposes; the term ``urban area'' means an 
        area within a Metropolitan Statistical Area (as defined 
        by the Office of Management and Budget) or within such 
        similar area as the Secretary has recognized under 
        subsection (a) by regulation; the term ``large urban 
        area'' means, with respect to a fiscal year, such an 
        urban area which the Secretary determines (in the 
        publications described in subsection (e)(5) before the 
        fiscal year) has a population of more than 1,000,000 
        (as determined by the Secretary based on the most 
        recent available population data published by the 
        Bureau of the Census); and the term ``rural area'' 
        means any area outside such an area or similar area. A 
        hospital located in a Metropolitan Statistical Area 
        shall be deemed to be located in the region in which 
        the largest number of the hospitals in the same 
        Metropolitan Statistical Area are located, or, at the 
        option of the Secretary, the region in which the 
        majority of the inpatient discharges (with respect to 
        which payments are made under this title) from 
        hospitals in the same Metropolitan Statistical Area are 
        made.
          (E) Reducing for value of outlier payments.--The 
        Secretary shall reduce each of the average standardized 
        amounts determined under subparagraph (D) by a 
        proportion equal to the proportion (estimated by the 
        Secretary) of the amount of payments under this 
        subsection based on DRG prospective payment rates which 
        are additional payments described in paragraph (5)(A) 
        (relating to outlier payments).
          (F) Maintaining budget neutrality.--The Secretary 
        shall adjust each of such average standardized amounts 
        as may be required under subsection (e)(1)(B) for that 
        fiscal year.
          (G) Computing drg-specific rates for urban and rural 
        hospitals in the united states and in each region.--For 
        each discharge classified within a diagnosis-related 
        group, the Secretary shall establish a national DRG 
        prospective payment rate and shall establish a regional 
        DRG prospective payment rate for each region, each of 
        which is equal--
                  (i) for hospitals located in an urban area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (D), 
                        reduced under subparagraph (E), and 
                        adjusted under subparagraph (F)) for 
                        hospitals located in an urban area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group; and
                  (ii) for hospitals located in a rural area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (D), 
                        reduced under subparagraph (E), and 
                        adjusted under subparagraph (F)) for 
                        hospitals located in a rural area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group.
          (H) Adjusting for different area wage levels.--The 
        Secretary shall adjust the proportion, (as estimated by 
        the Secretary from time to time) of hospitals' costs 
        which are attributable to wages and wage-related costs, 
        of the national and regional DRG prospective payment 
        rates computed under subparagraph (G) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the national average hospital wage 
        level.
  (3) The Secretary shall determine a national adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in a fiscal year after fiscal year 1984 involving inpatient 
hospital services of a subsection (d) hospital in the United 
States, and shall determine, for fiscal years before fiscal 
year 1997, a regional adjusted DRG prospective payment rate for 
such discharges in each region for which payment may be made 
under part A of this title. Each such rate shall be determined 
for hospitals located in large urban, other urban, or rural 
areas within the United States and within each such region, 
respectively, as follows:
          (A) Updating previous standardized amounts.--(i) For 
        discharges occurring in a fiscal year beginning before 
        October 1, 1987, the Secretary shall compute an average 
        standardized amount for hospitals located in an urban 
        area and for hospitals located in a rural area within 
        the United States and for hospitals located in an urban 
        area and for hospitals located in a rural area within 
        each region, equal to the respective average 
        standardized amount computed for the previous fiscal 
        year under paragraph (2)(D) or under this subparagraph, 
        increased for the fiscal year involved by the 
        applicable percentage increase under subsection 
        (b)(3)(B). With respect to discharges occurring on or 
        after October 1, 1987, the Secretary shall compute 
        urban and rural averages on the basis of discharge 
        weighting rather than hospital weighting, making 
        appropriate adjustments to ensure that computation on 
        such basis does not result in total payments under this 
        section that are greater or less than the total 
        payments that would have been made under this section 
        but for this sentence, and making appropriate changes 
        in the manner of determining the reductions under 
        subparagraph (C)(ii).
          (ii) For discharges occurring in a fiscal year 
        beginning on or after October 1, 1987, and ending on or 
        before September 30, 1994, the Secretary shall compute 
        an average standardized amount for hospitals located in 
        a large urban area, for hospitals located in a rural 
        area, and for hospitals located in other urban areas, 
        within the United States and within each region, equal 
        to the respective average standardized amount computed 
        for the previous fiscal year under this subparagraph 
        increased by the applicable percentage increase under 
        subsection (b)(3)(B)(i) with respect to hospitals 
        located in the respective areas for the fiscal year 
        involved.
          (iii) For discharges occurring in the fiscal year 
        beginning on October 1, 1994, the average standardized 
        amount for hospitals located in a rural area shall be 
        equal to the average standardized amount for hospitals 
        located in an urban area. For discharges occurring on 
        or after October 1, 1994, the Secretary shall adjust 
        the ratio of the labor portion to non-labor portion of 
        each average standardized amount to equal such ratio 
        for the national average of all standardized amounts.
          (iv)(I) Subject to subclause (II), for discharges 
        occurring in a fiscal year beginning on or after 
        October 1, 1995, the Secretary shall compute an average 
        standardized amount for hospitals located in a large 
        urban area and for hospitals located in other areas 
        within the United States and within each region equal 
        to the respective average standardized amount computed 
        for the previous fiscal year under this subparagraph 
        increased by the applicable percentage increase under 
        subsection (b)(3)(B)(i) with respect to hospitals 
        located in the respective areas for the fiscal year 
        involved.
          (II) For discharges occurring in a fiscal year 
        (beginning with fiscal year 2004), the Secretary shall 
        compute a standardized amount for hospitals located in 
        any area within the United States and within each 
        region equal to the standardized amount computed for 
        the previous fiscal year under this subparagraph for 
        hospitals located in a large urban area (or, beginning 
        with fiscal year 2005, for all hospitals in the 
        previous fiscal year) increased by the applicable 
        percentage increase under subsection (b)(3)(B)(i) for 
        the fiscal year involved.
          (v) Average standardized amounts computed under this 
        paragraph shall be adjusted to reflect the most recent 
        case-mix data available.
          (vi) Insofar as the Secretary determines that the 
        adjustments under paragraph (4)(C)(i) for a previous 
        fiscal year (or estimates that such adjustments for a 
        future fiscal year) did (or are likely to) result in a 
        change in aggregate payments under this subsection 
        during the fiscal year that are a result of changes in 
        the coding or classification of discharges that do not 
        reflect real changes in case mix, the Secretary may 
        adjust the average standardized amounts computed under 
        this paragraph for subsequent fiscal years so as to 
        eliminate the effect of such coding or classification 
        changes.
          (B) Reducing for value of outlier payments.--The 
        Secretary shall reduce each of the average standardized 
        amounts determined under subparagraph (A) by a factor 
        equal to the proportion of payments under this 
        subsection (as estimated by the Secretary) based on DRG 
        prospective payment amounts which are additional 
        payments described in paragraph (5)(A) (relating to 
        outlier payments).
          (C)(i) Maintaining budget neutrality for fiscal year 
        1985.--For discharges occurring in fiscal year 1985, 
        the Secretary shall adjust each of such average 
        standardized amounts as may be required under 
        subsection (e)(1)(B) for that fiscal year.
          (ii) Reducing for savings from amendment to indirect 
        teaching adjustment for discharges after September 30, 
        1986.--For discharges occurring after September 30, 
        1986, the Secretary shall further reduce each of the 
        average standardized amounts (in a proportion which 
        takes into account the differing effects of the 
        standardization effected under paragraph (2)(C)(i)) so 
        as to provide for a reduction in the total of the 
        payments (attributable to this paragraph) made for 
        discharges occurring on or after October 1, 1986, of an 
        amount equal to the estimated reduction in the payment 
        amounts under paragraph (5)(B) that would have resulted 
        from the enactment of the amendments made by section 
        9104 of the Medicare and Medicaid Budget Reconciliation 
        Amendments of 1985 and by section 4003(a)(1) of the 
        Omnibus Budget Reconciliation Act of 1987 if the factor 
        described in clause (ii)(II) of paragraph (5)(B) 
        (determined without regard to amendments made by the 
        Omnibus Budget Reconciliation Act of 1990) were applied 
        for discharges occurring on or after such date instead 
        of the factor described in clause (ii) of that 
        paragraph.
          (D) Computing drg-specific rates for hospitals.--For 
        each discharge classified within a diagnosis-related 
        group, the Secretary shall establish for the fiscal 
        year a national DRG prospective payment rate and shall 
        establish, for fiscal years before fiscal year 1997, a 
        regional DRG prospective payment rate for each region 
        which is equal--
                  (i) for fiscal years before fiscal year 2004, 
                for hospitals located in a large urban area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (A), 
                        reduced under subparagraph (B), and 
                        adjusted or reduced under subparagraph 
                        (C)) for the fiscal year for hospitals 
                        located in such a large urban area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group;
                  (ii) for fiscal years before fiscal year 
                2004, for hospitals located in other areas in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (A), 
                        reduced under subparagraph (B), and 
                        adjusted or reduced under subparagraph 
                        (C)) for the fiscal year for hospitals 
                        located in other areas in the United 
                        States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group; and
                  (iii) for a fiscal year beginning after 
                fiscal year 2003, for hospitals located in all 
                areas, to the product of--
                          (I) the applicable standardized 
                        amount (computed under subparagraph 
                        (A)), reduced under subparagraph (B), 
                        and adjusted or reduced under 
                        subparagraph (C) for the fiscal year; 
                        and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group.
          (E) Adjusting for different area wage levels.--
                  (i) In general.--Except as provided in clause 
                (ii) or (iii), the Secretary shall adjust the 
                proportion, (as estimated by the Secretary from 
                time to time) of hospitals' costs which are 
                attributable to wages and wage-related costs, 
                of the DRG prospective payment rates computed 
                under subparagraph (D) for area differences in 
                hospital wage levels by a factor (established 
                by the Secretary) reflecting the relative 
                hospital wage level in the geographic area of 
                the hospital compared to the national average 
                hospital wage level. Not later than October 1, 
                1990, and October 1, 1993 (and at least every 
                12 months thereafter), the Secretary shall 
                update the factor under the preceding sentence 
                on the basis of a survey conducted by the 
                Secretary (and updated as appropriate) of the 
                wages and wage-related costs of subsection (d) 
                hospitals in the United States. Not less often 
                than once every 3 years the Secretary (through 
                such survey or otherwise) shall measure the 
                earnings and paid hours of employment by 
                occupational category and shall exclude data 
                with respect to the wages and wage-related 
                costs incurred in furnishing skilled nursing 
                facility services. Any adjustments or updates 
                made under this subparagraph for a fiscal year 
                (beginning with fiscal year 1991) shall be made 
                in a manner that assures that the aggregate 
                payments under this subsection in the fiscal 
                year are not greater or less than those that 
                would have been made in the year without such 
                adjustment. The Secretary shall apply the 
                previous sentence for any period as if the 
                amendments made by section 403(a)(1) of the 
                Medicare Prescription Drug, Improvement, and 
                Modernization Act of 2003 and the amendments 
                made by section 10324(a)(1) of the Patient 
                Protection and Affordable Care Act had not been 
                enacted.
                  (ii) Alternative proportion to be adjusted 
                beginning in fiscal year 2005.--For discharges 
                occurring on or after October 1, 2004, the 
                Secretary shall substitute ``62 percent'' for 
                the proportion described in the first sentence 
                of clause (i), unless the application of this 
                clause would result in lower payments to a 
                hospital than would otherwise be made.
                  (iii) Floor on area wage index for hospitals 
                in frontier states.--
                          (I) In general.--Subject to subclause 
                        (IV), for discharges occurring on or 
                        after October 1, 2010, the area wage 
                        index applicable under this 
                        subparagraph to any hospital which is 
                        located in a frontier State (as defined 
                        in subclause (II)) may not be less than 
                        1.00.
                          (II) Frontier state defined.--In this 
                        clause, the term ``frontier State'' 
                        means a State in which at least 50 
                        percent of the counties in the State 
                        are frontier counties.
                          (III) Frontier county defined.--In 
                        this clause, the term ``frontier 
                        county'' means a county in which the 
                        population per square mile is less than 
                        6.
                          (IV) Limitation.--This clause shall 
                        not apply to any hospital located in a 
                        State that receives a non-labor related 
                        share adjustment under paragraph 
                        (5)(H).
  (4)(A) The Secretary shall establish a classification of 
inpatient hospital discharges by diagnosis-related groups and a 
methodology for classifying specific hospital discharges within 
these groups.
  (B) For each such diagnosis-related group the Secretary shall 
assign an appropriate weighting factor which reflects the 
relative hospital resources used with respect to discharges 
classified within that group compared to discharges classified 
within other groups.
  (C)(i) The Secretary shall adjust the classifications and 
weighting factors established under subparagraphs (A) and (B), 
for discharges in fiscal year 1988 and at least annually 
thereafter, to reflect changes in treatment patterns, 
technology (including a new medical service or technology under 
paragraph (5)(K)), and other factors which may change the 
relative use of hospital resources.
  (ii) For discharges in fiscal year 1990, the Secretary shall 
reduce the weighting factor for each diagnosis-related group by 
1.22 percent.
  (iii) Any such adjustment under clause (i) for discharges in 
a fiscal year (beginning with fiscal year 1991) shall be made 
in a manner that assures that the aggregate payments under this 
subsection for discharges in the fiscal year are not greater or 
less than those that would have been made for discharges in the 
year without such adjustment.
  (D)(i) For discharges occurring on or after October 1, 2008, 
the diagnosis-related group to be assigned under this paragraph 
for a discharge described in clause (ii) shall be a diagnosis-
related group that does not result in higher payment based on 
the presence of a secondary diagnosis code described in clause 
(iv).
  (ii) A discharge described in this clause is a discharge 
which meets the following requirements:
          (I) The discharge includes a condition identified by 
        a diagnosis code selected under clause (iv) as a 
        secondary diagnosis.
          (II) But for clause (i), the discharge would have 
        been classified to a diagnosis-related group that 
        results in a higher payment based on the presence of a 
        secondary diagnosis code selected under clause (iv).
          (III) At the time of admission, no code selected 
        under clause (iv) was present.
  (iii) As part of the information required to be reported by a 
hospital with respect to a discharge of an individual in order 
for payment to be made under this subsection, for discharges 
occurring on or after October 1, 2007, the information shall 
include the secondary diagnosis of the individual at admission.
  (iv) By not later than October 1, 2007, the Secretary shall 
select diagnosis codes associated with at least two conditions, 
each of which codes meets all of the following requirements (as 
determined by the Secretary):
          (I) Cases described by such code have a high cost or 
        high volume, or both, under this title.
          (II) The code results in the assignment of a case to 
        a diagnosis-related group that has a higher payment 
        when the code is present as a secondary diagnosis.
          (III) The code describes such conditions that could 
        reasonably have been prevented through the application 
        of evidence-based guidelines.
The Secretary may from time to time revise (through addition or 
deletion of codes) the diagnosis codes selected under this 
clause so long as there are diagnosis codes associated with at 
least two conditions selected for discharges occurring during 
any fiscal year.
  (v) In selecting and revising diagnosis codes under clause 
(iv), the Secretary shall consult with the Centers for Disease 
Control and Prevention and other appropriate entities.
  (vi) Any change resulting from the application of this 
subparagraph shall not be taken into account in adjusting the 
weighting factors under subparagraph (C)(i) or in applying 
budget neutrality under subparagraph (C)(iii).
  (5)(A)(i) For discharges occurring during fiscal years ending 
on or before September 30, 1997, the Secretary shall provide 
for an additional payment for a subsection (d) hospital for any 
discharge in a diagnosis-related group, the length of stay of 
which exceeds the mean length of stay for discharges within 
that group by a fixed number of days, or exceeds such mean 
length of stay by some fixed number of standard deviations, 
whichever is the fewer number of days.
  (ii) For cases which are not included in clause (i), a 
subsection (d) hospital may request additional payments in any 
case where charges, adjusted to cost, exceed a fixed multiple 
of the applicable DRG prospective payment rate, or exceed such 
other fixed dollar amount, whichever is greater, or for 
discharges in fiscal years beginning on or after October 1, 
1994, exceed the sum of the applicable DRG prospective payment 
rate plus any amounts payable under subparagraphs (B) and (F) 
plus a fixed dollar amount determined by the Secretary.
  (iii) The amount of such additional payment under clauses (i) 
and (ii) shall be determined by the Secretary and shall (except 
as payments under clause (i) are required to be reduced to take 
into account the requirements of clause (v)) approximate the 
marginal cost of care beyond the cutoff point applicable under 
clause (i) or (ii).
  (iv) The total amount of the additional payments made under 
this subparagraph for discharges in a fiscal year may not be 
less than 5 percent nor more than 6 percent of the total 
payments projected or estimated to be made based on DRG 
prospective payment rates for discharges in that year.
  (v) The Secretary shall provide that--
          (I) the day outlier percentage for fiscal year 1995 
        shall be 75 percent of the day outlier percentage for 
        fiscal year 1994;
          (II) the day outlier percentage for fiscal year 1996 
        shall be 50 percent of the day outlier percentage for 
        fiscal year 1994; and
          (III) the day outlier percentage for fiscal year 1997 
        shall be 25 percent of the day outlier percentage for 
        fiscal year 1994.
  (vi) For purposes of this subparagraph the term ``day outlier 
percentage'' means, for a fiscal year, the percentage of the 
total additional payments made by the Secretary under this 
subparagraph for discharges in that fiscal year which are 
additional payments under clause (i).
  (B) The Secretary shall provide for an additional payment 
amount for subsection (d) hospitals with indirect costs of 
medical education, in an amount computed in the same manner as 
the adjustment for such costs under regulations (in effect as 
of January 1, 1983) under subsection (a)(2), except as follows:
          (i) The amount of such additional payment shall be 
        determined by multiplying (I) the sum of the amount 
        determined under paragraph (1)(A)(ii)(II) (or, if 
        applicable, the amount determined under paragraph 
        (1)(A)(iii)) and, for cases qualifying for additional 
        payment under subparagraph (A)(i), the amount paid to 
        the hospital under subparagraph (A), by (II) the 
        indirect teaching adjustment factor described in clause 
        (ii).
          (ii) For purposes of clause (i)(II), the indirect 
        teaching adjustment factor is equal to c  
        (((1+r) to the nth power) - 1), where ``r'' is the 
        ratio of the hospital's full-time equivalent interns 
        and residents to beds and ``n'' equals .405. Subject to 
        clause (ix), for discharges occurring--
                  (I) on or after October 1, 1988, and before 
                October 1, 1997, ``c'' is equal to 1.89;
                  (II) during fiscal year 1998, ``c'' is equal 
                to 1.72;
                  (III) during fiscal year 1999, ``c'' is equal 
                to 1.6;
                  (IV) during fiscal year 2000, ``c'' is equal 
                to 1.47;
                  (V) during fiscal year 2001, ``c'' is equal 
                to 1.54;
                  (VI) during fiscal year 2002, ``c'' is equal 
                to 1.6;
                  (VII) on or after October 1, 2002, and before 
                April 1, 2004, ``c'' is equal to 1.35;
                  (VIII) on or after April 1, 2004, and before 
                October 1, 2004, ``c'' is equal to 1.47;
                  (IX) during fiscal year 2005, ``c'' is equal 
                to 1.42;
                  (X) during fiscal year 2006, ``c'' is equal 
                to 1.37;
                  (XI) during fiscal year 2007, ``c'' is equal 
                to 1.32; and
                  (XII) on or after October 1, 2007, ``c'' is 
                equal to 1.35.
          (iii) In determining such adjustment the Secretary 
        shall not distinguish between those interns and 
        residents who are employees of a hospital and those 
        interns and residents who furnish services to a 
        hospital but are not employees of such hospital.
          (iv)(I) Effective for discharges occurring on or 
        after October 1, 1997, and before July 1, 2010, all the 
        time spent by an intern or resident in patient care 
        activities under an approved medical residency training 
        program at an entity in a nonhospital setting shall be 
        counted towards the determination of full-time 
        equivalency if the hospital incurs all, or 
        substantially all, of the costs for the training 
        program in that setting.
          (II) Effective for discharges occurring on or after 
        July 1, 2010, all the time spent by an intern or 
        resident in patient care activities in a nonprovider 
        setting shall be counted towards the determination of 
        full-time equivalency if a hospital incurs the costs of 
        the stipends and fringe benefits of the intern or 
        resident during the time the intern or resident spends 
        in that setting. If more than one hospital incurs these 
        costs, either directly or through a third party, such 
        hospitals shall count a proportional share of the time, 
        as determined by written agreement between the 
        hospitals, that a resident spends training in that 
        setting.
          (v) In determining the adjustment with respect to a 
        hospital for discharges occurring on or after October 
        1, 1997, the total number of full-time equivalent 
        interns and residents in the fields of allopathic and 
        osteopathic medicine in either a hospital or 
        nonhospital setting may not exceed the number (or, 130 
        percent of such number in the case of a hospital 
        located in a rural area) of such full-time equivalent 
        interns and residents in the hospital with respect to 
        the hospital's most recent cost reporting period ending 
        on or before December 31, 1996. Rules similar to the 
        rules of subsection (h)(4)(F)(ii) shall apply for 
        purposes of this clause. The provisions of subsections 
        (h)(4)(H)(vi), (h)(7), and (h)(8) shall apply with 
        respect to the first sentence of this clause in the 
        same manner as they apply with respect to subsection 
        (h)(4)(F)(i).
          (vi) For purposes of clause (ii)--
                  (I) ``r'' may not exceed the ratio of the 
                number of interns and residents, subject to the 
                limit under clause (v), with respect to the 
                hospital for its most recent cost reporting 
                period to the hospital's available beds (as 
                defined by the Secretary) during that cost 
                reporting period, and
                  (II) for the hospital's cost reporting 
                periods beginning on or after October 1, 1997, 
                subject to the limits described in clauses (iv) 
                and (v), the total number of full-time 
                equivalent residents for payment purposes shall 
                equal the average of the actual full-time 
                equivalent resident count for the cost 
                reporting period and the preceding two cost 
                reporting periods.
        In the case of the first cost reporting period 
        beginning on or after October 1, 1997, subclause (II) 
        shall be applied by using the average for such period 
        and the preceding cost reporting period.
          (vii) If any cost reporting period beginning on or 
        after October 1, 1997, is not equal to twelve months, 
        the Secretary shall make appropriate modifications to 
        ensure that the average full-time equivalent residency 
        count pursuant to subclause (II) of clause (vi) is 
        based on the equivalent of full twelve-month cost 
        reporting periods.
          (viii) Rules similar to the rules of subsection 
        (h)(4)(H) shall apply for purposes of clauses (v) and 
        (vi).
          (ix) For discharges occurring on or after July 1, 
        2005, insofar as an additional payment amount under 
        this subparagraph is attributable to resident positions 
        redistributed to a hospital under subsection (h)(7)(B), 
        in computing the indirect teaching adjustment factor 
        under clause (ii) the adjustment shall be computed in a 
        manner as if ``c'' were equal to 0.66 with respect to 
        such resident positions.
          (x) For discharges occurring on or after July 1, 
        2011, insofar as an additional payment amount under 
        this subparagraph is attributable to resident positions 
        distributed to a hospital under subsection (h)(8)(B), 
        the indirect teaching adjustment factor shall be 
        computed in the same manner as provided under clause 
        (ii) with respect to such resident positions.
          (x)(I) The provisions of subparagraph (K) of 
        subsection (h)(4) shall apply under this subparagraph 
        in the same manner as they apply under such subsection.
                          (II) In determining the hospital's 
                        number of full-time equivalent 
                        residents for purposes of this 
                        subparagraph, all the time spent by an 
                        intern or resident in an approved 
                        medical residency training program in 
                        non-patient care activities, such as 
                        didactic conferences and seminars, as 
                        such time and activities are defined by 
                        the Secretary, that occurs in the 
                        hospital shall be counted toward the 
                        determination of full-time equivalency 
                        if the hospital--
                                  (aa) is recognized as a 
                                subsection (d) hospital;
                                  (bb) is recognized as a 
                                subsection (d) Puerto Rico 
                                hospital;
                                  (cc) is reimbursed under a 
                                reimbursement system authorized 
                                under section 1814(b)(3); or
                                  (dd) is a provider-based 
                                hospital outpatient department.
                          (III) In determining the hospital's 
                        number of full-time equivalent 
                        residents for purposes of this 
                        subparagraph, all the time spent by an 
                        intern or resident in an approved 
                        medical residency training program in 
                        research activities that are not 
                        associated with the treatment or 
                        diagnosis of a particular patient, as 
                        such time and activities are defined by 
                        the Secretary, shall not be counted 
                        toward the determination of full-time 
                        equivalency.
  (C)(i) The Secretary shall provide for such exceptions and 
adjustments to the payment amounts established under this 
subsection (other than under paragraph (9)) as the Secretary 
deems appropriate to take into account the special needs of 
regional and national referral centers (including those 
hospitals of 275 or more beds located in rural areas). A 
hospital which is classified as a rural hospital may appeal to 
the Secretary to be classified as a rural referral center under 
this clause on the basis of criteria (established by the 
Secretary) which shall allow the hospital to demonstrate that 
it should be so reclassified by reason of certain of its 
operating characteristics being similar to those of a typical 
urban hospital located in the same census region and which 
shall not require a rural osteopathic hospital to have more 
than 3,000 discharges in a year in order to be classified as a 
rural referral center. Such characteristics may include wages, 
scope of services, service area, and the mix of medical 
specialties. The Secretary shall publish the criteria not later 
than August 17, 1984, for implementation by October 1, 1984. An 
appeal allowed under this clause must be submitted to the 
Secretary (in such form and manner as the Secretary may 
prescribe) during the quarter before the first quarter of the 
hospital's cost reporting period (or, in the case of a cost 
reporting period beginning during October 1984, during the 
first quarter of that period), and the Secretary must make a 
final determination with respect to such appeal within 60 days 
after the date the appeal was submitted. Any payment 
adjustments necessitated by a reclassification based upon the 
appeal shall be effective at the beginning of such cost 
reporting period.
  (ii) The Secretary shall provide, under clause (i), for the 
classification of a rural hospital as a regional referral 
center if the hospital has a case mix index equal to or greater 
than the median case mix index for hospitals (other than 
hospitals with approved teaching programs) located in an urban 
area in the same region (as defined in paragraph (2)(D)), has 
at least 5,000 discharges a year or, if less, the median number 
of discharges in urban hospitals in the region in which the 
hospital is located (or, in the case of a rural osteopathic 
hospital, meets the criterion established by the Secretary 
under clause (i) with respect to the annual number of 
discharges for such hospitals), and meets any other criteria 
established by the Secretary under clause (i).
  (D)(i) For any cost reporting period beginning on or after 
April 1, 1990, with respect to a subsection (d) hospital which 
is a sole community hospital, payment under paragraph (1)(A) 
shall be--
          (I) an amount based on 100 percent of the hospital's 
        target amount for the cost reporting period, as defined 
        in subsection (b)(3)(C), or
          (II) the amount determined under paragraph 
        (1)(A)(iii),
whichever results in greater payment to the hospital.
  (ii) In the case of a sole community hospital that 
experiences, in a cost reporting period compared to the 
previous cost reporting period, a decrease of more than 5 
percent in its total number of inpatient cases due to 
circumstances beyond its control, the Secretary shall provide 
for such adjustment to the payment amounts under this 
subsection (other than under paragraph (9)) as may be necessary 
to fully compensate the hospital for the fixed costs it incurs 
in the period in providing inpatient hospital services, 
including the reasonable cost of maintaining necessary core 
staff and services.
  (iii) For purposes of this title, the term ``sole community 
hospital'' means any hospital--
          (I) that the Secretary determines is located more 
        than 35 road miles from another hospital,
          (II) that, by reason of factors such as the time 
        required for an individual to travel to the nearest 
        alternative source of appropriate inpatient care (in 
        accordance with standards promulgated by the 
        Secretary), location, weather conditions, travel 
        conditions, or absence of other like hospitals (as 
        determined by the Secretary), is the sole source of 
        inpatient hospital services reasonably available to 
        individuals in a geographic area who are entitled to 
        benefits under part A, or
          (III) that is located in a rural area and designated 
        by the Secretary as an essential access community 
        hospital under section 1820(i)(1) as in effect on 
        September 30, 1997.
  (iv) The Secretary shall promulgate a standard for 
determining whether a hospital meets the criteria for 
classification as a sole community hospital under clause 
(iii)(II) because of the time required for an individual to 
travel to the nearest alternative source of appropriate 
inpatient care.
  (v) If the Secretary determines that, in the case of a 
hospital located in a rural area and designated by the 
Secretary as an essential access community hospital under 
section 1820(i)(1) as in effect on September 30, 1997, the 
hospital has incurred increases in reasonable costs during a 
cost reporting period as a result of becoming a member of a 
rural health network (as defined in section 1820(d)) in the 
State in which it is located, and in incurring such increases, 
the hospital will increase its costs for subsequent cost 
reporting periods, the Secretary shall increase the hospital's 
target amount under subsection (b)(3)(C) to account for such 
incurred increases.
  (E)(i) The Secretary shall estimate the amount of 
reimbursement made for services described in section 
1862(a)(14) with respect to which payment was made under part B 
in the base reporting periods referred to in paragraph (2)(A) 
and with respect to which payment is no longer being made.
  (ii) The Secretary shall provide for an adjustment to the 
payment for subsection (d) hospitals in each fiscal year so as 
appropriately to reflect the net amount described in clause 
(i).
  (F)(i) Subject to subsection (r), for discharges occurring on 
or after May 1, 1986, the Secretary shall provide, in 
accordance with this subparagraph, for an additional payment 
amount for each subsection (d) hospital which--
          (I) serves a significantly disproportionate number of 
        low-income patients (as defined in clause (v)), or
          (II) is located in an urban area, has 100 or more 
        beds, and can demonstrate that its net inpatient care 
        revenues (excluding any of such revenues attributable 
        to this title or State plans approved under title XIX), 
        during the cost reporting period in which the 
        discharges occur, for indigent care from State and 
        local government sources exceed 30 percent of its total 
        of such net inpatient care revenues during the period.
  (ii) Subject to clause (ix), the amount of such payment for 
each discharge shall be determined by multiplying (I) the sum 
of the amount determined under paragraph (1)(A)(ii)(II) (or, if 
applicable, the amount determined under paragraph (1)(A)(iii)) 
and, for cases qualifying for additional payment under 
subparagraph (A)(i), the amount paid to the hospital under 
subparagraph (A) for that discharge, by (II) the 
disproportionate share adjustment percentage established under 
clause (iii) or (iv) for the cost reporting period in which the 
discharge occurs.
  (iii) The disproportionate share adjustment percentage for a 
cost reporting period for a hospital described in clause 
(i)(II) is equal to 35 percent.
  (iv) The disproportionate share adjustment percentage for a 
cost reporting period for a hospital that is not described in 
clause (i)(II) and that--
          (I) is located in an urban area and has 100 or more 
        beds or is described in the second sentence of clause 
        (v), is equal to the percent determined in accordance 
        with the applicable formula described in clause (vii);
          (II) is located in an urban area and has less than 
        100 beds, is equal to 5 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (xiii);
          (III) is located in a rural area and is not described 
        in subclause (IV) or (V) or in the second sentence of 
        clause (v), is equal to 4 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (xii);
          (IV) is located in a rural area, is classified as a 
        rural referral center under subparagraph (C), and is 
        classified as a sole community hospital under 
        subparagraph (D), is equal to 10 percent or, if 
        greater, the percent determined in accordance with the 
        applicable formula described in clause (viii) or, 
        subject to clause (xiv) and for discharges occurring on 
        or after April 1, 2001, the greater of the percentages 
        determined under clause (x) or (xi);
          (V) is located in a rural area, is classified as a 
        rural referral center under subparagraph (C), and is 
        not classified as a sole community hospital under 
        subparagraph (D), is equal to the percent determined in 
        accordance with the applicable formula described in 
        clause (viii) or, subject to clause (xiv) and for 
        discharges occurring on or after April 1, 2001, is 
        equal to the percent determined in accordance with 
        clause (xi); or
          (VI) is located in a rural area, is classified as a 
        sole community hospital under subparagraph (D), and is 
        not classified as a rural referral center under 
        subparagraph (C), is 10 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (x).
  (v) In this subparagraph, a hospital ``serves a significantly 
disproportionate number of low income patients'' for a cost 
reporting period if the hospital has a disproportionate patient 
percentage (as defined in clause (vi)) for that period which 
equals, or exceeds--
          (I) 15 percent, if the hospital is located in an 
        urban area and has 100 or more beds,
          (II) 30 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in a rural area and has more than 100 beds, 
        or is located in a rural area and is classified as a 
        sole community hospital under subparagraph (D),
          (III) 40 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in an urban area and has less than 100 beds, 
        or
          (IV) 45 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in a rural area and is not described in 
        subclause (II).
A hospital located in a rural area and with 500 or more beds 
also ``serves a significantly disproportionate number of low 
income patients'' for a cost reporting period if the hospital 
has a disproportionate patient percentage (as defined in clause 
(vi)) for that period which equals or exceeds a percentage 
specified by the Secretary.
  (vi) In this subparagraph, the term ``disproportionate 
patient percentage'' means, with respect to a cost reporting 
period of a hospital, the sum of--
          (I) the fraction (expressed as a percentage), the 
        numerator of which is the number of such hospital's 
        patient days for such period which were made up of 
        patients who (for such days) were entitled to benefits 
        under part A of this title and were entitled to 
        supplementary security income benefits (excluding any 
        State supplementation) under title XVI of this Act, and 
        the denominator of which is the number of such 
        hospital's patient days for such fiscal year which were 
        made up of patients who (for such days) were entitled 
        to benefits under part A of this title, and
          (II) the fraction (expressed as a percentage), the 
        numerator of which is the number of the hospital's 
        patient days for such period which consist of patients 
        who (for such days) were eligible for medical 
        assistance under a State plan approved under title XIX, 
        but who were not entitled to benefits under part A of 
        this title, and the denominator of which is the total 
        number of the hospital's patient days for such period.
In determining under subclause (II) the number of the 
hospital's patient days for such period which consist of 
patients who (for such days) were eligible for medical 
assistance under a State plan approved under title XIX, the 
Secretary may, to the extent and for the period the Secretary 
determines appropriate, include patient days of patients not so 
eligible but who are regarded as such because they receive 
benefits under a demonstration project approved under title XI.
  (vii) The formula used to determine the disproportionate 
share adjustment percentage for a cost reporting period for a 
hospital described in clause (iv)(I) is--
          (I) in the case of such a hospital with a 
        disproportionate patient percentage (as defined in 
        clause (vi)) greater than 20.2--
                  (a) for discharges occurring on or after 
                April 1, 1990, and on or before December 31, 
                1990, (P-20.2)(.65) + 5.62,
                  (b) for discharges occurring on or after 
                January 1, 1991, and on or before September 30, 
                1993, (P-20.2)(.7) + 5.62,
                  (c) for discharges occurring on or after 
                October 1, 1993, and on or before September 30, 
                1994, (P-20.2)(.8) + 5.88, and
                  (d) for discharges occurring on or after 
                October 1, 1994, (P-20.2)(.825) + 5.88; or
          (II) in the case of any other such hospital--
                  (a) for discharges occurring on or after 
                April 1, 1990, and on or before December 31, 
                1990, (P-15)(.6) + 2.5,
                  (b) for discharges occurring on or after 
                January 1, 1991, and on or before September 30, 
                1993, (P-15)(.6) + 2.5,
                  (c) for discharges occurring on or after 
                October 1, 1993, (P-15)(.65) + 2.5,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (viii) Subject to clause (xiv), the formula used to determine 
the disproportionate share adjustment percentage for a cost 
reporting period for a hospital described in clause (iv)(IV) or 
(iv)(V) is the percentage determined in accordance with the 
following formula:(P-30)(.6) + 4.0, where ``P'' is the 
hospital's disproportionate patient percentage (as defined in 
clause (vi)).
  (ix) In the case of discharges occurring--
          (I) during fiscal year 1998, the additional payment 
        amount otherwise determined under clause (ii) shall be 
        reduced by 1 percent;
          (II) during fiscal year 1999, such additional payment 
        amount shall be reduced by 2 percent;
          (III) during fiscal years 2000 and 2001, such 
        additional payment amount shall be reduced by 3 percent 
        and 2 percent, respectively;
          (IV) during fiscal year 2002, such additional payment 
        amount shall be reduced by 3 percent; and
          (V) during fiscal year 2003 and each subsequent 
        fiscal year, such additional payment amount shall be 
        reduced by 0 percent.
  (x) Subject to clause (xiv), for purposes of clause (iv)(VI) 
(relating to sole community hospitals), in the case of a 
hospital for a cost reporting period with a disproportionate 
patient percentage (as defined in clause (vi)) that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5;
          (II) is equal to or exceeds 19.3, but is less than 
        30.0, such adjustment percentage is equal to 5.25 
        percent; or
          (III) is equal to or exceeds 30, such adjustment 
        percentage is equal to 10 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xi) Subject to clause (xiv), for purposes of clause (iv)(V) 
(relating to rural referral centers), in the case of a hospital 
for a cost reporting period with a disproportionate patient 
percentage (as defined in clause (vi)) that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5;
          (II) is equal to or exceeds 19.3, but is less than 
        30.0, such adjustment percentage is equal to 5.25 
        percent; or
          (III) is equal to or exceeds 30, such adjustment 
        percentage is determined in accordance with the 
        following formula: (P-30)(.6) + 5.25,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xii) Subject to clause (xiv), for purposes of clause 
(iv)(III) (relating to small rural hospitals generally), in the 
case of a hospital for a cost reporting period with a 
disproportionate patient percentage (as defined in clause (vi)) 
that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5; or
          (II) is equal to or exceeds 19.3, such adjustment 
        percentage is equal to 5.25 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xiii) Subject to clause (xiv), for purposes of clause 
(iv)(II) (relating to urban hospitals with less than 100 beds), 
in the case of a hospital for a cost reporting period with a 
disproportionate patient percentage (as defined in clause (vi)) 
that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5; or
          (II) is equal to or exceeds 19.3, such adjustment 
        percentage is equal to 5.25 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xiv)(I) In the case of discharges occurring on or after 
April 1, 2004, subject to subclause (II), there shall be 
substituted for the disproportionate share adjustment 
percentage otherwise determined under clause (iv) (other than 
subclause (I)) or under clause (viii), (x), (xi), (xii), or 
(xiii), the disproportionate share adjustment percentage 
determined under clause (vii) (relating to large, urban 
hospitals).
  (II) Under subclause (I), the disproportionate share 
adjustment percentage shall not exceed 12 percent for a 
hospital that is not classified as a rural referral center 
under subparagraph (C) or, in the case of discharges occurring 
on or after October 1, 2006, as a medicare-dependent, small 
rural hospital under subparagraph (G)(iv).
  (G)(i) For any cost reporting period beginning on or after 
April 1, 1990, and before October 1, 1994, or discharges 
occurring on or after October 1, 1997, and before October 1, 
2017, in the case of a subsection (d) hospital which is a 
medicare-dependent, small rural hospital, payment under 
paragraph (1)(A) shall be equal to the sum of the amount 
determined under clause (ii) and the amount determined under 
paragraph (1)(A)(iii).
  (ii) The amount determined under this clause is--
          (I) for discharges occurring during the 36-month 
        period beginning with the first day of the cost 
        reporting period that begins on or after April 1, 1990, 
        the amount by which the hospital's target amount for 
        the cost reporting period (as defined in subsection 
        (b)(3)(D)) exceeds the amount determined under 
        paragraph (1)(A)(iii); and
          (II) for discharges occurring during any subsequent 
        cost reporting period (or portion thereof) and before 
        October 1, 1994, or discharges occurring on or after 
        October 1, 1997, and before October 1, 2017, 50 percent 
        (or 75 percent in the case of discharges occurring on 
        or after October 1, 2006) of the amount by which the 
        hospital's target amount for the cost reporting period 
        or for discharges in the fiscal year (as defined in 
        subsection (b)(3)(D)) exceeds the amount determined 
        under paragraph (1)(A)(iii).
  (iii) In the case of a medicare dependent, small rural 
hospital that experiences, in a cost reporting period compared 
to the previous cost reporting period, a decrease of more than 
5 percent in its total number of inpatient cases due to 
circumstances beyond its control, the Secretary shall provide 
for such adjustment to the payment amounts under this 
subsection (other than under paragraph (9)) as may be necessary 
to fully compensate the hospital for the fixed costs it incurs 
in the period in providing inpatient hospital services, 
including the reasonable cost of maintaining necessary core 
staff and services.
  (iv) The term ``medicare-dependent, small rural hospital'' 
means, with respect to any cost reporting period to which 
clause (i) applies, any hospital--
          (I) located in a rural area,
          (II) that has not more than 100 beds,
          (III) that is not classified as a sole community 
        hospital under subparagraph (D), and
          (IV) for which not less than 60 percent of its 
        inpatient days or discharges during the cost reporting 
        period beginning in fiscal year 1987, or two of the 
        three most recently audited cost reporting periods for 
        which the Secretary has a settled cost report, were 
        attributable to inpatients entitled to benefits under 
        part A.
  (H) The Secretary may provide for such adjustments to the 
payment amounts under this subsection as the Secretary deems 
appropriate to take into account the unique circumstances of 
hospitals located in Alaska and Hawaii.
  (I)(i) The Secretary shall provide by regulation for such 
other exceptions and adjustments to such payment amounts under 
this subsection as the Secretary deems appropriate.
  (ii) In making adjustments under clause (i) for transfer 
cases (as defined by the Secretary) in a fiscal year, not 
taking in account the effect of subparagraph (J), the Secretary 
may make adjustments to each of the average standardized 
amounts determined under paragraph (3) to assure that the 
aggregate payments made under this subsection for such fiscal 
year are not greater or lesser than those that would have 
otherwise been made in such fiscal year.
  (J)(i) The Secretary shall treat the term ``transfer case'' 
(as defined in subparagraph (I)(ii)) as including the case of a 
qualified discharge (as defined in clause (ii)), which is 
classified within a diagnosis-related group described in clause 
(iii), and which occurs on or after October 1, 1998. In the 
case of a qualified discharge for which a substantial portion 
of the costs of care are incurred in the early days of the 
inpatient stay (as defined by the Secretary), in no case may 
the payment amount otherwise provided under this subsection 
exceed an amount equal to the sum of--
          (I) 50 percent of the amount of payment under this 
        subsection for transfer cases (as established under 
        subparagraph (I)(i)), and
          (II) 50 percent of the amount of payment which would 
        have been made under this subsection with respect to 
        the qualified discharge if no transfer were involved.
  (ii) For purposes of clause (i), subject to clause (iii), the 
term ``qualified discharge'' means a discharge classified with 
a diagnosis-related group (described in clause (iii)) of an 
individual from a subsection (d) hospital, if upon such 
discharge the individual--
          (I) is admitted as an inpatient to a hospital or 
        hospital unit that is not a subsection (d) hospital for 
        the provision of inpatient hospital services;
          (II) is admitted to a skilled nursing facility;
          (III) is provided home health services from a home 
        health agency, if such services relate to the condition 
        or diagnosis for which such individual received 
        inpatient hospital services from the subsection (d) 
        hospital, and if such services are provided within an 
        appropriate period (as determined by the Secretary); or
          (IV) for discharges occurring on or after October 1, 
        2000, the individual receives post discharge services 
        described in clause (iv)(I).
  (iii) Subject to clause (iv), a diagnosis-related group 
described in this clause is--
          (I) 1 of 10 diagnosis-related groups selected by the 
        Secretary based upon a high volume of discharges 
        classified within such groups and a disproportionate 
        use of post discharge services described in clause 
        (ii); and
          (II) a diagnosis-related group specified by the 
        Secretary under clause (iv)(II).
  (iv) The Secretary shall include in the proposed rule 
published under subsection (e)(5)(A) for fiscal year 2001, a 
description of the effect of this subparagraph. The Secretary 
may include in the proposed rule (and in the final rule 
published under paragraph (6)) for fiscal year 2001 or a 
subsequent fiscal year, a description of--
          (I) post-discharge services not described in 
        subclauses (I), (II), and (III) of clause (ii), the 
        receipt of which results in a qualified discharge; and
          (II) diagnosis-related groups described in clause 
        (iii)(I) in addition to the 10 selected under such 
        clause.
  (K)(i) Effective for discharges beginning on or after October 
1, 2001, the Secretary shall establish a mechanism to recognize 
the costs of new medical services and technologies under the 
payment system established under this subsection. Such 
mechanism shall be established after notice and opportunity for 
public comment (in the publications required by subsection 
(e)(5) for a fiscal year or otherwise). Such mechanism shall be 
modified to meet the requirements of clause (viii).
  (ii) The mechanism established pursuant to clause (i) shall--
          (I) apply to a new medical service or technology if, 
        based on the estimated costs incurred with respect to 
        discharges involving such service or technology, the 
        DRG prospective payment rate otherwise applicable to 
        such discharges under this subsection is inadequate 
        (applying a threshold specified by the Secretary that 
        is the lesser of 75 percent of the standardized amount 
        (increased to reflect the difference between cost and 
        charges) or 75 percent of one standard deviation for 
        the diagnosis-related group involved);
          (II) provide for the collection of data with respect 
        to the costs of a new medical service or technology 
        described in subclause (I) for a period of not less 
        than two years and not more than three years beginning 
        on the date on which an inpatient hospital code is 
        issued with respect to the service or technology;
          (III) provide for additional payment to be made under 
        this subsection with respect to discharges involving a 
        new medical service or technology described in 
        subclause (I) that occur during the period described in 
        subclause (II) in an amount that adequately reflects 
        the estimated average cost of such service or 
        technology; and
          (IV) provide that discharges involving such a service 
        or technology that occur after the close of the period 
        described in subclause (II) will be classified within a 
        new or existing diagnosis-related group with a 
        weighting factor under paragraph (4)(B) that is derived 
        from cost data collected with respect to discharges 
        occurring during such period.
  (iii) For purposes of clause (ii)(II), the term ``inpatient 
hospital code'' means any code that is used with respect to 
inpatient hospital services for which payment may be made under 
this subsection and includes an alphanumeric code issued under 
the International Classification of Diseases, 9th Revision, 
Clinical Modification (``ICD-9-CM'') and its subsequent 
revisions.
  (iv) For purposes of clause (ii)(III), the term ``additional 
payment'' means, with respect to a discharge for a new medical 
service or technology described in clause (ii)(I), an amount 
that exceeds the prospective payment rate otherwise applicable 
under this subsection to discharges involving such service or 
technology that would be made but for this subparagraph.
  (v) The requirement under clause (ii)(III) for an additional 
payment may be satisfied by means of a new-technology group 
(described in subparagraph (L)), an add-on payment, a payment 
adjustment, or any other similar mechanism for increasing the 
amount otherwise payable with respect to a discharge under this 
subsection. The Secretary may not establish a separate fee 
schedule for such additional payment for such services and 
technologies, by utilizing a methodology established under 
subsection (a) or (h) of section 1834 to determine the amount 
of such additional payment, or by other similar mechanisms or 
methodologies.
  (vi) For purposes of this subparagraph and subparagraph (L), 
a medical service or technology will be considered a ``new 
medical service or technology'' if the service or technology 
meets criteria established by the Secretary after notice and an 
opportunity for public comment.
  (vii) Under the mechanism under this subparagraph, the 
Secretary shall provide for the addition of new diagnosis and 
procedure codes in April 1 of each year, but the addition of 
such codes shall not require the Secretary to adjust the 
payment (or diagnosis-related group classification) under this 
subsection until the fiscal year that begins after such date.
  (viii) The mechanism established pursuant to clause (i) shall 
be adjusted to provide, before publication of a proposed rule, 
for public input regarding whether a new service or technology 
represents an advance in medical technology that substantially 
improves the diagnosis or treatment of individuals entitled to 
benefits under part A as follows:
          (I) The Secretary shall make public and periodically 
        update a list of all the services and technologies for 
        which an application for additional payment under this 
        subparagraph is pending.
          (II) The Secretary shall accept comments, 
        recommendations, and data from the public regarding 
        whether the service or technology represents a 
        substantial improvement.
          (III) The Secretary shall provide for a meeting at 
        which organizations representing hospitals, physicians, 
        such individuals, manufacturers, and any other 
        interested party may present comments, recommendations, 
        and data to the clinical staff of the Centers for 
        Medicare & Medicaid Services before publication of a 
        notice of proposed rulemaking regarding whether service 
        or technology represents a substantial improvement.
  (ix) Before establishing any add-on payment under this 
subparagraph with respect to a new technology, the Secretary 
shall seek to identify one or more diagnosis-related groups 
associated with such technology, based on similar clinical or 
anatomical characteristics and the cost of the technology. 
Within such groups the Secretary shall assign an eligible new 
technology into a diagnosis-related group where the average 
costs of care most closely approximate the costs of care of 
using the new technology. No add-on payment under this 
subparagraph shall be made with respect to such new technology 
and this clause shall not affect the application of paragraph 
(4)(C)(iii).
  (L)(i) In establishing the mechanism under subparagraph (K), 
the Secretary may establish new-technology groups into which a 
new medical service or technology will be classified if, based 
on the estimated average costs incurred with respect to 
discharges involving such service or technology, the DRG 
prospective payment rate otherwise applicable to such 
discharges under this subsection is inadequate.
  (ii) Such groups--
          (I) shall not be based on the costs associated with a 
        specific new medical service or technology; but
          (II) shall, in combination with the applicable 
        standardized amounts and the weighting factors assigned 
        to such groups under paragraph (4)(B), reflect such 
        cost cohorts as the Secretary determines are 
        appropriate for all new medical services and 
        technologies that are likely to be provided as 
        inpatient hospital services in a fiscal year.
  (iii) The methodology for classifying specific hospital 
discharges within a diagnosis-related group under paragraph 
(4)(A) or a new-technology group shall provide that a specific 
hospital discharge may not be classified within both a 
diagnosis-related group and a new-technology group.
  (6) The Secretary shall provide for publication in the 
Federal Register, on or before the August 1 before each fiscal 
year (beginning with fiscal year 1984), of a description of the 
methodology and data used in computing the adjusted DRG 
prospective payment rates under this subsection, including any 
adjustments required under subsection (e)(1)(B).
  (7) There shall be no administrative or judicial review under 
section 1878 or otherwise of--
          (A) the determination of the requirement, or the 
        proportional amount, of any adjustment effected 
        pursuant to subsection (e)(1) or the determination of 
        the applicable percentage increase under paragraph 
        (12)(A)(ii),
          (B) the establishment of diagnosis-related groups, of 
        the methodology for the classification of discharges 
        within such groups, and of the appropriate weighting 
        factors thereof under paragraph (4), including the 
        selection and revision of codes under paragraph (4)(D), 
        and
          (C) the determination of whether services provided 
        prior to a patient's inpatient admission are related to 
        the admission (as described in subsection (a)(4)).
  (8)(A) In the case of any hospital which is located in an 
area which is, at any time after April 20, 1983, reclassified 
from an urban to a rural area, payments to such hospital for 
the first two cost reporting periods for which such 
reclassification is effective shall be made as follows:
          (i) For the first such cost reporting period, payment 
        shall be equal to the amount payable to such hospital 
        for such reporting period on the basis of the rural 
        classification, plus an amount equal to two-thirds of 
        the amount (if any) by which--
                  (I) the amount which would have been payable 
                to such hospital for such reporting period on 
                the basis of an urban classification, exceeds
                  (II) the amount payable to such hospital for 
                such reporting period on the basis of the rural 
                classification.
          (ii) For the second such cost reporting period, 
        payment shall be equal to the amount payable to such 
        hospital for such reporting period on the basis of the 
        rural classification, plus an amount equal to one-third 
        of the amount (if any) by which--
                  (I) the amount which would have been payable 
                to such hospital for such reporting period on 
                the basis of an urban classification, exceeds
                  (II) the amount payable to such hospital for 
                such reporting period on the basis of the rural 
                classification.
  (B)(i) For purposes of this subsection, the Secretary shall 
treat a hospital located in a rural county adjacent to one or 
more urban areas as being located in the urban metropolitan 
statistical area to which the greatest number of workers in the 
county commute, if the rural county would otherwise be 
considered part of an urban area, under the standards for 
designating Metropolitan Statistical Areas (and for designating 
New England County Metropolitan Areas) described in clause 
(ii), if the commuting rates used in determining outlying 
counties (or, for New England, similar recognized areas) were 
determined on the basis of the aggregate number of resident 
workers who commute to (and, if applicable under the standards, 
from) the central county or counties of all contiguous 
Metropolitan Statistical Areas (or New England County 
Metropolitan Areas).
  (ii) The standards described in this clause for cost 
reporting periods beginning in a fiscal year--
          (I) before fiscal year 2003, are the standards 
        published in the Federal Register on January 3, 1980, 
        or, at the election of the hospital with respect to 
        fiscal years 2001 and 2002, standards so published on 
        March 30, 1990; and
          (II) after fiscal year 2002, are the standards 
        published in the Federal Register by the Director of 
        the Office of Management and Budget based on the most 
        recent available decennial population data.
Subparagraphs (C) and (D) shall not apply with respect to the 
application of subclause (I).
  (C)(i) If the application of subparagraph (B) or a decision 
of the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10), by treating hospitals located 
in a rural county or counties as being located in an urban 
area, or by treating hospitals located in one urban area as 
being located in another urban area--
          (I) reduces the wage index for that urban area (as 
        applied under this subsection) by 1 percentage point or 
        less, the Secretary, in calculating such wage index 
        under this subsection, shall exclude those hospitals so 
        treated, or
          (II) reduces the wage index for that urban area by 
        more than 1 percentage point (as applied under this 
        subsection), the Secretary shall calculate and apply 
        such wage index under this subsection separately to 
        hospitals located in such urban area (excluding all the 
        hospitals so treated) and to the hospitals so treated 
        (as if such hospitals were located in such urban area).
  (ii) If the application of subparagraph (B) or a decision of 
the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10), by treating hospitals located 
in a rural county or counties as not being located in the rural 
area in a State, reduces the wage index for that rural area (as 
applied under this subsection), the Secretary shall calculate 
and apply such wage index under this subsection as if the 
hospitals so treated had not been excluded from calculation of 
the wage index for that rural area.
  (iii) The application of subparagraph (B) or a decision of 
the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10) may not result in the reduction 
of any county's wage index to a level below the wage index for 
rural areas in the State in which the county is located.
  (iv) The application of subparagraph (B) or a decision of the 
Medicare Geographic Classification Review Board or of the 
Secretary under paragraph (10) may not result in a reduction in 
an urban area's wage index if--
          (I) the urban area has a wage index below the wage 
        index for rural areas in the State in which it is 
        located; or
          (II) the urban area is located in a State that is 
        composed of a single urban area.
  (v) This subparagraph shall apply with respect to discharges 
occurring in a fiscal year only if the Secretary uses a method 
for making adjustments to the DRG prospective payment rate for 
area differences in hospital wage levels under paragraph (3)(E) 
for the fiscal year that is based on the use of Metropolitan 
Statistical Area classifications.
  (D) The Secretary shall make a proportional adjustment in the 
standardized amounts determined under paragraph (3) to assure 
that the provisions of subparagraphs (B) and (C) or a decision 
of the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10) do not result in aggregate 
payments under this section that are greater or less than those 
that would otherwise be made.
  (E)(i) For purposes of this subsection, not later than 60 
days after the receipt of an application (in a form and manner 
determined by the Secretary) from a subsection (d) hospital 
described in clause (ii), the Secretary shall treat the 
hospital as being located in the rural area (as defined in 
paragraph (2)(D)) of the State in which the hospital is 
located.
  (ii) For purposes of clause (i), a subsection (d) hospital 
described in this clause is a subsection (d) hospital that is 
located in an urban area (as defined in paragraph (2)(D)) and 
satisfies any of the following criteria:
          (I) The hospital is located in a rural census tract 
        of a metropolitan statistical area (as determined under 
        the most recent modification of the Goldsmith 
        Modification, originally published in the Federal 
        Register on February 27, 1992 (57 Fed. Reg. 6725)).
          (II) The hospital is located in an area designated by 
        any law or regulation of such State as a rural area (or 
        is designated by such State as a rural hospital).
          (III) The hospital would qualify as a rural, 
        regional, or national referral center under paragraph 
        (5)(C) or as a sole community hospital under paragraph 
        (5)(D) if the hospital were located in a rural area.
          (IV) The hospital meets such other criteria as the 
        Secretary may specify.
  (9)(A) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, the amount of the payment with 
respect to the operating costs of inpatient hospital services 
of a subsection (d) Puerto Rico hospital for inpatient hospital 
discharges is equal to the sum of--
          (i) the applicable Puerto Rico percentage (specified 
        in subparagraph (E)) of the Puerto Rico adjusted DRG 
        prospective payment rate (determined under subparagraph 
        (B) or (C)) for such discharges,
          (ii) the applicable Federal percentage (specified in 
        subparagraph (E)) of--
                  (I) for discharges beginning in a fiscal year 
                beginning on or after October 1, 1997, and 
                before October 1, 2003, the discharge-weighted 
                average of--
                          (aa) the national adjusted DRG 
                        prospective payment rate (determined 
                        under paragraph (3)(D)) for hospitals 
                        located in a large urban area,
                          (bb) such rate for hospitals located 
                        in other urban areas, and
                          (cc) such rate for hospitals located 
                        in a rural area,
                for such discharges, adjusted in the manner 
                provided in paragraph (3)(E) for different area 
                wage levels; and
                  (II) for discharges in a fiscal year 
                beginning on or after October 1, 2003, the 
                national DRG prospective payment rate 
                determined under paragraph (3)(D)(iii) for 
                hospitals located in any area for such 
                discharges, adjusted in the manner provided in 
                paragraph (3)(E) for different area wage 
                levels.
As used in this section, the term ``subsection (d) Puerto Rico 
hospital'' means a hospital that is located in Puerto Rico and 
that would be a subsection (d) hospital (as defined in 
paragraph (1)(B)) if it were located in one of the 50 States.
  (B) The Secretary shall determine a Puerto Rico adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in fiscal year 1988 involving inpatient hospital services of a 
subsection (d) Puerto Rico hospital for which payment may be 
made under part A of this title. Such rate shall be determined 
for such hospitals located in urban or rural areas within 
Puerto Rico, as follows:
          (i) The Secretary shall determine the target amount 
        (as defined in subsection (b)(3)(A)) for the hospital 
        for the cost reporting period beginning in fiscal year 
        1987 and increase such amount by prorating the 
        applicable percentage increase (as defined in 
        subsection (b)(3)(B)) to update the amount to the 
        midpoint in fiscal year 1988.
          (ii) The Secretary shall standardize the amount 
        determined under clause (i) for each hospital by--
                  (I) excluding an estimate of indirect medical 
                education costs,
                  (II) adjusting for variations among hospitals 
                by area in the average hospital wage level,
                  (III) adjusting for variations in case mix 
                among hospitals, and
                  (IV) excluding an estimate of the additional 
                payments to certain subsection (d) Puerto Rico 
                hospitals to be made under subparagraph 
                (D)(iii) (relating to disproportionate share 
                payments).
          (iii) The Secretary shall compute a discharge 
        weighted average of the standardized amounts determined 
        under clause (ii) for all hospitals located in an urban 
        area and for all hospitals located in a rural area (as 
        such terms are defined in paragraph (2)(D)).
          (iv) The Secretary shall reduce the average 
        standardized amount by a proportion equal to the 
        proportion (estimated by the Secretary) of the amount 
        of payments under this paragraph which are additional 
        payments described in subparagraph (D)(i) (relating to 
        outlier payments).
          (v) For each discharge classified within a diagnosis-
        related group for hospitals located in an urban or 
        rural area, respectively, the Secretary shall establish 
        a Puerto Rico DRG prospective payment rate equal to the 
        product of--
                  (I) the average standardized amount (computed 
                under clause (iii) and reduced under clause 
                (iv)) for hospitals located in an urban or 
                rural area, respectively, and
                  (II) the weighting factor (determined under 
                paragraph (4)(B)) for that diagnosis-related 
                group.
          (vi) The Secretary shall adjust the proportion (as 
        estimated by the Secretary from time to time) of 
        hospitals' costs which are attributable to wages and 
        wage-related costs, of the Puerto Rico DRG prospective 
        payment rate computed under clause (v) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the Puerto Rican average hospital 
        wage level.
  (C) The Secretary shall determine a Puerto Rico adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
after fiscal year 1988 involving inpatient hospital services of 
a subsection (d) Puerto Rico hospital for which payment may be 
made under part A of this title. Such rate shall be determined 
for hospitals located in urban or rural areas within Puerto 
Rico as follows:
          (i)(I) For discharges in a fiscal year after fiscal 
        year 1988 and before fiscal year 2004, the Secretary 
        shall compute an average standardized amount for 
        hospitals located in an urban area and for hospitals 
        located in a rural area equal to the respective average 
        standardized amount computed for the previous fiscal 
        year under subparagraph (B)(iii) or under this clause, 
        increased for fiscal year 1989 by the applicable 
        percentage increase under subsection (b)(3)(B), and 
        adjusted for subsequent fiscal years in accordance with 
        the final determination of the Secretary under 
        subsection (e)(4), and adjusted to reflect the most 
        recent case-mix data available.
          (II) For discharges occurring in a fiscal year 
        (beginning with fiscal year 2004), the Secretary shall 
        compute an average standardized amount for hospitals 
        located in any area of Puerto Rico that is equal to the 
        average standardized amount computed under subclause 
        (I) for fiscal year 2003 for hospitals in a large urban 
        area (or, beginning with fiscal year 2005, for all 
        hospitals in the previous fiscal year) increased by the 
        applicable percentage increase under subsection 
        (b)(3)(B) for the fiscal year involved.
          (ii) The Secretary shall reduce each of the average 
        standardized amounts (or for fiscal year 2004 and 
        thereafter, the average standardized amount) by a 
        proportion equal to the proportion (estimated by the 
        Secretary) of the amount of payments under this 
        paragraph which are additional payments described in 
        subparagraph (D)(i) (relating to outlier payments).
          (iii) For each discharge classified within a 
        diagnosis-related group for hospitals located in an 
        urban or rural area, respectively, the Secretary shall 
        establish a Puerto Rico DRG prospective payment rate 
        equal to the product of--
                  (I) the average standardized amount (computed 
                under clause (i) and reduced under clause 
                (ii)), and
                  (II) the weighting factor (determined under 
                paragraph (4)(B)) for that diagnosis-related 
                group.
          (iv)(I) The Secretary shall adjust the proportion (as 
        estimated by the Secretary from time to time) of 
        hospitals' costs which are attributable to wages and 
        wage-related costs, of the Puerto Rico DRG prospective 
        payment rate computed under clause (iii) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the Puerto Rico average hospital 
        wage level. The second and third sentences of paragraph 
        (3)(E)(i) shall apply to subsection (d) Puerto Rico 
        hospitals under this clause in the same manner as they 
        apply to subsection (d) hospitals under such paragraph 
        and, for purposes of this clause, any reference in such 
        paragraph to a subsection (d) hospital is deemed a 
        reference to a subsection (d) Puerto Rico hospital.
          (II) For discharges occurring on or after October 1, 
        2004, the Secretary shall substitute ``62 percent'' for 
        the proportion described in the first sentence of 
        clause (i), unless the application of this subclause 
        would result in lower payments to a hospital than would 
        otherwise be made.
  (D) The following provisions of paragraph (5) shall apply to 
subsection (d) Puerto Rico hospitals receiving payment under 
this paragraph in the same manner and to the extent as they 
apply to subsection (d) hospitals receiving payment under this 
subsection:
          (i) Subparagraph (A) (relating to outlier payments).
          (ii) Subparagraph (B) (relating to payments for 
        indirect medical education costs), except that for this 
        purpose the sum of the amount determined under 
        subparagraph (A) of this paragraph and the amount paid 
        to the hospital under clause (i) of this subparagraph 
        shall be substituted for the sum referred to in 
        paragraph (5)(B)(i)(I).
          (iii) Subparagraph (F) (relating to disproportionate 
        share payments), except that for this purpose the sum 
        described in clause (ii) of this subparagraph shall be 
        substituted for the sum referred to in paragraph 
        (5)(F)(ii)(I).
          (iv) Subparagraph (H) (relating to exceptions and 
        adjustments).
  (E) For purposes of subparagraph (A), for discharges 
occurring--
          (i) on or after October 1, 1987, and before October 
        1, 1997, the applicable Puerto Rico percentage is 75 
        percent and the applicable Federal percentage is 25 
        percent;
          (ii) on or after October 1, 1997, and before April 1, 
        2004, the applicable Puerto Rico percentage is 50 
        percent and the applicable Federal percentage is 50 
        percent;
          (iii) on or after April 1, 2004, and before October 
        1, 2004, the applicable Puerto Rico percentage is 37.5 
        percent and the applicable Federal percentage is 62.5 
        percent; and
          (iv) on or after October 1, 2004, the applicable 
        Puerto Rico percentage is 25 percent and the applicable 
        Federal percentage is 75 percent.
  (10)(A) There is hereby established the Medicare Geographic 
Classification Review Board (hereinafter in this paragraph 
referred to as the ``Board'').
  (B)(i) The Board shall be composed of 5 members appointed by 
the Secretary without regard to the provisions of title 5, 
United States Code, governing appointments in the competitive 
service. Two of such members shall be representative of 
subsection (d) hospitals located in a rural area under 
paragraph (2)(D). At least 1 member shall be knowledgeable in 
the field of analyzing costs with respect to the provision of 
inpatient hospital services.
  (ii) The Secretary shall make initial appointments to the 
Board as provided in this paragraph within 180 days after the 
date of the enactment of this paragraph.
  (C)(i) The Board shall consider the application of any 
subsection (d) hospital requesting that the Secretary change 
the hospital's geographic classification for purposes of 
determining for a fiscal year--
          (I) the hospital's average standardized amount under 
        paragraph (2)(D), or
          (II) the factor used to adjust the DRG prospective 
        payment rate for area differences in hospital wage 
        levels that applies to such hospital under paragraph 
        (3)(E).
  (ii) A hospital requesting a change in geographic 
classification under clause (i) for a fiscal year shall submit 
its application to the Board not later than the first day of 
the 13-month period ending on September 30 of the preceding 
fiscal year.
  (iii)(I) The Board shall render a decision on an application 
submitted under clause (i) not later than 180 days after the 
deadline referred to in clause (ii).
  (II) Appeal of decisions of the Board shall be subject to the 
provisions of section 557b of title 5, United States Code. The 
Secretary shall issue a decision on such an appeal not later 
than 90 days after the date on which the appeal is filed. The 
decision of the Secretary shall be final and shall not be 
subject to judicial review.
  (D)(i) The Secretary shall publish guidelines to be utilized 
by the Board in rendering decisions on applications submitted 
under this paragraph, and shall include in such guidelines the 
following:
          (I) Guidelines for comparing wages, taking into 
        account (to the extent the Secretary determines 
        appropriate) occupational mix, in the area in which the 
        hospital is classified and the area in which the 
        hospital is applying to be classified.
          (II) Guidelines for determining whether the county in 
        which the hospital is located should be treated as 
        being a part of a particular Metropolitan Statistical 
        Area.
          (III) Guidelines for considering information provided 
        by an applicant with respect to the effects of the 
        hospital's geographic classification on access to 
        inpatient hospital services by medicare beneficiaries.
          (IV) Guidelines for considering the appropriateness 
        of the criteria used to define New England County 
        Metropolitan Areas.
  (ii) Notwithstanding clause (i), if the Secretary uses a 
method for making adjustments to the DRG prospective payment 
rate for area differences in hospital wage levels under 
paragraph (3)(E) that is not based on the use of Metropolitan 
Statistical Area classifications, the Secretary may revise the 
guidelines published under clause (i) to the extent such 
guidelines are used to determine the appropriateness of the 
geographic area in which the hospital is determined to be 
located for purposes of making such adjustments.
  (iii) Under the guidelines published by the Secretary under 
clause (i), in the case of a hospital which has ever been 
classified by the Secretary as a rural referral center under 
paragraph (5)(C), the Board may not reject the application of 
the hospital under this paragraph on the basis of any 
comparison between the average hourly wage of the hospital and 
the average hourly wage of hospitals in the area in which it is 
located.
  (iv) The Secretary shall publish the guidelines described in 
clause (i) by July 1, 1990.
  (v) Any decision of the Board to reclassify a subsection (d) 
hospital for purposes of the adjustment factor described in 
subparagraph (C)(i)(II) for fiscal year 2001 or any fiscal year 
thereafter shall be effective for a period of 3 fiscal years, 
except that the Secretary shall establish procedures under 
which a subsection (d) hospital may elect to terminate such 
reclassification before the end of such period.
  (vi) Such guidelines shall provide that, in making decisions 
on applications for reclassification for the purposes described 
in clause (v) for fiscal year 2003 and any succeeding fiscal 
year, the Board shall base any comparison of the average hourly 
wage for the hospital with the average hourly wage for 
hospitals in an area on--
          (I) an average of the average hourly wage amount for 
        the hospital from the most recently published hospital 
        wage survey data of the Secretary (as of the date on 
        which the hospital applies for reclassification) and 
        such amount from each of the two immediately preceding 
        surveys; and
          (II) an average of the average hourly wage amount for 
        hospitals in such area from the most recently published 
        hospital wage survey data of the Secretary (as of the 
        date on which the hospital applies for 
        reclassification) and such amount from each of the two 
        immediately preceding surveys.
  (E)(i) The Board shall have full power and authority to make 
rules and establish procedures, not inconsistent with the 
provisions of this title or regulations of the Secretary, which 
are necessary or appropriate to carry out the provisions of 
this paragraph. In the course of any hearing the Board may 
administer oaths and affirmations. The provisions of 
subsections (d) and (e) of section 205 with respect to subpenas 
shall apply to the Board to the same extent as such provisions 
apply to the Secretary with respect to title II.
  (ii) The Board is authorized to engage such technical 
assistance and to receive such information as may be required 
to carry out its functions, and the Secretary shall, in 
addition, make available to the Board such secretarial, 
clerical, and other assistance as the Board may require to 
carry out its functions.
  (F)(i) Each member of the Board who is not an officer or 
employee of the Federal Government shall be compensated at a 
rate equal to the daily equivalent of the annual rate of basic 
pay prescribed for grade GS-18 of the General Schedule under 
section 5332 of title 5, United States Code, for each day 
(including travel time) during which such member is engaged in 
the performance of the duties of the Board. Each member of the 
Board who is an officer or employee of the United States shall 
serve without compensation in addition to that received for 
service as an officer or employee of the United States.
  (ii) Members of the Board shall be allowed travel expenses, 
including per diem in lieu of subsistence, at rates authorized 
for employees of agencies under subchapter I of chapter 57 of 
title 5, United States Code, while away from their homes or 
regular places of business in the performance of services for 
the Board.
          (11) Additional payments for managed care 
        enrollees.--
                  (A) In general.--For portions of cost 
                reporting periods occurring on or after January 
                1, 1998, the Secretary shall provide for an 
                additional payment amount for each applicable 
                discharge of any subsection (d) hospital that 
                has an approved medical residency training 
                program.
                  (B) Applicable discharge.--For purposes of 
                this paragraph, the term ``applicable 
                discharge'' means the discharge of any 
                individual who is enrolled under a risk-sharing 
                contract with an eligible organization under 
                section 1876 and who is entitled to benefits 
                under part A or any individual who is enrolled 
                with a Medicare+Choice organization under part 
                C.
                  (C) Determination of amount.--The amount of 
                the payment under this paragraph with respect 
                to any applicable discharge shall be equal to 
                the applicable percentage (as defined in 
                subsection (h)(3)(D)(ii)) of the estimated 
                average per discharge amount that would 
                otherwise have been paid under paragraph (5)(B) 
                if the individuals had not been enrolled as 
                described in subparagraph (B).
                  (D) Special rule for hospitals under 
                reimbursement system.--The Secretary shall 
                establish rules for the application of this 
                paragraph to a hospital reimbursed under a 
                reimbursement system authorized under section 
                1814(b)(3) in the same manner as it would apply 
                to the hospital if it were not reimbursed under 
                such section.
          (12) Payment adjustment for low-volume hospitals.--
                  (A) In general.--In addition to any payments 
                calculated under this section for a subsection 
                (d) hospital, for discharges occurring during a 
                fiscal year (beginning with fiscal year 2005), 
                the Secretary shall provide for an additional 
                payment amount to each low-volume hospital (as 
                defined in subparagraph (C)(i)) for discharges 
                occurring during that fiscal year that is equal 
                to the applicable percentage increase 
                (determined under subparagraph (B) or (D) for 
                the hospital involved) in the amount paid to 
                such hospital under this section for such 
                discharges (determined without regard to this 
                paragraph).
                  (B) Applicable percentage increase.--For 
                discharges occurring in fiscal years 2005 
                through 2010 and for discharges occurring in 
                fiscal year 2018 and subsequent fiscal years, 
                the Secretary shall determine an applicable 
                percentage increase for purposes of 
                subparagraph (A) as follows:
                          (i) The Secretary shall determine the 
                        empirical relationship for subsection 
                        (d) hospitals between the standardized 
                        cost-per-case for such hospitals and 
                        the total number of discharges of such 
                        hospitals and the amount of the 
                        additional incremental costs (if any) 
                        that are associated with such number of 
                        discharges.
                          (ii) The applicable percentage 
                        increase shall be determined based upon 
                        such relationship in a manner that 
                        reflects, based upon the number of such 
                        discharges for a subsection (d) 
                        hospital, such additional incremental 
                        costs.
                          (iii) In no case shall the applicable 
                        percentage increase exceed 25 percent.
                  (C) Definitions.--
                          (i) Low-volume hospital.--For 
                        purposes of this paragraph, the term 
                        ``low-volume hospital'' means, for a 
                        fiscal year, a subsection (d) hospital 
                        (as defined in paragraph (1)(B)) that 
                        the Secretary determines is located 
                        more than 25 road miles (or, with 
                        respect to fiscal years 2011 through 
                        2017, 15 road miles) from another 
                        subsection (d) hospital and has less 
                        than 800 discharges (or, with respect 
                        to fiscal years 2011 through 2017, 
                        1,600 discharges of individuals 
                        entitled to, or enrolled for, benefits 
                        under part A) during the fiscal year or 
                        portion of fiscal year.
                          (ii) Discharge.--For purposes of 
                        subparagraph (B) and clause (i), the 
                        term ``discharge'' means an inpatient 
                        acute care discharge of an individual 
                        regardless of whether the individual is 
                        entitled to benefits under part A.
                  (D) Temporary applicable percentage 
                increase.--For discharges occurring in fiscal 
                years 2011 through 2017, the Secretary shall 
                determine an applicable percentage increase for 
                purposes of subparagraph (A) using a continuous 
                linear sliding scale ranging from 25 percent 
                for low-volume hospitals with 200 or fewer 
                discharges of individuals entitled to, or 
                enrolled for, benefits under part A in the 
                fiscal year or the portion of fiscal year to 0 
                percent for low-volume hospitals with greater 
                than 1,600 discharges of such individuals in 
                the fiscal year.
  (13)(A) In order to recognize commuting patterns among 
geographic areas, the Secretary shall establish a process 
through application or otherwise for an increase of the wage 
index applied under paragraph (3)(E) for subsection (d) 
hospitals located in a qualifying county described in 
subparagraph (B) in the amount computed under subparagraph (D) 
based on out-migration of hospital employees who reside in that 
county to any higher wage index area.
  (B) The Secretary shall establish criteria for a qualifying 
county under this subparagraph based on the out-migration 
referred to in subparagraph (A) and differences in the area 
wage indices. Under such criteria the Secretary shall, 
utilizing such data as the Secretary determines to be 
appropriate, establish--
          (i) a threshold percentage, established by the 
        Secretary, of the weighted average of the area wage 
        index or indices for the higher wage index areas 
        involved;
          (ii) a threshold (of not less than 10 percent) for 
        minimum out-migration to a higher wage index area or 
        areas; and
          (iii) a requirement that the average hourly wage of 
        the hospitals in the qualifying county equals or 
        exceeds the average hourly wage of all the hospitals in 
        the area in which the qualifying county is located.
  (C) For purposes of this paragraph, the term ``higher wage 
index area'' means, with respect to a county, an area with a 
wage index that exceeds that of the county.
  (D) The increase in the wage index under subparagraph (A) for 
a qualifying county shall be equal to the percentage of the 
hospital employees residing in the qualifying county who are 
employed in any higher wage index area multiplied by the sum of 
the products, for each higher wage index area of--
          (i) the difference between--
                  (I) the wage index for such higher wage index 
                area, and
                  (II) the wage index of the qualifying county; 
                and
          (ii) the number of hospital employees residing in the 
        qualifying county who are employed in such higher wage 
        index area divided by the total number of hospital 
        employees residing in the qualifying county who are 
        employed in any higher wage index area.
  (E) The process under this paragraph may be based upon the 
process used by the Medicare Geographic Classification Review 
Board under paragraph (10). As the Secretary determines to be 
appropriate to carry out such process, the Secretary may 
require hospitals (including subsection (d) hospitals and other 
hospitals) and critical access hospitals, as required under 
section 1866(a)(1)(T), to submit data regarding the location of 
residence, or the Secretary may use data from other sources.
  (F) A wage index increase under this paragraph shall be 
effective for a period of 3 fiscal years, except that the 
Secretary shall establish procedures under which a subsection 
(d) hospital may elect to waive the application of such wage 
index increase.
  (G) A hospital in a county that has a wage index increase 
under this paragraph for a period and that has not waived the 
application of such an increase under subparagraph (F) is not 
eligible for reclassification under paragraph (8) or (10) 
during that period.
  (H) Any increase in a wage index under this paragraph for a 
county shall not be taken into account for purposes of--
          (i) computing the wage index for portions of the wage 
        index area (not including the county) in which the 
        county is located; or
          (ii) applying any budget neutrality adjustment with 
        respect to such index under paragraph (8)(D).
  (I) The thresholds described in subparagraph (B), data on 
hospital employees used under this paragraph, and any 
determination of the Secretary under the process described in 
subparagraph (E) shall be final and shall not be subject to 
judicial review.
  (e)(1)(A) For cost reporting periods of hospitals beginning 
in fiscal year 1984 or fiscal year 1985, the Secretary shall 
provide for such proportional adjustment in the applicable 
percentage increase (otherwise applicable to the periods under 
subsection (b)(3)(B)) as may be necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsection (d)(1)(A)(i)(I) for that fiscal year 
        for operating costs of inpatient hospital services of 
        hospitals (excluding payments made under section 
        1866(a)(1)(F)),
are not greater or less than--
          (ii) the target percentage (as defined in subsection 
        (d)(1)(C)) of the payment amounts which would have been 
        payable for such services for those same hospitals for 
        that fiscal year under this section under the law as in 
        effect before the date of the enactment of the Social 
        Security Amendments of 1983 (excluding payments made 
        under section 1866(a)(1)(F));
except that the adjustment made under this subparagraph shall 
apply only to subsection (d) hospitals and shall not apply for 
purposes of making computations under subsection (d)(2)(B)(ii) 
or subsection (d)(3)(A).
  (B) For discharges occurring in fiscal year 1984 or fiscal 
year 1985, the Secretary shall provide under subsections 
(d)(2)(F) and (d)(3)(C) for such equal proportional adjustment 
in each of the average standardized amounts otherwise computed 
for that fiscal year as may be necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsection (d)(1)(A)(i)(II) and (d)(5) for that 
        fiscal year for operating costs of inpatient hospital 
        services of hospitals (excluding payments made under 
        section 1866(a)(1)(F)),
are not greater or less than--
          (ii) the DRG percentage (as defined in subsection 
        (d)(1)(C)) of the payment amounts which would have been 
        payable for such services for those same hospitals for 
        that fiscal year under this section under the law as in 
        effect before the date of the enactment of the Social 
        Security Amendments of 1983 (excluding payments made 
        under section 1866(a)(1)(F)).
  (C) For discharges occurring in fiscal year 1988, the 
Secretary shall provide for such equal proportional adjustment 
in each of the average standardized amounts otherwise computed 
under subsection (d)(3) for that fiscal year as may be 
necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsections (d)(1)(A)(iii), (d)(5), and (d)(9) 
        for that fiscal year for operating costs of inpatient 
        hospital services of subsection (d) hospitals and 
        subsection (d) Puerto Rico hospitals,
are not greater or less than--
          (ii) the payment amounts that would have been payable 
        for such services for those same hospitals for that 
        fiscal year but for the enactment of the amendments 
        made by section 9304 of the Omnibus Budget 
        Reconciliation Act of 1986.
  (4)(A) Taking into consideration the recommendations of the 
Commission, the Secretary shall recommend for each fiscal year 
(beginning with fiscal year 1988) an appropriate change factor 
for inpatient hospital services for discharges in that fiscal 
year which will take into account amounts necessary for the 
efficient and effective delivery of medically appropriate and 
necessary care of high quality. The appropriate change factor 
may be different for all large urban subsection (d) hospitals, 
other urban subsection (d) hospitals, urban subsection (d) 
Puerto Rico hospitals, rural subsection (d) hospitals, and 
rural subsection (d) Puerto Rico hospitals, and all other 
hospitals and units not paid under subsection (d), and may vary 
among such other hospitals and units.
  (B) In addition to the recommendation made under subparagraph 
(A), the Secretary shall, taking into consideration the 
recommendations of the Commission under paragraph (2)(B), 
recommend for each fiscal year (beginning with fiscal year 
1992) other appropriate changes in each existing reimbursement 
policy under this title under which payments to an institution 
are based upon prospectively determined rates.
  (5) The Secretary shall cause to have published in the 
Federal Register, not later than--
          (A) the April 1 before each fiscal year (beginning 
        with fiscal year 1986), the Secretary's proposed 
        recommendations under paragraph (4) for that fiscal 
        year for public comment, and
          (B) the August 1 before such fiscal year after such 
        consideration of public comment on the proposal as is 
        feasible in the time available, the Secretary's final 
        recommendations under such paragraph for that year.
The Secretary shall include in the publication referred to in 
subparagraph (A) for a fiscal year the report of the 
Commission's recommendations submitted under paragraph (3) for 
that fiscal year. To the extent that the Secretary's 
recommendations under paragraph (4) differ from the 
Commission's recommendations for that fiscal year, the 
Secretary shall include in the publication referred to in 
subparagraph (A) an explanation of the Secretary's grounds for 
not following the Commission's recommendations.
  (f)(1)(A) The Secretary shall maintain a system for the 
reporting of costs of hospitals receiving payments computed 
under subsection (d).
  (B)(i) Subject to clause (ii), the Secretary shall place into 
effect a standardized electronic cost reporting format for 
hospitals under this title.
  (ii) The Secretary may delay or waive the implementation of 
such format in particular instances where such implementation 
would result in financial hardship (in particular with respect 
to hospitals with a small percentage of inpatients entitled to 
benefits under this title).
  (2) If the Secretary determines, based upon information 
supplied by a quality improvement organization under part B of 
title XI, that a hospital, in order to circumvent the payment 
method established under subsection (b) or (d) of this section, 
has taken an action that results in the admission of 
individuals entitled to benefits under part A unnecessarily, 
unnecessary multiple admissions of the same such individuals, 
or other inappropriate medical or other practices with respect 
to such individuals, the Secretary may--
          (A) deny payment (in whole or in part) under part A 
        with respect to inpatient hospital services provided 
        with respect to such an unnecessary admission (or 
        subsequent admission of the same individual), or
          (B) require the hospital to take other corrective 
        action necessary to prevent or correct the 
        inappropriate practice.
  (3) The provisions of subsections (c) through (g) of section 
1128 shall apply to determinations made under paragraph (2) in 
the same manner as they apply to exclusions effected under 
section 1128(b)(13).
  (g)(1)(A) Notwithstanding section 1861(v), instead of any 
amounts that are otherwise payable under this title with 
respect to the reasonable costs of subsection (d) hospitals and 
subsection (d) Puerto Rico hospitals for capital-related costs 
of inpatient hospital services, the Secretary shall, for 
hospital cost reporting periods beginning on or after October 
1, 1991, provide for payments for such costs in accordance with 
a prospective payment system established by the Secretary. 
Aggregate payments made under subsection (d) and this 
subsection during fiscal years 1992 through 1995 shall be 
reduced in a manner that results in a reduction (as estimated 
by the Secretary) in the amount of such payments equal to a 10 
percent reduction in the amount of payments attributable to 
capital-related costs that would otherwise have been made 
during such fiscal year had the amount of such payments been 
based on reasonable costs (as defined in section 1861(v)). For 
discharges occurring after September 30, 1993, the Secretary 
shall reduce by 7.4 percent the unadjusted standard Federal 
capital payment rate (as described in 42 CFR 412.308(c), as in 
effect on the date of the enactment of the Omnibus Budget 
Reconciliation Act of 1993) and shall (for hospital cost 
reporting periods beginning on or after October 1, 1993) 
redetermine which payment methodology is applied to the 
hospital under such system to take into account such reduction. 
In addition to the reduction described in the preceding 
sentence, for discharges occurring on or after October 1, 1997, 
the Secretary shall apply the budget neutrality adjustment 
factor used to determine the Federal capital payment rate in 
effect on September 30, 1995 (as described in section 412.352 
of title 42 of the Code of Federal Regulations), to (i) the 
unadjusted standard Federal capital payment rate (as described 
in section 412.308(c) of that title, as in effect on September 
30, 1997), and (ii) the unadjusted hospital-specific rate (as 
described in section 412.328(e)(1) of that title, as in effect 
on September 30, 1997), and, for discharges occurring on or 
after October 1, 1997, and before October 1, 2002, reduce the 
rates described in clauses (i) and (ii) by 2.1 percent.
  (B) Such system--
          (i) shall provide for (I) a payment on a per 
        discharge basis, and (II) an appropriate weighting of 
        such payment amount as relates to the classification of 
        the discharge;
          (ii) may provide for an adjustment to take into 
        account variations in the relative costs of capital and 
        construction for the different types of facilities or 
        areas in which they are located;
          (iii) may provide for such exceptions (including 
        appropriate exceptions to reflect capital obligations) 
        as the Secretary determines to be appropriate, and
          (iv) may provide for suitable adjustment to reflect 
        hospital occupancy rate.
  (C) In this paragraph, the term ``capital-related costs'' has 
the meaning given such term by the Secretary under subsection 
(a)(4) as of September 30, 1987, and does not include a return 
on equity capital.
  (2)(A) The Secretary shall provide that the amount which is 
allowable, with respect to reasonable costs of inpatient 
hospital services for which payment may be made under this 
title, for a return on equity capital for hospitals shall, for 
cost reporting periods beginning on or after the date of the 
enactment of this subsection, be equal to amounts otherwise 
allowable under regulations in effect on March 1, 1983, except 
that the rate of return to be recognized shall be equal to the 
applicable percentage (described in subparagraph (B)) of the 
average of the rates of interest, for each of the months any 
part of which is included in the reporting period, on 
obligations issued for purchase by the Federal Hospital 
Insurance Trust Fund.
  (B) In this paragraph, the ``applicable percentage'' is--
          (i) 75 percent, for cost reporting periods beginning 
        during fiscal year 1987,
          (ii) 50 percent, for cost reporting periods beginning 
        during fiscal year 1988,
          (iii) 25 percent, for cost reporting periods 
        beginning during fiscal year 1989, and
          (iv) 0 percent, for cost reporting periods beginning 
        on or after October 1, 1989.
  (3)(A) Except as provided in subparagraph (B), in determining 
the amount of the payments that may be made under this title 
with respect to all the capital-related costs of inpatient 
hospital services of a subsection (d) hospital and a subsection 
(d) Puerto Rico hospital, the Secretary shall reduce the 
amounts of such payments otherwise established under this title 
by--
          (i) 3.5 percent for payments attributable to portions 
        of cost reporting periods occurring during fiscal year 
        1987,
          (ii) 7 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during fiscal year 1988 on or after 
        October 1, 1987, and before January 1, 1988,
          (iii) 12 percent for payments attributable to 
        portions of cost reporting periods or discharges (as 
        the case may be) in fiscal year 1988, occurring on or 
        after January 1, 1988,
          (iv) 15 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during fiscal year 1989, and
          (v) 15 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during the period beginning January 
        1, 1990, and ending September 30, 1991.
  (B) Subparagraph (A) shall not apply to payments with respect 
to the capital-related costs of any hospital that is a sole 
community hospital (as defined in subsection (d)(5)(D)(iii)) or 
a critical access hospital (as defined in section 1861(mm)(1)).
  (4) In determining the amount of the payments that are 
attributable to portions of cost reporting periods occurring 
during fiscal years 1998 through 2002 and that may be made 
under this title with respect to capital-related costs of 
inpatient hospital services of a hospital which is described in 
clause (i), (ii), or (iv) of subsection (d)(1)(B) or a unit 
described in the matter after clause (v) of such subsection, 
the Secretary shall reduce the amounts of such payments 
otherwise determined under this title by 15 percent.
  (h) Payments for Direct Graduate Medical Education Costs.--
          (1) Substitution of special payment rules.--
        Notwithstanding section 1861(v), instead of any amounts 
        that are otherwise payable under this title with 
        respect to the reasonable costs of hospitals for direct 
        graduate medical education costs, the Secretary shall 
        provide for payments for such costs in accordance with 
        paragraph (3) of this subsection. In providing for such 
        payments, the Secretary shall provide for an allocation 
        of such payments between part A and part B (and the 
        trust funds established under the respective parts) as 
        reasonably reflects the proportion of direct graduate 
        medical education costs of hospitals associated with 
        the provision of services under each respective part.
          (2) Determination of hospital-specific approved fte 
        resident amounts.--The Secretary shall determine, for 
        each hospital with an approved medical residency 
        training program, an approved FTE resident amount for 
        each cost reporting period beginning on or after July 
        1, 1985, as follows:
                  (A) Determining allowable average cost per 
                fte resident in a hospital's base period.--The 
                Secretary shall determine, for the hospital's 
                cost reporting period that began during fiscal 
                year 1984, the average amount recognized as 
                reasonable under this title for direct graduate 
                medical education costs of the hospital for 
                each full-time-equivalent resident.
                  (B) Updating to the first cost reporting 
                period.--
                          (i) In general.--The Secretary shall 
                        update each average amount determined 
                        under subparagraph (A) by the 
                        percentage increase in the consumer 
                        price index during the 12-month cost 
                        reporting period described in such 
                        subparagraph.
                          (ii) Exception.--The Secretary shall 
                        not perform an update under clause (i) 
                        in the case of a hospital if the 
                        hospital's reporting period, described 
                        in subparagraph (A), began on or after 
                        July 1, 1984, and before October 1, 
                        1984.
                  (C) Amount for first cost reporting period.--
                For the first cost reporting period of the 
                hospital beginning on or after July 1, 1985, 
                the approved FTE resident amount for the 
                hospital is equal to the amount determined 
                under subparagraph (B) increased by 1 percent.
                  (D) Amount for subsequent cost reporting 
                periods.--
                          (i) In general.--Except as provided 
                        in a subsequent clause, for each 
                        subsequent cost reporting period, the 
                        approved FTE resident amount for the 
                        hospital is equal to the approved FTE 
                        resident amount determined under this 
                        paragraph for the previous cost 
                        reporting period updated, through the 
                        midpoint of the period, by projecting 
                        the estimated percentage change in the 
                        consumer price index during the 12-
                        month period ending at that midpoint, 
                        with appropriate adjustments to reflect 
                        previous under-or over-estimations 
                        under this subparagraph in the 
                        projected percentage change in the 
                        consumer price index.
                          (ii) Freeze in update for fiscal 
                        years 1994 and 1995.--For cost 
                        reporting periods beginning during 
                        fiscal year 1994 or fiscal year 1995, 
                        the approved FTE resident amount for a 
                        hospital shall not be updated under 
                        clause (i) for a resident who is not a 
                        primary care resident (as defined in 
                        paragraph (5)(H)) or a resident 
                        enrolled in an approved medical 
                        residency training program in 
                        obstetrics and gynecology.
                          (iii) Floor for locality adjusted 
                        national average per resident amount.--
                        The approved FTE resident amount for a 
                        hospital for the cost reporting period 
                        beginning during fiscal year 2001 shall 
                        not be less than 70 percent, and for 
                        the cost reporting period beginning 
                        during fiscal year 2002 shall not be 
                        less than 85 percent, of the locality 
                        adjusted national average per resident 
                        amount computed under subparagraph (E) 
                        for the hospital and period.
                          (iv) Adjustment in rate of increase 
                        for hospitals with fte approved amount 
                        above 140 percent of locality adjusted 
                        national average per resident amount.--
                                  (I) Freeze for fiscal years 
                                2001 and 2002 and 2004 through 
                                2013.--For a cost reporting 
                                period beginning during fiscal 
                                year 2001 or fiscal year 2002 
                                or during the period beginning 
                                with fiscal year 2004 and 
                                ending with fiscal year 2013, 
                                if the approved FTE resident 
                                amount for a hospital for the 
                                preceding cost reporting period 
                                exceeds 140 percent of the 
                                locality adjusted national 
                                average per resident amount 
                                computed under subparagraph (E) 
                                for that hospital and period, 
                                subject to subclause (III), the 
                                approved FTE resident amount 
                                for the period involved shall 
                                be the same as the approved FTE 
                                resident amount for the 
                                hospital for such preceding 
                                cost reporting period.
                                  (II)  2 percent decrease in 
                                update for fiscal years 2003, 
                                2004, and 2005.--For the cost 
                                reporting period beginning 
                                during fiscal year 2003, if the 
                                approved FTE resident amount 
                                for a hospital for the 
                                preceding cost reporting period 
                                exceeds 140 percent of the 
                                locality adjusted national 
                                average per resident amount 
                                computed under subparagraph (E) 
                                for that hospital and preceding 
                                period, the approved FTE 
                                resident amount for the period 
                                involved shall be updated in 
                                the manner described in 
                                subparagraph (D)(i) except 
                                that, subject to subclause 
                                (III), the consumer price index 
                                applied for a 12-month period 
                                shall be reduced (but not below 
                                zero) by 2 percentage points.
                                  (III) No adjustment below 140 
                                percent.--In no case shall 
                                subclause (I) or (II) reduce an 
                                approved FTE resident amount 
                                for a hospital for a cost 
                                reporting period below 140 
                                percent of the locality 
                                adjusted national average per 
                                resident amount computed under 
                                subparagraph (E) for such 
                                hospital and period.
                  (E) Determination of locality adjusted 
                national average per resident amount.--The 
                Secretary shall determine a locality adjusted 
                national average per resident amount with 
                respect to a cost reporting period of a 
                hospital beginning during a fiscal year as 
                follows:
                          (i) Determining hospital single per 
                        resident amount.--The Secretary shall 
                        compute for each hospital operating an 
                        approved graduate medical education 
                        program a single per resident amount 
                        equal to the average (weighted by 
                        number of full-time equivalent 
                        residents, as determined under 
                        paragraph (4)) of the primary care per 
                        resident amount and the non-primary 
                        care per resident amount computed under 
                        paragraph (2) for cost reporting 
                        periods ending during fiscal year 1997.
                          (ii) Standardizing per resident 
                        amounts.--The Secretary shall compute a 
                        standardized per resident amount for 
                        each such hospital by dividing the 
                        single per resident amount computed 
                        under clause (i) by an average of the 3 
                        geographic index values (weighted by 
                        the national average weight for each of 
                        the work, practice expense, and 
                        malpractice components) as applied 
                        under section 1848(e) for 1999 for the 
                        fee schedule area in which the hospital 
                        is located.
                          (iii) Computing of weighted 
                        average.--The Secretary shall compute 
                        the average of the standardized per 
                        resident amounts computed under clause 
                        (ii) for such hospitals, with the 
                        amount for each hospital weighted by 
                        the average number of full-time 
                        equivalent residents at such hospital 
                        (as determined under paragraph (4)).
                          (iv) Computing national average per 
                        resident amount.--The Secretary shall 
                        compute the national average per 
                        resident amount, for a hospital's cost 
                        reporting period that begins during 
                        fiscal year 2001, equal to the weighted 
                        average computed under clause (iii) 
                        increased by the estimated percentage 
                        increase in the consumer price index 
                        for all urban consumers during the 
                        period beginning with the month that 
                        represents the midpoint of the cost 
                        reporting periods described in clause 
                        (i) and ending with the midpoint of the 
                        hospital's cost reporting period that 
                        begins during fiscal year 2001.
                          (v) Adjusting for locality.--The 
                        Secretary shall compute the product 
                        of--
                                  (I) the national average per 
                                resident amount computed under 
                                clause (iv) for the hospital, 
                                and
                                  (II) the geographic index 
                                value average (described and 
                                applied under clause (ii)) for 
                                the fee schedule area in which 
                                the hospital is located.
                          (vi) Computing locality adjusted 
                        amount.--The locality adjusted national 
                        per resident amount for a hospital 
                        for--
                                  (I) the cost reporting period 
                                beginning during fiscal year 
                                2001 is the product computed 
                                under clause (v); or
                                  (II) each subsequent cost 
                                reporting period is equal to 
                                the locality adjusted national 
                                per resident amount for the 
                                hospital for the previous cost 
                                reporting period (as determined 
                                under this clause) updated, 
                                through the midpoint of the 
                                period, by projecting the 
                                estimated percentage change in 
                                the consumer price index for 
                                all urban consumers during the 
                                12-month period ending at that 
                                midpoint.
                  (F) Treatment of certain hospitals.--In the 
                case of a hospital that did not have an 
                approved medical residency training program or 
                was not participating in the program under this 
                title for a cost reporting period beginning 
                during fiscal year 1984, the Secretary shall, 
                for the first such period for which it has such 
                a residency training program and is 
                participating under this title, provide for 
                such approved FTE resident amount as the 
                Secretary determines to be appropriate, based 
                on approved FTE resident amounts for comparable 
                programs.
          (3) Hospital payment amount per resident.--
                  (A) In general.--The payment amount, for a 
                hospital cost reporting period beginning on or 
                after July 1, 1985, is equal to the product 
                of--
                          (i) the aggregate approved amount (as 
                        defined in subparagraph (B)) for that 
                        period, and
                          (ii) the hospital's medicare patient 
                        load (as defined in subparagraph (C)) 
                        for that period.
                  (B) Aggregate approved amount.--As used in 
                subparagraph (A), the term ``aggregate approved 
                amount'' means, for a hospital cost reporting 
                period, the product of--
                          (i) the hospital's approved FTE 
                        resident amount (determined under 
                        paragraph (2)) for that period, and
                          (ii) the weighted average number of 
                        full-time-equivalent residents (as 
                        determined under paragraph (4)) in the 
                        hospital's approved medical residency 
                        training programs in that period.
        The Secretary shall reduce the aggregate approved 
        amount to the extent payment is made under subsection 
        (k) for residents included in the hospital's count of 
        full-time equivalent residents.
                  (C) Medicare patient load.--As used in 
                subparagraph (A), the term ``medicare patient 
                load'' means, with respect to a hospital's cost 
                reporting period, the fraction of the total 
                number of inpatient-bed-days (as established by 
                the Secretary) during the period which are 
                attributable to patients with respect to whom 
                payment may be made under part A.
                  (D) Payment for managed care enrollees.--
                          (i) In general.--For portions of cost 
                        reporting periods occurring on or after 
                        January 1, 1998, the Secretary shall 
                        provide for an additional payment 
                        amount under this subsection for 
                        services furnished to individuals who 
                        are enrolled under a risk-sharing 
                        contract with an eligible organization 
                        under section 1876 and who are entitled 
                        to part A or with a Medicare+Choice 
                        organization under part C. The amount 
                        of such a payment shall equal, subject 
                        to clause (iii), the applicable 
                        percentage of the product of--
                                  (I) the aggregate approved 
                                amount (as defined in 
                                subparagraph (B)) for that 
                                period; and
                                  (II) the fraction of the 
                                total number of inpatient-bed 
                                days (as established by the 
                                Secretary) during the period 
                                which are attributable to such 
                                enrolled individuals.
                          (ii) Applicable percentage.--For 
                        purposes of clause (i), the applicable 
                        percentage is--
                                  (I) 20 percent in 1998,
                                  (II) 40 percent in 1999,
                                  (III) 60 percent in 2000,
                                  (IV) 80 percent in 2001, and
                                  (V) 100 percent in 2002 and 
                                subsequent years.
                          (iii) Proportional reduction for 
                        nursing and allied health education.--
                        The Secretary shall estimate a 
                        proportional adjustment in payments to 
                        all hospitals determined under clauses 
                        (i) and (ii) for portions of cost 
                        reporting periods beginning in a year 
                        (beginning with 2000) such that the 
                        proportional adjustment reduces 
                        payments in an amount for such year 
                        equal to the total additional payment 
                        amounts for nursing and allied health 
                        education determined under subsection 
                        (l) for portions of cost reporting 
                        periods occurring in that year.
                          (iv) Special rule for hospitals under 
                        reimbursement system.--The Secretary 
                        shall establish rules for the 
                        application of this subparagraph to a 
                        hospital reimbursed under a 
                        reimbursement system authorized under 
                        section 1814(b)(3) in the same manner 
                        as it would apply to the hospital if it 
                        were not reimbursed under such section.
          (4) Determination of full-time-equivalent 
        residents.--
                  (A) Rules.--The Secretary shall establish 
                rules consistent with this paragraph for the 
                computation of the number of full-time- 
                equivalent residents in an approved medical 
                residency training program.
                  (B) Adjustment for part-year or part-time 
                residents.--Such rules shall take into account 
                individuals who serve as residents for only a 
                portion of a period with a hospital or 
                simultaneously with more than one hospital.
                  (C) Weighting factors for certain 
                residents.--Subject to subparagraph (D), such 
                rules shall provide, in calculating the number 
                of full-time-equivalent residents in an 
                approved residency program--
                          (i) before July 1, 1986, for each 
                        resident the weighting factor is 1.00,
                          (ii) on or after July 1, 1986, for a 
                        resident who is in the resident's 
                        initial residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is 1.00,
                          (iii) on or after July 1, 1986, and 
                        before July 1, 1987, for a resident who 
                        is not in the resident's initial 
                        residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is .75, and
                          (iv) on or after July 1, 1987, for a 
                        resident who is not in the resident's 
                        initial residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is .50.
                  (D) Foreign medical graduates required to 
                pass fmgems examination.--
                          (i) In general.--Except as provided 
                        in clause (ii), such rules shall 
                        provide that, in the case of an 
                        individual who is a foreign medical 
                        graduate (as defined in paragraph 
                        (5)(D)), the individual shall not be 
                        counted as a resident on or after July 
                        1, 1986, unless--
                                  (I) the individual has passed 
                                the FMGEMS examination (as 
                                defined in paragraph (5)(E)), 
                                or
                                  (II) the individual has 
                                previously received 
                                certification from, or has 
                                previously passed the 
                                examination of, the Educational 
                                Commission for Foreign Medical 
                                Graduates.
                          (ii) Transition for current fmgs.--On 
                        or after July 1, 1986, but before July 
                        1, 1987, in the case of a foreign 
                        medical graduate who--
                                  (I) has served as a resident 
                                before July 1, 1986, and is 
                                serving as a resident after 
                                that date, but
                                  (II) has not passed the 
                                FMGEMS examination or a 
                                previous examination of the 
                                Educational Commission for 
                                Foreign Medical Graduates 
                                before July 1, 1986,
                        the individual shall be counted as a 
                        resident at a rate equal to one-half of 
                        the rate at which the individual would 
                        otherwise be counted.
                  (E) Counting time spent in outpatient 
                settings.--Subject to subparagraphs (J) and 
                (K), such rules shall provide that only time 
                spent in activities relating to patient care 
                shall be counted and that--
                          (i) effective for cost reporting 
                        periods beginning before July 1, 2010, 
                        all the time;
                          (ii) effective for cost reporting 
                        periods beginning on or after July 1, 
                        2010, all the time so spent by a 
                        resident shall be counted towards the 
                        determination of full-time equivalency, 
                        without regard to the setting in which 
                        the activities are performed, if a 
                        hospital incurs the costs of the 
                        stipends and fringe benefits of the 
                        resident during the time the resident 
                        spends in that setting. If more than 
                        one hospital incurs these costs, either 
                        directly or through a third party, such 
                        hospitals shall count a proportional 
                        share of the time, as determined by 
                        written agreement between the 
                        hospitals, that a resident spends 
                        training in that setting.
                so spent by a resident under an approved 
                medical residency training program shall be 
                counted towards the determination of full-time 
                equivalency, without regard to the setting in 
                which the activities are performed, if the 
                hospital incurs all, or substantially all, of 
                the costs for the training program in that 
                setting.
                Any hospital claiming under this subparagraph 
                for time spent in a nonprovider setting shall 
                maintain and make available to the Secretary 
                records regarding the amount of such time and 
                such amount in comparison with amounts of such 
                time in such base year as the Secretary shall 
                specify.
                  (F) Limitation on number of residents in 
                allopathic and osteopathic medicine.--
                          (i) In general.--Such rules shall 
                        provide that for purposes of a cost 
                        reporting period beginning on or after 
                        October 1, 1997, subject to paragraphs 
                        (7) and (8), the total number of full-
                        time equivalent residents before 
                        application of weighting factors (as 
                        determined under this paragraph) with 
                        respect to a hospital's approved 
                        medical residency training program in 
                        the fields of allopathic medicine and 
                        osteopathic medicine may not exceed the 
                        number (or, 130 percent of such number 
                        in the case of a hospital located in a 
                        rural area) of such full-time 
                        equivalent residents for the hospital's 
                        most recent cost reporting period 
                        ending on or before December 31, 1996.
                          (ii) Counting primary care residents 
                        on certain approved leaves of absence 
                        in base year fte count.--
                                  (I) In general.--In 
                                determining the number of such 
                                full-time equivalent residents 
                                for a hospital's most recent 
                                cost reporting period ending on 
                                or before December 31, 1996, 
                                for purposes of clause (i), the 
                                Secretary shall count an 
                                individual to the extent that 
                                the individual would have been 
                                counted as a primary care 
                                resident for such period but 
                                for the fact that the 
                                individual, as determined by 
                                the Secretary, was on maternity 
                                or disability leave or a 
                                similar approved leave of 
                                absence.
                                  (II) Limitation to 3 fte 
                                residents for any hospital.--
                                The total number of individuals 
                                counted under subclause (I) for 
                                a hospital may not exceed 3 
                                full-time equivalent residents.
                  (G) Counting interns and residents for fy 
                1998 and subsequent years.--
                          (i) In general.--For cost reporting 
                        periods beginning during fiscal years 
                        beginning on or after October 1, 1997, 
                        subject to the limit described in 
                        subparagraph (F), the total number of 
                        full-time equivalent residents for 
                        determining a hospital's graduate 
                        medical education payment shall equal 
                        the average of the actual full-time 
                        equivalent resident counts for the cost 
                        reporting period and the preceding two 
                        cost reporting periods.
                          (ii) Adjustment for short periods.--
                        If any cost reporting period beginning 
                        on or after October 1, 1997, is not 
                        equal to twelve months, the Secretary 
                        shall make appropriate modifications to 
                        ensure that the average full-time 
                        equivalent resident counts pursuant to 
                        clause (i) are based on the equivalent 
                        of full twelve-month cost reporting 
                        periods.
                          (iii) Transition rule for 1998.--In 
                        the case of a hospital's first cost 
                        reporting period beginning on or after 
                        October 1, 1997, clause (i) shall be 
                        applied by using the average for such 
                        period and the preceding cost reporting 
                        period.
                  (H) Special rules for application of 
                subparagraphs (f) and (g).--
                          (i) New facilities.--The Secretary 
                        shall, consistent with the principles 
                        of subparagraphs (F) and (G) and 
                        subject to paragraphs (7) and (8), 
                        prescribe rules for the application of 
                        such subparagraphs in the case of 
                        medical residency training programs 
                        established on or after January 1, 
                        1995. In promulgating such rules for 
                        purposes of subparagraph (F), the 
                        Secretary shall give special 
                        consideration to facilities that meet 
                        the needs of underserved rural areas.
                          (ii) Aggregation.--The Secretary may 
                        prescribe rules which allow 
                        institutions which are members of the 
                        same affiliated group (as defined by 
                        the Secretary) to elect to apply the 
                        limitation of subparagraph (F) on an 
                        aggregate basis.
                          (iii) Data collection.--The Secretary 
                        may require any entity that operates a 
                        medical residency training program and 
                        to which subparagraphs (F) and (G) 
                        apply to submit to the Secretary such 
                        additional information as the Secretary 
                        considers necessary to carry out such 
                        subparagraphs.
                          (iv) Nonrural hospitals operating 
                        training programs in rural areas.--In 
                        the case of a hospital that is not 
                        located in a rural area but establishes 
                        separately accredited approved medical 
                        residency training programs (or rural 
                        tracks) in an rural area or has an 
                        accredited training program with an 
                        integrated rural track, the Secretary 
                        shall adjust the limitation under 
                        subparagraph (F) in an appropriate 
                        manner insofar as it applies to such 
                        programs in such rural areas in order 
                        to encourage the training of physicians 
                        in rural areas.
                          (v) Special provider agreement.--If 
                        an entity enters into a provider 
                        agreement pursuant to section 1866(a) 
                        to provide hospital services on the 
                        same physical site previously used by 
                        Medicare Provider No. 05-0578--
                                  (I) the limitation on the 
                                number of total full time 
                                equivalent residents under 
                                subparagraph (F) and clauses 
                                (v) and (vi)(I) of subsection 
                                (d)(5)(B) applicable to such 
                                provider shall be equal to the 
                                limitation applicable under 
                                such provisions to Provider No. 
                                05-0578 for its cost reporting 
                                period ending on June 30, 2006; 
                                and
                                  (II) the provisions of 
                                subparagraph (G) and subsection 
                                (d)(5)(B)(vi)(II) shall not be 
                                applicable to such provider for 
                                the first three cost reporting 
                                years in which such provider 
                                trains residents under any 
                                approved medical residency 
                                training program.
                          (vi) Redistribution of residency 
                        slots after a hospital closes.--
                                  (I) In general.--Subject to 
                                the succeeding provisions of 
                                this clause, the Secretary 
                                shall, by regulation, establish 
                                a process under which, in the 
                                case where a hospital (other 
                                than a hospital described in 
                                clause (v)) with an approved 
                                medical residency program 
                                closes on or after a date that 
                                is 2 years before the date of 
                                enactment of this clause, the 
                                Secretary shall increase the 
                                otherwise applicable resident 
                                limit under this paragraph for 
                                other hospitals in accordance 
                                with this clause.
                                  (II) Priority for hospitals 
                                in certain areas.--Subject to 
                                the succeeding provisions of 
                                this clause, in determining for 
                                which hospitals the increase in 
                                the otherwise applicable 
                                resident limit is provided 
                                under such process, the 
                                Secretary shall distribute the 
                                increase to hospitals in the 
                                following priority order (with 
                                preference given within each 
                                category to hospitals that are 
                                members of the same affiliated 
                                group (as defined by the 
                                Secretary under clause (ii)) as 
                                the closed hospital):
                                          (aa) First, to 
                                        hospitals located in 
                                        the same core-based 
                                        statistical area as, or 
                                        a core-based 
                                        statistical area 
                                        contiguous to, the 
                                        hospital that closed.
                                          (bb) Second, to 
                                        hospitals located in 
                                        the same State as the 
                                        hospital that closed.
                                          (cc) Third, to 
                                        hospitals located in 
                                        the same region of the 
                                        country as the hospital 
                                        that closed.
                                          (dd) Fourth, only if 
                                        the Secretary is not 
                                        able to distribute the 
                                        increase to hospitals 
                                        described in item (cc), 
                                        to qualifying hospitals 
                                        in accordance with the 
                                        provisions of paragraph 
                                        (8).
                                  (III) Requirement hospital 
                                likely to fill position within 
                                certain time period.--The 
                                Secretary may only increase the 
                                otherwise applicable resident 
                                limit of a hospital under such 
                                process if the Secretary 
                                determines the hospital has 
                                demonstrated a likelihood of 
                                filling the positions made 
                                available under this clause 
                                within 3 years.
                                  (IV) Limitation.--The 
                                aggregate number of increases 
                                in the otherwise applicable 
                                resident limits for hospitals 
                                under this clause shall be 
                                equal to the number of resident 
                                positions in the approved 
                                medical residency programs that 
                                closed on or after the date 
                                described in subclause (I).
                                  (V) Administration.--Chapter 
                                35 of title 44, United States 
                                Code, shall not apply to the 
                                implementation of this clause.
                  (J) Treatment of certain nonprovider and 
                didactic activities.--Such rules shall provide 
                that all time spent by an intern or resident in 
                an approved medical residency training program 
                in a nonprovider setting that is primarily 
                engaged in furnishing patient care (as defined 
                in paragraph (5)(K)) in non-patient care 
                activities, such as didactic conferences and 
                seminars, but not including research not 
                associated with the treatment or diagnosis of a 
                particular patient, as such time and activities 
                are defined by the Secretary, shall be counted 
                toward the determination of full-time 
                equivalency.
                  (K) Treatment of certain other activities.--
                In determining the hospital's number of full-
                time equivalent residents for purposes of this 
                subsection, all the time that is spent by an 
                intern or resident in an approved medical 
                residency training program on vacation, sick 
                leave, or other approved leave, as such time is 
                defined by the Secretary, and that does not 
                prolong the total time the resident is 
                participating in the approved program beyond 
                the normal duration of the program shall be 
                counted toward the determination of full-time 
                equivalency.
          (5) Definitions and special rules.--As used in this 
        subsection:
                  (A) Approved medical residency training 
                program.--The term ``approved medical residency 
                training program'' means a residency or other 
                postgraduate medical training program 
                participation in which may be counted toward 
                certification in a specialty or subspecialty 
                and includes formal postgraduate training 
                programs in geriatric medicine approved by the 
                Secretary.
                  (B) Consumer price index.--The term 
                ``consumer price index'' refers to the Consumer 
                Price Index for All Urban Consumers (United 
                States city average), as published by the 
                Secretary of Commerce.
                  (C) Direct graduate medical education 
                costs.--The term ``direct graduate medical 
                education costs'' means direct costs of 
                approved educational activities for approved 
                medical residency training programs.
                  (D) Foreign medical graduate.--The term 
                ``foreign medical graduate'' means a resident 
                who is not a graduate of--
                          (i) a school of medicine accredited 
                        by the Liaison Committee on Medical 
                        Education of the American Medical 
                        Association and the Association of 
                        American Medical Colleges (or approved 
                        by such Committee as meeting the 
                        standards necessary for such 
                        accreditation),
                          (ii) a school of osteopathy 
                        accredited by the American Osteopathic 
                        Association, or approved by such 
                        Association as meeting the standards 
                        necessary for such accreditation, or
                          (iii) a school of dentistry or 
                        podiatry which is accredited (or meets 
                        the standards for accreditation) by an 
                        organization recognized by the 
                        Secretary for such purpose.
                  (E) FMGEMS examination.--The term ``FMGEMS 
                examination'' means parts I and II of the 
                Foreign Medical Graduate Examination in the 
                Medical Sciences or any successor examination 
                recognized by the Secretary for this purpose.
                  (F) Initial residency period.--The term 
                ``initial residency period'' means the period 
                of board eligibility, except that--
                          (i) except as provided in clause 
                        (ii), in no case shall the initial 
                        period of residency exceed an aggregate 
                        period of formal training of more than 
                        five years for any individual, and
                          (ii) a period, of not more than two 
                        years, during which an individual is in 
                        a geriatric residency or fellowship 
                        program or a preventive medicine 
                        residency or fellowship program which 
                        meets such criteria as the Secretary 
                        may establish, shall be treated as part 
                        of the initial residency period, but 
                        shall not be counted against any 
                        limitation on the initial residency 
                        period.
                Subject to subparagraph (G)(v), the initial 
                residency period shall be determined, with 
                respect to a resident, as of the time the 
                resident enters the residency training program.
                  (G) Period of board eligibility.--
                          (i) General rule.--Subject to clauses 
                        (ii), (iii), (iv), and (v), the term 
                        ``period of board eligibility'' means, 
                        for a resident, the minimum number of 
                        years of formal training necessary to 
                        satisfy the requirements for initial 
                        board eligibility in the particular 
                        specialty for which the resident is 
                        training.
                          (ii) Application of 1985-1986 
                        directory.--Except as provided in 
                        clause (iii), the period of board 
                        eligibility shall be such period 
                        specified in the 1985-1986 Directory of 
                        Residency Training Programs published 
                        by the Accreditation Council on 
                        Graduate Medical Education.
                          (iii) Changes in period of board 
                        eligibility.--On or after July 1, 1989, 
                        if the Accreditation Council on 
                        Graduate Medical Education, in its 
                        Directory of Residency Training 
                        Programs--
                                  (I) increases the minimum 
                                number of years of formal 
                                training necessary to satisfy 
                                the requirements for a 
                                specialty, above the period 
                                specified in its 1985-1986 
                                Directory, the Secretary may 
                                increase the period of board 
                                eligibility for that specialty, 
                                but not to exceed the period of 
                                board eligibility specified in 
                                that later Directory, or
                                  (II) decreases the minimum 
                                number of years of formal 
                                training necessary to satisfy 
                                the requirements for a 
                                specialty, below the period 
                                specified in its 1985-1986 
                                Directory, the Secretary may 
                                decrease the period of board 
                                eligibility for that specialty, 
                                but not below the period of 
                                board eligibility specified in 
                                that later Directory.
                          (iv) Special rule for certain primary 
                        care combined residency programs.--(I) 
                        In the case of a resident enrolled in a 
                        combined medical residency training 
                        program in which all of the individual 
                        programs (that are combined) are for 
                        training a primary care resident (as 
                        defined in subparagraph (H)), the 
                        period of board eligibility shall be 
                        the minimum number of years of formal 
                        training required to satisfy the 
                        requirements for initial board 
                        eligibility in the longest of the 
                        individual programs plus one additional 
                        year.
                          (II) A resident enrolled in a 
                        combined medical residency training 
                        program that includes an obstetrics and 
                        gynecology program shall qualify for 
                        the period of board eligibility under 
                        subclause (I) if the other programs 
                        such resident combines with such 
                        obstetrics and gynecology program are 
                        for training a primary care resident.
                          (v) Child neurology training 
                        programs.--In the case of a resident 
                        enrolled in a child neurology residency 
                        training program, the period of board 
                        eligibility and the initial residency 
                        period shall be the period of board 
                        eligibility for pediatrics plus 2 
                        years.
                  (H) Primary care resident.--The term 
                ``primary care resident'' means a resident 
                enrolled in an approved medical residency 
                training program in family medicine, general 
                internal medicine, general pediatrics, 
                preventive medicine, geriatric medicine, or 
                osteopathic general practice.
                  (I) Resident.--The term ``resident'' includes 
                an intern or other participant in an approved 
                medical residency training program.
                  (J) Adjustments for certain family practice 
                residency programs.--
                          (i) In general.--In the case of an 
                        approved medical residency training 
                        program (meeting the requirements of 
                        clause (ii)) of a hospital which 
                        received funds from the United States, 
                        a State, or a political subdivision of 
                        a State or an instrumentality of such a 
                        State or political subdivision (other 
                        than payments under this title or a 
                        State plan under title XIX) for the 
                        program during the cost reporting 
                        period that began during fiscal year 
                        1984, the Secretary shall--
                                  (I) provide for an average 
                                amount under paragraph (2)(A) 
                                that takes into account the 
                                Secretary's estimate of the 
                                amount that would have been 
                                recognized as reasonable under 
                                this title if the hospital had 
                                not received such funds, and
                                  (II) reduce the payment 
                                amount otherwise provided under 
                                this subsection in an amount 
                                equal to the proportion of such 
                                program funds received during 
                                the cost reporting period 
                                involved that is allocable to 
                                this title.
                          (ii) Additional requirements.--A 
                        hospital's approved medical residency 
                        program meets the requirements of this 
                        clause if--
                                  (I) the program is limited to 
                                training for family and 
                                community medicine;
                                  (II) the program is the only 
                                approved medical residency 
                                program of the hospital; and
                                  (III) the average amount 
                                determined under paragraph 
                                (2)(A) for the hospital (as 
                                determined without regard to 
                                the increase in such amount 
                                described in clause (i)(I)) 
                                does not exceed $10,000.
                  (K) Nonprovider setting that is primarily 
                engaged in furnishing patient care.--The term 
                ``nonprovider setting that is primarily engaged 
                in furnishing patient care'' means a 
                nonprovider setting in which the primary 
                activity is the care and treatment of patients, 
                as defined by the Secretary.
          (6) Incentive payment under plans for voluntary 
        reduction in number of residents.--
                  (A) In general.--In the case of a voluntary 
                residency reduction plan for which an 
                application is approved under subparagraph (B), 
                subject to subparagraph (F), each hospital 
                which is part of the qualifying entity 
                submitting the plan shall be paid an applicable 
                hold harmless percentage (as specified in 
                subparagraph (E)) of the sum of--
                          (i) the amount (if any) by which--
                                  (I) the amount of payment 
                                which would have been made 
                                under this subsection if there 
                                had been a 5-percent reduction 
                                in the number of full-time 
                                equivalent residents in the 
                                approved medical education 
                                training programs of the 
                                hospital as of June 30, 1997, 
                                exceeds
                                  (II) the amount of payment 
                                which is made under this 
                                subsection, taking into account 
                                the reduction in such number 
                                effected under the reduction 
                                plan; and
                          (ii) the amount of the reduction in 
                        payment under subsection (d)(5)(B) for 
                        the hospital that is attributable to 
                        the reduction in number of residents 
                        effected under the plan below 95 
                        percent of the number of full-time 
                        equivalent residents in such programs 
                        of the hospital as of June 30, 1997.
                The determination of the amounts under clauses 
                (i) and (ii) for any year shall be made on the 
                basis of the provisions of this title in effect 
                on the application deadline date for the first 
                calendar year to which the reduction plan 
                applies.
                  (B) Approval of plan applications.--The 
                Secretary may not approve the application of an 
                qualifying entity unless--
                          (i) the application is submitted in a 
                        form and manner specified by the 
                        Secretary and by not later than 
                        November 1, 1999,
                          (ii) the application provides for the 
                        operation of a plan for the reduction 
                        in the number of full-time equivalent 
                        residents in the approved medical 
                        residency training programs of the 
                        entity consistent with the requirements 
                        of subparagraph (D);
                          (iii) the entity elects in the 
                        application the period of residency 
                        training years (not greater than 5) 
                        over which the reduction will occur;
                          (iv) the entity will not reduce the 
                        proportion of its residents in primary 
                        care (to the total number of residents) 
                        below such proportion as in effect as 
                        of the applicable time described in 
                        subparagraph (D)(v); and
                          (v) the Secretary determines that the 
                        application and the entity and such 
                        plan meet such other requirements as 
                        the Secretary specifies in regulations.
                  (C) Qualifying entity.--For purposes of this 
                paragraph, any of the following may be a 
                qualifying entity:
                          (i) Individual hospitals operating 
                        one or more approved medical residency 
                        training programs.
                          (ii) Two or more hospitals that 
                        operate such programs and apply for 
                        treatment under this paragraph as a 
                        single qualifying entity.
                          (iii) A qualifying consortium (as 
                        described in section 4628 of the 
                        Balanced Budget Act of 1997).
                  (D) Residency reduction requirements.--
                          (i) Individual hospital applicants.--
                        In the case of a qualifying entity 
                        described in subparagraph (C)(i), the 
                        number of full-time equivalent 
                        residents in all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        as follows:
                                  (I) If the base number of 
                                residents exceeds 750 
                                residents, by a number equal to 
                                at least 20 percent of such 
                                base number.
                                  (II) Subject to subclause 
                                (IV), if the base number of 
                                residents exceeds 600 but is 
                                less than 750 residents, by 150 
                                residents.
                                  (III) Subject to subclause 
                                (IV), if the base number of 
                                residents does not exceed 600 
                                residents, by a number equal to 
                                at least 25 percent of such 
                                base number.
                                  (IV) In the case of a 
                                qualifying entity which is 
                                described in clause (v) and 
                                which elects treatment under 
                                this subclause, by a number 
                                equal to at least 20 percent of 
                                the base number.
                          (ii) Joint applicants.--In the case 
                        of a qualifying entity described in 
                        subparagraph (C)(ii), the number of 
                        full-time equivalent residents in the 
                        aggregate for all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        as follows:
                                  (I) Subject to subclause 
                                (II), by a number equal to at 
                                least 25 percent of the base 
                                number.
                                  (II) In the case of such a 
                                qualifying entity which is 
                                described in clause (v) and 
                                which elects treatment under 
                                this subclause, by a number 
                                equal to at least 20 percent of 
                                the base number.
                          (iii) Consortia.--In the case of a 
                        qualifying entity described in 
                        subparagraph (C)(iii), the number of 
                        full-time equivalent residents in the 
                        aggregate for all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        by a number equal to at least 20 
                        percent of the base number.
                          (iv) Manner of reduction.--The 
                        reductions specified under the 
                        preceding provisions of this 
                        subparagraph for a qualifying entity 
                        shall be below the base number of 
                        residents for that entity and shall be 
                        fully effective not later than the 5th 
                        residency training year in which the 
                        application under subparagraph (B) is 
                        effective.
                          (v) Entities providing assurance of 
                        increase in primary care residents.--An 
                        entity is described in this clause if--
                                  (I) the base number of 
                                residents for the entity is 
                                less than 750 or the entity is 
                                described in subparagraph 
                                (C)(ii); and
                                  (II) the entity represents in 
                                its application under 
                                subparagraph (B) that it will 
                                increase the number of full-
                                time equivalent residents in 
                                primary care by at least 20 
                                percent (from such number 
                                included in the base number of 
                                residents) by not later than 
                                the 5th residency training year 
                                in which the application under 
                                subparagraph (B) is effective.
                        If a qualifying entity fails to comply 
                        with the representation described in 
                        subclause (II) by the end of such 5th 
                        residency training year, the entity 
                        shall be subject to repayment of all 
                        amounts paid under this paragraph, in 
                        accordance with procedures established 
                        to carry out subparagraph (F).
                          (vi) Base number of residents 
                        defined.--For purposes of this 
                        paragraph, the term ``base number of 
                        residents'' means, with respect to a 
                        qualifying entity (or its participating 
                        hospitals) operating approved medical 
                        residency training programs, the number 
                        of full-time equivalent residents in 
                        such programs (before application of 
                        weighting factors) of the entity as of 
                        the most recent residency training year 
                        ending before June 30, 1997, or, if 
                        less, for any subsequent residency 
                        training year that ends before the date 
                        the entity makes application under this 
                        paragraph.
                  (E) Applicable hold harmless percentage.--For 
                purposes of subparagraph (A), the ``applicable 
                hold harmless percentage'' for the--
                          (i) first and second residency 
                        training years in which the reduction 
                        plan is in effect, 100 percent,
                          (ii) third such year, 75 percent,
                          (iii) fourth such year, 50 percent, 
                        and
                          (iv) fifth such year, 25 percent.
                  (F) Penalty for noncompliance.--
                          (i) In general.--No payment may be 
                        made under this paragraph to a hospital 
                        for a residency training year if the 
                        hospital has failed to reduce the 
                        number of full-time equivalent 
                        residents (in the manner required under 
                        subparagraph (D)) to the number agreed 
                        to by the Secretary and the qualifying 
                        entity in approving the application 
                        under this paragraph with respect to 
                        such year.
                          (ii) Increase in number of residents 
                        in subsequent years.--If payments are 
                        made under this paragraph to a 
                        hospital, and if the hospital increases 
                        the number of full-time equivalent 
                        residents above the number of such 
                        residents permitted under the reduction 
                        plan as of the completion of the plan, 
                        then, as specified by the Secretary, 
                        the entity is liable for repayment to 
                        the Secretary of the total amounts paid 
                        under this paragraph to the entity.
                  (G) Treatment of rotating residents.--In 
                applying this paragraph, the Secretary shall 
                establish rules regarding the counting of 
                residents who are assigned to institutions the 
                medical residency training programs in which 
                are not covered under approved applications 
                under this paragraph.
          (7) Redistribution of unused resident positions.--
                  (A) Reduction in limit based on unused 
                positions.--
                          (i) Programs subject to reduction.--
                                  (I) In general.--Except as 
                                provided in subclause (II), if 
                                a hospital's reference resident 
                                level (specified in clause 
                                (ii)) is less than the 
                                otherwise applicable resident 
                                limit (as defined in 
                                subparagraph (C)(ii)), 
                                effective for portions of cost 
                                reporting periods occurring on 
                                or after July 1, 2005, the 
                                otherwise applicable resident 
                                limit shall be reduced by 75 
                                percent of the difference 
                                between such otherwise 
                                applicable resident limit and 
                                such reference resident level.
                                  (II) Exception for small 
                                rural hospitals.--This 
                                subparagraph shall not apply to 
                                a hospital located in a rural 
                                area (as defined in subsection 
                                (d)(2)(D)(ii)) with fewer than 
                                250 acute care inpatient beds.
                          (ii) Reference resident level.--
                                  (I) In general.--Except as 
                                otherwise provided in 
                                subclauses (II) and (III), the 
                                reference resident level 
                                specified in this clause for a 
                                hospital is the resident level 
                                for the most recent cost 
                                reporting period of the 
                                hospital ending on or before 
                                September 30, 2002, for which a 
                                cost report has been settled 
                                (or, if not, submitted (subject 
                                to audit)), as determined by 
                                the Secretary.
                                  (II) Use of most recent 
                                accounting period to recognize 
                                expansion of existing 
                                programs.--If a hospital 
                                submits a timely request to 
                                increase its resident level due 
                                to an expansion of an existing 
                                residency training program that 
                                is not reflected on the most 
                                recent settled cost report, 
                                after audit and subject to the 
                                discretion of the Secretary, 
                                the reference resident level 
                                for such hospital is the 
                                resident level for the cost 
                                reporting period that includes 
                                July 1, 2003, as determined by 
                                the Secretary.
                                  (III) Expansions under newly 
                                approved programs.--Upon the 
                                timely request of a hospital, 
                                the Secretary shall adjust the 
                                reference resident level 
                                specified under subclause (I) 
                                or (II) to include the number 
                                of medical residents that were 
                                approved in an application for 
                                a medical residency training 
                                program that was approved by an 
                                appropriate accrediting 
                                organization (as determined by 
                                the Secretary) before January 
                                1, 2002, but which was not in 
                                operation during the cost 
                                reporting period used under 
                                subclause (I) or (II), as the 
                                case may be, as determined by 
                                the Secretary.
                          (iii) Affiliation.--The provisions of 
                        clause (i) shall be applied to 
                        hospitals which are members of the same 
                        affiliated group (as defined by the 
                        Secretary under paragraph (4)(H)(ii)) 
                        as of July 1, 2003.
                  (B) Redistribution.--
                          (i) In general.--The Secretary is 
                        authorized to increase the otherwise 
                        applicable resident limit for each 
                        qualifying hospital that submits a 
                        timely application under this 
                        subparagraph by such number as the 
                        Secretary may approve for portions of 
                        cost reporting periods occurring on or 
                        after July 1, 2005. The aggregate 
                        number of increases in the otherwise 
                        applicable resident limits under this 
                        subparagraph may not exceed the 
                        Secretary's estimate of the aggregate 
                        reduction in such limits attributable 
                        to subparagraph (A).
                          (ii) Considerations in 
                        redistribution.--In determining for 
                        which hospitals the increase in the 
                        otherwise applicable resident limit is 
                        provided under clause (i), the 
                        Secretary shall take into account the 
                        demonstrated likelihood of the hospital 
                        filling the positions within the first 
                        3 cost reporting periods beginning on 
                        or after July 1, 2005, made available 
                        under this subparagraph, as determined 
                        by the Secretary.
                          (iii) Priority for rural and small 
                        urban areas.--In determining for which 
                        hospitals and residency training 
                        programs an increase in the otherwise 
                        applicable resident limit is provided 
                        under clause (i), the Secretary shall 
                        distribute the increase to programs of 
                        hospitals located in the following 
                        priority order:
                                  (I) First, to hospitals 
                                located in rural areas (as 
                                defined in subsection 
                                (d)(2)(D)(ii)).
                                  (II) Second, to hospitals 
                                located in urban areas that are 
                                not large urban areas (as 
                                defined for purposes of 
                                subsection (d)).
                                  (III) Third, to other 
                                hospitals in a State if the 
                                residency training program 
                                involved is in a specialty for 
                                which there are not other 
                                residency training programs in 
                                the State.
                        Increases of residency limits within 
                        the same priority category under this 
                        clause shall be determined by the 
                        Secretary.
                          (iv) Limitation.--In no case shall 
                        more than 25 full-time equivalent 
                        additional residency positions be made 
                        available under this subparagraph with 
                        respect to any hospital.
                          (v) Application of locality adjusted 
                        national average per resident amount.--
                        With respect to additional residency 
                        positions in a hospital attributable to 
                        the increase provided under this 
                        subparagraph, notwithstanding any other 
                        provision of this subsection, the 
                        approved FTE resident amount is deemed 
                        to be equal to the locality adjusted 
                        national average per resident amount 
                        computed under paragraph (4)(E) for 
                        that hospital.
                          (vi) Construction.--Nothing in this 
                        subparagraph shall be construed as 
                        permitting the redistribution of 
                        reductions in residency positions 
                        attributable to voluntary reduction 
                        programs under paragraph (6), under a 
                        demonstration project approved as of 
                        October 31, 2003, under the authority 
                        of section 402 of Public Law 90-248, or 
                        as affecting the ability of a hospital 
                        to establish new medical residency 
                        training programs under paragraph 
                        (4)(H).
                  (C) Resident level and limit defined.--In 
                this paragraph:
                          (i) Resident level.--The term 
                        ``resident level'' means, with respect 
                        to a hospital, the total number of 
                        full-time equivalent residents, before 
                        the application of weighting factors 
                        (as determined under paragraph (4)), in 
                        the fields of allopathic and 
                        osteopathic medicine for the hospital.
                          (ii) Otherwise applicable resident 
                        limit.--The term ``otherwise applicable 
                        resident limit'' means, with respect to 
                        a hospital, the limit otherwise 
                        applicable under subparagraphs (F)(i) 
                        and (H) of paragraph (4) on the 
                        resident level for the hospital 
                        determined without regard to this 
                        paragraph.
                  (D) Adjustment based on settled cost 
                report.--In the case of a hospital with a dual 
                accredited osteopathic and allopathic family 
                practice program for which--
                          (i) the otherwise applicable resident 
                        limit was reduced under subparagraph 
                        (A)(i)(I); and
                          (ii) such reduction was based on a 
                        reference resident level that was 
                        determined using a cost report and 
                        where a revised or corrected notice of 
                        program reimbursement was issued for 
                        such cost report between September 1, 
                        2006 and September 15, 2006, whether as 
                        a result of an appeal or otherwise, and 
                        the reference resident level under such 
                        settled cost report is higher than the 
                        level used for the reduction under 
                        subparagraph (A)(i)(I);
                the Secretary shall apply subparagraph 
                (A)(i)(I) using the higher resident reference 
                level and make any necessary adjustments to 
                such reduction. Any such necessary adjustments 
                shall be effective for portions of cost 
                reporting periods occurring on or after July 1, 
                2005.
                  (E) Judicial review.--There shall be no 
                administrative or judicial review under section 
                1869, 1878, or otherwise, with respect to 
                determinations made under this this paragraph, 
                paragraph (8), or paragraph (4)(H)(vi).
          (8) Distribution of additional residency positions.--
                  (A) Reductions in limit based on unused 
                positions.--
                          (i) In general.--Except as provided 
                        in clause (ii), if a hospital's 
                        reference resident level (as defined in 
                        subparagraph (H)(i)) is less than the 
                        otherwise applicable resident limit (as 
                        defined in subparagraph (H)(iii)), 
                        effective for portions of cost 
                        reporting periods occurring on or after 
                        July 1, 2011, the otherwise applicable 
                        resident limit shall be reduced by 65 
                        percent of the difference between such 
                        otherwise applicable resident limit and 
                        such reference resident level.
                          (ii) Exceptions.--This subparagraph 
                        shall not apply to--
                                  (I) a hospital located in a 
                                rural area (as defined in 
                                subsection (d)(2)(D)(ii)) with 
                                fewer than 250 acute care 
                                inpatient beds;
                                  (II) a hospital that was part 
                                of a qualifying entity which 
                                had a voluntary residency 
                                reduction plan approved under 
                                paragraph (6)(B) or under the 
                                authority of section 402 of 
                                Public Law 90-248, if the 
                                hospital demonstrates to the 
                                Secretary that it has a 
                                specified plan in place for 
                                filling the unused positions by 
                                not later than 2 years after 
                                the date of enactment of this 
                                paragraph; or
                                  (III) a hospital described in 
                                paragraph (4)(H)(v).
                  (B) Distribution.--
                          (i) In general.--The Secretary shall 
                        increase the otherwise applicable 
                        resident limit for each qualifying 
                        hospital that submits an application 
                        under this subparagraph by such number 
                        as the Secretary may approve for 
                        portions of cost reporting periods 
                        occurring on or after July 1, 2011. The 
                        aggregate number of increases in the 
                        otherwise applicable resident limit 
                        under this subparagraph shall be equal 
                        to the aggregate reduction in such 
                        limits attributable to subparagraph (A) 
                        (as estimated by the Secretary).
                          (ii) Requirements.--Subject to clause 
                        (iii), a hospital that receives an 
                        increase in the otherwise applicable 
                        resident limit under this subparagraph 
                        shall ensure, during the 5-year period 
                        beginning on the date of such increase, 
                        that--
                                  (I) the number of full-time 
                                equivalent primary care 
                                residents, as defined in 
                                paragraph (5)(H) (as determined 
                                by the Secretary), excluding 
                                any additional positions under 
                                subclause (II), is not less 
                                than the average number of 
                                full-time equivalent primary 
                                care residents (as so 
                                determined) during the 3 most 
                                recent cost reporting periods 
                                ending prior to the date of 
                                enactment of this paragraph; 
                                and
                                  (II) not less than 75 percent 
                                of the positions attributable 
                                to such increase are in a 
                                primary care or general surgery 
                                residency (as determined by the 
                                Secretary).
                        The Secretary may determine whether a 
                        hospital has met the requirements under 
                        this clause during such 5-year period 
                        in such manner and at such time as the 
                        Secretary determines appropriate, 
                        including at the end of such 5-year 
                        period.
                          (iii) Redistribution of positions if 
                        hospital no longer meets certain 
                        requirements.--In the case where the 
                        Secretary determines that a hospital 
                        described in clause (ii) does not meet 
                        either of the requirements under 
                        subclause (I) or (II) of such clause, 
                        the Secretary shall--
                                  (I) reduce the otherwise 
                                applicable resident limit of 
                                the hospital by the amount by 
                                which such limit was increased 
                                under this paragraph; and
                                  (II) provide for the 
                                distribution of positions 
                                attributable to such reduction 
                                in accordance with the 
                                requirements of this paragraph.
                  (C) Considerations in redistribution.--In 
                determining for which hospitals the increase in 
                the otherwise applicable resident limit is 
                provided under subparagraph (B), the Secretary 
                shall take into account--
                          (i) the demonstration likelihood of 
                        the hospital filling the positions made 
                        available under this paragraph within 
                        the first 3 cost reporting periods 
                        beginning on or after July 1, 2011, as 
                        determined by the Secretary; and
                          (ii) whether the hospital has an 
                        accredited rural training track (as 
                        described in paragraph (4)(H)(iv)).
                  (D) Priority for certain areas.--In 
                determining for which hospitals the increase in 
                the otherwise applicable resident limit is 
                provided under subparagraph (B), subject to 
                subparagraph (E), the Secretary shall 
                distribute the increase to hospitals based on 
                the following factors:
                          (i) Whether the hospital is located 
                        in a State with a resident-to-
                        population ratio in the lowest quartile 
                        (as determined by the Secretary).
                          (ii) Whether the hospital is located 
                        in a State, a territory of the United 
                        States, or the District of Columbia 
                        that is among the top 10 States, 
                        territories, or Districts in terms of 
                        the ratio of--
                                  (I) the total population of 
                                the State, territory, or 
                                District living in an area 
                                designated (under such section 
                                332(a)(1)(A)) as a health 
                                professional shortage area (as 
                                of the date of enactment of 
                                this paragraph); to
                                  (II) the total population of 
                                the State, territory, or 
                                District (as determined by the 
                                Secretary based on the most 
                                recent available population 
                                data published by the Bureau of 
                                the Census).
                          (iii) Whether the hospital is located 
                        in a rural area (as defined in 
                        subsection (d)(2)(D)(ii)).
                  (E) Reservation of positions for certain 
                hospitals.--
                          (i) In general.--Subject to clause 
                        (ii), the Secretary shall reserve the 
                        positions available for distribution 
                        under this paragraph as follows:
                                  (I) 70 percent of such 
                                positions for distribution to 
                                hospitals described in clause 
                                (i) of subparagraph (D).
                                  (II) 30 percent of such 
                                positions for distribution to 
                                hospitals described in clause 
                                (ii) and (iii) of such 
                                subparagraph.
                          (ii) Exception if positions not 
                        redistributed by july 1, 2011.--In the 
                        case where the Secretary does not 
                        distribute positions to hospitals in 
                        accordance with clause (i) by July 1, 
                        2011, the Secretary shall distribute 
                        such positions to other hospitals in 
                        accordance with the considerations 
                        described in subparagraph (C) and the 
                        priority described in subparagraph (D).
                  (F) Limitation.--A hospital may not receive 
                more than 75 full-time equivalent additional 
                residency positions under this paragraph.
                  (G) Application of per resident amounts for 
                primary care and nonprimary care.--With respect 
                to additional residency positions in a hospital 
                attributable to the increase provided under 
                this paragraph, the approved FTE per resident 
                amounts are deemed to be equal to the hospital 
                per resident amounts for primary care and 
                nonprimary care computed under paragraph (2)(D) 
                for that hospital.
                  (H) Definitions.--In this paragraph:
                          (i) Reference resident level.--The 
                        term ``reference resident level'' 
                        means, with respect to a hospital, the 
                        highest resident level for any of the 3 
                        most recent cost reporting periods 
                        (ending before the date of the 
                        enactment of this paragraph) of the 
                        hospital for which a cost report has 
                        been settled (or, if not, submitted 
                        (subject to audit)), as determined by 
                        the Secretary.
                          (ii) Resident level.--The term 
                        ``resident level'' has the meaning 
                        given such term in paragraph (7)(C)(i).
                          (iii) Otherwise applicable resident 
                        limit.--The term ``otherwise applicable 
                        resident limit'' means, with respect to 
                        a hospital, the limit otherwise 
                        applicable under subparagraphs (F)(i) 
                        and (H) of paragraph (4) on the 
                        resident level for the hospital 
                        determined without regard to this 
                        paragraph but taking into account 
                        paragraph (7)(A).
                  (I) Affiliation.--The provisions of this 
                paragraph shall be applied to hospitals which 
                are members of the same affiliated group (as 
                defined by the Secretary under paragraph 
                (4)(H)(ii)) and the reference resident level 
                for each such hospital shall be the reference 
                resident level with respect to the cost 
                reporting period that results in the smallest 
                difference between the reference resident level 
                and the otherwise applicable resident limit.
  (i) Avoiding Duplicative Payments to Hospitals Participating 
in Rural Demonstration Programs.--The Secretary shall reduce 
any payment amounts otherwise determined under this section to 
the extent necessary to avoid duplication of any payment made 
under section 4005(e) of the Omnibus Budget Reconciliation Act 
of 1987.
  (j) Prospective Payment for Inpatient Rehabilitation 
Services.--
          (1) Payment during transition period.--
                  (A) In general.--Notwithstanding section 
                1814(b), but subject to the provisions of 
                section 1813, the amount of the payment with 
                respect to the operating and capital costs of 
                inpatient hospital services of a rehabilitation 
                hospital or a rehabilitation unit (in this 
                subsection referred to as a ``rehabilitation 
                facility''), other than a facility making an 
                election under subparagraph (F) in a cost 
                reporting period beginning on or after October 
                1, 2000, and before October 1, 2002, is equal 
                to the sum of--
                          (i) the TEFRA percentage (as defined 
                        in subparagraph (C)) of the amount that 
                        would have been paid under part A with 
                        respect to such costs if this 
                        subsection did not apply, and
                          (ii) the prospective payment 
                        percentage (as defined in subparagraph 
                        (C)) of the product of (I) the per unit 
                        payment rate established under this 
                        subsection for the fiscal year in which 
                        the payment unit of service occurs, and 
                        (II) the number of such payment units 
                        occurring in the cost reporting period.
                  (B) Fully implemented system.--
                Notwithstanding section 1814(b), but subject to 
                the provisions of section 1813, the amount of 
                the payment with respect to the operating and 
                capital costs of inpatient hospital services of 
                a rehabilitation facility for a payment unit in 
                a cost reporting period beginning on or after 
                October 1, 2002, or, in the case of a facility 
                making an election under subparagraph (F), for 
                any cost reporting period described in such 
                subparagraph, is equal to the per unit payment 
                rate established under this subsection for the 
                fiscal year in which the payment unit of 
                service occurs.
                  (C) TEFRA and prospective payment percentages 
                specified.--For purposes of subparagraph (A), 
                for a cost reporting period beginning--
                          (i) on or after October 1, 2000, and 
                        before October 1, 2001, the ``TEFRA 
                        percentage'' is 66\2/3\ percent and the 
                        ``prospective payment percentage'' is 
                        33\1/3\ percent; and
                          (ii) on or after October 1, 2001, and 
                        before October 1, 2002, the ``TEFRA 
                        percentage'' is 33\1/3\ percent and the 
                        ``prospective payment percentage'' is 
                        66\2/3\ percent.
                  (D) Payment unit.--For purposes of this 
                subsection, the term ``payment unit'' means a 
                discharge.
                  (E) Construction relating to transfer 
                authority.--Nothing in this subsection shall be 
                construed as preventing the Secretary from 
                providing for an adjustment to payments to take 
                into account the early transfer of a patient 
                from a rehabilitation facility to another site 
                of care.
                  (F) Election to apply full prospective 
                payment system.--A rehabilitation facility may 
                elect, not later than 30 days before its first 
                cost reporting period for which the payment 
                methodology under this subsection applies to 
                the facility, to have payment made to the 
                facility under this subsection under the 
                provisions of subparagraph (B) (rather than 
                subparagraph (A)) for each cost reporting 
                period to which such payment methodology 
                applies.
          (2) Patient case mix groups.--
                  (A) Establishment.--The Secretary shall 
                establish--
                          (i) classes of patient discharges of 
                        rehabilitation facilities by 
                        functional-related groups (each in this 
                        subsection referred to as a ``case mix 
                        group''), based on impairment, age, 
                        comorbidities, and functional 
                        capability of the patient and such 
                        other factors as the Secretary deems 
                        appropriate to improve the explanatory 
                        power of functional independence 
                        measure-function related groups; and
                          (ii) a method of classifying specific 
                        patients in rehabilitation facilities 
                        within these groups.
                  (B) Weighting factors.--For each case mix 
                group the Secretary shall assign an appropriate 
                weighting which reflects the relative facility 
                resources used with respect to patients 
                classified within that group compared to 
                patients classified within other groups.
                  (C) Adjustments for case mix.--
                          (i) In general.--The Secretary shall 
                        from time to time adjust the 
                        classifications and weighting factors 
                        established under this paragraph as 
                        appropriate to reflect changes in 
                        treatment patterns, technology, case 
                        mix, number of payment units for which 
                        payment is made under this title, and 
                        other factors which may affect the 
                        relative use of resources. Such 
                        adjustments shall be made in a manner 
                        so that changes in aggregate payments 
                        under the classification system are a 
                        result of real changes and are not a 
                        result of changes in coding that are 
                        unrelated to real changes in case mix.
                          (ii) Adjustment.--Insofar as the 
                        Secretary determines that such 
                        adjustments for a previous fiscal year 
                        (or estimates that such adjustments for 
                        a future fiscal year) did (or are 
                        likely to) result in a change in 
                        aggregate payments under the 
                        classification system during the fiscal 
                        year that are a result of changes in 
                        the coding or classification of 
                        patients that do not reflect real 
                        changes in case mix, the Secretary 
                        shall adjust the per payment unit 
                        payment rate for subsequent years so as 
                        to eliminate the effect of such coding 
                        or classification changes.
                  (D) Data collection.--The Secretary is 
                authorized to require rehabilitation facilities 
                that provide inpatient hospital services to 
                submit such data as the Secretary deems 
                necessary to establish and administer the 
                prospective payment system under this 
                subsection.
          (3) Payment rate.--
                  (A) In general.--The Secretary shall 
                determine a prospective payment rate for each 
                payment unit for which such rehabilitation 
                facility is entitled to receive payment under 
                this title. Subject to subparagraph (B), such 
                rate for payment units occurring during a 
                fiscal year shall be based on the average 
                payment per payment unit under this title for 
                inpatient operating and capital costs of 
                rehabilitation facilities using the most recent 
                data available (as estimated by the Secretary 
                as of the date of establishment of the system) 
                adjusted--
                          (i) by updating such per-payment-unit 
                        amount to the fiscal year involved by 
                        the weighted average of the applicable 
                        percentage increases provided under 
                        subsection (b)(3)(B)(ii) (for cost 
                        reporting periods beginning during the 
                        fiscal year) covering the period from 
                        the midpoint of the period for such 
                        data through the midpoint of fiscal 
                        year 2000 and by an increase factor 
                        (described in subparagraph (C)) 
                        specified by the Secretary for 
                        subsequent fiscal years up to the 
                        fiscal year involved;
                          (ii) by reducing such rates by a 
                        factor equal to the proportion of 
                        payments under this subsection (as 
                        estimated by the Secretary) based on 
                        prospective payment amounts which are 
                        additional payments described in 
                        paragraph (4) (relating to outlier and 
                        related payments);
                          (iii) for variations among 
                        rehabilitation facilities by area under 
                        paragraph (6);
                          (iv) by the weighting factors 
                        established under paragraph (2)(B); and
                          (v) by such other factors as the 
                        Secretary determines are necessary to 
                        properly reflect variations in 
                        necessary costs of treatment among 
                        rehabilitation facilities.
                  (B) Budget neutral rates.--The Secretary 
                shall establish the prospective payment amounts 
                under this subsection for payment units during 
                fiscal years 2001 and 2002 at levels such that, 
                in the Secretary's estimation, the amount of 
                total payments under this subsection for such 
                fiscal years (including any payment adjustments 
                pursuant to paragraphs (4) and (6) but not 
                taking into account any payment adjustment 
                resulting from an election permitted under 
                paragraph (1)(F)) shall be equal to 98 percent 
                for fiscal year 2001 and 100 percent for fiscal 
                year 2002 of the amount of payments that would 
                have been made under this title during the 
                fiscal years for operating and capital costs of 
                rehabilitation facilities had this subsection 
                not been enacted. In establishing such payment 
                amounts, the Secretary shall consider the 
                effects of the prospective payment system 
                established under this subsection on the total 
                number of payment units from rehabilitation 
                facilities and other factors described in 
                subparagraph (A).
                  (C) Increase factor.--
                          (i) In general.--For purposes of this 
                        subsection for payment units in each 
                        fiscal year (beginning with fiscal year 
                        2001), the Secretary shall establish an 
                        increase factor subject to clauses (ii) 
                        and (iii). Such factor shall be based 
                        on an appropriate percentage increase 
                        in a market basket of goods and 
                        services comprising services for which 
                        payment is made under this subsection, 
                        which may be the market basket 
                        percentage increase described in 
                        subsection (b)(3)(B)(iii). The increase 
                        factor to be applied under this 
                        subparagraph for each of fiscal years 
                        2008 and 2009 shall be 0 percent.
                          (ii) Productivity and other 
                        adjustment.--Subject to clause (iii), 
                        after establishing the increase factor 
                        described in clause (i) for a fiscal 
                        year, the Secretary shall reduce such 
                        increase factor--
                                  (I) for fiscal year 2012 and 
                                each subsequent fiscal year, by 
                                the productivity adjustment 
                                described in section 
                                1886(b)(3)(B)(xi)(II); and
                                  (II) for each of fiscal years 
                                2010 through 2019, by the other 
                                adjustment described in 
                                subparagraph (D).
                        The application of this clause may 
                        result in the increase factor under 
                        this subparagraph being less than 0.0 
                        for a fiscal year, and may result in 
                        payment rates under this subsection for 
                        a fiscal year being less than such 
                        payment rates for the preceding fiscal 
                        year.
                          (iii) Special rule for fiscal year 
                        2018.--The increase factor to be 
                        applied under this subparagraph for 
                        fiscal year 2018, after the application 
                        of clause (ii), shall be 1 percent.
                  (D) Other adjustment.--For purposes of 
                subparagraph (C)(ii)(II), the other adjustment 
                described in this subparagraph is--
                          (i) for each of fiscal years 2010 and 
                        2011, 0.25 percentage point;
                          (ii) for each of fiscal years 2012 
                        and 2013, 0.1 percentage point;
                          (iii) for fiscal year 2014, 0.3 
                        percentage point;
                          (iv) for each of fiscal years 2015 
                        and 2016, 0.2 percentage point; and
                          (v) for each of fiscal years 2017, 
                        2018, and 2019, 0.75 percentage point.
          (4) Outlier and special payments.--
                  (A) Outliers.--
                          (i) In general.--The Secretary may 
                        provide for an additional payment to a 
                        rehabilitation facility for patients in 
                        a case mix group, based upon the 
                        patient being classified as an outlier 
                        based on an unusual length of stay, 
                        costs, or other factors specified by 
                        the Secretary.
                          (ii) Payment based on marginal cost 
                        of care.--The amount of such additional 
                        payment under clause (i) shall be 
                        determined by the Secretary and shall 
                        approximate the marginal cost of care 
                        beyond the cutoff point applicable 
                        under clause (i).
                          (iii) Total payments.--The total 
                        amount of the additional payments made 
                        under this subparagraph for payment 
                        units in a fiscal year may not exceed 5 
                        percent of the total payments projected 
                        or estimated to be made based on 
                        prospective payment rates for payment 
                        units in that year.
                  (B) Adjustment.--The Secretary may provide 
                for such adjustments to the payment amounts 
                under this subsection as the Secretary deems 
                appropriate to take into account the unique 
                circumstances of rehabilitation facilities 
                located in Alaska and Hawaii.
          (5) Publication.--The Secretary shall provide for 
        publication in the Federal Register, on or before 
        August 1 before each fiscal year (beginning with fiscal 
        year 2001), of the classification and weighting factors 
        for case mix groups under paragraph (2) for such fiscal 
        year and a description of the methodology and data used 
        in computing the prospective payment rates under this 
        subsection for that fiscal year.
          (6) Area wage adjustment.--The Secretary shall adjust 
        the proportion (as estimated by the Secretary from time 
        to time) of rehabilitation facilities' costs which are 
        attributable to wages and wage-related costs, of the 
        prospective payment rates computed under paragraph (3) 
        for area differences in wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        rehabilitation facility compared to the national 
        average wage level for such facilities. Not later than 
        October 1, 2001 (and at least every 36 months 
        thereafter), the Secretary shall update the factor 
        under the preceding sentence on the basis of 
        information available to the Secretary (and updated as 
        appropriate) of the wages and wage-related costs 
        incurred in furnishing rehabilitation services. Any 
        adjustments or updates made under this paragraph for a 
        fiscal year shall be made in a manner that assures that 
        the aggregated payments under this subsection in the 
        fiscal year are not greater or less than those that 
        would have been made in the year without such 
        adjustment.
          (7) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--For purposes of 
                        fiscal year 2014 and each subsequent 
                        fiscal year, in the case of a 
                        rehabilitation facility that does not 
                        submit data to the Secretary in 
                        accordance with subparagraphs (C) and 
                        (F) with respect to such a fiscal year, 
                        after determining the increase factor 
                        described in paragraph (3)(C), and 
                        after application of subparagraphs 
                        (C)(iii) and (D) of paragraph (3), the 
                        Secretary shall reduce such increase 
                        factor for payments for discharges 
                        occurring during such fiscal year by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in the 
                        increase factor described in paragraph 
                        (3)(C) being less than 0.0 for a fiscal 
                        year, and may result in payment rates 
                        under this subsection for a fiscal year 
                        being less than such payment rates for 
                        the preceding fiscal year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the fiscal year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                this subsection for a subsequent fiscal year.
                  (C) Submission of quality data.--Subject to 
                subparagraph (G), for fiscal year 2014 and each 
                subsequent fiscal year, each rehabilitation 
                facility shall submit to the Secretary data on 
                quality measures specified under subparagraph 
                (D). Such data shall be submitted in a form and 
                manner, and at a time, specified by the 
                Secretary for purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to fiscal year 
                        2014.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                and subparagraph (F)(i) available to the 
                public. Such procedures shall ensure that a 
                rehabilitation facility has the opportunity to 
                review the data that is to be made public with 
                respect to the facility prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in 
                rehabilitation facilities on the Internet 
                website of the Centers for Medicare & Medicaid 
                Services.
                  (F) Submission of additional data.--
                          (i) In general.--For the fiscal year 
                        beginning on the specified application 
                        date (as defined in subsection 
                        (a)(2)(E) of section 1899B), as 
                        applicable with respect to inpatient 
                        rehabilitation facilities and quality 
                        measures under subsection (c)(1) of 
                        such section and measures under 
                        subsection (d)(1) of such section, and 
                        each subsequent fiscal year, in 
                        addition to such data on the quality 
                        measures described in subparagraph (C), 
                        each rehabilitation facility shall 
                        submit to the Secretary data on the 
                        quality measures under such subsection 
                        (c)(1) and any necessary data specified 
                        by the Secretary under such subsection 
                        (d)(1).
                          (ii) Standardized patient assessment 
                        data.--For fiscal year 2019 and each 
                        subsequent fiscal year, in addition to 
                        such data described in clause (i), each 
                        rehabilitation facility shall submit to 
                        the Secretary standardized patient 
                        assessment data required under 
                        subsection (b)(1) of section 1899B.
                          (iii) Submission.--Such data shall be 
                        submitted in the form and manner, and 
                        at the time, specified by the Secretary 
                        for purposes of this subparagraph.
                  (G) Non-duplication.--To the extent data 
                submitted under subparagraph (F) duplicates 
                other data required to be submitted under 
                subparagraph (C), the submission of such data 
                under subparagraph (F) shall be in lieu of the 
                submission of such data under subparagraph (C). 
                The previous sentence shall not apply insofar 
                as the Secretary determines it is necessary to 
                avoid a delay in the implementation of section 
                1899B, taking into account the different 
                specified application dates under subsection 
                (a)(2)(E) of such section.
          (8) Limitation on review.--There shall be no 
        administrative or judicial review under section 1869, 
        1878, or otherwise of the establishment of--
                  (A) case mix groups, of the methodology for 
                the classification of patients within such 
                groups, and of the appropriate weighting 
                factors thereof under paragraph (2),
                  (B) the prospective payment rates under 
                paragraph (3),
                  (C) outlier and special payments under 
                paragraph (4), and
                  (D) area wage adjustments under paragraph 
                (6).
  (k) Payment to Nonhospital Providers.--
          (1) In general.--For cost reporting periods beginning 
        on or after October 1, 1997, the Secretary may 
        establish rules for payment to qualified nonhospital 
        providers for their direct costs of medical education, 
        if those costs are incurred in the operation of an 
        approved medical residency training program described 
        in subsection (h). Such rules shall specify the 
        amounts, form, and manner in which such payments will 
        be made and the portion of such payments that will be 
        made from each of the trust funds under this title.
          (2) Qualified nonhospital providers.--For purposes of 
        this subsection, the term ``qualified nonhospital 
        providers'' means--
                  (A) a Federally qualified health center, as 
                defined in section 1861(aa)(4);
                  (B) a rural health clinic, as defined in 
                section 1861(aa)(2);
                  (C) Medicare+Choice organizations; and
                  (D) such other providers (other than 
                hospitals) as the Secretary determines to be 
                appropriate.
  (l) Payment for Nursing and Allied Health Education for 
Managed Care Enrollees.--
          (1) In general.--For portions of cost reporting 
        periods occurring in a year (beginning with 2000), the 
        Secretary shall provide for an additional payment 
        amount for any hospital that receives payments for the 
        costs of approved educational activities for nurse and 
        allied health professional training under section 
        1861(v)(1).
          (2) Payment amount.--The additional payment amount 
        under this subsection for each hospital for portions of 
        cost reporting periods occurring in a year shall be an 
        amount specified by the Secretary in a manner 
        consistent with the following:
                  (A) Determination of managed care enrollee 
                payment ratio for graduate medical education 
                payments.--The Secretary shall estimate the 
                ratio of payments for all hospitals for 
                portions of cost reporting periods occurring in 
                the year under subsection (h)(3)(D) to total 
                direct graduate medical education payments 
                estimated for such portions of periods under 
                subsection (h)(3).
                  (B) Application to fee-for-service nursing 
                and allied health education payments.--Such 
                ratio shall be applied to the Secretary's 
                estimate of total payments for nursing and 
                allied health education determined under 
                section 1861(v) for portions of cost reporting 
                periods occurring in the year to determine a 
                total amount of additional payments for nursing 
                and allied health education to be distributed 
                to hospitals under this subsection for portions 
                of cost reporting periods occurring in the 
                year; except that in no case shall such total 
                amount exceed $60,000,000 in any year.
                  (C) Application to hospital.--The amount of 
                payment under this subsection to a hospital for 
                portions of cost reporting periods occurring in 
                a year is equal to the total amount of payments 
                determined under subparagraph (B) for the year 
                multiplied by the ratio of--
                          (i) the product of (I) the 
                        Secretary's estimate of the ratio of 
                        the amount of payments made under 
                        section 1861(v) to the hospital for 
                        nursing and allied health education 
                        activities for the hospital's cost 
                        reporting period ending in the second 
                        preceding fiscal year, to the 
                        hospital's total inpatient days for 
                        such period, and (II) the total number 
                        of inpatient days (as established by 
                        the Secretary) for such period which 
                        are attributable to services furnished 
                        to individuals who are enrolled under a 
                        risk sharing contract with an eligible 
                        organization under section 1876 and who 
                        are entitled to benefits under part A 
                        or who are enrolled with a 
                        Medicare+Choice organization under part 
                        C; to
                          (ii) the sum of the products 
                        determined under clause (i) for such 
                        cost reporting periods.
  (m) Prospective Payment for Long-Term Care Hospitals.--
          (1) Reference to establishment and implementation of 
        system.--For provisions related to the establishment 
        and implementation of a prospective payment system for 
        payments under this title for inpatient hospital 
        services furnished by a long-term care hospital 
        described in subsection (d)(1)(B)(iv), see section 123 
        of the Medicare, Medicaid, and SCHIP Balanced Budget 
        Refinement Act of 1999 and section 307(b) of the 
        Medicare, Medicaid, and SCHIP Benefits Improvement and 
        Protection Act of 2000.
          (2) Update for rate year 2008.--In implementing the 
        system described in paragraph (1) for discharges 
        occurring during the rate year ending in 2008 for a 
        hospital, the base rate for such discharges for the 
        hospital shall be the same as the base rate for 
        discharges for the hospital occurring during the rate 
        year ending in 2007.
          (3) Implementation for rate year 2010 and subsequent 
        years.--
                  (A) In general.--Subject to subparagraph (C), 
                in implementing the system described in 
                paragraph (1) for rate year 2010 and each 
                subsequent rate year, any annual update to a 
                standard Federal rate for discharges for the 
                hospital during the rate year, shall be 
                reduced--
                          (i) for rate year 2012 and each 
                        subsequent rate year, by the 
                        productivity adjustment described in 
                        section 1886(b)(3)(B)(xi)(II); and
                          (ii) for each of rate years 2010 
                        through 2019, by the other adjustment 
                        described in paragraph (4).
                  (B) Special rule.--The application of this 
                paragraph may result in such annual update 
                being less than 0.0 for a rate year, and may 
                result in payment rates under the system 
                described in paragraph (1) for a rate year 
                being less than such payment rates for the 
                preceding rate year.
                  (C) Additional special rule.--For fiscal year 
                2018, the annual update under subparagraph (A) 
                for the fiscal year, after application of 
                clauses (i) and (ii) of subparagraph (A), shall 
                be 1 percent.
          (4) Other adjustment.--For purposes of paragraph 
        (3)(A)(ii), the other adjustment described in this 
        paragraph is--
                  (A) for rate year 2010, 0.25 percentage 
                point;
                  (B) for rate year 2011, 0.50 percentage 
                point;
                  (C) for each of the rate years beginning in 
                2012 and 2013, 0.1 percentage point;
                  (D) for rate year 2014, 0.3 percentage point;
                  (E) for each of rate years 2015 and 2016, 0.2 
                percentage point; and
                  (F) for each of rate years 2017, 2018, and 
                2019, 0.75 percentage point.
          (5) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--Under the system 
                        described in paragraph (1), for rate 
                        year 2014 and each subsequent rate 
                        year, in the case of a long-term care 
                        hospital that does not submit data to 
                        the Secretary in accordance with 
                        subparagraphs (C) and (F) with respect 
                        to such a rate year, any annual update 
                        to a standard Federal rate for 
                        discharges for the hospital during the 
                        rate year, and after application of 
                        paragraph (3), shall be reduced by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in such 
                        annual update being less than 0.0 for a 
                        rate year, and may result in payment 
                        rates under the system described in 
                        paragraph (1) for a rate year being 
                        less than such payment rates for the 
                        preceding rate year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the rate year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                the system described in paragraph (1) for a 
                subsequent rate year.
                  (C) Submission of quality data.--Subject to 
                subparagraph (G), for rate year 2014 and each 
                subsequent rate year, each long-term care 
                hospital shall submit to the Secretary data on 
                quality measures specified under subparagraph 
                (D). Such data shall be submitted in a form and 
                manner, and at a time, specified by the 
                Secretary for purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to rate year 
                        2014.
                          (iv) Additional quality measures.--
                        Not later than October 1, 2015, the 
                        Secretary shall establish a functional 
                        status quality measure for change in 
                        mobility among inpatients requiring 
                        ventilator support.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                and subparagraph (F)(i) available to the 
                public. Such procedures shall ensure that a 
                long-term care hospital has the opportunity to 
                review the data that is to be made public with 
                respect to the hospital prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in long-term 
                care hospitals on the Internet website of the 
                Centers for Medicare & Medicaid Services.
                  (F) Submission of additional data.--
                          (i) In general.--For the rate year 
                        beginning on the specified application 
                        date (as defined in subsection 
                        (a)(2)(E) of section 1899B), as 
                        applicable with respect to long-term 
                        care hospitals and quality measures 
                        under subsection (c)(1) of such section 
                        and measures under subsection (d)(1) of 
                        such section, and each subsequent rate 
                        year, in addition to the data on the 
                        quality measures described in 
                        subparagraph (C), each long-term care 
                        hospital (other than a hospital 
                        classified under subsection 
                        (d)(1)(B)(iv)(II)) shall submit to the 
                        Secretary data on the quality measures 
                        under such subsection (c)(1) and any 
                        necessary data specified by the 
                        Secretary under such subsection (d)(1).
                          (ii) Standardized patient assessment 
                        data.--For rate year 2019 and each 
                        subsequent rate year, in addition to 
                        such data described in clause (i), each 
                        long-term care hospital (other than a 
                        hospital classified under subsection 
                        (d)(1)(B)(iv)(II)) shall submit to the 
                        Secretary standardized patient 
                        assessment data required under 
                        subsection (b)(1) of section 1899B.
                          (iii) Submission.--Such data shall be 
                        submitted in the form and manner, and 
                        at the time, specified by the Secretary 
                        for purposes of this subparagraph.
                  (G) Non-duplication.--To the extent data 
                submitted under subparagraph (F) duplicates 
                other data required to be submitted under 
                subparagraph (C), the submission of such data 
                under subparagraph (F) shall be in lieu of the 
                submission of such data under subparagraph (C). 
                The previous sentence shall not apply insofar 
                as the Secretary determines it is necessary to 
                avoid a delay in the implementation of section 
                1899B, taking into account the different 
                specified application dates under subsection 
                (a)(2)(E) of such section.
          (6) Application of site neutral ipps payment rate in 
        certain cases.--
                  (A) General application of site neutral ipps 
                payment amount for discharges failing to meet 
                applicable criteria.--
                          (i) In general.--For a discharge in 
                        cost reporting periods beginning on or 
                        after October 1, 2015, except as 
                        provided in clause (ii) and 
                        subparagraph (C), payment under this 
                        title to a long-term care hospital for 
                        inpatient hospital services shall be 
                        made at the applicable site neutral 
                        payment rate (as defined in 
                        subparagraph (B)).
                          (ii) Exception for certain discharges 
                        meeting criteria.--Clause (i) shall not 
                        apply (and payment shall be made to a 
                        long-term care hospital without regard 
                        to this paragraph) for a discharge if--
                                  (I) the discharge meets the 
                                ICU criterion under clause 
                                (iii) or the ventilator 
                                criterion under clause (iv); 
                                and
                                  (II) the discharge does not 
                                have a principal diagnosis 
                                relating to a psychiatric 
                                diagnosis or to rehabilitation.
                          (iii) Intensive care unit (icu) 
                        criterion.--
                                  (I) In general.--The 
                                criterion specified in this 
                                clause (in this paragraph 
                                referred to as the ``ICU 
                                criterion''), for a discharge 
                                from a long-term care hospital, 
                                is that the stay in the long-
                                term care hospital ending with 
                                such discharge was immediately 
                                preceded by a discharge from a 
                                stay in a subsection (d) 
                                hospital that included at least 
                                3 days in an intensive care 
                                unit (ICU), as determined by 
                                the Secretary.
                                  (II) Determining icu days.--
                                In determining intensive care 
                                unit days under subclause (I), 
                                the Secretary shall use data 
                                from revenue center codes 020x 
                                or 021x (or such successor 
                                codes as the Secretary may 
                                establish).
                          (iv) Ventilator criterion.--The 
                        criterion specified in this clause (in 
                        this paragraph referred to as the 
                        ``ventilator criterion''), for a 
                        discharge from a long-term care 
                        hospital, is that--
                                  (I) the stay in the long-term 
                                care hospital ending with such 
                                discharge was immediately 
                                preceded by a discharge from a 
                                stay in a subsection (d) 
                                hospital; and
                                  (II) the individual 
                                discharged was assigned to a 
                                Medicare-Severity-Long-Term-
                                Care-Diagnosis-Related-Group 
                                (MS-LTC-DRG) based on the 
                                receipt of ventilator services 
                                of at least 96 hours.
                  (B) Applicable site neutral payment rate 
                defined.--
                          (i) In general.--In this paragraph, 
                        the term ``applicable site neutral 
                        payment rate'' means--
                                  (I) for discharges in cost 
                                reporting periods beginning 
                                during fiscal year 2016 or 
                                fiscal year 2017, the blended 
                                payment rate specified in 
                                clause (iii); and
                                  (II) for discharges in cost 
                                reporting periods beginning 
                                during fiscal year 2018 or a 
                                subsequent fiscal year, the 
                                site neutral payment rate (as 
                                defined in clause (ii)).
                          (ii) Site neutral payment rate 
                        defined.--In this paragraph, the term 
                        ``site neutral payment rate'' means the 
                        lower of--
                                  (I) the IPPS comparable per 
                                diem amount determined under 
                                paragraph (d)(4) of section 
                                412.529 of title 42, Code of 
                                Federal Regulations, including 
                                any applicable outlier payments 
                                under section 412.525 of such 
                                title; or
                                  (II) 100 percent of the 
                                estimated cost for the services 
                                involved.
                          (iii) Blended payment rate.--The 
                        blended payment rate specified in this 
                        clause, for a long-term care hospital 
                        for inpatient hospital services for a 
                        discharge, is comprised of--
                                  (I) half of the site neutral 
                                payment rate (as defined in 
                                clause (ii)) for the discharge; 
                                and
                                  (II) half of the payment rate 
                                that would otherwise be 
                                applicable to such discharge 
                                without regard to this 
                                paragraph, as determined by the 
                                Secretary.
                  (C) Limiting payment for all hospital 
                discharges to site neutral payment rate for 
                hospitals failing to meet applicable ltch 
                discharge thresholds.--
                          (i) Notice of ltch discharge payment 
                        percentage.--For cost reporting periods 
                        beginning during or after fiscal year 
                        2016, the Secretary shall inform each 
                        long-term care hospital of its LTCH 
                        discharge payment percentage (as 
                        defined in clause (iv)) for such 
                        period.
                          (ii) Limitation.--For cost reporting 
                        periods beginning during or after 
                        fiscal year 2020, if the Secretary 
                        determines for a long-term care 
                        hospital that its LTCH discharge 
                        payment percentage for the period is 
                        not at least 50 percent--
                                  (I) the Secretary shall 
                                inform the hospital of such 
                                fact; and
                                  (II) subject to clause (iii), 
                                for all discharges in the 
                                hospital in each succeeding 
                                cost reporting period, the 
                                payment amount under this 
                                subsection shall be the payment 
                                amount that would apply under 
                                subsection (d) for the 
                                discharge if the hospital were 
                                a subsection (d) hospital.
                          (iii) Process for reinstatement.--The 
                        Secretary shall establish a process 
                        whereby a long-term care hospital may 
                        seek to and have the provisions of 
                        subclause (II) of clause (ii) 
                        discontinued with respect to that 
                        hospital.
                          (iv) LTCH discharge payment 
                        percentage.--In this subparagraph, the 
                        term ``LTCH discharge payment 
                        percentage'' means, with respect to a 
                        long-term care hospital for a cost 
                        reporting period beginning during or 
                        after fiscal year 2020, the ratio 
                        (expressed as a percentage) of--
                                  (I) the number of Medicare 
                                fee-for-service discharges for 
                                such hospital and period for 
                                which payment is not made at 
                                the site neutral payment rate, 
                                to
                                  (II) the total number of 
                                Medicare fee-for-service 
                                discharges for such hospital 
                                and period.
                  (D) Inclusion of subsection (d) puerto rico 
                hospitals.--In this paragraph, any reference in 
                this paragraph to a subsection (d) hospital 
                shall be deemed to include a reference to a 
                subsection (d) Puerto Rico hospital.
  (n) Incentives for Adoption and Meaningful Use of Certified 
EHR Technology.--
          (1) In general.--Subject to the succeeding provisions 
        of this subsection, with respect to inpatient hospital 
        services furnished by an eligible hospital during a 
        payment year (as defined in paragraph (2)(G)), if the 
        eligible hospital is a meaningful EHR user (as 
        determined under paragraph (3)) for the EHR reporting 
        period with respect to such year, in addition to the 
        amount otherwise paid under this section, there also 
        shall be paid to the eligible hospital, from the 
        Federal Hospital Insurance Trust Fund established under 
        section 1817, an amount equal to the applicable amount 
        specified in paragraph (2)(A) for the hospital for such 
        payment year.
          (2) Payment amount.--
                  (A) In general.--Subject to the succeeding 
                subparagraphs of this paragraph, the applicable 
                amount specified in this subparagraph for an 
                eligible hospital for a payment year is equal 
                to the product of the following:
                          (i) Initial amount.--The sum of--
                                  (I) the base amount specified 
                                in subparagraph (B); plus
                                  (II) the discharge related 
                                amount specified in 
                                subparagraph (C) for a 12-month 
                                period selected by the 
                                Secretary with respect to such 
                                payment year.
                          (ii) Medicare share.--The Medicare 
                        share as specified in subparagraph (D) 
                        for the eligible hospital for a period 
                        selected by the Secretary with respect 
                        to such payment year.
                          (iii) Transition factor.--The 
                        transition factor specified in 
                        subparagraph (E) for the eligible 
                        hospital for the payment year.
                  (B) Base amount.--The base amount specified 
                in this subparagraph is $2,000,000.
                  (C) Discharge related amount.--The discharge 
                related amount specified in this subparagraph 
                for a 12-month period selected by the Secretary 
                shall be determined as the sum of the amount, 
                estimated based upon total discharges for the 
                eligible hospital (regardless of any source of 
                payment) for the period, for each discharge up 
                to the 23,000th discharge as follows:
                          (i) For the first through 1,149th 
                        discharge, $0.
                          (ii) For the 1,150th through the 
                        23,000th discharge, $200.
                          (iii) For any discharge greater than 
                        the 23,000th, $0.
                  (D) Medicare share.--The Medicare share 
                specified under this subparagraph for an 
                eligible hospital for a period selected by the 
                Secretary for a payment year is equal to the 
                fraction--
                          (i) the numerator of which is the sum 
                        (for such period and with respect to 
                        the eligible hospital) of--
                                  (I) the estimated number of 
                                inpatient-bed-days (as 
                                established by the Secretary) 
                                which are attributable to 
                                individuals with respect to 
                                whom payment may be made under 
                                part A; and
                                  (II) the estimated number of 
                                inpatient-bed-days (as so 
                                established) which are 
                                attributable to individuals who 
                                are enrolled with a Medicare 
                                Advantage organization under 
                                part C; and
                          (ii) the denominator of which is the 
                        product of--
                                  (I) the estimated total 
                                number of inpatient-bed-days 
                                with respect to the eligible 
                                hospital during such period; 
                                and
                                  (II) the estimated total 
                                amount of the eligible 
                                hospital's charges during such 
                                period, not including any 
                                charges that are attributable 
                                to charity care (as such term 
                                is used for purposes of 
                                hospital cost reporting under 
                                this title), divided by the 
                                estimated total amount of the 
                                hospital's charges during such 
                                period.
                Insofar as the Secretary determines that data 
                are not available on charity care necessary to 
                calculate the portion of the formula specified 
                in clause (ii)(II), the Secretary shall use 
                data on uncompensated care and may adjust such 
                data so as to be an appropriate proxy for 
                charity care including a downward adjustment to 
                eliminate bad debt data from uncompensated care 
                data. In the absence of the data necessary, 
                with respect to a hospital, for the Secretary 
                to compute the amount described in clause 
                (ii)(II), the amount under such clause shall be 
                deemed to be 1. In the absence of data, with 
                respect to a hospital, necessary to compute the 
                amount described in clause (i)(II), the amount 
                under such clause shall be deemed to be 0.
                  (E) Transition factor specified.--
                          (i) In general.--Subject to clause 
                        (ii), the transition factor specified 
                        in this subparagraph for an eligible 
                        hospital for a payment year is as 
                        follows:
                                  (I) For the first payment 
                                year for such hospital, 1.
                                  (II) For the second payment 
                                year for such hospital, \3/4\.
                                  (III) For the third payment 
                                year for such hospital, \1/2\.
                                  (IV) For the fourth payment 
                                year for such hospital, \1/4\.
                                  (V) For any succeeding 
                                payment year for such hospital, 
                                0.
                          (ii) Phase down for eligible 
                        hospitals first adopting ehr after 
                        2013.--If the first payment year for an 
                        eligible hospital is after 2013, then 
                        the transition factor specified in this 
                        subparagraph for a payment year for 
                        such hospital is the same as the amount 
                        specified in clause (i) for such 
                        payment year for an eligible hospital 
                        for which the first payment year is 
                        2013. If the first payment year for an 
                        eligible hospital is after 2015 then 
                        the transition factor specified in this 
                        subparagraph for such hospital and for 
                        such year and any subsequent year shall 
                        be 0.
                  (F) Form of payment.--The payment under this 
                subsection for a payment year may be in the 
                form of a single consolidated payment or in the 
                form of such periodic installments as the 
                Secretary may specify.
                  (G) Payment year defined.--
                          (i) In general.--For purposes of this 
                        subsection, the term ``payment year'' 
                        means a fiscal year beginning with 
                        fiscal year 2011.
                          (ii) First, second, etc. payment 
                        year.--The term ``first payment year'' 
                        means, with respect to inpatient 
                        hospital services furnished by an 
                        eligible hospital, the first fiscal 
                        year for which an incentive payment is 
                        made for such services under this 
                        subsection. The terms ``second payment 
                        year'', ``third payment year'', and 
                        ``fourth payment year'' mean, with 
                        respect to an eligible hospital, each 
                        successive year immediately following 
                        the first payment year for that 
                        hospital.
          (3) Meaningful ehr user.--
                  (A) In general.--For purposes of paragraph 
                (1), an eligible hospital shall be treated as a 
                meaningful EHR user for an EHR reporting period 
                for a payment year (or, for purposes of 
                subsection (b)(3)(B)(ix), for an EHR reporting 
                period under such subsection for a fiscal year) 
                if each of the following requirements are met:
                          (i) Meaningful use of certified ehr 
                        technology.--The eligible hospital 
                        demonstrates to the satisfaction of the 
                        Secretary, in accordance with 
                        subparagraph (C)(i), that during such 
                        period the hospital is using certified 
                        EHR technology in a meaningful manner.
                          (ii) Information exchange.--The 
                        eligible hospital demonstrates to the 
                        satisfaction of the Secretary, in 
                        accordance with subparagraph (C)(i), 
                        that during such period such certified 
                        EHR technology is connected in a manner 
                        that provides, in accordance with law 
                        and standards applicable to the 
                        exchange of information, for the 
                        electronic exchange of health 
                        information to improve the quality of 
                        health care, such as promoting care 
                        coordination, and the hospital 
                        demonstrates (through a process 
                        specified by the Secretary, such as the 
                        use of an attestation) that the 
                        hospital has not knowingly and 
                        willfully taken action (such as to 
                        disable functionality) to limit or 
                        restrict the compatibility or 
                        interoperability of the certified EHR 
                        technology.
                          (iii) Reporting on measures using 
                        ehr.--Subject to subparagraph (B)(ii) 
                        and using such certified EHR 
                        technology, the eligible hospital 
                        submits information for such period, in 
                        a form and manner specified by the 
                        Secretary, on such clinical quality 
                        measures and such other measures as 
                        selected by the Secretary under 
                        subparagraph (B)(i).
                The Secretary shall seek to improve the use of 
                electronic health records and health care 
                quality over time by requiring more stringent 
                measures of meaningful use selected under this 
                paragraph.
                  (B) Reporting on measures.--
                          (i) Selection.--The Secretary shall 
                        select measures for purposes of 
                        subparagraph (A)(iii) but only 
                        consistent with the following:
                                  (I) The Secretary shall 
                                provide preference to clinical 
                                quality measures that have been 
                                selected for purposes of 
                                applying subsection 
                                (b)(3)(B)(viii) or that have 
                                been endorsed by the entity 
                                with a contract with the 
                                Secretary under section 
                                1890(a).
                                  (II) Prior to any measure 
                                (other than a clinical quality 
                                measure that has been selected 
                                for purposes of applying 
                                subsection (b)(3)(B)(viii)) 
                                being selected under this 
                                subparagraph, the Secretary 
                                shall publish in the Federal 
                                Register such measure and 
                                provide for a period of public 
                                comment on such measure.
                          (ii) Limitations.--The Secretary may 
                        not require the electronic reporting of 
                        information on clinical quality 
                        measures under subparagraph (A)(iii) 
                        unless the Secretary has the capacity 
                        to accept the information 
                        electronically, which may be on a pilot 
                        basis.
                          (iii) Coordination of reporting of 
                        information.--In selecting such 
                        measures, and in establishing the form 
                        and manner for reporting measures under 
                        subparagraph (A)(iii), the Secretary 
                        shall seek to avoid redundant or 
                        duplicative reporting with reporting 
                        otherwise required, including reporting 
                        under subsection (b)(3)(B)(viii).
                  (C) Demonstration of meaningful use of 
                certified ehr technology and information 
                exchange.--
                          (i) In general.--An eligible hospital 
                        may satisfy the demonstration 
                        requirement of clauses (i) and (ii) of 
                        subparagraph (A) through means 
                        specified by the Secretary, which may 
                        include--
                                  (I) an attestation;
                                  (II) the submission of claims 
                                with appropriate coding (such 
                                as a code indicating that 
                                inpatient care was documented 
                                using certified EHR 
                                technology);
                                  (III) a survey response;
                                  (IV) reporting under 
                                subparagraph (A)(iii); and
                                  (V) other means specified by 
                                the Secretary.
                          (ii) Use of part d data.--
                        Notwithstanding sections 1860D-
                        15(d)(2)(B) and 1860D-15(f)(2), the 
                        Secretary may use data regarding drug 
                        claims submitted for purposes of 
                        section 1860D-15 that are necessary for 
                        purposes of subparagraph (A).
          (4) Application.--
                  (A) Limitations on review.--There shall be no 
                administrative or judicial review under section 
                1869, section 1878, or otherwise, of--
                          (i) the methodology and standards for 
                        determining payment amounts under this 
                        subsection and payment adjustments 
                        under subsection (b)(3)(B)(ix), 
                        including selection of periods under 
                        paragraph (2) for determining, and 
                        making estimates or using proxies of, 
                        discharges under paragraph (2)(C) and 
                        inpatient-bed-days, hospital charges, 
                        charity charges, and Medicare share 
                        under paragraph (2)(D);
                          (ii) the methodology and standards 
                        for determining a meaningful EHR user 
                        under paragraph (3), including 
                        selection of measures under paragraph 
                        (3)(B), specification of the means of 
                        demonstrating meaningful EHR use under 
                        paragraph (3)(C), and the hardship 
                        exception under subsection 
                        (b)(3)(B)(ix)(II); and
                          (iii) the specification of EHR 
                        reporting periods under paragraph 
                        (6)(B) and the selection of the form of 
                        payment under paragraph (2)(F).
                  (B) Posting on website.--The Secretary shall 
                post on the Internet website of the Centers for 
                Medicare & Medicaid Services, in an easily 
                understandable format, a list of the names of 
                the eligible hospitals that are meaningful EHR 
                users under this subsection or subsection 
                (b)(3)(B)(ix) (and a list of the names of 
                critical access hospitals to which paragraph 
                (3) or (4) of section 1814(l) applies), and 
                other relevant data as determined appropriate 
                by the Secretary. The Secretary shall ensure 
                that an eligible hospital (or critical access 
                hospital) has the opportunity to review the 
                other relevant data that are to be made public 
                with respect to the hospital (or critical 
                access hospital) prior to such data being made 
                public.
          (5) Certified ehr technology defined.--The term 
        ``certified EHR technology'' has the meaning given such 
        term in section 1848(o)(4).
          (6) Definitions.--For purposes of this subsection:
                  (A) EHR reporting period.--The term ``EHR 
                reporting period'' means, with respect to a 
                payment year, any period (or periods) as 
                specified by the Secretary.
                  (B) Eligible hospital.--The term ``eligible 
                hospital'' means a subsection (d) hospital.
  (o) Hospital Value-Based Purchasing Program.--
          (1) Establishment.--
                  (A) In general.--Subject to the succeeding 
                provisions of this subsection, the Secretary 
                shall establish a hospital value-based 
                purchasing program (in this subsection referred 
                to as the ``Program'') under which value-based 
                incentive payments are made in a fiscal year to 
                hospitals that meet the performance standards 
                under paragraph (3) for the performance period 
                for such fiscal year (as established under 
                paragraph (4)).
                  (B) Program to begin in fiscal year 2013.--
                The Program shall apply to payments for 
                discharges occurring on or after October 1, 
                2012.
                  (C) Applicability of program to hospitals.--
                          (i) In general.--For purposes of this 
                        subsection, subject to clause (ii), the 
                        term ``hospital'' means a subsection 
                        (d) hospital (as defined in subsection 
                        (d)(1)(B)).
                          (ii) Exclusions.--The term 
                        ``hospital'' shall not include, with 
                        respect to a fiscal year, a hospital--
                                  (I) that is subject to the 
                                payment reduction under 
                                subsection (b)(3)(B)(viii)(I) 
                                for such fiscal year;
                                  (II) for which, during the 
                                performance period for such 
                                fiscal year, the Secretary has 
                                cited deficiencies that pose 
                                immediate jeopardy to the 
                                health or safety of patients;
                                  (III) for which there are not 
                                a minimum number (as determined 
                                by the Secretary) of measures 
                                that apply to the hospital for 
                                the performance period for such 
                                fiscal year; or
                                  (IV) for which there are not 
                                a minimum number (as determined 
                                by the Secretary) of cases for 
                                the measures that apply to the 
                                hospital for the performance 
                                period for such fiscal year.
                          (iii) Independent analysis.--For 
                        purposes of determining the minimum 
                        numbers under subclauses (III) and (IV) 
                        of clause (ii), the Secretary shall 
                        have conducted an independent analysis 
                        of what numbers are appropriate.
                          (iv) Exemption.--In the case of a 
                        hospital that is paid under section 
                        1814(b)(3), the Secretary may exempt 
                        such hospital from the application of 
                        this subsection if the State which is 
                        paid under such section submits an 
                        annual report to the Secretary 
                        describing how a similar program in the 
                        State for a participating hospital or 
                        hospitals achieves or surpasses the 
                        measured results in terms of patient 
                        health outcomes and cost savings 
                        established under this subsection.
          (2) Measures.--
                  (A) In general.--The Secretary shall select 
                measures, other than measures of readmissions, 
                for purposes of the Program. Such measures 
                shall be selected from the measures specified 
                under subsection (b)(3)(B)(viii).
                  (B) Requirements.--
                          (i) For fiscal year 2013.--For value-
                        based incentive payments made with 
                        respect to discharges occurring during 
                        fiscal year 2013, the Secretary shall 
                        ensure the following:
                                  (I) Conditions or 
                                procedures.--Measures are 
                                selected under subparagraph (A) 
                                that cover at least the 
                                following 5 specific conditions 
                                or procedures:
                                          (aa) Acute myocardial 
                                        infarction (AMI).
                                          (bb) Heart failure.
                                          (cc) Pneumonia.
                                          (dd) Surgeries, as 
                                        measured by the 
                                        Surgical Care 
                                        Improvement Project 
                                        (formerly referred to 
                                        as ``Surgical Infection 
                                        Prevention'' for 
                                        discharges occurring 
                                        before July 2006).
                                          (ee) Healthcare-
                                        associated infections, 
                                        as measured by the 
                                        prevention metrics and 
                                        targets established in 
                                        the HHS Action Plan to 
                                        Prevent Healthcare-
                                        Associated Infections 
                                        (or any successor plan) 
                                        of the Department of 
                                        Health and Human 
                                        Services.
                                  (II) HCAHPS.--Measures 
                                selected under subparagraph (A) 
                                shall be related to the 
                                Hospital Consumer Assessment of 
                                Healthcare Providers and 
                                Systems survey (HCAHPS).
                          (ii) Inclusion of efficiency 
                        measures.--For value-based incentive 
                        payments made with respect to 
                        discharges occurring during fiscal year 
                        2014 or a subsequent fiscal year, the 
                        Secretary shall ensure that measures 
                        selected under subparagraph (A) include 
                        efficiency measures, including measures 
                        of ``Medicare spending per 
                        beneficiary''. Such measures shall be 
                        adjusted for factors such as age, sex, 
                        race, severity of illness, and other 
                        factors that the Secretary determines 
                        appropriate.
                  (C) Limitations.--
                          (i) Time requirement for prior 
                        reporting and notice.--The Secretary 
                        may not select a measure under 
                        subparagraph (A) for use under the 
                        Program with respect to a performance 
                        period for a fiscal year (as 
                        established under paragraph (4)) unless 
                        such measure has been specified under 
                        subsection (b)(3)(B)(viii) and included 
                        on the Hospital Compare Internet 
                        website for at least 1 year prior to 
                        the beginning of such performance 
                        period.
                          (ii) Measure not applicable unless 
                        hospital furnishes services appropriate 
                        to the measure.--A measure selected 
                        under subparagraph (A) shall not apply 
                        to a hospital if such hospital does not 
                        furnish services appropriate to such 
                        measure.
                  (D) Replacing measures.--Subclause (VI) of 
                subsection (b)(3)(B)(viii) shall apply to 
                measures selected under subparagraph (A) in the 
                same manner as such subclause applies to 
                measures selected under such subsection.
          (3) Performance standards.--
                  (A) Establishment.--The Secretary shall 
                establish performance standards with respect to 
                measures selected under paragraph (2) for a 
                performance period for a fiscal year (as 
                established under paragraph (4)).
                  (B) Achievement and improvement.--The 
                performance standards established under 
                subparagraph (A) shall include levels of 
                achievement and improvement.
                  (C) Timing.--The Secretary shall establish 
                and announce the performance standards under 
                subparagraph (A) not later than 60 days prior 
                to the beginning of the performance period for 
                the fiscal year involved.
                  (D) Considerations in establishing 
                standards.--In establishing performance 
                standards with respect to measures under this 
                paragraph, the Secretary shall take into 
                account appropriate factors, such as--
                          (i) practical experience with the 
                        measures involved, including whether a 
                        significant proportion of hospitals 
                        failed to meet the performance standard 
                        during previous performance periods;
                          (ii) historical performance 
                        standards;
                          (iii) improvement rates; and
                          (iv) the opportunity for continued 
                        improvement.
          (4) Performance period.--For purposes of the Program, 
        the Secretary shall establish the performance period 
        for a fiscal year. Such performance period shall begin 
        and end prior to the beginning of such fiscal year.
          (5) Hospital performance score.--
                  (A) In general.--Subject to subparagraph (B), 
                the Secretary shall develop a methodology for 
                assessing the total performance of each 
                hospital based on performance standards with 
                respect to the measures selected under 
                paragraph (2) for a performance period (as 
                established under paragraph (4)). Using such 
                methodology, the Secretary shall provide for an 
                assessment (in this subsection referred to as 
                the ``hospital performance score'') for each 
                hospital for each performance period.
                  (B) Application.--
                          (i) Appropriate distribution.--The 
                        Secretary shall ensure that the 
                        application of the methodology 
                        developed under subparagraph (A) 
                        results in an appropriate distribution 
                        of value-based incentive payments under 
                        paragraph (6) among hospitals achieving 
                        different levels of hospital 
                        performance scores, with hospitals 
                        achieving the highest hospital 
                        performance scores receiving the 
                        largest value-based incentive payments.
                          (ii) Higher of achievement or 
                        improvement.--The methodology developed 
                        under subparagraph (A) shall provide 
                        that the hospital performance score is 
                        determined using the higher of its 
                        achievement or improvement score for 
                        each measure.
                          (iii) Weights.--The methodology 
                        developed under subparagraph (A) shall 
                        provide for the assignment of weights 
                        for categories of measures as the 
                        Secretary determines appropriate.
                          (iv) No minimum performance 
                        standard.--The Secretary shall not set 
                        a minimum performance standard in 
                        determining the hospital performance 
                        score for any hospital.
                          (v) Reflection of measures applicable 
                        to the hospital.--The hospital 
                        performance score for a hospital shall 
                        reflect the measures that apply to the 
                        hospital.
          (6) Calculation of value-based incentive payments.--
                  (A) In general.--In the case of a hospital 
                that the Secretary determines meets (or 
                exceeds) the performance standards under 
                paragraph (3) for the performance period for a 
                fiscal year (as established under paragraph 
                (4)), the Secretary shall increase the base 
                operating DRG payment amount (as defined in 
                paragraph (7)(D)), as determined after 
                application of paragraph (7)(B)(i), for a 
                hospital for each discharge occurring in such 
                fiscal year by the value-based incentive 
                payment amount.
                  (B) Value-based incentive payment amount.--
                The value-based incentive payment amount for 
                each discharge of a hospital in a fiscal year 
                shall be equal to the product of--
                          (i) the base operating DRG payment 
                        amount (as defined in paragraph (7)(D)) 
                        for the discharge for the hospital for 
                        such fiscal year; and
                          (ii) the value-based incentive 
                        payment percentage specified under 
                        subparagraph (C) for the hospital for 
                        such fiscal year.
                  (C) Value-based incentive payment 
                percentage.--
                          (i) In general.--The Secretary shall 
                        specify a value-based incentive payment 
                        percentage for a hospital for a fiscal 
                        year.
                          (ii) Requirements.--In specifying the 
                        value-based incentive payment 
                        percentage for each hospital for a 
                        fiscal year under clause (i), the 
                        Secretary shall ensure that--
                                  (I) such percentage is based 
                                on the hospital performance 
                                score of the hospital under 
                                paragraph (5); and
                                  (II) the total amount of 
                                value-based incentive payments 
                                under this paragraph to all 
                                hospitals in such fiscal year 
                                is equal to the total amount 
                                available for value-based 
                                incentive payments for such 
                                fiscal year under paragraph 
                                (7)(A), as estimated by the 
                                Secretary.
          (7) Funding for value-based incentive payments.--
                  (A) Amount.--The total amount available for 
                value-based incentive payments under paragraph 
                (6) for all hospitals for a fiscal year shall 
                be equal to the total amount of reduced 
                payments for all hospitals under subparagraph 
                (B) for such fiscal year, as estimated by the 
                Secretary.
                  (B) Adjustment to payments.--
                          (i) In general.--The Secretary shall 
                        reduce the base operating DRG payment 
                        amount (as defined in subparagraph (D)) 
                        for a hospital for each discharge in a 
                        fiscal year (beginning with fiscal year 
                        2013) by an amount equal to the 
                        applicable percent (as defined in 
                        subparagraph (C)) of the base operating 
                        DRG payment amount for the discharge 
                        for the hospital for such fiscal year. 
                        The Secretary shall make such 
                        reductions for all hospitals in the 
                        fiscal year involved, regardless of 
                        whether or not the hospital has been 
                        determined by the Secretary to have 
                        earned a value-based incentive payment 
                        under paragraph (6) for such fiscal 
                        year.
                          (ii) No effect on other payments.--
                        Payments described in items (aa) and 
                        (bb) of subparagraph (D)(i)(II) for a 
                        hospital shall be determined as if this 
                        subsection had not been enacted.
                  (C) Applicable percent defined.--For purposes 
                of subparagraph (B), the term ``applicable 
                percent'' means--
                          (i) with respect to fiscal year 2013, 
                        1.0 percent;
                          (ii) with respect to fiscal year 
                        2014, 1.25 percent;
                          (iii) with respect to fiscal year 
                        2015, 1.5 percent;
                          (iv) with respect to fiscal year 
                        2016, 1.75 percent; and
                          (v) with respect to fiscal year 2017 
                        and succeeding fiscal years, 2 percent.
                  (D) Base operating drg payment amount 
                defined.--
                          (i) In general.--Except as provided 
                        in clause (ii), in this subsection, the 
                        term ``base operating DRG payment 
                        amount'' means, with respect to a 
                        hospital for a fiscal year--
                                  (I) the payment amount that 
                                would otherwise be made under 
                                subsection (d) (determined 
                                without regard to subsection 
                                (q)) for a discharge if this 
                                subsection did not apply; 
                                reduced by
                                  (II) any portion of such 
                                payment amount that is 
                                attributable to--
                                          (aa) payments under 
                                        paragraphs (5)(A), 
                                        (5)(B), (5)(F), and 
                                        (12) of subsection (d); 
                                        and
                                          (bb) such other 
                                        payments under 
                                        subsection (d) 
                                        determined appropriate 
                                        by the Secretary.
                          (ii) Special rules for certain 
                        hospitals.--
                                  (I) Sole community hospitals 
                                and medicare-dependent, small 
                                rural hospitals.--In the case 
                                of a medicare-dependent, small 
                                rural hospital (with respect to 
                                discharges occurring during 
                                fiscal year 2012 and 2013) or a 
                                sole community hospital, in 
                                applying subparagraph (A)(i), 
                                the payment amount that would 
                                otherwise be made under 
                                subsection (d) shall be 
                                determined without regard to 
                                subparagraphs (I) and (L) of 
                                subsection (b)(3) and 
                                subparagraphs (D) and (G) of 
                                subsection (d)(5).
                                  (II) Hospitals paid under 
                                section 1814.--In the case of a 
                                hospital that is paid under 
                                section 1814(b)(3), the term 
                                ``base operating DRG payment 
                                amount'' means the payment 
                                amount under such section.
          (8) Announcement of net result of adjustments.--Under 
        the Program, the Secretary shall, not later than 60 
        days prior to the fiscal year involved, inform each 
        hospital of the adjustments to payments to the hospital 
        for discharges occurring in such fiscal year under 
        paragraphs (6) and (7)(B)(i).
          (9) No effect in subsequent fiscal years.--The value-
        based incentive payment under paragraph (6) and the 
        payment reduction under paragraph (7)(B)(i) shall each 
        apply only with respect to the fiscal year involved, 
        and the Secretary shall not take into account such 
        value-based incentive payment or payment reduction in 
        making payments to a hospital under this section in a 
        subsequent fiscal year.
          (10) Public reporting.--
                  (A) Hospital specific information.--
                          (i) In general.--The Secretary shall 
                        make information available to the 
                        public regarding the performance of 
                        individual hospitals under the Program, 
                        including--
                                  (I) the performance of the 
                                hospital with respect to each 
                                measure that applies to the 
                                hospital;
                                  (II) the performance of the 
                                hospital with respect to each 
                                condition or procedure; and
                                  (III) the hospital 
                                performance score assessing the 
                                total performance of the 
                                hospital.
                          (ii) Opportunity to review and submit 
                        corrections.--The Secretary shall 
                        ensure that a hospital has the 
                        opportunity to review, and submit 
                        corrections for, the information to be 
                        made public with respect to the 
                        hospital under clause (i) prior to such 
                        information being made public.
                          (iii) Website.--Such information 
                        shall be posted on the Hospital Compare 
                        Internet website in an easily 
                        understandable format.
                  (B) Aggregate information.--The Secretary 
                shall periodically post on the Hospital Compare 
                Internet website aggregate information on the 
                Program, including--
                          (i) the number of hospitals receiving 
                        value-based incentive payments under 
                        paragraph (6) and the range and total 
                        amount of such value-based incentive 
                        payments; and
                          (ii) the number of hospitals 
                        receiving less than the maximum value-
                        based incentive payment available to 
                        the hospital for the fiscal year 
                        involved and the range and amount of 
                        such payments.
          (11) Implementation.--
                  (A) Appeals.--The Secretary shall establish a 
                process by which hospitals may appeal the 
                calculation of a hospital's performance 
                assessment with respect to the performance 
                standards established under paragraph (3)(A) 
                and the hospital performance score under 
                paragraph (5). The Secretary shall ensure that 
                such process provides for resolution of such 
                appeals in a timely manner.
                  (B) Limitation on review.--Except as provided 
                in subparagraph (A), there shall be no 
                administrative or judicial review under section 
                1869, section 1878, or otherwise of the 
                following:
                          (i) The methodology used to determine 
                        the amount of the value-based incentive 
                        payment under paragraph (6) and the 
                        determination of such amount.
                          (ii) The determination of the amount 
                        of funding available for such value-
                        based incentive payments under 
                        paragraph (7)(A) and the payment 
                        reduction under paragraph (7)(B)(i).
                          (iii) The establishment of the 
                        performance standards under paragraph 
                        (3) and the performance period under 
                        paragraph (4).
                          (iv) The measures specified under 
                        subsection (b)(3)(B)(viii) and the 
                        measures selected under paragraph (2).
                          (v) The methodology developed under 
                        paragraph (5) that is used to calculate 
                        hospital performance scores and the 
                        calculation of such scores.
                          (vi) The validation methodology 
                        specified in subsection 
                        (b)(3)(B)(viii)(XI).
                  (C) Consultation with small hospitals.--The 
                Secretary shall consult with small rural and 
                urban hospitals on the application of the 
                Program to such hospitals.
          (12) Promulgation of regulations.--The Secretary 
        shall promulgate regulations to carry out the Program, 
        including the selection of measures under paragraph 
        (2), the methodology developed under paragraph (5) that 
        is used to calculate hospital performance scores, and 
        the methodology used to determine the amount of value-
        based incentive payments under paragraph (6).
  (p) Adjustment to Hospital Payments for Hospital Acquired 
Conditions.--
          (1) In general.--In order to provide an incentive for 
        applicable hospitals to reduce hospital acquired 
        conditions under this title, with respect to discharges 
        from an applicable hospital occurring during fiscal 
        year 2015 or a subsequent fiscal year, the amount of 
        payment under this section or section 1814(b)(3), as 
        applicable, for such discharges during the fiscal year 
        shall be equal to 99 percent of the amount of payment 
        that would otherwise apply to such discharges under 
        this section or section 1814(b)(3) (determined after 
        the application of subsections (o) and (q) and section 
        1814(l)(4) but without regard to this subsection).
          (2) Applicable hospitals.--
                  (A) In general.--For purposes of this 
                subsection, the term ``applicable hospital'' 
                means a subsection (d) hospital that meets the 
                criteria described in subparagraph (B).
                  (B) Criteria described.--
                          (i) In general.--The criteria 
                        described in this subparagraph, with 
                        respect to a subsection (d) hospital, 
                        is that the subsection (d) hospital is 
                        in the top quartile of all subsection 
                        (d) hospitals, relative to the national 
                        average, of hospital acquired 
                        conditions during the applicable 
                        period, as determined by the Secretary.
                          (ii) Risk adjustment.--In carrying 
                        out clause (i), the Secretary shall 
                        establish and apply an appropriate risk 
                        adjustment methodology.
                  (C) Exemption.--In the case of a hospital 
                that is paid under section 1814(b)(3), the 
                Secretary may exempt such hospital from the 
                application of this subsection if the State 
                which is paid under such section submits an 
                annual report to the Secretary describing how a 
                similar program in the State for a 
                participating hospital or hospitals achieves or 
                surpasses the measured results in terms of 
                patient health outcomes and cost savings 
                established under this subsection.
          (3) Hospital acquired conditions.--For purposes of 
        this subsection, the term ``hospital acquired 
        condition'' means a condition identified for purposes 
        of subsection (d)(4)(D)(iv) and any other condition 
        determined appropriate by the Secretary that an 
        individual acquires during a stay in an applicable 
        hospital, as determined by the Secretary.
          (4) Applicable period.--In this subsection, the term 
        ``applicable period'' means, with respect to a fiscal 
        year, a period specified by the Secretary.
          (5) Reporting to hospitals.--Prior to fiscal year 
        2015 and each subsequent fiscal year, the Secretary 
        shall provide confidential reports to applicable 
        hospitals with respect to hospital acquired conditions 
        of the applicable hospital during the applicable 
        period.
          (6) Reporting hospital specific information.--
                  (A) In general.--The Secretary shall make 
                information available to the public regarding 
                hospital acquired conditions of each applicable 
                hospital.
                  (B) Opportunity to review and submit 
                corrections.--The Secretary shall ensure that 
                an applicable hospital has the opportunity to 
                review, and submit corrections for, the 
                information to be made public with respect to 
                the hospital under subparagraph (A) prior to 
                such information being made public.
                  (C) Website.--Such information shall be 
                posted on the Hospital Compare Internet website 
                in an easily understandable format.
          (7) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) The criteria described in paragraph 
                (2)(A).
                  (B) The specification of hospital acquired 
                conditions under paragraph (3).
                  (C) The specification of the applicable 
                period under paragraph (4).
                  (D) The provision of reports to applicable 
                hospitals under paragraph (5) and the 
                information made available to the public under 
                paragraph (6).
  (q) Hospital Readmissions Reduction Program.--
          (1) In general.--With respect to payment for 
        discharges from an applicable hospital (as defined in 
        paragraph (5)(C)) occurring during a fiscal year 
        beginning on or after October 1, 2012, in order to 
        account for excess readmissions in the hospital, the 
        Secretary shall make payments (in addition to the 
        payments described in paragraph (2)(A)(ii)) for such a 
        discharge to such hospital under subsection (d) (or 
        section 1814(b)(3), as the case may be) in an amount 
        equal to the product of--
                  (A) the base operating DRG payment amount (as 
                defined in paragraph (2)) for the discharge; 
                and
                  (B) the adjustment factor (described in 
                paragraph (3)(A)) for the hospital for the 
                fiscal year.
          (2) Base operating drg payment amount defined.--
                  (A) In general.--Except as provided in 
                subparagraph (B), in this subsection, the term 
                ``base operating DRG payment amount'' means, 
                with respect to a hospital for a fiscal year--
                          (i) the payment amount that would 
                        otherwise be made under subsection (d) 
                        (determined without regard to 
                        subsection (o)) for a discharge if this 
                        subsection did not apply; reduced by
                          (ii) any portion of such payment 
                        amount that is attributable to payments 
                        under paragraphs (5)(A), (5)(B), 
                        (5)(F), and (12) of subsection (d).
                  (B) Special rules for certain hospitals.--
                          (i) Sole community hospitals and 
                        medicare-dependent, small rural 
                        hospitals.--In the case of a medicare-
                        dependent, small rural hospital (with 
                        respect to discharges occurring during 
                        fiscal years 2012 and 2013) or a sole 
                        community hospital, in applying 
                        subparagraph (A)(i), the payment amount 
                        that would otherwise be made under 
                        subsection (d) shall be determined 
                        without regard to subparagraphs (I) and 
                        (L) of subsection (b)(3) and 
                        subparagraphs (D) and (G) of subsection 
                        (d)(5).
                          (ii) Hospitals paid under section 
                        1814.--In the case of a hospital that 
                        is paid under section 1814(b)(3), the 
                        Secretary may exempt such hospitals 
                        provided that States paid under such 
                        section submit an annual report to the 
                        Secretary describing how a similar 
                        program in the State for a 
                        participating hospital or hospitals 
                        achieves or surpasses the measured 
                        results in terms of patient health 
                        outcomes and cost savings established 
                        herein with respect to this section.
          (3) Adjustment factor.--
                  (A) In general.--For purposes of paragraph 
                (1), the adjustment factor under this paragraph 
                for an applicable hospital for a fiscal year is 
                equal to the greater of--
                          (i) the ratio described in 
                        subparagraph (B) for the hospital for 
                        the applicable period (as defined in 
                        paragraph (5)(D)) for such fiscal year; 
                        or
                          (ii) the floor adjustment factor 
                        specified in subparagraph (C).
                  (B) Ratio.--The ratio described in this 
                subparagraph for a hospital for an applicable 
                period is equal to 1 minus the ratio of--
                          (i) the aggregate payments for excess 
                        readmissions (as defined in paragraph 
                        (4)(A)) with respect to an applicable 
                        hospital for the applicable period; and
                          (ii) the aggregate payments for all 
                        discharges (as defined in paragraph 
                        (4)(B)) with respect to such applicable 
                        hospital for such applicable period.
                  (C) Floor adjustment factor.--For purposes of 
                subparagraph (A), the floor adjustment factor 
                specified in this subparagraph for--
                          (i) fiscal year 2013 is 0.99;
                          (ii) fiscal year 2014 is 0.98; or
                          (iii) fiscal year 2015 and subsequent 
                        fiscal years is 0.97.
          (4) Aggregate payments, excess readmission ratio 
        defined.--For purposes of this subsection:
                  (A) Aggregate payments for excess 
                readmissions.--The term ``aggregate payments 
                for excess readmissions'' means, for a hospital 
                for an applicable period, the sum, for 
                applicable conditions (as defined in paragraph 
                (5)(A)), of the product, for each applicable 
                condition, of--
                          (i) the base operating DRG payment 
                        amount for such hospital for such 
                        applicable period for such condition;
                          (ii) the number of admissions for 
                        such condition for such hospital for 
                        such applicable period; and
                          (iii) the excess readmissions ratio 
                        (as defined in subparagraph (C)) for 
                        such hospital for such applicable 
                        period minus 1.
                  (B) Aggregate payments for all discharges.--
                The term ``aggregate payments for all 
                discharges'' means, for a hospital for an 
                applicable period, the sum of the base 
                operating DRG payment amounts for all 
                discharges for all conditions from such 
                hospital for such applicable period.
                  (C) Excess readmission ratio.--
                          (i) In general.--Subject to clause 
                        (ii), the term ``excess readmissions 
                        ratio'' means, with respect to an 
                        applicable condition for a hospital for 
                        an applicable period, the ratio (but 
                        not less than 1.0) of--
                                  (I) the risk adjusted 
                                readmissions based on actual 
                                readmissions, as determined 
                                consistent with a readmission 
                                measure methodology that has 
                                been endorsed under paragraph 
                                (5)(A)(ii)(I), for an 
                                applicable hospital for such 
                                condition with respect to such 
                                applicable period; to
                                  (II) the risk adjusted 
                                expected readmissions (as 
                                determined consistent with such 
                                a methodology) for such 
                                hospital for such condition 
                                with respect to such applicable 
                                period.
                          (ii) Exclusion of certain 
                        readmissions.--For purposes of clause 
                        (i), with respect to a hospital, excess 
                        readmissions shall not include 
                        readmissions for an applicable 
                        condition for which there are fewer 
                        than a minimum number (as determined by 
                        the Secretary) of discharges for such 
                        applicable condition for the applicable 
                        period and such hospital.
          (5) Definitions.--For purposes of this subsection:
                  (A) Applicable condition.--The term 
                ``applicable condition'' means, subject to 
                subparagraph (B), a condition or procedure 
                selected by the Secretary among conditions and 
                procedures for which--
                          (i) readmissions (as defined in 
                        subparagraph (E)) that represent 
                        conditions or procedures that are high 
                        volume or high expenditures under this 
                        title (or other criteria specified by 
                        the Secretary); and
                          (ii) measures of such readmissions--
                                  (I) have been endorsed by the 
                                entity with a contract under 
                                section 1890(a); and
                                  (II) such endorsed measures 
                                have exclusions for 
                                readmissions that are unrelated 
                                to the prior discharge (such as 
                                a planned readmission or 
                                transfer to another applicable 
                                hospital).
                  (B) Expansion of applicable conditions.--
                Beginning with fiscal year 2015, the Secretary 
                shall, to the extent practicable, expand the 
                applicable conditions beyond the 3 conditions 
                for which measures have been endorsed as 
                described in subparagraph (A)(ii)(I) as of the 
                date of the enactment of this subsection to the 
                additional 4 conditions that have been 
                identified by the Medicare Payment Advisory 
                Commission in its report to Congress in June 
                2007 and to other conditions and procedures as 
                determined appropriate by the Secretary. In 
                expanding such applicable conditions, the 
                Secretary shall seek the endorsement described 
                in subparagraph (A)(ii)(I) but may apply such 
                measures without such an endorsement in the 
                case of a specified area or medical topic 
                determined appropriate by the Secretary for 
                which a feasible and practical measure has not 
                been endorsed by the entity with a contract 
                under section 1890(a) as long as due 
                consideration is given to measures that have 
                been endorsed or adopted by a consensus 
                organization identified by the Secretary.
                  (C) Applicable hospital.--The term 
                ``applicable hospital'' means a subsection (d) 
                hospital or a hospital that is paid under 
                section 1814(b)(3), as the case may be.
                  (D) Applicable period.--The term ``applicable 
                period'' means, with respect to a fiscal year, 
                such period as the Secretary shall specify.
                  (E) Readmission.--The term ``readmission'' 
                means, in the case of an individual who is 
                discharged from an applicable hospital, the 
                admission of the individual to the same or 
                another applicable hospital within a time 
                period specified by the Secretary from the date 
                of such discharge. Insofar as the discharge 
                relates to an applicable condition for which 
                there is an endorsed measure described in 
                subparagraph (A)(ii)(I), such time period (such 
                as 30 days) shall be consistent with the time 
                period specified for such measure.
          (6) Reporting hospital specific information.--
                  (A) In general.--The Secretary shall make 
                information available to the public regarding 
                readmission rates of each subsection (d) 
                hospital under the program.
                  (B) Opportunity to review and submit 
                corrections.--The Secretary shall ensure that a 
                subsection (d) hospital has the opportunity to 
                review, and submit corrections for, the 
                information to be made public with respect to 
                the hospital under subparagraph (A) prior to 
                such information being made public.
                  (C) Website.--Such information shall be 
                posted on the Hospital Compare Internet website 
                in an easily understandable format.
          (7) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) The determination of base operating DRG 
                payment amounts.
                  (B) The methodology for determining the 
                adjustment factor under paragraph (3), 
                including excess readmissions ratio under 
                paragraph (4)(C), aggregate payments for excess 
                readmissions under paragraph (4)(A), and 
                aggregate payments for all discharges under 
                paragraph (4)(B), and applicable periods and 
                applicable conditions under paragraph (5).
                  (C) The measures of readmissions as described 
                in paragraph (5)(A)(ii).
          (8) Readmission rates for all patients.--
                  (A) Calculation of readmission.--The 
                Secretary shall calculate readmission rates for 
                all patients (as defined in subparagraph (D)) 
                for a specified hospital (as defined in 
                subparagraph (D)(ii)) for an applicable 
                condition (as defined in paragraph (5)(B)) and 
                other conditions deemed appropriate by the 
                Secretary for an applicable period (as defined 
                in paragraph (5)(D)) in the same manner as used 
                to calculate such readmission rates for 
                hospitals with respect to this title and posted 
                on the CMS Hospital Compare website.
                  (B) Posting of hospital specific all patient 
                readmission rates.--The Secretary shall make 
                information on all patient readmission rates 
                calculated under subparagraph (A) available on 
                the CMS Hospital Compare website in a form and 
                manner determined appropriate by the Secretary. 
                The Secretary may also make other information 
                determined appropriate by the Secretary 
                available on such website.
                  (C) Hospital submission of all patient 
                data.--
                          (i) Except as provided for in clause 
                        (ii), each specified hospital (as 
                        defined in subparagraph (D)(ii)) shall 
                        submit to the Secretary, in a form, 
                        manner and time specified by the 
                        Secretary, data and information 
                        determined necessary by the Secretary 
                        for the Secretary to calculate the all 
                        patient readmission rates described in 
                        subparagraph (A).
                          (ii) Instead of a specified hospital 
                        submitting to the Secretary the data 
                        and information described in clause 
                        (i), such data and information may be 
                        submitted to the Secretary, on behalf 
                        of such a specified hospital, by a 
                        state or an entity determined 
                        appropriate by the Secretary.
                  (D) Definitions.--For purposes of this 
                paragraph:
                          (i) The term ``all patients'' means 
                        patients who are treated on an 
                        inpatient basis and discharged from a 
                        specified hospital (as defined in 
                        clause (ii)).
                          (ii) The term ``specified hospital'' 
                        means a subsection (d) hospital, 
                        hospitals described in clauses (i) 
                        through (v) of subsection (d)(1)(B) 
                        and, as determined feasible and 
                        appropriate by the Secretary, other 
                        hospitals not otherwise described in 
                        this subparagraph.
  (r) Adjustments to Medicare DSH Payments.--
          (1) Empirically justified dsh payments.--For fiscal 
        year 2014 and each subsequent fiscal year, instead of 
        the amount of disproportionate share hospital payment 
        that would otherwise be made under subsection (d)(5)(F) 
        to a subsection (d) hospital for the fiscal year, the 
        Secretary shall pay to the subsection (d) hospital 25 
        percent of such amount (which represents the 
        empirically justified amount for such payment, as 
        determined by the Medicare Payment Advisory Commission 
        in its March 2007 Report to the Congress).
          (2) Additional payment.--In addition to the payment 
        made to a subsection (d) hospital under paragraph (1), 
        for fiscal year 2014 and each subsequent fiscal year, 
        the Secretary shall pay to such subsection (d) 
        hospitals an additional amount equal to the product of 
        the following factors:
                  (A) Factor one.--A factor equal to the 
                difference between--
                          (i) the aggregate amount of payments 
                        that would be made to subsection (d) 
                        hospitals under subsection (d)(5)(F) if 
                        this subsection did not apply for such 
                        fiscal year (as estimated by the 
                        Secretary); and
                          (ii) the aggregate amount of payments 
                        that are made to subsection (d) 
                        hospitals under paragraph (1) for such 
                        fiscal year (as so estimated).
                  (B) Factor two.--
                          (i) Fiscal years 2014, 2015, 2016, 
                        and 2017.--For each of fiscal years 
                        2014, 2015, 2016, and 2017, a factor 
                        equal to 1 minus the percent change in 
                        the percent of individuals under the 
                        age of 65 who are uninsured, as 
                        determined by comparing the percent of 
                        such individuals--
                                  (I) who are uninsured in 
                                2013, the last year before 
                                coverage expansion under the 
                                Patient Protection and 
                                Affordable Care Act (as 
                                calculated by the Secretary 
                                based on the most recent 
                                estimates available from the 
                                Director of the Congressional 
                                Budget Office before a vote in 
                                either House on the Health Care 
                                and Education Reconciliation 
                                Act of 2010 that, if determined 
                                in the affirmative, would clear 
                                such Act for enrollment); and
                                  (II) who are uninsured in the 
                                most recent period for which 
                                data is available (as so 
                                calculated),
                        minus 0.1 percentage points for fiscal 
                        year 2014 and minus 0.2 percentage 
                        points for each of fiscal years 2015, 
                        2016, and 2017.
                          (ii) 2018 and subsequent years.--For 
                        fiscal year 2018 and each subsequent 
                        fiscal year, a factor equal to 1 minus 
                        the percent change in the percent of 
                        individuals who are uninsured, as 
                        determined by comparing the percent of 
                        individuals--
                                  (I) who are uninsured in 2013 
                                (as estimated by the Secretary, 
                                based on data from the Census 
                                Bureau or other sources the 
                                Secretary determines 
                                appropriate, and certified by 
                                the Chief Actuary of the 
                                Centers for Medicare & Medicaid 
                                Services); and
                                  (II) who are uninsured in the 
                                most recent period for which 
                                data is available (as so 
                                estimated and certified),
                        minus 0.2 percentage points for each of 
                        fiscal years 2018 and 2019.
                  (C) Factor three.--A factor equal to the 
                percent, for each subsection (d) hospital, that 
                represents the quotient of--
                          (i) the amount of uncompensated care 
                        for such hospital for a period selected 
                        by the Secretary (as estimated by the 
                        Secretary, based on appropriate data 
                        (including, in the case where the 
                        Secretary determines that alternative 
                        data is available which is a better 
                        proxy for the costs of subsection (d) 
                        hospitals for treating the uninsured, 
                        the use of such alternative data)); and
                          (ii) the aggregate amount of 
                        uncompensated care for all subsection 
                        (d) hospitals that receive a payment 
                        under this subsection for such period 
                        (as so estimated, based on such data).
          (3) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) Any estimate of the Secretary for 
                purposes of determining the factors described 
                in paragraph (2).
                  (B) Any period selected by the Secretary for 
                such purposes.
  (s) Prospective Payment for Psychiatric Hospitals.--
          (1) Reference to establishment and implementation of 
        system.--For provisions related to the establishment 
        and implementation of a prospective payment system for 
        payments under this title for inpatient hospital 
        services furnished by psychiatric hospitals (as 
        described in clause (i) of subsection (d)(1)(B)) and 
        psychiatric units (as described in the matter following 
        clause (v) of such subsection), see section 124 of the 
        Medicare, Medicaid, and SCHIP Balanced Budget 
        Refinement Act of 1999.
          (2) Implementation for rate year beginning in 2010 
        and subsequent rate years.--
                  (A) In general.--In implementing the system 
                described in paragraph (1) for the rate year 
                beginning in 2010 and any subsequent rate year, 
                any update to a base rate for days during the 
                rate year for a psychiatric hospital or unit, 
                respectively, shall be reduced--
                          (i) for the rate year beginning in 
                        2012 and each subsequent rate year, by 
                        the productivity adjustment described 
                        in section 1886(b)(3)(B)(xi)(II); and
                          (ii) for each of the rate years 
                        beginning in 2010 through 2019, by the 
                        other adjustment described in paragraph 
                        (3).
                  (B) Special rule.--The application of this 
                paragraph may result in such update being less 
                than 0.0 for a rate year, and may result in 
                payment rates under the system described in 
                paragraph (1) for a rate year being less than 
                such payment rates for the preceding rate year.
          (3) Other adjustment.--For purposes of paragraph 
        (2)(A)(ii), the other adjustment described in this 
        paragraph is--
                  (A) for each of the rate years beginning in 
                2010 and 2011, 0.25 percentage point;
                  (B) for each of the rate years beginning in 
                2012 and 2013, 0.1 percentage point;
                  (C) for the rate year beginning in 2014, 0.3 
                percentage point;
                  (D) for each of the rate years beginning in 
                2015 and 2016, 0.2 percentage point; and
                  (E) for each of the rate years beginning in 
                2017, 2018, and 2019, 0.75 percentage point.
          (4) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--Under the system 
                        described in paragraph (1), for rate 
                        year 2014 and each subsequent rate 
                        year, in the case of a psychiatric 
                        hospital or psychiatric unit that does 
                        not submit data to the Secretary in 
                        accordance with subparagraph (C) with 
                        respect to such a rate year, any annual 
                        update to a standard Federal rate for 
                        discharges for the hospital during the 
                        rate year, and after application of 
                        paragraph (2), shall be reduced by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in such 
                        annual update being less than 0.0 for a 
                        rate year, and may result in payment 
                        rates under the system described in 
                        paragraph (1) for a rate year being 
                        less than such payment rates for the 
                        preceding rate year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the rate year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                the system described in paragraph (1) for a 
                subsequent rate year.
                  (C) Submission of quality data.--For rate 
                year 2014 and each subsequent rate year, each 
                psychiatric hospital and psychiatric unit shall 
                submit to the Secretary data on quality 
                measures specified under subparagraph (D). Such 
                data shall be submitted in a form and manner, 
                and at a time, specified by the Secretary for 
                purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to rate year 
                        2014.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                available to the public. Such procedures shall 
                ensure that a psychiatric hospital and a 
                psychiatric unit has the opportunity to review 
                the data that is to be made public with respect 
                to the hospital or unit prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in psychiatric 
                hospitals and psychiatric units on the Internet 
                website of the Centers for Medicare & Medicaid 
                Services.

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      B. Changes in Existing Law Proposed by the Bill, as Reported

    In compliance with clause 3(e)(1)(B) of rule XIII of the 
Rules of the House of Representatives, changes in existing law 
proposed by the bill, as reported, are shown as follows 
(existing law proposed to be omitted is enclosed in black 
brackets, new matter is printed in italic, existing law in 
which no change is proposed is shown in roman):

          MEDICARE, MEDICAID, AND SCHIP EXTENSION ACT OF 2007




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TITLE I--MEDICARE

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SEC. 114. LONG-TERM CARE HOSPITALS.

  (a) [Omitted Amendatory]
  (b) Study and Report on Long-Term Care Hospital Facility and 
Patient Criteria.--
          (1) In general.--The Secretary of Health and Human 
        Services (in this section referred to as the 
        ``Secretary'') shall conduct a study on the 
        establishment of national long-term care hospital 
        facility and patient criteria for purposes of 
        determining medical necessity, appropriateness of 
        admission, and continued stay at, and discharge from, 
        long-term care hospitals.
          (2) Report.--Not later than 18 months after the date 
        of the enactment of this Act, the Secretary shall 
        submit to Congress a report on the study conducted 
        under paragraph (1), together with recommendations for 
        such legislation and administrative actions, including 
        timelines for implementation of patient criteria or 
        other actions, as the Secretary determines appropriate.
          (3) Considerations.--In conducting the study and 
        preparing the report under this subsection, the 
        Secretary shall consider--
                  (A) recommendations contained in a report to 
                Congress by the Medicare Payment Advisory 
                Commission in June 2004 for long-term care 
                hospital-specific facility and patient criteria 
                to ensure that patients admitted to long-term 
                care hospitals are medically complex and 
                appropriate to receive long-term care hospital 
                services; and
                  (B) ongoing work by the Secretary to evaluate 
                and determine the feasibility of such 
                recommendations.
  (c) Payment for Long-Term Care Hospital Services.--
          (1) Delay in application of 25 percent patient 
        threshold payment adjustment.--The Secretary shall not 
        apply, for cost reporting periods beginning on or after 
        July 1, 2007,--
                  (A) for a 9-year period, section 412.536 of 
                title 42, Code of Federal Regulations, or any 
                similar provision, to freestanding long-term 
                care hospitals or to a long-termcare hospital, 
                or satellite facility, that as of December29, 
                2007, was co-located with an entity that is a 
                provider-based, off-campus location of a 
                subsection (d) hospital whichdid not provide 
                services payable under section 1886(d) ofthe 
                Social Security Act at the off-campus location; 
                and
                  (B) such section or section 412.534 of title 
                42, Code of Federal Regulations, or any similar 
                provisions, to a long-term care hospital 
                identified by the amendment made by section 
                4417(a) of the Balanced Budget Act of 1997 
                (Public Law 105-33).
          (2) Payment for hospitals-within-hospitals.--
                  (A) In general.--Payment to an applicable 
                long-term care hospital or satellite facility 
                which is located in a rural area or which is 
                co-located with an urban single or MSA dominant 
                hospital under paragraphs (d)(1), (e)(1), and 
                (e)(4) of section 412.534 of title 42, Code of 
                Federal Regulations, shall not be subject to 
                any payment adjustment under such section if no 
                more than 75 percent of the hospital's Medicare 
                discharges (other than discharges described in 
                paragraph (d)(2) or (e)(3) of such section) are 
                admitted from a co-located hospital.
                  (B) Co-located long-term care hospitals and 
                satellite facilities.--
                          (i) In general.--Payment to an 
                        applicable long-term care hospital or 
                        satellite facility which is co-located 
                        with another hospital shall not be 
                        subject to any payment adjustment under 
                        section 412.534 of title 42, Code of 
                        Federal Regulations, if no more than 50 
                        percent of the hospital's Medicare 
                        discharges (other than discharges 
                        described in paragraph (c)(3) of such 
                        section) are admitted from a co-located 
                        hospital.
                          (ii) Applicable long-term care 
                        hospital or satellite facility 
                        defined.--In this paragraph, the term 
                        ``applicable long-term care hospital or 
                        satellite facility'' means a hospital 
                        or satellite facility that is subject 
                        to the transition rules under section 
                        412.534(g) of title 42, Code of Federal 
                        Regulations or that isdescribed in 
                        section 412.22(h)(3)(i) of such title.
                  (C) Effective date.--Subparagraphs (A) and 
                (B) shall apply to cost reporting periods 
                beginning on or after October 1, 2007 (or July 
                1, 2007, in the case of a satellite facility 
                described in section 412.22(h)(3)(i) of title 
                42, Code of Federal Regulations) for a 9-year 
                period.
          (3) No application of very short-stay outlier 
        policy.--The Secretary shall not apply, for the 5-year 
        period beginning on the date of the enactment of this 
        Act, the amendments finalized on May 11, 2007 (72 
        Federal Register 26904, 26992) made to the short-stay 
        outlier payment provision for long-term care hospitals 
        contained in section 412.529(c)(3)(i) of title 42, Code 
        of Federal Regulations, or any similar provision.
          (4) No application of one-time adjustment to standard 
        amount.--The Secretary shall not, for the 5-year period 
        beginning on the date of the enactment of this Act, 
        make the one-time prospective adjustment to long-term 
        care hospital prospective payment rates provided for in 
        section 412.523(d)(3) of title 42, Code of Federal 
        Regulations, or any similar provision.
  (d) Moratorium on the Establishment of Long-Term Care 
Hospitals, Long-Term Care Satellite Facilities and on the 
Increase of Long-Term Care Hospital Beds in Existing Long-Term 
Care Hospitals or Satellite Facilities.--
          (1) In general.--During the 5-year period (and for 
        the period beginning on the date of the enactment of 
        paragraph (7) of this subsection and ending September 
        30, 2017) beginning on the date of the enactment of 
        this Act, the Secretary shall impose a moratorium for 
        purposes of the Medicare program under title XVIII of 
        the Social Security Act--
                  (A) subject to paragraph (2), on the 
                establishment and classification of a long-term 
                care hospital or satellite facility, other than 
                an existing long-term care hospital or 
                facility; and
                  (B) subject to paragraph (3), on an increase 
                of long-term care hospital beds in existing 
                long-term care hospitals or satellite 
                facilities.
          (2) Exception for certain long-term care hospitals.--
        The moratorium under paragraph (1)(A) shall not apply 
        to a long-term care hospital that as of the date of the 
        enactment of this Act--
                  (A) began its qualifying period for payment 
                as a long-term care hospital under section 
                412.23(e) of title 42, Code of Federal 
                Regulations, on or before the date of the 
                enactment of this Act;
                  (B) has a binding written agreement with an 
                outside, unrelated party for the actual 
                construction, renovation, lease, or demolition 
                for a long-term care hospital, and has 
                expended, before the date of the enactment of 
                this Act, at least 10 percent of the estimated 
                cost of the project (or, if less, $2,500,000); 
                or
                  (C) has obtained an approved certificate of 
                need in a State where one is required on or 
                before the date of the enactment of this Act.
          (3) Exception for bed increases during moratorium.--
                  (A) In general.--Subject to subparagraph (B), 
                the moratorium under paragraph (1)(B) shall not 
                apply to an increase in beds in an existing 
                hospital or satellite facility if the hospital 
                or facility obtained a certificate of need for 
                an increase in beds that is in a State for 
                which such certificate of need is required and 
                that was issued on or after April 1, 2005, and 
                before December 29, 2007, or if the hospital or 
                facility--
                          (i) is located in a State where there 
                        is only one other long-term care 
                        hospital; and
                          (ii) requests an increase in beds 
                        following the closure or the decrease 
                        in the number of beds of another long-
                        term care hospital in the State.
                  (B) No effect on certain limitation.--The 
                exception under subparagraph (A) shall not 
                effect the limitation on increasing beds under 
                sections 412.22(h)(3) and 412.22(f) of title 
                42, Code of Federal Regulations.
          (4) Existing hospital or satellite facility 
        defined.--For purposes of this subsection, the term 
        ``existing'' means, with respect to a hospital or 
        satellite facility, a hospital or satellite facility 
        that received payment under the provisions of subpart O 
        of part 412 of title 42, Code of Federal Regulations, 
        as of the date of the enactment of this Act.
          (5) Judicial review.--There shall be no 
        administrative or judicial review under section 1869 of 
        the Social Security Act (42 U.S.C. 1395ff), section 
        1878 of such Act (42 U.S.C. 1395oo), or otherwise, of 
        the application of this subsection by the Secretary.
          (6) Limitation on application of exceptions.--
        Paragraphs (2) and (3) shall not apply during the 
        period beginning on the date of the enactment of 
        paragraph (7) of this subsection and ending September 
        30, 2017.
          (7) Additional exception for certain long-term care 
        hospitals.--[The moratorium under paragraph (1)(A)] Any 
        moratorium under paragraph (1) shall not apply to a 
        long-term care hospital that--
                  (A) began its qualifying period for payment 
                as a long-term care hospital under section 
                412.23(e) of title 42, Code of Federal 
                Regulations, on or before the date of enactment 
                of this paragraph;
                  (B) has a binding written agreement as of the 
                date of the enactment of this paragraph with an 
                outside, unrelated party for the actual 
                construction, renovation, lease, or demolition 
                for a long-term care hospital, and has 
                expended, before such date of enactment, at 
                least 10 percent of the estimated cost of the 
                project (or, if less, $2,500,000); or
                  (C) has obtained an approved certificate of 
                need in a State where one is required on or 
                before such date of enactment.
  (e) Long-Term Care Hospital Payment Update.--
          (1) [Omitted Amendatory]
          (2) Delayed effective date.--Subsection (m)(2) of 
        section 1886 of the Social Security Act, as added by 
        paragraph (1), shall not apply to discharges occurring 
        on or after July 1, 2007, and before April 1, 2008.
  (f) Expanded Review of Medical Necessity.--
          (1) In general.--The Secretary of Health and Human 
        Services shall provide, under contracts with one or 
        more appropriate fiscal intermediaries or medicare 
        administrative contractors under section 1874A(a)(4)(G) 
        of the Social Security Act (42 U.S.C. 1395kk-
        1(a)(4)(G)), for reviews of the medical necessity of 
        admissions to long-term care hospitals (described in 
        section 1886(d)(1)(B)(iv) of such Act) and continued 
        stay at such hospitals, of individuals entitled to, or 
        enrolled for, benefits under part A of title XVIII of 
        such Act consistent with this subsection. Such reviews 
        shall be made for discharges occurring on or after 
        October 1, 2007.
          (2) Review methodology.--The medical necessity 
        reviews under paragraph (1) shall be conducted on an 
        annual basis in accordance with rules specified by the 
        Secretary. Such reviews shall--
                  (A) provide for a statistically valid and 
                representative sample of admissions of such 
                individuals sufficient to provide results at a 
                95 percent confidence interval; and
                  (B) guarantee that at least 75 percent of 
                overpayments received by long-term care 
                hospitals for medically unnecessary admissions 
                and continued stays of individuals in long-term 
                care hospitals will be identified and recovered 
                and that related days of care will not be 
                counted toward the length of stay requirement 
                contained in section 1886(d)(1)(B)(iv) of the 
                Social Security Act (42 U.S.C. 
                1395ww(d)(1)(B)(iv)).
          (3) Continuation of reviews.--Under contracts under 
        this subsection, the Secretary shall establish an error 
        rate with respect to such reviews that could require 
        further review of the medical necessity of admissions 
        and continued stay in the hospital involved and other 
        actions as determined by the Secretary.
          (4) Termination of required reviews.--
                  (A) In general.--Subject to subparagraph (B), 
                the previous provisions of this subsection 
                shall cease to apply for discharges occurring 
                on or after October 1, 2010.
                  (B) Continuation.--As of the date specified 
                in subparagraph (A), the Secretary shall 
                determine whether to continue to guarantee, 
                through continued medical review and sampling 
                under this paragraph, recovery of at least 75 
                percent of overpayments received by long-term 
                care hospitals due to medically unnecessary 
                admissions and continued stays.
          (5) Funding.--The costs to fiscal intermediaries or 
        medicare administrative contractors conducting the 
        medical necessity reviews under paragraph (1) shall be 
        funded from the aggregate overpayments recouped by the 
        Secretary of Health and Human Services from long-term 
        care hospitals due to medically unnecessary admissions 
        and continued stays. The Secretary may use an amount 
        not in excess of 40 percent of the overpayments 
        recouped under this paragraph to compensate the fiscal 
        intermediaries or Medicare administrative contractors 
        for the costs of services performed.
  (g) Implementation.--For purposes of carrying out the 
provisions of, and amendments made by, this title, in addition 
to any amounts otherwise provided in this title, there are 
appropriated to the Centers for Medicare & Medicaid Services 
Program Management Account, out of any money in the Treasury 
not otherwise appropriated, $35,000,000 for the period of 
fiscal years 2008 and 2009.

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                              ----------                              


                          SOCIAL SECURITY ACT


TITLE XVIII--HEALTH INSURANCE FOR THE AGED AND DISABLED

           *       *       *       *       *       *       *



Part E--Miscellaneous Provisions

           *       *       *       *       *       *       *



          payment to hospitals for inpatient hospital services

  Sec. 1886. (a)(1)(A)(i) The Secretary, in determining the 
amount of the payments that may be made under this title with 
respect to operating costs of inpatient hospital services (as 
defined in paragraph (4)) shall not recognize as reasonable (in 
the efficient delivery of health services) costs for the 
provision of such services by a hospital for a cost reporting 
period to the extent such costs exceed the applicable 
percentage (as determined under clause (ii)) of the average of 
such costs for all hospitals in the same grouping as such 
hospital for comparable time periods.
  (ii) For purposes of clause (i), the applicable percentage 
for hospital cost reporting periods beginning--
          (I) on or after October 1, 1982, and before October 
        1, 1983, is 120 percent;
          (II) on or after October 1, 1983, and before October 
        1, 1984, is 115 percent; and
          (III) on or after October 1, 1984, is 110 percent.
  (B)(i) For purposes of subparagraph (A) the Secretary shall 
establish case mix indexes for all short- term hospitals, and 
shall set limits for each hospital based upon the general mix 
of types of medical cases with respect to which such hospital 
provides services for which payment may be made under this 
title.
  (ii) The Secretary shall set such limits for a cost reporting 
period of a hospital--
          (I) by updating available data for a previous period 
        to the immediate preceding cost reporting period by the 
        estimated average rate of change of hospital costs 
        industry-wide, and
          (II) by projecting for the cost reporting period by 
        the applicable percentage increase (as defined in 
        subsection (b)(3)(B)).
  (C) The limitation established under subparagraph (A) for any 
hospital shall in no event be lower than the allowable 
operating costs of inpatient hospital services (as defined in 
paragraph (4)) recognized under this title for such hospital 
for such hospital's last cost reporting period prior to the 
hospital's first cost reporting period for which this section 
is in effect.
  (D) Subparagraph (A) shall not apply to cost reporting 
periods beginning on or after October 1, 1983.
  (2) The Secretary shall provide for such exemptions from, and 
exceptions and adjustments to, the limitation established under 
paragraph (1)(A) as he deems appropriate, including those which 
he deems necessary to take into account--
          (A) the special needs of sole community hospitals, of 
        new hospitals, of risk based health maintenance 
        organizations, and of hospitals which provide atypical 
        services or essential community services, and to take 
        into account extraordinary circumstances beyond the 
        hospital's control, medical and paramedical education 
        costs, significantly fluctuating population in the 
        service area of the hospital, and unusual labor costs,
          (B) the special needs of psychiatric hospitals and of 
        public or other hospitals that serve a significantly 
        disproportionate number of patients who have low income 
        or are entitled to benefits under part A of this title, 
        and
          (C) a decrease in the inpatient hospital services 
        that a hospital provides and that are customarily 
        provided directly by similar hospitals which results in 
        a significant distortion in the operating costs of 
        inpatient hospital services.
  (3) The limitation established under paragraph (1)(A) shall 
not apply with respect to any hospital which--
          (A) is located outside of a standard metropolitan 
        statistical area, and
          (B)(i) has less than 50 beds, and
          (ii) was in operation and had less than 50 beds on 
        the date of the enactment of this section.
  (4) For purposes of this section, the term ``operating costs 
of inpatient hospital services'' includes all routine operating 
costs, ancillary service operating costs, and special care unit 
operating costs with respect to inpatient hospital services as 
such costs are determined on an average per admission or per 
discharge basis (as determined by the Secretary), and includes 
the costs of all services for which payment may be made under 
this title that are provided by the hospital (or by an entity 
wholly owned or operated by the hospital) to the patient during 
the 3 days (or, in the case of a hospital that is not a 
subsection (d) hospital, during the 1 day) immediately 
preceding the date of the patient's admission if such services 
are diagnostic services (including clinical diagnostic 
laboratory tests) or are other services related to the 
admission (as defined by the Secretary). Such term does not 
include costs of approved educational activities, a return on 
equity capital, or, other capital-related costs (as defined by 
the Secretary for periods before October 1, 1987). In applying 
the first sentence of this paragraph, the term ``other services 
related to the admission'' includes all services that are not 
diagnostic services (other than ambulance and maintenance renal 
dialysis services) for which payment may be made under this 
title that are provided by a hospital (or an entity wholly 
owned or operated by the hospital) to a patient--
          (A) on the date of the patient's inpatient admission; 
        or
          (B) during the 3 days (or, in the case of a hospital 
        that is not a subsection (d) hospital, during the 1 
        day) immediately preceding the date of such admission 
        unless the hospital demonstrates (in a form and manner, 
        and at a time, specified by the Secretary) that such 
        services are not related (as determined by the 
        Secretary) to such admission.
  (b)(1) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, if the operating costs of inpatient 
hospital services (as defined in subsection (a)(4)) of a 
hospital (other than a subsection (d) hospital, as defined in 
subsection (d)(1)(B) and other than a rehabilitation facility 
described in subsection (j)(1)) for a cost reporting period 
subject to this paragraph--
          (A) are less than or equal to the target amount (as 
        defined in paragraph (3)) for that hospital for that 
        period, the amount of the payment with respect to such 
        operating costs payable under part A on a per discharge 
        or per admission basis (as the case may be) shall be 
        equal to the amount of such operating costs, plus--
                  (i) 15 percent of the amount by which the 
                target amount exceeds the amount of the 
                operating costs, or
                  (ii) 2 percent of the target amount,
        whichever is less;
          (B) are greater than the target amount but do not 
        exceed 110 percent of the target amount, the amount of 
        the payment with respect to those operating costs 
        payable under part A on a per discharge basis shall 
        equal the target amount; or
          (C) are greater than 110 percent of the target 
        amount, the amount of the payment with respect to such 
        operating costs payable under part A on a per discharge 
        or per admission basis (as the case may be) shall be 
        equal to (i) the target amount, plus (ii) in the case 
        of cost reporting periods beginning on or after October 
        1, 1991, an additional amount equal to 50 percent of 
        the amount by which the operating costs exceed 110 
        percent of the target amount (except that such 
        additional amount may not exceed 10 percent of the 
        target amount) after any exceptions or adjustments are 
        made to such target amount for the cost reporting 
        period;
plus the amount, if any, provided under paragraph (2), except 
that in no case may the amount payable under this title (other 
than on the basis of a DRG prospective payment rate determined 
under subsection (d)) with respect to operating costs of 
inpatient hospital services exceed the maximum amount payable 
with respect to such costs pursuant to subsection (a).
  (2)(A) Except as provided in subparagraph (E), in addition to 
the payment computed under paragraph (1), in the case of an 
eligible hospital (described in subparagraph (B)) for a cost 
reporting period beginning on or after October 1, 1997, the 
amount of payment on a per discharge basis under paragraph (1) 
shall be increased by the lesser of--
          (i) 50 percent of the amount by which the operating 
        costs are less than the expected costs (as defined in 
        subparagraph (D)) for the period; or
          (ii) 1 percent of the target amount for the period.
  (B) For purposes of this paragraph, an ``eligible hospital'' 
means with respect to a cost reporting period, a hospital--
          (i) that has received payments under this subsection 
        for at least 3 full cost reporting periods before that 
        cost reporting period, and
          (ii) whose operating costs for the period are less 
        than the least of its target amount, its trended costs 
        (as defined in subparagraph (C)), or its expected costs 
        (as defined in subparagraph (D)) for the period.
  (C) For purposes of subparagraph (B)(ii), the term ``trended 
costs'' means for a hospital cost reporting period ending in a 
fiscal year--
          (i) in the case of a hospital for which its cost 
        reporting period ending in fiscal year 1996 was its 
        third or subsequent full cost reporting period for 
        which it receives payments under this subsection, the 
        lesser of the operating costs or target amount for that 
        hospital for its cost reporting period ending in fiscal 
        year 1996, or
          (ii) in the case of any other hospital, the operating 
        costs for that hospital for its third full cost 
        reporting period for which it receives payments under 
        this subsection,
increased (in a compounded manner) for each succeeding fiscal 
year (through the fiscal year involved) by the market basket 
percentage increase for the fiscal year.
  (D) For purposes of this paragraph, the term ``expected 
costs'', with respect to the cost reporting period ending in a 
fiscal year, means the lesser of the operating costs of 
inpatient hospital services or target amount per discharge for 
the previous cost reporting period updated by the market basket 
percentage increase (as defined in paragraph (3)(B)(iii)) for 
the fiscal year.
  (E)(i) In the case of an eligible hospital that is a hospital 
or unit that is within a class of hospital described in clause 
(ii) with a 12-month cost reporting period beginning before the 
enactment of this subparagraph, in determining the amount of 
the increase under subparagraph (A), the Secretary shall 
substitute for the percentage of the target amount applicable 
under subparagraph (A)(ii)--
          (I) for a cost reporting period beginning on or after 
        October 1, 2000, and before September 30, 2001, 1.5 
        percent; and
          (II) for a cost reporting period beginning on or 
        after October 1, 2001, and before September 30, 2002, 2 
        percent.
  (ii) For purposes of clause (i), each of the following shall 
be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (iv) of such 
        subsection.
  (3)(A) Except as provided in subparagraph (C) and succeeding 
subparagraphs and in paragraph (7)(A)(ii), for purposes of this 
subsection, the term ``target amount'' means, with respect to a 
hospital for a particular 12-month cost reporting period--
          (i) in the case of the first such reporting period 
        for which this subsection is in effect, the allowable 
        operating costs of inpatient hospital services (as 
        defined in subsection (a)(4)) recognized under this 
        title for such hospital for the preceding 12-month cost 
        reporting period, and
          (ii) in the case of a later reporting period, the 
        target amount for the preceding 12-month cost reporting 
        period,
increased by the applicable percentage increase under 
subparagraph (B) for that particular cost reporting period.
  (B)(i) For purposes of subsection (d) and subsection (j) for 
discharges occurring during a fiscal year, the ``applicable 
percentage increase'' shall be--
          (I) for fiscal year 1986, \1/2\ percent,
          (II) for fiscal year 1987, 1.15 percent,
          (III) for fiscal year 1988, 3.0 percent for hospitals 
        located in a rural area, 1.5 percent for hospitals 
        located in a large urban area (as defined in subsection 
        (d)(2)(D)), and 1.0 percent for hospitals located in 
        other urban areas,
          (IV) for fiscal year 1989, the market basket 
        percentage increase minus 1.5 percentage points for 
        hospitals located in a rural area, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals located in a large urban area, and the market 
        basket percentage increase minus 2.5 percentage points 
        for hospitals located in other urban areas,
          (V) for fiscal year 1990, the market basket 
        percentage increase plus 4.22 percentage points for 
        hospitals located in a rural area, the market basket 
        percentage increase plus 0.12 percentage points for 
        hospitals located in a large urban area, and the market 
        basket percentage increase minus 0.53 percentage points 
        for hospitals located in other urban areas,
          (VI) for fiscal year 1991, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.7 percentage 
        point for hospitals located in a rural area,
          (VII) for fiscal year 1992, the market basket 
        percentage increase minus 1.6 percentage points for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.6 percentage 
        point for hospitals located in a rural area,
          (VIII) for fiscal year 1993, the market basket 
        percentage increase minus 1.55 percentage point for 
        hospitals in a large urban or other urban area, and the 
        market basket percentage increase minus 0.55 for 
        hospitals located in a rural area,
          (IX) for fiscal year 1994, the market basket 
        percentage increase minus 2.5 percentage points for 
        hospitals located in a large urban or other urban area, 
        and the market basket percentage increase minus 1.0 
        percentage point for hospitals located in a rural area,
          (X) for fiscal year 1995, the market basket 
        percentage increase minus 2.5 percentage points for 
        hospitals located in a large urban or other urban area, 
        and such percentage increase for hospitals located in a 
        rural area as will provide for the average standardized 
        amount determined under subsection (d)(3)(A) for 
        hospitals located in a rural area being equal to such 
        average standardized amount for hospitals located in an 
        urban area (other than a large urban area),
          (XI) for fiscal year 1996, the market basket 
        percentage increase minus 2.0 percentage points for 
        hospitals in all areas,
          (XII) for fiscal year 1997, the market basket 
        percentage increase minus 0.5 percentage point for 
        hospitals in all areas,
          (XIII) for fiscal year 1998, 0 percent,
          (XIV) for fiscal year 1999, the market basket 
        percentage increase minus 1.9 percentage points for 
        hospitals in all areas,
          (XV) for fiscal year 2000, the market basket 
        percentage increase minus 1.8 percentage points for 
        hospitals in all areas,
          (XVI) for fiscal year 2001, the market basket 
        percentage increase for hospitals in all areas,
          (XVII) for fiscal year 2002, the market basket 
        percentage increase minus 0.55 percentage points for 
        hospitals in all areas,
          (XVIII) for fiscal year 2003, the market basket 
        percentage increase minus 0.55 percentage points for 
        hospitals in all areas,
          (XIX) for each of fiscal years 2004 through 2006, 
        subject to clause (vii), the market basket percentage 
        increase for hospitals in all areas; and
          (XX) for each subsequent fiscal year, subject to 
        clauses (viii), (ix), (xi), and (xii), the market 
        basket percentage increase for hospitals in all areas.
  (ii) For purposes of subparagraphs (A) and (E), the 
``applicable percentage increase'' for 12-month cost reporting 
periods beginning during--
          (I) fiscal year 1986, is 0.5 percent,
          (II) fiscal year 1987, is 1.15 percent,
          (III) fiscal year 1988, is the market basket 
        percentage increase minus 2.0 percentage points,
          (IV) a subsequent fiscal year ending on or before 
        September 30, 1993, is the market basket percentage 
        increase,
          (V) fiscal years 1994 through 1997, is the market 
        basket percentage increase minus the applicable 
        reduction (as defined in clause (v)(II)), or in the 
        case of a hospital for a fiscal year for which the 
        hospital's update adjustment percentage (as defined in 
        clause (v)(I)) is at least 10 percent, the market 
        basket percentage increase,
          (VI) for fiscal year 1998, is 0 percent,
          (VII) for fiscal years 1999 through 2002, is the 
        applicable update factor specified under clause (vi) 
        for the fiscal year, and
          (VIII) subsequent fiscal years is the market basket 
        percentage increase.
  (iii) For purposes of this subparagraph, the term ``market 
basket percentage increase'' means, with respect to cost 
reporting periods and discharges occurring in a fiscal year, 
the percentage, estimated by the Secretary before the beginning 
of the period or fiscal year, by which the cost of the mix of 
goods and services (including personnel costs but excluding 
nonoperating costs) comprising routine, ancillary, and special 
care unit inpatient hospital services, based on an index of 
appropriately weighted indicators of changes in wages and 
prices which are representative of the mix of goods and 
services included in such inpatient hospital services, for the 
period or fiscal year will exceed the cost of such mix of goods 
and services for the preceding 12-month cost reporting period 
or fiscal year.
  (iv) For purposes of subparagraphs (C) and (D), the 
``applicable percentage increase'' is--
          (I) for 12-month cost reporting periods beginning 
        during fiscal years 1986 through 1993, the applicable 
        percentage increase specified in clause (ii),
          (II) for fiscal year 1994, the market basket 
        percentage increase minus 2.3 percentage points 
        (adjusted to exclude any portion of a cost reporting 
        period beginning during fiscal year 1993 for which the 
        applicable percentage increase is determined under 
        subparagraph (I)),
          (III) for fiscal year 1995, the market basket 
        percentage increase minus 2.2 percentage points, and
          (IV) for fiscal year 1996 and each subsequent fiscal 
        year, the applicable percentage increase under clause 
        (i).
  (v) For purposes of clause (ii)(V)--
          (I) a hospital's ``update adjustment percentage'' for 
        a fiscal year is the percentage by which the hospital's 
        allowable operating costs of inpatient hospital 
        services recognized under this title for the cost 
        reporting period beginning in fiscal year 1990 exceeds 
        the hospital's target amount (as determined under 
        subparagraph (A)) for such cost reporting period, 
        increased for each fiscal year (beginning with fiscal 
        year 1994) by the sum of any of the hospital's 
        applicable reductions under subclause (V) for previous 
        fiscal years; and
          (II) the ``applicable reduction'' with respect to a 
        hospital for a fiscal year is the lesser of 1 
        percentage point or the percentage point difference 
        between 10 percent and the hospital's update adjustment 
        percentage for the fiscal year.
  (vi) For purposes of clause (ii)(VII) for a fiscal year, if a 
hospital's allowable operating costs of inpatient hospital 
services recognized under this title for the most recent cost 
reporting period for which information is available--
          (I) is equal to, or exceeds, 110 percent of the 
        hospital's target amount (as determined under 
        subparagraph (A)) for such cost reporting period, the 
        applicable update factor specified under this clause is 
        the market basket percentage;
          (II) exceeds 100 percent, but is less than 110 
        percent, of such target amount for the hospital, the 
        applicable update factor specified under this clause is 
        0 percent or, if greater, the market basket percentage 
        minus 0.25 percentage points for each percentage point 
        by which such allowable operating costs (expressed as a 
        percentage of such target amount) is less than 110 
        percent of such target amount;
          (III) is equal to, or less than 100 percent, but 
        exceeds \2/3\ of such target amount for the hospital, 
        the applicable update factor specified under this 
        clause is 0 percent or, if greater, the market basket 
        percentage minus 2.5 percentage points; or
          (IV) does not exceed \2/3\ of such target amount for 
        the hospital, the applicable update factor specified 
        under this clause is 0 percent.
  (vii)(I) For purposes of clause (i)(XIX) for fiscal years 
2005 and 2006, in a case of a subsection (d) hospital that does 
not submit data to the Secretary in accordance with subclause 
(II) with respect to such a fiscal year, the applicable 
percentage increase under such clause for such fiscal year 
shall be reduced by 0.4 percentage points. Such reduction shall 
apply only with respect to the fiscal year involved, and the 
Secretary shall not take into account such reduction in 
computing the applicable percentage increase under clause 
(i)(XIX) for a subsequent fiscal year.
  (II) For fiscal years 2005 and 2006, each subsection (d) 
hospital shall submit to the Secretary quality data (for a set 
of 10 indicators established by the Secretary as of November 1, 
2003) that relate to the quality of care furnished by the 
hospital in inpatient settings in a form and manner, and at a 
time, specified by the Secretary for purposes of this clause, 
but with respect to fiscal year 2005, the Secretary shall 
provide for a 30-day grace period for the submission of data by 
a hospital.
  (viii)(I) For purposes of clause (i) for fiscal year 2007 and 
each subsequent fiscal year, in the case of a subsection (d) 
hospital that does not submit, to the Secretary in accordance 
with this clause, data required to be submitted on measures 
selected under this clause with respect to such a fiscal year, 
the applicable percentage increase under clause (i) for such 
fiscal year shall be reduced by 2.0 percentage points (or, 
beginning with fiscal year 2015, by one-quarter of such 
applicable percentage increase (determined without regard to 
clause (ix), (xi), or (xii))). Such reduction shall apply only 
with respect to the fiscal year involved and the Secretary 
shall not take into account such reduction in computing the 
applicable percentage increase under clause (i) for a 
subsequent fiscal year, and the Secretary and the Medicare 
Payment Advisory Commission shall carry out the requirements 
under section 5001(b) of the Deficit Reduction Act of 2005.
  (II) Each subsection (d) hospital shall submit data on 
measures selected under this clause to the Secretary in a form 
and manner, and at a time, specified by the Secretary for 
purposes of this clause. The Secretary may require hospitals to 
submit data on measures that are not used for the determination 
of value-based incentive payments under subsection (o).
  (III) The Secretary shall expand, beyond the measures 
specified under clause (vii)(II) and consistent with the 
succeeding subclauses, the set of measures that the Secretary 
determines to be appropriate for the measurement of the quality 
of care (including medication errors) furnished by hospitals in 
inpatient settings.
  (IV) Effective for payments beginning with fiscal year 2007, 
in expanding the number of measures under subclause (III), the 
Secretary shall begin to adopt the baseline set of performance 
measures as set forth in the November 2005 report by the 
Institute of Medicine of the National Academy of Sciences under 
section 238(b) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003.
  (V) Effective for payments for fiscal years 2008 through 
2012, the Secretary shall add other measures that reflect 
consensus among affected parties and, to the extent feasible 
and practicable, shall include measures set forth by one or 
more national consensus building entities.
  (VI) For purposes of this clause and clause (vii), the 
Secretary may replace any measures or indicators in appropriate 
cases, such as where all hospitals are effectively in 
compliance or the measures or indicators have been subsequently 
shown not to represent the best clinical practice.
  (VII) The Secretary shall establish procedures for making 
information regarding measures submitted under this clause 
available to the public. Such procedures shall ensure that a 
hospital has the opportunity to review the data that are to be 
made public with respect to the hospital prior to such data 
being made public. The Secretary shall report quality measures 
of process, structure, outcome, patients' perspectives on care, 
efficiency, and costs of care that relate to services furnished 
in inpatient settings in hospitals on the Internet website of 
the Centers for Medicare & Medicaid Services.
  (VIII) Effective for payments beginning with fiscal year 
2013, with respect to quality measures for outcomes of care, 
the Secretary shall provide for such risk adjustment as the 
Secretary determines to be appropriate to maintain incentives 
for hospitals to treat patients with severe illnesses or 
conditions.
  (IX)(aa) Subject to item (bb), effective for payments 
beginning with fiscal year 2013, each measure specified by the 
Secretary under this clause shall be endorsed by the entity 
with a contract under section 1890(a).
  (bb) In the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible 
and practical measure has not been endorsed by the entity with 
a contract under section 1890(a), the Secretary may specify a 
measure that is not so endorsed as long as due consideration is 
given to measures that have been endorsed or adopted by a 
consensus organization identified by the Secretary.
  (X) To the extent practicable, the Secretary shall, with 
input from consensus organizations and other stakeholders, take 
steps to ensure that the measures specified by the Secretary 
under this clause are coordinated and aligned with quality 
measures applicable to--
          (aa) physicians under section 1848(k); and
          (bb) other providers of services and suppliers under 
        this title.
  (XI) The Secretary shall establish a process to validate 
measures specified under this clause as appropriate. Such 
process shall include the auditing of a number of randomly 
selected hospitals sufficient to ensure validity of the 
reporting program under this clause as a whole and shall 
provide a hospital with an opportunity to appeal the validation 
of measures reported by such hospital.
  (ix)(I) For purposes of clause (i) for fiscal year 2015 and 
each subsequent fiscal year, in the case of an eligible 
hospital (as defined in subsection (n)(6)(A)) that is not a 
meaningful EHR user (as defined in subsection (n)(3)) for an 
EHR reporting period for such fiscal year, three-quarters of 
the applicable percentage increase otherwise applicable under 
clause (i) (determined without regard to clause (viii), (xi), 
or (xii)) for such fiscal year shall be reduced by 33\1/3\ 
percent for fiscal year 2015, 66\2/3\ percent for fiscal year 
2016, and 100 percent for fiscal year 2017 and each subsequent 
fiscal year. Such reduction shall apply only with respect to 
the fiscal year involved and the Secretary shall not take into 
account such reduction in computing the applicable percentage 
increase under clause (i) for a subsequent fiscal year.
  (II) The Secretary may, on a case-by-case basis, exempt a 
subsection (d) hospital from the application of subclause (I) 
with respect to a fiscal year if the Secretary determines, 
subject to annual renewal, that requiring such hospital to be a 
meaningful EHR user during such fiscal year would result in a 
significant hardship, such as in the case of a hospital in a 
rural area without sufficient Internet access. In no case may a 
hospital be granted an exemption under this subclause for more 
than 5 years.
  (III) For fiscal year 2015 and each subsequent fiscal year, a 
State in which hospitals are paid for services under section 
1814(b)(3) shall adjust the payments to each subsection (d) 
hospital in the State that is not a meaningful EHR user (as 
defined in subsection (n)(3)) in a manner that is designed to 
result in an aggregate reduction in payments to hospitals in 
the State that is equivalent to the aggregate reduction that 
would have occurred if payments had been reduced to each 
subsection (d) hospital in the State in a manner comparable to 
the reduction under the previous provisions of this clause. The 
State shall report to the Secretary the methodology it will use 
to make the payment adjustment under the previous sentence.
  (IV) For purposes of this clause, the term ``EHR reporting 
period'' means, with respect to a fiscal year, any period (or 
periods) as specified by the Secretary.
  (x)(I) The Secretary shall develop standard Internet website 
reports tailored to meet the needs of various stakeholders such 
as hospitals, patients, researchers, and policymakers. The 
Secretary shall seek input from such stakeholders in 
determining the type of information that is useful and the 
formats that best facilitate the use of the information.
  (II) The Secretary shall modify the Hospital Compare Internet 
website to make the use and navigation of that website readily 
available to individuals accessing it.
  (xi)(I) For 2012 and each subsequent fiscal year, after 
determining the applicable percentage increase described in 
clause (i) and after application of clauses (viii) and (ix), 
such percentage increase shall be reduced by the productivity 
adjustment described in subclause (II).
  (II) The productivity adjustment described in this subclause, 
with respect to a percentage, factor, or update for a fiscal 
year, year, cost reporting period, or other annual period, is a 
productivity adjustment equal to the 10-year moving average of 
changes in annual economy-wide private nonfarm business multi-
factor productivity (as projected by the Secretary for the 10-
year period ending with the applicable fiscal year, year, cost 
reporting period, or other annual period).
  (III) The application of subclause (I) may result in the 
applicable percentage increase described in clause (i) being 
less than 0.0 for a fiscal year, and may result in payment 
rates under this section for a fiscal year being less than such 
payment rates for the preceding fiscal year.
  (xii) After determining the applicable percentage increase 
described in clause (i), and after application of clauses 
(viii), (ix), and (xi), the Secretary shall reduce such 
applicable percentage increase--
          (I) for each of fiscal years 2010 and 2011, by 0.25 
        percentage point;
          (II) for each of fiscal years 2012 and 2013, by 0.1 
        percentage point;
          (III) for fiscal year 2014, by 0.3 percentage point;
          (IV) for each of fiscal years 2015 and 2016, by 0.2 
        percentage point; and
          (V) for each of fiscal years 2017, 2018, and 2019, by 
        0.75 percentage point.
The application of this clause may result in the applicable 
percentage increase described in clause (i) being less than 0.0 
for a fiscal year, and may result in payment rates under this 
section for a fiscal year being less than such payment rates 
for the preceding fiscal year.
  (C) In the case of a hospital that is a sole community 
hospital (as defined in subsection (d)(5)(D)(iii)), subject to 
subparagraphs (I) and (L), the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the applicable percentage increases 
                applied to such hospital under this paragraph 
                for cost reporting periods after the base cost 
                reporting period and up to and including such 
                first 12-month cost reporting period,
          (ii) with respect to a later cost reporting period 
        beginning before fiscal year 1994, the target amount 
        for the preceding 12-month cost reporting period, 
        increased by the applicable percentage increase under 
        subparagraph (B)(iv) for discharges occurring in the 
        fiscal year in which that later cost reporting period 
        begins,
          (iii) with respect to discharges occurring in fiscal 
        year 1994, the target amount for the cost reporting 
        period beginning in fiscal year 1993 increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv), or
          (iv) with respect to discharges occurring in fiscal 
        year 1995 and each subsequent fiscal year, the target 
        amount for the preceding year increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv).
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (D) For cost reporting periods ending on or before September 
30, 1994, and for cost reporting periods occurring on or after 
October 1, 1997, and before October 1, 2017, in the case of a 
hospital that is a medicare-dependent, small rural hospital (as 
defined in subsection (d)(5)(G)), subject to subparagraph (K), 
the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the applicable percentage increases 
                applied to such hospital under this paragraph 
                for cost reporting periods after the base cost 
                reporting period and up to and including such 
                first 12-month cost reporting period, or
          (ii) with respect to a later cost reporting period 
        beginning before fiscal year 1994, the target amount 
        for the preceding 12-month cost reporting period, 
        increased by the applicable percentage increase under 
        subparagraph (B)(iv) for discharges occurring in the 
        fiscal year in which that later cost reporting period 
        begins,
          (iii) with respect to discharges occurring in fiscal 
        year 1994, the target amount for the cost reporting 
        period beginning in fiscal year 1993 increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv), and
          (iv) with respect to discharges occurring during 
        fiscal year 1998 through fiscal year 2017, the target 
        amount for the preceding year increased by the 
        applicable percentage increase under subparagraph 
        (B)(iv).
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (E) In the case of a hospital described in clause (v) of 
subsection (d)(1)(B), the term ``target amount'' means--
          (i) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the 
        hospital--
                  (I) the allowable operating costs of 
                inpatient hospital services (as defined in 
                subsection (a)(4)) recognized under this title 
                for the hospital for the 12-month cost 
                reporting period (in this subparagraph referred 
                to as the ``base cost reporting period'') 
                preceding the first cost reporting period for 
                which this subsection was in effect with 
                respect to such hospital, increased (in a 
                compounded manner) by--
                  (II) the sum of the applicable percentage 
                increases applied to such hospital under this 
                paragraph for cost reporting periods after the 
                base cost reporting period and up to and 
                including such first 12-month cost reporting 
                period, or
          (ii) with respect to a later cost reporting period, 
        the target amount for the preceding 12-month cost 
        reporting period, increased by the applicable 
        percentage increase under subparagraph (B)(ii) for that 
        later cost reporting period.
There shall be substituted for the base cost reporting period 
described in clause (i) a hospital's cost reporting period (if 
any) beginning during fiscal year 1987 if such substitution 
results in an increase in the target amount for the hospital.
  (F)(i) In the case of a hospital (or unit described in the 
matter following clause (v) of subsection (d)(1)(B)) that 
received payment under this subsection for inpatient hospital 
services furnished during cost reporting periods beginning 
before October 1, 1990, that is within a class of hospital 
described in clause (iii), and that elects (in a form and 
manner determined by the Secretary) this subparagraph to apply 
to the hospital, the target amount for the hospital's 12-month 
cost reporting period beginning during fiscal year 1998 is 
equal to the average described in clause (ii).
  (ii) The average described in this clause for a hospital or 
unit shall be determined by the Secretary as follows:
          (I) The Secretary shall determine the allowable 
        operating costs for inpatient hospital services for the 
        hospital or unit for each of the 5 cost reporting 
        periods for which the Secretary has the most recent 
        settled cost reports as of the date of the enactment of 
        this subparagraph.
          (II) The Secretary shall increase the amount 
        determined under subclause (I) for each cost reporting 
        period by the applicable percentage increase under 
        subparagraph (B)(ii) for each subsequent cost reporting 
        period up to the cost reporting period described in 
        clause (i).
          (III) The Secretary shall identify among such 5 cost 
        reporting periods the cost reporting periods for which 
        the amount determined under subclause (II) is the 
        highest, and the lowest.
          (IV) The Secretary shall compute the averages of the 
        amounts determined under subclause (II) for the 3 cost 
        reporting periods not identified under subclause (III).
  (iii) For purposes of this subparagraph, each of the 
following shall be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (III) Hospitals described in clause (iii) of such 
        subsection.
          (IV) Hospitals described in clause (iv) of such 
        subsection.
          (V) Hospitals described in clause (v) of such 
        subsection.
  (G)(i) In the case of a qualified long-term care hospital (as 
defined in clause (ii)) that elects (in a form and manner 
determined by the Secretary) this subparagraph to apply to the 
hospital, the target amount for the hospital's 12-month cost 
reporting period beginning during fiscal year 1998 is equal to 
the allowable operating costs of inpatient hospital services 
(as defined in subsection (a)(4)) recognized under this title 
for the hospital for the 12-month cost reporting period 
beginning during fiscal year 1996, increased by the applicable 
percentage increase for the cost reporting period beginning 
during fiscal year 1997.
  (ii) In clause (i), a ``qualified long-term care hospital'' 
means, with respect to a cost reporting period, a hospital 
described in clause (iv) of subsection (d)(1)(B) during each of 
the 2 cost reporting periods for which the Secretary has the 
most recent settled cost reports as of the date of the 
enactment of this subparagraph for each of which--
          (I) the hospital's allowable operating costs of 
        inpatient hospital services recognized under this title 
        exceeded 115 percent of the hospital's target amount, 
        and
          (II) the hospital would have a disproportionate 
        patient percentage of at least 70 percent (as 
        determined by the Secretary under subsection 
        (d)(5)(F)(vi)) if the hospital were a subsection (d) 
        hospital.
  (H)(i) In the case of a hospital or unit that is within a 
class of hospital described in clause (iv), for a cost 
reporting period beginning during fiscal years 1998 through 
2002, the target amount for such a hospital or unit may not 
exceed the amount as updated up to or for such cost reporting 
period under clause (ii).
  (ii)(I) In the case of a hospital or unit that is within a 
class of hospital described in clause (iv), the Secretary shall 
estimate the 75th percentile of the target amounts for such 
hospitals within such class for cost reporting periods ending 
during fiscal year 1996, as adjusted under clause (iii).
  (II) The Secretary shall update the amount determined under 
subclause (I), for each cost reporting period after the cost 
reporting period described in such subclause and up to the 
first cost reporting period beginning on or after October 1, 
1997, by a factor equal to the market basket percentage 
increase.
  (III) For cost reporting periods beginning during each of 
fiscal years 1999 through 2002, subject to subparagraph (J), 
the Secretary shall update such amount by a factor equal to the 
market basket percentage increase.
  (iii) In applying clause (ii)(I) in the case of a hospital or 
unit, the Secretary shall provide for an appropriate adjustment 
to the labor-related portion of the amount determined under 
such subparagraph to take into account differences between 
average wage-related costs in the area of the hospital and the 
national average of such costs within the same class of 
hospital.
  (iv) For purposes of this subparagraph, each of the following 
shall be treated as a separate class of hospital:
          (I) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (II) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (III) Hospitals described in clause (iv) of such 
        subsection.
  (I)(i) Subject to subparagraph (L), for cost reporting 
periods beginning on or after October 1, 2000, in the case of a 
sole community hospital there shall be substituted for the 
amount otherwise determined under subsection (d)(5)(D)(i), if 
such substitution results in a greater amount of payment under 
this section for the hospital--
          (I) with respect to discharges occurring in fiscal 
        year 2001, 75 percent of the amount otherwise 
        applicable to the hospital under subsection 
        (d)(5)(D)(i) (referred to in this clause as the 
        ``subsection (d)(5)(D)(i) amount'') and 25 percent of 
        the rebased target amount (as defined in clause (ii));
          (II) with respect to discharges occurring in fiscal 
        year 2002, 50 percent of the subsection (d)(5)(D)(i) 
        amount and 50 percent of the rebased target amount;
          (III) with respect to discharges occurring in fiscal 
        year 2003, 25 percent of the subsection (d)(5)(D)(i) 
        amount and 75 percent of the rebased target amount; and
          (IV) with respect to discharges occurring after 
        fiscal year 2003, 100 percent of the rebased target 
        amount.
  (ii) For purposes of this subparagraph, the ``rebased target 
amount'' has the meaning given the term ``target amount'' in 
subparagraph (C) except that--
          (I) there shall be substituted for the base cost 
        reporting period the 12-month cost reporting period 
        beginning during fiscal year 1996;
          (II) any reference in subparagraph (C)(i) to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after October 1, 2000; 
        and
          (III) applicable increase percentage shall only be 
        applied under subparagraph (C)(iv) for discharges 
        occurring in fiscal years beginning with fiscal year 
        2002.
  (iii) In no case shall a hospital be denied treatment as a 
sole community hospital or payment (on the basis of a target 
rate as such as a hospital) because data are unavailable for 
any cost reporting period due to changes in ownership, changes 
in fiscal intermediaries, or other extraordinary circumstances, 
so long as data for at least one applicable base cost reporting 
period is available.
  (J) For cost reporting periods beginning during fiscal year 
2001, for a hospital described in subsection (d)(1)(B)(iv)--
          (i) the limiting or cap amount otherwise determined 
        under subparagraph (H) shall be increased by 2 percent; 
        and
          (ii) the target amount otherwise determined under 
        subparagraph (A) shall be increased by 25 percent 
        (subject to the limiting or cap amount determined under 
        subparagraph (H), as increased by clause (i)).
  (K)(i) With respect to discharges occurring on or after 
October 1, 2006, in the case of a medicare-dependent, small 
rural hospital, for purposes of applying subparagraph (D)--
          (I) there shall be substituted for the base cost 
        reporting period described in subparagraph (D)(i) the 
        12-month cost reporting period beginning during fiscal 
        year 2002; and
          (II) any reference in such subparagraph to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after October 1, 2006.
  (ii) This subparagraph shall only apply to a hospital if the 
substitution described in clause (i)(I) results in an increase 
in the target amount under subparagraph (D) for the hospital.
  (L)(i) For cost reporting periods beginning on or after 
January 1, 2009, in the case of a sole community hospital there 
shall be substituted for the amount otherwise determined under 
subsection (d)(5)(D)(i) of this section, if such substitution 
results in a greater amount of payment under this section for 
the hospital, the subparagraph (L) rebased target amount.
  (ii) For purposes of this subparagraph, the term 
``subparagraph (L) rebased target amount'' has the meaning 
given the term ``target amount'' in subparagraph (C), except 
that--
          (I) there shall be substituted for the base cost 
        reporting period the 12-month cost reporting period 
        beginning during fiscal year 2006;
          (II) any reference in subparagraph (C)(i) to the 
        ``first cost reporting period'' described in such 
        subparagraph is deemed a reference to the first cost 
        reporting period beginning on or after January 1, 2009; 
        and
          (III) the applicable percentage increase shall only 
        be applied under subparagraph (C)(iv) for discharges 
        occurring on or after January 1, 2009.
  (4)(A)(i) The Secretary shall provide for an exception and 
adjustment to (and in the case of a hospital described in 
subsection (d)(1)(B)(iii), may provide an exemption from) the 
method under this subsection for determining the amount of 
payment to a hospital where events beyond the hospital's 
control or extraordinary circumstances, including changes in 
the case mix of such hospital, create a distortion in the 
increase in costs for a cost reporting period (including any 
distortion in the costs for the base period against which such 
increase is measured). The Secretary may provide for such other 
exemptions from, and exceptions and adjustments to, such method 
as the Secretary deems appropriate, including the assignment of 
a new base period which is more representative, as determined 
by the Secretary, of the reasonable and necessary cost of 
inpatient services and including those which he deems necessary 
to take into account a decrease in the inpatient hospital 
services that a hospital provides and that are customarily 
provided directly by similar hospitals which results in a 
significant distortion in the operating costs of inpatient 
hospital services. The Secretary shall announce a decision on 
any request for an exemption, exception, or adjustment under 
this paragraph not later than 180 days after receiving a 
completed application from the intermediary for such exemption, 
exception, or adjustment, and shall include in such decision a 
detailed explanation of the grounds on which such request was 
approved or denied.
  (ii) The payment reductions under paragraph (3)(B)(ii)(V) 
shall not be considered by the Secretary in making adjustments 
pursuant to clause (i). In making such reductions, the 
Secretary shall treat the applicable update factor described in 
paragraph (3)(B)(vi) for a fiscal year as being equal to the 
market basket percentage for that year.
  (B) In determining under subparagraph (A) whether to assign a 
new base period which is more representative of the reasonable 
and necessary cost to a hospital of providing inpatient 
services, the Secretary shall take into consideration--
          (i) changes in applicable technologies and medical 
        practices, or differences in the severity of illness 
        among patients, that increase the hospital's costs;
          (ii) whether increases in wages and wage-related 
        costs for hospitals located in the geographic area in 
        which the hospital is located exceed the average of the 
        increases in such costs paid by hospitals in the United 
        States; and
          (iii) such other factors as the Secretary considers 
        appropriate in determining increases in the hospital's 
        costs of providing inpatient services.
  (C) Paragraph (1) shall not apply to payment of hospitals 
which is otherwise determined under paragraph (3) of section 
1814(b).
  (5) In the case of any hospital having any cost reporting 
period of other than a 12-month period, the Secretary shall 
determine the 12-month period which shall be used for purposes 
of this section.
  (6) In the case of any hospital which becomes subject to the 
taxes under section 3111 of the Internal Revenue Code of 1954, 
with respect to any or all of its employees, for part or all of 
a cost reporting period, and was not subject to such taxes with 
respect to any or all of its employees for all or part of the 
12-month base cost reporting period referred to in subsection 
(b)(3)(A)(i), the Secretary shall provide for an adjustment by 
increasing the base period amount described in such subsection 
for such hospital by an amount equal to the amount of such 
taxes which would have been paid or accrued by such hospital 
for such base period if such hospital had been subject to such 
taxes for all of such base period with respect to all its 
employees, minus the amount of any such taxes actually paid or 
accrued for such base period.
  (7)(A) Notwithstanding paragraph (1), in the case of a 
hospital or unit that is within a class of hospital described 
in subparagraph (B) which first receives payments under this 
section on or after October 1, 1997--
          (i) for each of the first 2 cost reporting periods 
        for which the hospital has a settled cost report, the 
        amount of the payment with respect to operating costs 
        described in paragraph (1) under part A on a per 
        discharge or per admission basis (as the case may be) 
        is equal to the lesser of--
                  (I) the amount of operating costs for such 
                respective period, or
                  (II) 110 percent of the national median (as 
                estimated by the Secretary) of the target 
                amount for hospitals in the same class as the 
                hospital for cost reporting periods ending 
                during fiscal year 1996, updated by the 
                hospital market basket increase percentage to 
                the fiscal year in which the hospital first 
                received payments under this section, as 
                adjusted under subparagraph (C); and
          (ii) for purposes of computing the target amount for 
        the subsequent cost reporting period, the target amount 
        for the preceding cost reporting period is equal to the 
        amount determined under clause (i) for such preceding 
        period.
  (B) For purposes of this paragraph, each of the following 
shall be treated as a separate class of hospital:
          (i) Hospitals described in clause (i) of subsection 
        (d)(1)(B) and psychiatric units described in the matter 
        following clause (v) of such subsection.
          (ii) Hospitals described in clause (ii) of such 
        subsection and rehabilitation units described in the 
        matter following clause (v) of such subsection.
          (iii) Hospitals described in clause (iv) of such 
        subsection.
  (C) In applying subparagraph (A)(i)(II) in the case of a 
hospital or unit, the Secretary shall provide for an 
appropriate adjustment to the labor-related portion of the 
amount determined under such subparagraph to take into account 
differences between average wage-related costs in the area of 
the hospital and the national average of such costs within the 
same class of hospital.
  (c)(1) The Secretary may provide, in his discretion, that 
payment with respect to services provided by a hospital in a 
State may be made in accordance with a hospital reimbursement 
control system in a State, rather than in accordance with the 
other provisions of this title, if the chief executive officer 
of the State requests such treatment and if--
          (A) the Secretary determines that the system, if 
        approved under this subsection, will apply (i) to 
        substantially all non- Federal acute care hospitals (as 
        defined by the Secretary) in the State and (ii) to the 
        review of at least 75 percent of all revenues or 
        expenses in the State for inpatient hospital services 
        and of revenues or expenses for inpatient hospital 
        services provided under the State's plan approved under 
        title XIX;
          (B) the Secretary has been provided satisfactory 
        assurances as to the equitable treatment under the 
        system of all entities (including Federal and State 
        programs) that pay hospitals for inpatient hospital 
        services, of hospital employees, and of hospital 
        patients;
          (C) the Secretary has been provided satisfactory 
        assurances that under the system, over 36-month periods 
        (the first such period beginning with the first month 
        in which this subsection applies to that system in the 
        State), the amount of payments made under this title 
        under such system will not exceed the amount of 
        payments which would otherwise have been made under 
        this title not using such system;
          (D) the Secretary determines that the system will not 
        preclude an eligible organization (as defined in 
        section 1876(b)) from negotiating directly with 
        hospitals with respect to the organization's rate of 
        payment for inpatient hospital services; and
          (E) the Secretary determines that the system requires 
        hospitals to meet the requirement of section 
        1866(a)(1)(G) and the system provides for the exclusion 
        of certain costs in accordance with section 1862(a)(14) 
        (except for such waivers thereof as the Secretary 
        provides by regulation).
The Secretary cannot deny the application of a State under this 
subsection on the ground that the State's hospital 
reimbursement control system is based on a payment methodology 
other than on the basis of a diagnosis-related group or on the 
ground that the amount of payments made under this title under 
such system must be less than the amount of payments which 
would otherwise have been made under this title not using such 
system. If the Secretary determines that the conditions 
described in subparagraph (C) are based on maintaining payment 
amounts at no more than a specified percentage increase above 
the payment amounts in a base period, the State has the option 
of applying such test (for inpatient hospital services under 
part A) on an aggregate payment basis or on the basis of the 
amount of payment per inpatient discharge or admission. If the 
Secretary determines that the conditions described in 
subparagraph (C) are based on maintaining aggregate payment 
amounts below a national average percentage increase in total 
payments under part A for inpatient hospital services, the 
Secretary cannot deny the application of a State under this 
subsection on the ground that the State's rate of increase in 
such payments for such services must be less than such national 
average rate of increase.
  (2) In determining under paragraph (1)(C) the amount of 
payment which would otherwise have been made under this title 
for a State, the Secretary may provide for appropriate 
adjustment of such amount to take into account previous 
reductions effected in the amount of payments made under this 
title in the State due to the operation of the hospital 
reimbursement control system in the State if the system has 
resulted in an aggregate rate of increase in operating costs of 
inpatient hospital services (as defined in subsection (a)(4)) 
under this title for hospitals in the State which is less than 
the aggregate rate of increase in such costs under this title 
for hospitals in the United States.
  (3) The Secretary shall discontinue payments under a system 
described in paragraph (1) if the Secretary--
          (A) determines that the system no longer meets the 
        requirements of subparagraphs (A), (D), and (E) of 
        paragraph (1) and, if applicable, the requirements of 
        paragraph (5), or
          (B) has reason to believe that the assurances 
        described in subparagraph (B) or (C) of paragraph (1) 
        (or, if applicable, in paragraph (5)) are not being (or 
        will not be) met.
  (4) The Secretary shall approve the request of a State under 
paragraph (1) with respect to a hospital reimbursement control 
system if--
          (A) the requirements of subparagraphs (A), (B), (C), 
        (D), and (E) of paragraph (1) have been met with 
        respect to the system, and
          (B) with respect to that system a waiver of certain 
        requirements of title XVIII of the Social Security Act 
        has been approved on or before (and which is in effect 
        as of) the date of the enactment of the Social Security 
        Amendments of 1983, pursuant to section 402(a) of the 
        Social Security Amendments of 1967 or section 222(a) of 
        the Social Security Amendments of 1972.
With respect to a State system described in this paragraph, the 
Secretary shall judge the effectiveness of such system on the 
basis of its rate of increase or inflation in inpatient 
hospital payments for individuals under this title, as compared 
to the national rate of increase or inflation for such 
payments, with the State retaining the option to have the test 
applied on the basis of the aggregate payments under the State 
system as compared to aggregate payments which would have been 
made under the national system since October 1, 1984, to the 
most recent date for which annual data are available.
  (5) The Secretary shall approve the request of a State under 
paragraph (1) with respect to a hospital reimbursement control 
system if--
          (A) the requirements of subparagraphs (A), (B), (C), 
        (D), and (E) of paragraph (1) have been met with 
        respect to the system;
          (B) the Secretary determines that the system--
                  (i) is operated directly by the State or by 
                an entity designated pursuant to State law,
                  (ii) provides for payment of hospitals 
                covered under the system under a methodology 
                (which sets forth exceptions and adjustments, 
                as well as any method for changes in the 
                methodology) by which rates or amounts to be 
                paid for hospital services during a specified 
                period are established under the system prior 
                to the defined rate period, and
                  (iii) hospitals covered under the system will 
                make such reports (in lieu of cost and other 
                reports, identified by the Secretary, otherwise 
                required under this title) as the Secretary may 
                require in order to properly monitor assurances 
                provided under this subsection;
          (C) the State has provided the Secretary with 
        satisfactory assurances that operation of the system 
        will not result in any change in hospital admission 
        practices which result in--
                  (i) a significant reduction in the proportion 
                of patients (receiving hospital services 
                covered under the system) who have no third-
                party coverage and who are unable to pay for 
                hospital services,
                  (ii) a significant reduction in the 
                proportion of individuals admitted to hospitals 
                for inpatient hospital services for which 
                payment is (or is likely to be) less than the 
                anticipated charges for or costs of such 
                services,
                  (iii) the refusal to admit patients who would 
                be expected to require unusually costly or 
                prolonged treatment for reasons other than 
                those related to the appropriateness of the 
                care available at the hospital, or
                  (iv) the refusal to provide emergency 
                services to any person who is in need of 
                emergency services if the hospital provides 
                such services;
          (D) any change by the State in the system which has 
        the effect of materially reducing payments to hospitals 
        can only take effect upon 60 days notice to the 
        Secretary and to the hospitals the payment to which is 
        likely to be materially affected by the change; and
          (E) the State has provided the Secretary with 
        satisfactory assurances that in the development of the 
        system the State has consulted with local governmental 
        officials concerning the impact of the system on public 
        hospitals.
The Secretary shall respond to requests of States under this 
paragraph within 60 days of the date the request is submitted 
to the Secretary.
  (6) If the Secretary determines that the assurances described 
in paragraph (1)(C) have not been met with respect to any 36-
month period, the Secretary may reduce payments under this 
title to hospitals under the system in an amount equal to the 
amount by which the payment under this title under such system 
for such period exceeded the amount of payments which would 
otherwise have been made under this title not using such 
system.
  (7) In the case of a State which made a request under 
paragraph (5) before December 31, 1984, for the approval of a 
State hospital reimbursement control system and which request 
was approved--
          (A) in applying paragraphs (1)(C) and (6), a 
        reference to a ``36-month period'' is deemed a 
        reference to a ``48-month period'', and
          (B) in order to allow the State the opportunity to 
        provide the assurances described in paragraph (1)(C) 
        for a 48-month period, the Secretary may not 
        discontinue payments under the system, under the 
        authority of paragraph (3)(A) because the Secretary has 
        reason to believe that such assurances are not being 
        (or will not be) met, before July 1, 1986.
  (d)(1)(A) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, the amount of the payment with 
respect to the operating costs of inpatient hospital services 
(as defined in subsection (a)(4)) of a subsection (d) hospital 
(as defined in subparagraph (B)) for inpatient hospital 
discharges in a cost reporting period or in a fiscal year--
          (i) beginning on or after October 1, 1983, and before 
        October 1, 1984, is equal to the sum of--
                  (I) the target percentage (as defined in 
                subparagraph (C)) of the hospital's target 
                amount for the cost reporting period (as 
                defined in subsection (b)(3)(A), but determined 
                without the application of subsection (a)), and
                  (II) the DRG percentage (as defined in 
                subparagraph (C)) of the regional adjusted DRG 
                prospective payment rate determined under 
                paragraph (2) for such discharges;
          (ii) beginning on or after October 1, 1984, and 
        before October 1, 1987, is equal to the sum of--
                  (I) the target percentage (as defined in 
                subparagraph (C)) of the hospital's target 
                amount for the cost reporting period (as 
                defined in subsection (b)(3)(A), but determined 
                without the application of subsection (a)), and
                  (II) the DRG percentage (as defined in 
                subparagraph (C)) of the applicable combined 
                adjusted DRG prospective payment rate 
                determined under subparagraph (D) for such 
                discharges; or
          (iii) beginning on or after April 1, 1988, is equal 
        to
                  (I) the national adjusted DRG prospective 
                payment rate determined under paragraph (3) for 
                such discharges, or
                  (II) for discharges occurring during a fiscal 
                year ending on or before September 30, 1996, 
                the sum of 85 percent of the national adjusted 
                DRG prospective payment rate determined under 
                paragraph (3) for such discharges and 15 
                percent of the regional adjusted DRG 
                prospective payment rate determined under such 
                paragraph, but only if the average standardized 
                amount (described in clause (i)(I) or clause 
                (ii)(I) of paragraph (3)(D)) for hospitals 
                within the region of, and in the same large 
                urban or other area (or, for discharges 
                occurring during a fiscal year ending on or 
                before September 30, 1994, the same rural, 
                large urban, or other urban area) as, the 
                hospital is greater than the average 
                standardized amount (described in the 
                respective clause) for hospitals within the 
                United States in that type of area for 
                discharges occurring during such fiscal year.
  (B) As used in this section, the term ``subsection (d) 
hospital'' means a hospital located in one of the fifty States 
or the District of Columbia other than--
          (i) a psychiatric hospital (as defined in section 
        1861(f)),
          (ii) a rehabilitation hospital (as defined by the 
        Secretary),
          (iii) a hospital whose inpatients are predominantly 
        individuals under 18 years of age,
          (iv)(I) a hospital which has an average inpatient 
        length of stay (as determined by the Secretary) of 
        greater than 25 days, or
          (II) a hospital that first received payment under 
        this subsection in 1986 which has an average inpatient 
        length of stay (as determined by the Secretary) of 
        greater than 20 days and that has 80 percent or more of 
        its annual medicare inpatient discharges with a 
        principal diagnosis that reflects a finding of 
        neoplastic disease in the 12-month cost reporting 
        period ending in fiscal year 1997, or
          (v)(I) a hospital that the Secretary has classified, 
        at any time on or before December 31, 1990, (or, in the 
        case of a hospital that, as of the date of the 
        enactment of this clause, is located in a State 
        operating a demonstration project under section 
        1814(b), on or before December 31, 1991) for purposes 
        of applying exceptions and adjustments to payment 
        amounts under this subsection, as a hospital involved 
        extensively in treatment for or research on cancer,
          (II) a hospital that was recognized as a 
        comprehensive cancer center or clinical cancer research 
        center by the National Cancer Institute of the National 
        Institutes of Health as of April 20, 1983, that is 
        located in a State which, as of December 19, 1989, was 
        not operating a demonstration project under section 
        1814(b), that applied and was denied, on or before 
        December 31, 1990, for classification as a hospital 
        involved extensively in treatment for or research on 
        cancer under this clause (as in effect on the day 
        before the date of the enactment of this subclause), 
        that as of the date of the enactment of this subclause, 
        is licensed for less than 50 acute care beds, and that 
        demonstrates for the 4-year period ending on December 
        31, 1996, that at least 50 percent of its total 
        discharges have a principal finding of neoplastic 
        disease, as defined in subparagraph (E), or
          (III) a hospital that was recognized as a clinical 
        cancer research center by the National Cancer Institute 
        of the National Institutes of Health as of February 18, 
        1998, that has never been reimbursed for inpatient 
        hospital services pursuant to a reimbursement system 
        under a demonstration project under section 1814(b), 
        that is a freestanding facility organized primarily for 
        treatment of and research on cancer and is not a unit 
        of another hospital, that as of the date of the 
        enactment of this subclause, is licensed for 162 acute 
        care beds, and that demonstrates for the 4-year period 
        ending on June 30, 1999, that at least 50 percent of 
        its total discharges have a principal finding of 
        neoplastic disease, as defined in subparagraph (E);
and, in accordance with regulations of the Secretary, does not 
include a psychiatric or rehabilitation unit of the hospital 
which is a distinct part of the hospital (as defined by the 
Secretary). A hospital that was classified by the Secretary on 
or before September 30, 1995, as a hospital described in clause 
(iv) shall continue to be so classified notwithstanding that it 
is located in the same building as, or on the same campus as, 
another hospital.
  (C) For purposes of this subsection, for cost reporting 
periods beginning--
          (i) on or after October 1, 1983, and before October 
        1, 1984, the ``target percentage'' is 75 percent and 
        the ``DRG percentage'' is 25 percent;
          (ii) on or after October 1, 1984, and before October 
        1, 1985, the ``target percentage'' is 50 percent and 
        the ``DRG percentage'' is 50 percent;
          (iii) on or after October 1, 1985, and before October 
        1, 1986, the ``target percentage'' is 45 percent and 
        the ``DRG percentage'' is 55 percent; and
          (iv) on or after October 1, 1986, and before October 
        1, 1987, the ``target percentage'' is 25 percent and 
        the ``DRG percentage'' is 75 percent.
  (D) For purposes of subparagraph (A)(ii)(II), the 
``applicable combined adjusted DRG prospective payment rate'' 
for discharges occurring--
          (i) on or after October 1, 1984, and before October 
        1, 1986, is a combined rate consisting of 25 percent of 
        the national adjusted DRG prospective payment rate, and 
        75 percent of the regional adjusted DRG prospective 
        payment rate, determined under paragraph (3) for such 
        discharges; and
          (ii) on or after October 1, 1986, and before October 
        1, 1987, is a combined rate consisting of 50 percent of 
        the national adjusted DRG prospective payment rate, and 
        50 percent of the regional adjusted DRG prospective 
        payment rate, determined under paragraph (3) for such 
        discharges.
  (E) For purposes of subclauses (II) and (III) of subparagraph 
(B)(v) only, the term ``principal finding of neoplastic 
disease'' means the condition established after study to be 
chiefly responsible for occasioning the admission of a patient 
to a hospital, except that only discharges with ICD-9-CM 
principal diagnosis codes of 140 through 239, V58.0, V58.1, 
V66.1, V66.2, or 990 will be considered to reflect such a 
principal diagnosis.
  (2) The Secretary shall determine a national adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in fiscal year 1984 involving inpatient hospital services of a 
subsection (d) hospital in the United States, and shall 
determine a regional adjusted DRG prospective payment rate for 
such discharges in each region, for which payment may be made 
under part A of this title. Each such rate shall be determined 
for hospitals located in urban or rural areas within the United 
States or within each such region, respectively, as follows:
          (A) Determining allowable individual hospital costs 
        for base period.--The Secretary shall determine the 
        allowable operating costs per discharge of inpatient 
        hospital services for the hospital for the most recent 
        cost reporting period for which data are available.
          (B) Updating for fiscal year 1984.--The Secretary 
        shall update each amount determined under subparagraph 
        (A) for fiscal year 1984 by--
                  (i) updating for fiscal year 1983 by the 
                estimated average rate of change of hospital 
                costs industry-wide between the cost reporting 
                period used under such subparagraph and fiscal 
                year 1983 and the most recent case-mix data 
                available, and
                  (ii) projecting for fiscal year 1984 by the 
                applicable percentage increase (as defined in 
                subsection (b)(3)(B)) for fiscal year 1984.
          (C) Standardizing amounts.--The Secretary shall 
        standardize the amount updated under subparagraph (B) 
        for each hospital by--
                  (i) excluding an estimate of indirect medical 
                education costs (taking into account, for 
                discharges occurring after September 30, 1986, 
                the amendments made by section 9104(a) of the 
                Medicare and Medicaid Budget Reconciliation 
                Amendments of 1985), except that the Secretary 
                shall not take into account any reduction in 
                the amount of additional payments under 
                paragraph (5)(B)(ii) resulting from the 
                amendment made by section 4621(a)(1) of the 
                Balanced Budget Act of 1997 or any additional 
                payments under such paragraph resulting from 
                the application of section 111 of the Medicare, 
                Medicaid, and SCHIP Balanced Budget Refinement 
                Act of 1999, of section 302 of the Medicare, 
                Medicaid, and SCHIP Benefits Improvement and 
                Protection Act of 2000, or the Medicare 
                Prescription Drug, Improvement, and 
                Modernization Act of 2003,
                  (ii) adjusting for variations among hospitals 
                by area in the average hospital wage level,
                  (iii) adjusting for variations in case mix 
                among hospitals, and
                  (iv) for discharges occurring on or after 
                October 1, 1986, excluding an estimate of the 
                additional payments to certain hospitals to be 
                made under paragraph (5)(F), except that the 
                Secretary shall not exclude additional payments 
                under such paragraph made as a result of the 
                enactment of section 6003(c) of the Omnibus 
                Budget Reconciliation Act of 1989, the 
                enactment of section 4002(b) of the Omnibus 
                Budget Reconciliation Act of 1990, the 
                enactment of section 303 of the Medicare, 
                Medicaid, and SCHIP Benefits Improvement and 
                Protection Act of 2000, or the enactment of 
                section 402(a)(1) of the Medicare Prescription 
                Drug, Improvement, and Modernization Act of 
                2003.
          (D) Computing urban and rural averages.--The 
        Secretary shall compute an average of the standardized 
        amounts determined under subparagraph (C) for the 
        United States and for each region--
                  (i) for all subsection (d) hospitals located 
                in an urban area within the United States or 
                that region, respectively, and
                  (ii) for all subsection (d) hospitals located 
                in a rural area within the United States or 
                that region, respectively.
        For purposes of this subsection, the term ``region'' 
        means one of the nine census divisions, comprising the 
        fifty States and the District of Columbia, established 
        by the Bureau of the Census for statistical and 
        reporting purposes; the term ``urban area'' means an 
        area within a Metropolitan Statistical Area (as defined 
        by the Office of Management and Budget) or within such 
        similar area as the Secretary has recognized under 
        subsection (a) by regulation; the term ``large urban 
        area'' means, with respect to a fiscal year, such an 
        urban area which the Secretary determines (in the 
        publications described in subsection (e)(5) before the 
        fiscal year) has a population of more than 1,000,000 
        (as determined by the Secretary based on the most 
        recent available population data published by the 
        Bureau of the Census); and the term ``rural area'' 
        means any area outside such an area or similar area. A 
        hospital located in a Metropolitan Statistical Area 
        shall be deemed to be located in the region in which 
        the largest number of the hospitals in the same 
        Metropolitan Statistical Area are located, or, at the 
        option of the Secretary, the region in which the 
        majority of the inpatient discharges (with respect to 
        which payments are made under this title) from 
        hospitals in the same Metropolitan Statistical Area are 
        made.
          (E) Reducing for value of outlier payments.--The 
        Secretary shall reduce each of the average standardized 
        amounts determined under subparagraph (D) by a 
        proportion equal to the proportion (estimated by the 
        Secretary) of the amount of payments under this 
        subsection based on DRG prospective payment rates which 
        are additional payments described in paragraph (5)(A) 
        (relating to outlier payments).
          (F) Maintaining budget neutrality.--The Secretary 
        shall adjust each of such average standardized amounts 
        as may be required under subsection (e)(1)(B) for that 
        fiscal year.
          (G) Computing drg-specific rates for urban and rural 
        hospitals in the united states and in each region.--For 
        each discharge classified within a diagnosis-related 
        group, the Secretary shall establish a national DRG 
        prospective payment rate and shall establish a regional 
        DRG prospective payment rate for each region, each of 
        which is equal--
                  (i) for hospitals located in an urban area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (D), 
                        reduced under subparagraph (E), and 
                        adjusted under subparagraph (F)) for 
                        hospitals located in an urban area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group; and
                  (ii) for hospitals located in a rural area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (D), 
                        reduced under subparagraph (E), and 
                        adjusted under subparagraph (F)) for 
                        hospitals located in a rural area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group.
          (H) Adjusting for different area wage levels.--The 
        Secretary shall adjust the proportion, (as estimated by 
        the Secretary from time to time) of hospitals' costs 
        which are attributable to wages and wage-related costs, 
        of the national and regional DRG prospective payment 
        rates computed under subparagraph (G) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the national average hospital wage 
        level.
  (3) The Secretary shall determine a national adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in a fiscal year after fiscal year 1984 involving inpatient 
hospital services of a subsection (d) hospital in the United 
States, and shall determine, for fiscal years before fiscal 
year 1997, a regional adjusted DRG prospective payment rate for 
such discharges in each region for which payment may be made 
under part A of this title. Each such rate shall be determined 
for hospitals located in large urban, other urban, or rural 
areas within the United States and within each such region, 
respectively, as follows:
          (A) Updating previous standardized amounts.--(i) For 
        discharges occurring in a fiscal year beginning before 
        October 1, 1987, the Secretary shall compute an average 
        standardized amount for hospitals located in an urban 
        area and for hospitals located in a rural area within 
        the United States and for hospitals located in an urban 
        area and for hospitals located in a rural area within 
        each region, equal to the respective average 
        standardized amount computed for the previous fiscal 
        year under paragraph (2)(D) or under this subparagraph, 
        increased for the fiscal year involved by the 
        applicable percentage increase under subsection 
        (b)(3)(B). With respect to discharges occurring on or 
        after October 1, 1987, the Secretary shall compute 
        urban and rural averages on the basis of discharge 
        weighting rather than hospital weighting, making 
        appropriate adjustments to ensure that computation on 
        such basis does not result in total payments under this 
        section that are greater or less than the total 
        payments that would have been made under this section 
        but for this sentence, and making appropriate changes 
        in the manner of determining the reductions under 
        subparagraph (C)(ii).
          (ii) For discharges occurring in a fiscal year 
        beginning on or after October 1, 1987, and ending on or 
        before September 30, 1994, the Secretary shall compute 
        an average standardized amount for hospitals located in 
        a large urban area, for hospitals located in a rural 
        area, and for hospitals located in other urban areas, 
        within the United States and within each region, equal 
        to the respective average standardized amount computed 
        for the previous fiscal year under this subparagraph 
        increased by the applicable percentage increase under 
        subsection (b)(3)(B)(i) with respect to hospitals 
        located in the respective areas for the fiscal year 
        involved.
          (iii) For discharges occurring in the fiscal year 
        beginning on October 1, 1994, the average standardized 
        amount for hospitals located in a rural area shall be 
        equal to the average standardized amount for hospitals 
        located in an urban area. For discharges occurring on 
        or after October 1, 1994, the Secretary shall adjust 
        the ratio of the labor portion to non-labor portion of 
        each average standardized amount to equal such ratio 
        for the national average of all standardized amounts.
          (iv)(I) Subject to subclause (II), for discharges 
        occurring in a fiscal year beginning on or after 
        October 1, 1995, the Secretary shall compute an average 
        standardized amount for hospitals located in a large 
        urban area and for hospitals located in other areas 
        within the United States and within each region equal 
        to the respective average standardized amount computed 
        for the previous fiscal year under this subparagraph 
        increased by the applicable percentage increase under 
        subsection (b)(3)(B)(i) with respect to hospitals 
        located in the respective areas for the fiscal year 
        involved.
          (II) For discharges occurring in a fiscal year 
        (beginning with fiscal year 2004), the Secretary shall 
        compute a standardized amount for hospitals located in 
        any area within the United States and within each 
        region equal to the standardized amount computed for 
        the previous fiscal year under this subparagraph for 
        hospitals located in a large urban area (or, beginning 
        with fiscal year 2005, for all hospitals in the 
        previous fiscal year) increased by the applicable 
        percentage increase under subsection (b)(3)(B)(i) for 
        the fiscal year involved.
          (v) Average standardized amounts computed under this 
        paragraph shall be adjusted to reflect the most recent 
        case-mix data available.
          (vi) Insofar as the Secretary determines that the 
        adjustments under paragraph (4)(C)(i) for a previous 
        fiscal year (or estimates that such adjustments for a 
        future fiscal year) did (or are likely to) result in a 
        change in aggregate payments under this subsection 
        during the fiscal year that are a result of changes in 
        the coding or classification of discharges that do not 
        reflect real changes in case mix, the Secretary may 
        adjust the average standardized amounts computed under 
        this paragraph for subsequent fiscal years so as to 
        eliminate the effect of such coding or classification 
        changes.
          (B) Reducing for value of outlier payments.--The 
        Secretary shall reduce each of the average standardized 
        amounts determined under subparagraph (A) by a factor 
        equal to the proportion of payments under this 
        subsection (as estimated by the Secretary) based on DRG 
        prospective payment amounts which are additional 
        payments described in paragraph (5)(A) (relating to 
        outlier payments).
          (C)(i) Maintaining budget neutrality for fiscal year 
        1985.--For discharges occurring in fiscal year 1985, 
        the Secretary shall adjust each of such average 
        standardized amounts as may be required under 
        subsection (e)(1)(B) for that fiscal year.
          (ii) Reducing for savings from amendment to indirect 
        teaching adjustment for discharges after September 30, 
        1986.--For discharges occurring after September 30, 
        1986, the Secretary shall further reduce each of the 
        average standardized amounts (in a proportion which 
        takes into account the differing effects of the 
        standardization effected under paragraph (2)(C)(i)) so 
        as to provide for a reduction in the total of the 
        payments (attributable to this paragraph) made for 
        discharges occurring on or after October 1, 1986, of an 
        amount equal to the estimated reduction in the payment 
        amounts under paragraph (5)(B) that would have resulted 
        from the enactment of the amendments made by section 
        9104 of the Medicare and Medicaid Budget Reconciliation 
        Amendments of 1985 and by section 4003(a)(1) of the 
        Omnibus Budget Reconciliation Act of 1987 if the factor 
        described in clause (ii)(II) of paragraph (5)(B) 
        (determined without regard to amendments made by the 
        Omnibus Budget Reconciliation Act of 1990) were applied 
        for discharges occurring on or after such date instead 
        of the factor described in clause (ii) of that 
        paragraph.
          (D) Computing drg-specific rates for hospitals.--For 
        each discharge classified within a diagnosis-related 
        group, the Secretary shall establish for the fiscal 
        year a national DRG prospective payment rate and shall 
        establish, for fiscal years before fiscal year 1997, a 
        regional DRG prospective payment rate for each region 
        which is equal--
                  (i) for fiscal years before fiscal year 2004, 
                for hospitals located in a large urban area in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (A), 
                        reduced under subparagraph (B), and 
                        adjusted or reduced under subparagraph 
                        (C)) for the fiscal year for hospitals 
                        located in such a large urban area in 
                        the United States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group;
                  (ii) for fiscal years before fiscal year 
                2004, for hospitals located in other areas in 
                the United States or that region 
                (respectively), to the product of--
                          (I) the average standardized amount 
                        (computed under subparagraph (A), 
                        reduced under subparagraph (B), and 
                        adjusted or reduced under subparagraph 
                        (C)) for the fiscal year for hospitals 
                        located in other areas in the United 
                        States or that region, and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group; and
                  (iii) for a fiscal year beginning after 
                fiscal year 2003, for hospitals located in all 
                areas, to the product of--
                          (I) the applicable standardized 
                        amount (computed under subparagraph 
                        (A)), reduced under subparagraph (B), 
                        and adjusted or reduced under 
                        subparagraph (C) for the fiscal year; 
                        and
                          (II) the weighting factor (determined 
                        under paragraph (4)(B)) for that 
                        diagnosis-related group.
          (E) Adjusting for different area wage levels.--
                  (i) In general.--Except as provided in clause 
                (ii) or (iii), the Secretary shall adjust the 
                proportion, (as estimated by the Secretary from 
                time to time) of hospitals' costs which are 
                attributable to wages and wage-related costs, 
                of the DRG prospective payment rates computed 
                under subparagraph (D) for area differences in 
                hospital wage levels by a factor (established 
                by the Secretary) reflecting the relative 
                hospital wage level in the geographic area of 
                the hospital compared to the national average 
                hospital wage level. Not later than October 1, 
                1990, and October 1, 1993 (and at least every 
                12 months thereafter), the Secretary shall 
                update the factor under the preceding sentence 
                on the basis of a survey conducted by the 
                Secretary (and updated as appropriate) of the 
                wages and wage-related costs of subsection (d) 
                hospitals in the United States. Not less often 
                than once every 3 years the Secretary (through 
                such survey or otherwise) shall measure the 
                earnings and paid hours of employment by 
                occupational category and shall exclude data 
                with respect to the wages and wage-related 
                costs incurred in furnishing skilled nursing 
                facility services. Any adjustments or updates 
                made under this subparagraph for a fiscal year 
                (beginning with fiscal year 1991) shall be made 
                in a manner that assures that the aggregate 
                payments under this subsection in the fiscal 
                year are not greater or less than those that 
                would have been made in the year without such 
                adjustment. The Secretary shall apply the 
                previous sentence for any period as if the 
                amendments made by section 403(a)(1) of the 
                Medicare Prescription Drug, Improvement, and 
                Modernization Act of 2003 and the amendments 
                made by section 10324(a)(1) of the Patient 
                Protection and Affordable Care Act had not been 
                enacted.
                  (ii) Alternative proportion to be adjusted 
                beginning in fiscal year 2005.--For discharges 
                occurring on or after October 1, 2004, the 
                Secretary shall substitute ``62 percent'' for 
                the proportion described in the first sentence 
                of clause (i), unless the application of this 
                clause would result in lower payments to a 
                hospital than would otherwise be made.
                  (iii) Floor on area wage index for hospitals 
                in frontier states.--
                          (I) In general.--Subject to subclause 
                        (IV), for discharges occurring on or 
                        after October 1, 2010, the area wage 
                        index applicable under this 
                        subparagraph to any hospital which is 
                        located in a frontier State (as defined 
                        in subclause (II)) may not be less than 
                        1.00.
                          (II) Frontier state defined.--In this 
                        clause, the term ``frontier State'' 
                        means a State in which at least 50 
                        percent of the counties in the State 
                        are frontier counties.
                          (III) Frontier county defined.--In 
                        this clause, the term ``frontier 
                        county'' means a county in which the 
                        population per square mile is less than 
                        6.
                          (IV) Limitation.--This clause shall 
                        not apply to any hospital located in a 
                        State that receives a non-labor related 
                        share adjustment under paragraph 
                        (5)(H).
  (4)(A) The Secretary shall establish a classification of 
inpatient hospital discharges by diagnosis-related groups and a 
methodology for classifying specific hospital discharges within 
these groups.
  (B) For each such diagnosis-related group the Secretary shall 
assign an appropriate weighting factor which reflects the 
relative hospital resources used with respect to discharges 
classified within that group compared to discharges classified 
within other groups.
  (C)(i) The Secretary shall adjust the classifications and 
weighting factors established under subparagraphs (A) and (B), 
for discharges in fiscal year 1988 and at least annually 
thereafter, to reflect changes in treatment patterns, 
technology (including a new medical service or technology under 
paragraph (5)(K)), and other factors which may change the 
relative use of hospital resources.
  (ii) For discharges in fiscal year 1990, the Secretary shall 
reduce the weighting factor for each diagnosis-related group by 
1.22 percent.
  (iii) Any such adjustment under clause (i) for discharges in 
a fiscal year (beginning with fiscal year 1991) shall be made 
in a manner that assures that the aggregate payments under this 
subsection for discharges in the fiscal year are not greater or 
less than those that would have been made for discharges in the 
year without such adjustment.
  (D)(i) For discharges occurring on or after October 1, 2008, 
the diagnosis-related group to be assigned under this paragraph 
for a discharge described in clause (ii) shall be a diagnosis-
related group that does not result in higher payment based on 
the presence of a secondary diagnosis code described in clause 
(iv).
  (ii) A discharge described in this clause is a discharge 
which meets the following requirements:
          (I) The discharge includes a condition identified by 
        a diagnosis code selected under clause (iv) as a 
        secondary diagnosis.
          (II) But for clause (i), the discharge would have 
        been classified to a diagnosis-related group that 
        results in a higher payment based on the presence of a 
        secondary diagnosis code selected under clause (iv).
          (III) At the time of admission, no code selected 
        under clause (iv) was present.
  (iii) As part of the information required to be reported by a 
hospital with respect to a discharge of an individual in order 
for payment to be made under this subsection, for discharges 
occurring on or after October 1, 2007, the information shall 
include the secondary diagnosis of the individual at admission.
  (iv) By not later than October 1, 2007, the Secretary shall 
select diagnosis codes associated with at least two conditions, 
each of which codes meets all of the following requirements (as 
determined by the Secretary):
          (I) Cases described by such code have a high cost or 
        high volume, or both, under this title.
          (II) The code results in the assignment of a case to 
        a diagnosis-related group that has a higher payment 
        when the code is present as a secondary diagnosis.
          (III) The code describes such conditions that could 
        reasonably have been prevented through the application 
        of evidence-based guidelines.
The Secretary may from time to time revise (through addition or 
deletion of codes) the diagnosis codes selected under this 
clause so long as there are diagnosis codes associated with at 
least two conditions selected for discharges occurring during 
any fiscal year.
  (v) In selecting and revising diagnosis codes under clause 
(iv), the Secretary shall consult with the Centers for Disease 
Control and Prevention and other appropriate entities.
  (vi) Any change resulting from the application of this 
subparagraph shall not be taken into account in adjusting the 
weighting factors under subparagraph (C)(i) or in applying 
budget neutrality under subparagraph (C)(iii).
  (5)(A)(i) For discharges occurring during fiscal years ending 
on or before September 30, 1997, the Secretary shall provide 
for an additional payment for a subsection (d) hospital for any 
discharge in a diagnosis-related group, the length of stay of 
which exceeds the mean length of stay for discharges within 
that group by a fixed number of days, or exceeds such mean 
length of stay by some fixed number of standard deviations, 
whichever is the fewer number of days.
  (ii) For cases which are not included in clause (i), a 
subsection (d) hospital may request additional payments in any 
case where charges, adjusted to cost, exceed a fixed multiple 
of the applicable DRG prospective payment rate, or exceed such 
other fixed dollar amount, whichever is greater, or for 
discharges in fiscal years beginning on or after October 1, 
1994, exceed the sum of the applicable DRG prospective payment 
rate plus any amounts payable under subparagraphs (B) and (F) 
plus a fixed dollar amount determined by the Secretary.
  (iii) The amount of such additional payment under clauses (i) 
and (ii) shall be determined by the Secretary and shall (except 
as payments under clause (i) are required to be reduced to take 
into account the requirements of clause (v)) approximate the 
marginal cost of care beyond the cutoff point applicable under 
clause (i) or (ii).
  (iv) The total amount of the additional payments made under 
this subparagraph for discharges in a fiscal year may not be 
less than 5 percent nor more than 6 percent of the total 
payments projected or estimated to be made based on DRG 
prospective payment rates for discharges in that year.
  (v) The Secretary shall provide that--
          (I) the day outlier percentage for fiscal year 1995 
        shall be 75 percent of the day outlier percentage for 
        fiscal year 1994;
          (II) the day outlier percentage for fiscal year 1996 
        shall be 50 percent of the day outlier percentage for 
        fiscal year 1994; and
          (III) the day outlier percentage for fiscal year 1997 
        shall be 25 percent of the day outlier percentage for 
        fiscal year 1994.
  (vi) For purposes of this subparagraph the term ``day outlier 
percentage'' means, for a fiscal year, the percentage of the 
total additional payments made by the Secretary under this 
subparagraph for discharges in that fiscal year which are 
additional payments under clause (i).
  (B) The Secretary shall provide for an additional payment 
amount for subsection (d) hospitals with indirect costs of 
medical education, in an amount computed in the same manner as 
the adjustment for such costs under regulations (in effect as 
of January 1, 1983) under subsection (a)(2), except as follows:
          (i) The amount of such additional payment shall be 
        determined by multiplying (I) the sum of the amount 
        determined under paragraph (1)(A)(ii)(II) (or, if 
        applicable, the amount determined under paragraph 
        (1)(A)(iii)) and, for cases qualifying for additional 
        payment under subparagraph (A)(i), the amount paid to 
        the hospital under subparagraph (A), by (II) the 
        indirect teaching adjustment factor described in clause 
        (ii).
          (ii) For purposes of clause (i)(II), the indirect 
        teaching adjustment factor is equal to c  
        (((1+r) to the nth power) - 1), where ``r'' is the 
        ratio of the hospital's full-time equivalent interns 
        and residents to beds and ``n'' equals .405. Subject to 
        clause (ix), for discharges occurring--
                  (I) on or after October 1, 1988, and before 
                October 1, 1997, ``c'' is equal to 1.89;
                  (II) during fiscal year 1998, ``c'' is equal 
                to 1.72;
                  (III) during fiscal year 1999, ``c'' is equal 
                to 1.6;
                  (IV) during fiscal year 2000, ``c'' is equal 
                to 1.47;
                  (V) during fiscal year 2001, ``c'' is equal 
                to 1.54;
                  (VI) during fiscal year 2002, ``c'' is equal 
                to 1.6;
                  (VII) on or after October 1, 2002, and before 
                April 1, 2004, ``c'' is equal to 1.35;
                  (VIII) on or after April 1, 2004, and before 
                October 1, 2004, ``c'' is equal to 1.47;
                  (IX) during fiscal year 2005, ``c'' is equal 
                to 1.42;
                  (X) during fiscal year 2006, ``c'' is equal 
                to 1.37;
                  (XI) during fiscal year 2007, ``c'' is equal 
                to 1.32; and
                  (XII) on or after October 1, 2007, ``c'' is 
                equal to 1.35.
          (iii) In determining such adjustment the Secretary 
        shall not distinguish between those interns and 
        residents who are employees of a hospital and those 
        interns and residents who furnish services to a 
        hospital but are not employees of such hospital.
          (iv)(I) Effective for discharges occurring on or 
        after October 1, 1997, and before July 1, 2010, all the 
        time spent by an intern or resident in patient care 
        activities under an approved medical residency training 
        program at an entity in a nonhospital setting shall be 
        counted towards the determination of full-time 
        equivalency if the hospital incurs all, or 
        substantially all, of the costs for the training 
        program in that setting.
          (II) Effective for discharges occurring on or after 
        July 1, 2010, all the time spent by an intern or 
        resident in patient care activities in a nonprovider 
        setting shall be counted towards the determination of 
        full-time equivalency if a hospital incurs the costs of 
        the stipends and fringe benefits of the intern or 
        resident during the time the intern or resident spends 
        in that setting. If more than one hospital incurs these 
        costs, either directly or through a third party, such 
        hospitals shall count a proportional share of the time, 
        as determined by written agreement between the 
        hospitals, that a resident spends training in that 
        setting.
          (v) In determining the adjustment with respect to a 
        hospital for discharges occurring on or after October 
        1, 1997, the total number of full-time equivalent 
        interns and residents in the fields of allopathic and 
        osteopathic medicine in either a hospital or 
        nonhospital setting may not exceed the number (or, 130 
        percent of such number in the case of a hospital 
        located in a rural area) of such full-time equivalent 
        interns and residents in the hospital with respect to 
        the hospital's most recent cost reporting period ending 
        on or before December 31, 1996. Rules similar to the 
        rules of subsection (h)(4)(F)(ii) shall apply for 
        purposes of this clause. The provisions of subsections 
        (h)(4)(H)(vi), (h)(7), and (h)(8) shall apply with 
        respect to the first sentence of this clause in the 
        same manner as they apply with respect to subsection 
        (h)(4)(F)(i).
          (vi) For purposes of clause (ii)--
                  (I) ``r'' may not exceed the ratio of the 
                number of interns and residents, subject to the 
                limit under clause (v), with respect to the 
                hospital for its most recent cost reporting 
                period to the hospital's available beds (as 
                defined by the Secretary) during that cost 
                reporting period, and
                  (II) for the hospital's cost reporting 
                periods beginning on or after October 1, 1997, 
                subject to the limits described in clauses (iv) 
                and (v), the total number of full-time 
                equivalent residents for payment purposes shall 
                equal the average of the actual full-time 
                equivalent resident count for the cost 
                reporting period and the preceding two cost 
                reporting periods.
        In the case of the first cost reporting period 
        beginning on or after October 1, 1997, subclause (II) 
        shall be applied by using the average for such period 
        and the preceding cost reporting period.
          (vii) If any cost reporting period beginning on or 
        after October 1, 1997, is not equal to twelve months, 
        the Secretary shall make appropriate modifications to 
        ensure that the average full-time equivalent residency 
        count pursuant to subclause (II) of clause (vi) is 
        based on the equivalent of full twelve-month cost 
        reporting periods.
          (viii) Rules similar to the rules of subsection 
        (h)(4)(H) shall apply for purposes of clauses (v) and 
        (vi).
          (ix) For discharges occurring on or after July 1, 
        2005, insofar as an additional payment amount under 
        this subparagraph is attributable to resident positions 
        redistributed to a hospital under subsection (h)(7)(B), 
        in computing the indirect teaching adjustment factor 
        under clause (ii) the adjustment shall be computed in a 
        manner as if ``c'' were equal to 0.66 with respect to 
        such resident positions.
          (x) For discharges occurring on or after July 1, 
        2011, insofar as an additional payment amount under 
        this subparagraph is attributable to resident positions 
        distributed to a hospital under subsection (h)(8)(B), 
        the indirect teaching adjustment factor shall be 
        computed in the same manner as provided under clause 
        (ii) with respect to such resident positions.
          (x)(I) The provisions of subparagraph (K) of 
        subsection (h)(4) shall apply under this subparagraph 
        in the same manner as they apply under such subsection.
                          (II) In determining the hospital's 
                        number of full-time equivalent 
                        residents for purposes of this 
                        subparagraph, all the time spent by an 
                        intern or resident in an approved 
                        medical residency training program in 
                        non-patient care activities, such as 
                        didactic conferences and seminars, as 
                        such time and activities are defined by 
                        the Secretary, that occurs in the 
                        hospital shall be counted toward the 
                        determination of full-time equivalency 
                        if the hospital--
                                  (aa) is recognized as a 
                                subsection (d) hospital;
                                  (bb) is recognized as a 
                                subsection (d) Puerto Rico 
                                hospital;
                                  (cc) is reimbursed under a 
                                reimbursement system authorized 
                                under section 1814(b)(3); or
                                  (dd) is a provider-based 
                                hospital outpatient department.
                          (III) In determining the hospital's 
                        number of full-time equivalent 
                        residents for purposes of this 
                        subparagraph, all the time spent by an 
                        intern or resident in an approved 
                        medical residency training program in 
                        research activities that are not 
                        associated with the treatment or 
                        diagnosis of a particular patient, as 
                        such time and activities are defined by 
                        the Secretary, shall not be counted 
                        toward the determination of full-time 
                        equivalency.
  (C)(i) The Secretary shall provide for such exceptions and 
adjustments to the payment amounts established under this 
subsection (other than under paragraph (9)) as the Secretary 
deems appropriate to take into account the special needs of 
regional and national referral centers (including those 
hospitals of 275 or more beds located in rural areas). A 
hospital which is classified as a rural hospital may appeal to 
the Secretary to be classified as a rural referral center under 
this clause on the basis of criteria (established by the 
Secretary) which shall allow the hospital to demonstrate that 
it should be so reclassified by reason of certain of its 
operating characteristics being similar to those of a typical 
urban hospital located in the same census region and which 
shall not require a rural osteopathic hospital to have more 
than 3,000 discharges in a year in order to be classified as a 
rural referral center. Such characteristics may include wages, 
scope of services, service area, and the mix of medical 
specialties. The Secretary shall publish the criteria not later 
than August 17, 1984, for implementation by October 1, 1984. An 
appeal allowed under this clause must be submitted to the 
Secretary (in such form and manner as the Secretary may 
prescribe) during the quarter before the first quarter of the 
hospital's cost reporting period (or, in the case of a cost 
reporting period beginning during October 1984, during the 
first quarter of that period), and the Secretary must make a 
final determination with respect to such appeal within 60 days 
after the date the appeal was submitted. Any payment 
adjustments necessitated by a reclassification based upon the 
appeal shall be effective at the beginning of such cost 
reporting period.
  (ii) The Secretary shall provide, under clause (i), for the 
classification of a rural hospital as a regional referral 
center if the hospital has a case mix index equal to or greater 
than the median case mix index for hospitals (other than 
hospitals with approved teaching programs) located in an urban 
area in the same region (as defined in paragraph (2)(D)), has 
at least 5,000 discharges a year or, if less, the median number 
of discharges in urban hospitals in the region in which the 
hospital is located (or, in the case of a rural osteopathic 
hospital, meets the criterion established by the Secretary 
under clause (i) with respect to the annual number of 
discharges for such hospitals), and meets any other criteria 
established by the Secretary under clause (i).
  (D)(i) For any cost reporting period beginning on or after 
April 1, 1990, with respect to a subsection (d) hospital which 
is a sole community hospital, payment under paragraph (1)(A) 
shall be--
          (I) an amount based on 100 percent of the hospital's 
        target amount for the cost reporting period, as defined 
        in subsection (b)(3)(C), or
          (II) the amount determined under paragraph 
        (1)(A)(iii),
whichever results in greater payment to the hospital.
  (ii) In the case of a sole community hospital that 
experiences, in a cost reporting period compared to the 
previous cost reporting period, a decrease of more than 5 
percent in its total number of inpatient cases due to 
circumstances beyond its control, the Secretary shall provide 
for such adjustment to the payment amounts under this 
subsection (other than under paragraph (9)) as may be necessary 
to fully compensate the hospital for the fixed costs it incurs 
in the period in providing inpatient hospital services, 
including the reasonable cost of maintaining necessary core 
staff and services.
  (iii) For purposes of this title, the term ``sole community 
hospital'' means any hospital--
          (I) that the Secretary determines is located more 
        than 35 road miles from another hospital,
          (II) that, by reason of factors such as the time 
        required for an individual to travel to the nearest 
        alternative source of appropriate inpatient care (in 
        accordance with standards promulgated by the 
        Secretary), location, weather conditions, travel 
        conditions, or absence of other like hospitals (as 
        determined by the Secretary), is the sole source of 
        inpatient hospital services reasonably available to 
        individuals in a geographic area who are entitled to 
        benefits under part A, or
          (III) that is located in a rural area and designated 
        by the Secretary as an essential access community 
        hospital under section 1820(i)(1) as in effect on 
        September 30, 1997.
  (iv) The Secretary shall promulgate a standard for 
determining whether a hospital meets the criteria for 
classification as a sole community hospital under clause 
(iii)(II) because of the time required for an individual to 
travel to the nearest alternative source of appropriate 
inpatient care.
  (v) If the Secretary determines that, in the case of a 
hospital located in a rural area and designated by the 
Secretary as an essential access community hospital under 
section 1820(i)(1) as in effect on September 30, 1997, the 
hospital has incurred increases in reasonable costs during a 
cost reporting period as a result of becoming a member of a 
rural health network (as defined in section 1820(d)) in the 
State in which it is located, and in incurring such increases, 
the hospital will increase its costs for subsequent cost 
reporting periods, the Secretary shall increase the hospital's 
target amount under subsection (b)(3)(C) to account for such 
incurred increases.
  (E)(i) The Secretary shall estimate the amount of 
reimbursement made for services described in section 
1862(a)(14) with respect to which payment was made under part B 
in the base reporting periods referred to in paragraph (2)(A) 
and with respect to which payment is no longer being made.
  (ii) The Secretary shall provide for an adjustment to the 
payment for subsection (d) hospitals in each fiscal year so as 
appropriately to reflect the net amount described in clause 
(i).
  (F)(i) Subject to subsection (r), for discharges occurring on 
or after May 1, 1986, the Secretary shall provide, in 
accordance with this subparagraph, for an additional payment 
amount for each subsection (d) hospital which--
          (I) serves a significantly disproportionate number of 
        low-income patients (as defined in clause (v)), or
          (II) is located in an urban area, has 100 or more 
        beds, and can demonstrate that its net inpatient care 
        revenues (excluding any of such revenues attributable 
        to this title or State plans approved under title XIX), 
        during the cost reporting period in which the 
        discharges occur, for indigent care from State and 
        local government sources exceed 30 percent of its total 
        of such net inpatient care revenues during the period.
  (ii) Subject to clause (ix), the amount of such payment for 
each discharge shall be determined by multiplying (I) the sum 
of the amount determined under paragraph (1)(A)(ii)(II) (or, if 
applicable, the amount determined under paragraph (1)(A)(iii)) 
and, for cases qualifying for additional payment under 
subparagraph (A)(i), the amount paid to the hospital under 
subparagraph (A) for that discharge, by (II) the 
disproportionate share adjustment percentage established under 
clause (iii) or (iv) for the cost reporting period in which the 
discharge occurs.
  (iii) The disproportionate share adjustment percentage for a 
cost reporting period for a hospital described in clause 
(i)(II) is equal to 35 percent.
  (iv) The disproportionate share adjustment percentage for a 
cost reporting period for a hospital that is not described in 
clause (i)(II) and that--
          (I) is located in an urban area and has 100 or more 
        beds or is described in the second sentence of clause 
        (v), is equal to the percent determined in accordance 
        with the applicable formula described in clause (vii);
          (II) is located in an urban area and has less than 
        100 beds, is equal to 5 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (xiii);
          (III) is located in a rural area and is not described 
        in subclause (IV) or (V) or in the second sentence of 
        clause (v), is equal to 4 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (xii);
          (IV) is located in a rural area, is classified as a 
        rural referral center under subparagraph (C), and is 
        classified as a sole community hospital under 
        subparagraph (D), is equal to 10 percent or, if 
        greater, the percent determined in accordance with the 
        applicable formula described in clause (viii) or, 
        subject to clause (xiv) and for discharges occurring on 
        or after April 1, 2001, the greater of the percentages 
        determined under clause (x) or (xi);
          (V) is located in a rural area, is classified as a 
        rural referral center under subparagraph (C), and is 
        not classified as a sole community hospital under 
        subparagraph (D), is equal to the percent determined in 
        accordance with the applicable formula described in 
        clause (viii) or, subject to clause (xiv) and for 
        discharges occurring on or after April 1, 2001, is 
        equal to the percent determined in accordance with 
        clause (xi); or
          (VI) is located in a rural area, is classified as a 
        sole community hospital under subparagraph (D), and is 
        not classified as a rural referral center under 
        subparagraph (C), is 10 percent or, subject to clause 
        (xiv) and for discharges occurring on or after April 1, 
        2001, is equal to the percent determined in accordance 
        with clause (x).
  (v) In this subparagraph, a hospital ``serves a significantly 
disproportionate number of low income patients'' for a cost 
reporting period if the hospital has a disproportionate patient 
percentage (as defined in clause (vi)) for that period which 
equals, or exceeds--
          (I) 15 percent, if the hospital is located in an 
        urban area and has 100 or more beds,
          (II) 30 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in a rural area and has more than 100 beds, 
        or is located in a rural area and is classified as a 
        sole community hospital under subparagraph (D),
          (III) 40 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in an urban area and has less than 100 beds, 
        or
          (IV) 45 percent (or 15 percent, for discharges 
        occurring on or after April 1, 2001), if the hospital 
        is located in a rural area and is not described in 
        subclause (II).
A hospital located in a rural area and with 500 or more beds 
also ``serves a significantly disproportionate number of low 
income patients'' for a cost reporting period if the hospital 
has a disproportionate patient percentage (as defined in clause 
(vi)) for that period which equals or exceeds a percentage 
specified by the Secretary.
  (vi) In this subparagraph, the term ``disproportionate 
patient percentage'' means, with respect to a cost reporting 
period of a hospital, the sum of--
          (I) the fraction (expressed as a percentage), the 
        numerator of which is the number of such hospital's 
        patient days for such period which were made up of 
        patients who (for such days) were entitled to benefits 
        under part A of this title and were entitled to 
        supplementary security income benefits (excluding any 
        State supplementation) under title XVI of this Act, and 
        the denominator of which is the number of such 
        hospital's patient days for such fiscal year which were 
        made up of patients who (for such days) were entitled 
        to benefits under part A of this title, and
          (II) the fraction (expressed as a percentage), the 
        numerator of which is the number of the hospital's 
        patient days for such period which consist of patients 
        who (for such days) were eligible for medical 
        assistance under a State plan approved under title XIX, 
        but who were not entitled to benefits under part A of 
        this title, and the denominator of which is the total 
        number of the hospital's patient days for such period.
In determining under subclause (II) the number of the 
hospital's patient days for such period which consist of 
patients who (for such days) were eligible for medical 
assistance under a State plan approved under title XIX, the 
Secretary may, to the extent and for the period the Secretary 
determines appropriate, include patient days of patients not so 
eligible but who are regarded as such because they receive 
benefits under a demonstration project approved under title XI.
  (vii) The formula used to determine the disproportionate 
share adjustment percentage for a cost reporting period for a 
hospital described in clause (iv)(I) is--
          (I) in the case of such a hospital with a 
        disproportionate patient percentage (as defined in 
        clause (vi)) greater than 20.2--
                  (a) for discharges occurring on or after 
                April 1, 1990, and on or before December 31, 
                1990, (P-20.2)(.65) + 5.62,
                  (b) for discharges occurring on or after 
                January 1, 1991, and on or before September 30, 
                1993, (P-20.2)(.7) + 5.62,
                  (c) for discharges occurring on or after 
                October 1, 1993, and on or before September 30, 
                1994, (P-20.2)(.8) + 5.88, and
                  (d) for discharges occurring on or after 
                October 1, 1994, (P-20.2)(.825) + 5.88; or
          (II) in the case of any other such hospital--
                  (a) for discharges occurring on or after 
                April 1, 1990, and on or before December 31, 
                1990, (P-15)(.6) + 2.5,
                  (b) for discharges occurring on or after 
                January 1, 1991, and on or before September 30, 
                1993, (P-15)(.6) + 2.5,
                  (c) for discharges occurring on or after 
                October 1, 1993, (P-15)(.65) + 2.5,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (viii) Subject to clause (xiv), the formula used to determine 
the disproportionate share adjustment percentage for a cost 
reporting period for a hospital described in clause (iv)(IV) or 
(iv)(V) is the percentage determined in accordance with the 
following formula:(P-30)(.6) + 4.0, where ``P'' is the 
hospital's disproportionate patient percentage (as defined in 
clause (vi)).
  (ix) In the case of discharges occurring--
          (I) during fiscal year 1998, the additional payment 
        amount otherwise determined under clause (ii) shall be 
        reduced by 1 percent;
          (II) during fiscal year 1999, such additional payment 
        amount shall be reduced by 2 percent;
          (III) during fiscal years 2000 and 2001, such 
        additional payment amount shall be reduced by 3 percent 
        and 2 percent, respectively;
          (IV) during fiscal year 2002, such additional payment 
        amount shall be reduced by 3 percent; and
          (V) during fiscal year 2003 and each subsequent 
        fiscal year, such additional payment amount shall be 
        reduced by 0 percent.
  (x) Subject to clause (xiv), for purposes of clause (iv)(VI) 
(relating to sole community hospitals), in the case of a 
hospital for a cost reporting period with a disproportionate 
patient percentage (as defined in clause (vi)) that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5;
          (II) is equal to or exceeds 19.3, but is less than 
        30.0, such adjustment percentage is equal to 5.25 
        percent; or
          (III) is equal to or exceeds 30, such adjustment 
        percentage is equal to 10 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xi) Subject to clause (xiv), for purposes of clause (iv)(V) 
(relating to rural referral centers), in the case of a hospital 
for a cost reporting period with a disproportionate patient 
percentage (as defined in clause (vi)) that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5;
          (II) is equal to or exceeds 19.3, but is less than 
        30.0, such adjustment percentage is equal to 5.25 
        percent; or
          (III) is equal to or exceeds 30, such adjustment 
        percentage is determined in accordance with the 
        following formula: (P-30)(.6) + 5.25,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xii) Subject to clause (xiv), for purposes of clause 
(iv)(III) (relating to small rural hospitals generally), in the 
case of a hospital for a cost reporting period with a 
disproportionate patient percentage (as defined in clause (vi)) 
that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5; or
          (II) is equal to or exceeds 19.3, such adjustment 
        percentage is equal to 5.25 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xiii) Subject to clause (xiv), for purposes of clause 
(iv)(II) (relating to urban hospitals with less than 100 beds), 
in the case of a hospital for a cost reporting period with a 
disproportionate patient percentage (as defined in clause (vi)) 
that--
          (I) is less than 19.3, the disproportionate share 
        adjustment percentage is determined in accordance with 
        the following formula: (P-15)(.65) + 2.5; or
          (II) is equal to or exceeds 19.3, such adjustment 
        percentage is equal to 5.25 percent,
where ``P'' is the hospital's disproportionate patient 
percentage (as defined in clause (vi)).
  (xiv)(I) In the case of discharges occurring on or after 
April 1, 2004, subject to subclause (II), there shall be 
substituted for the disproportionate share adjustment 
percentage otherwise determined under clause (iv) (other than 
subclause (I)) or under clause (viii), (x), (xi), (xii), or 
(xiii), the disproportionate share adjustment percentage 
determined under clause (vii) (relating to large, urban 
hospitals).
  (II) Under subclause (I), the disproportionate share 
adjustment percentage shall not exceed 12 percent for a 
hospital that is not classified as a rural referral center 
under subparagraph (C) or, in the case of discharges occurring 
on or after October 1, 2006, as a medicare-dependent, small 
rural hospital under subparagraph (G)(iv).
  (G)(i) For any cost reporting period beginning on or after 
April 1, 1990, and before October 1, 1994, or discharges 
occurring on or after October 1, 1997, and before October 1, 
2017, in the case of a subsection (d) hospital which is a 
medicare-dependent, small rural hospital, payment under 
paragraph (1)(A) shall be equal to the sum of the amount 
determined under clause (ii) and the amount determined under 
paragraph (1)(A)(iii).
  (ii) The amount determined under this clause is--
          (I) for discharges occurring during the 36-month 
        period beginning with the first day of the cost 
        reporting period that begins on or after April 1, 1990, 
        the amount by which the hospital's target amount for 
        the cost reporting period (as defined in subsection 
        (b)(3)(D)) exceeds the amount determined under 
        paragraph (1)(A)(iii); and
          (II) for discharges occurring during any subsequent 
        cost reporting period (or portion thereof) and before 
        October 1, 1994, or discharges occurring on or after 
        October 1, 1997, and before October 1, 2017, 50 percent 
        (or 75 percent in the case of discharges occurring on 
        or after October 1, 2006) of the amount by which the 
        hospital's target amount for the cost reporting period 
        or for discharges in the fiscal year (as defined in 
        subsection (b)(3)(D)) exceeds the amount determined 
        under paragraph (1)(A)(iii).
  (iii) In the case of a medicare dependent, small rural 
hospital that experiences, in a cost reporting period compared 
to the previous cost reporting period, a decrease of more than 
5 percent in its total number of inpatient cases due to 
circumstances beyond its control, the Secretary shall provide 
for such adjustment to the payment amounts under this 
subsection (other than under paragraph (9)) as may be necessary 
to fully compensate the hospital for the fixed costs it incurs 
in the period in providing inpatient hospital services, 
including the reasonable cost of maintaining necessary core 
staff and services.
  (iv) The term ``medicare-dependent, small rural hospital'' 
means, with respect to any cost reporting period to which 
clause (i) applies, any hospital--
          (I) located in a rural area,
          (II) that has not more than 100 beds,
          (III) that is not classified as a sole community 
        hospital under subparagraph (D), and
          (IV) for which not less than 60 percent of its 
        inpatient days or discharges during the cost reporting 
        period beginning in fiscal year 1987, or two of the 
        three most recently audited cost reporting periods for 
        which the Secretary has a settled cost report, were 
        attributable to inpatients entitled to benefits under 
        part A.
  (H) The Secretary may provide for such adjustments to the 
payment amounts under this subsection as the Secretary deems 
appropriate to take into account the unique circumstances of 
hospitals located in Alaska and Hawaii.
  (I)(i) The Secretary shall provide by regulation for such 
other exceptions and adjustments to such payment amounts under 
this subsection as the Secretary deems appropriate.
  (ii) In making adjustments under clause (i) for transfer 
cases (as defined by the Secretary) in a fiscal year, not 
taking in account the effect of subparagraph (J), the Secretary 
may make adjustments to each of the average standardized 
amounts determined under paragraph (3) to assure that the 
aggregate payments made under this subsection for such fiscal 
year are not greater or lesser than those that would have 
otherwise been made in such fiscal year.
  (J)(i) The Secretary shall treat the term ``transfer case'' 
(as defined in subparagraph (I)(ii)) as including the case of a 
qualified discharge (as defined in clause (ii)), which is 
classified within a diagnosis-related group described in clause 
(iii), and which occurs on or after October 1, 1998. In the 
case of a qualified discharge for which a substantial portion 
of the costs of care are incurred in the early days of the 
inpatient stay (as defined by the Secretary), in no case may 
the payment amount otherwise provided under this subsection 
exceed an amount equal to the sum of--
          (I) 50 percent of the amount of payment under this 
        subsection for transfer cases (as established under 
        subparagraph (I)(i)), and
          (II) 50 percent of the amount of payment which would 
        have been made under this subsection with respect to 
        the qualified discharge if no transfer were involved.
  (ii) For purposes of clause (i), subject to clause (iii), the 
term ``qualified discharge'' means a discharge classified with 
a diagnosis-related group (described in clause (iii)) of an 
individual from a subsection (d) hospital, if upon such 
discharge the individual--
          (I) is admitted as an inpatient to a hospital or 
        hospital unit that is not a subsection (d) hospital for 
        the provision of inpatient hospital services;
          (II) is admitted to a skilled nursing facility;
          (III) is provided home health services from a home 
        health agency, if such services relate to the condition 
        or diagnosis for which such individual received 
        inpatient hospital services from the subsection (d) 
        hospital, and if such services are provided within an 
        appropriate period (as determined by the Secretary); or
          (IV) for discharges occurring on or after October 1, 
        2000, the individual receives post discharge services 
        described in clause (iv)(I).
  (iii) Subject to clause (iv), a diagnosis-related group 
described in this clause is--
          (I) 1 of 10 diagnosis-related groups selected by the 
        Secretary based upon a high volume of discharges 
        classified within such groups and a disproportionate 
        use of post discharge services described in clause 
        (ii); and
          (II) a diagnosis-related group specified by the 
        Secretary under clause (iv)(II).
  (iv) The Secretary shall include in the proposed rule 
published under subsection (e)(5)(A) for fiscal year 2001, a 
description of the effect of this subparagraph. The Secretary 
may include in the proposed rule (and in the final rule 
published under paragraph (6)) for fiscal year 2001 or a 
subsequent fiscal year, a description of--
          (I) post-discharge services not described in 
        subclauses (I), (II), and (III) of clause (ii), the 
        receipt of which results in a qualified discharge; and
          (II) diagnosis-related groups described in clause 
        (iii)(I) in addition to the 10 selected under such 
        clause.
  (K)(i) Effective for discharges beginning on or after October 
1, 2001, the Secretary shall establish a mechanism to recognize 
the costs of new medical services and technologies under the 
payment system established under this subsection. Such 
mechanism shall be established after notice and opportunity for 
public comment (in the publications required by subsection 
(e)(5) for a fiscal year or otherwise). Such mechanism shall be 
modified to meet the requirements of clause (viii).
  (ii) The mechanism established pursuant to clause (i) shall--
          (I) apply to a new medical service or technology if, 
        based on the estimated costs incurred with respect to 
        discharges involving such service or technology, the 
        DRG prospective payment rate otherwise applicable to 
        such discharges under this subsection is inadequate 
        (applying a threshold specified by the Secretary that 
        is the lesser of 75 percent of the standardized amount 
        (increased to reflect the difference between cost and 
        charges) or 75 percent of one standard deviation for 
        the diagnosis-related group involved);
          (II) provide for the collection of data with respect 
        to the costs of a new medical service or technology 
        described in subclause (I) for a period of not less 
        than two years and not more than three years beginning 
        on the date on which an inpatient hospital code is 
        issued with respect to the service or technology;
          (III) provide for additional payment to be made under 
        this subsection with respect to discharges involving a 
        new medical service or technology described in 
        subclause (I) that occur during the period described in 
        subclause (II) in an amount that adequately reflects 
        the estimated average cost of such service or 
        technology; and
          (IV) provide that discharges involving such a service 
        or technology that occur after the close of the period 
        described in subclause (II) will be classified within a 
        new or existing diagnosis-related group with a 
        weighting factor under paragraph (4)(B) that is derived 
        from cost data collected with respect to discharges 
        occurring during such period.
  (iii) For purposes of clause (ii)(II), the term ``inpatient 
hospital code'' means any code that is used with respect to 
inpatient hospital services for which payment may be made under 
this subsection and includes an alphanumeric code issued under 
the International Classification of Diseases, 9th Revision, 
Clinical Modification (``ICD-9-CM'') and its subsequent 
revisions.
  (iv) For purposes of clause (ii)(III), the term ``additional 
payment'' means, with respect to a discharge for a new medical 
service or technology described in clause (ii)(I), an amount 
that exceeds the prospective payment rate otherwise applicable 
under this subsection to discharges involving such service or 
technology that would be made but for this subparagraph.
  (v) The requirement under clause (ii)(III) for an additional 
payment may be satisfied by means of a new-technology group 
(described in subparagraph (L)), an add-on payment, a payment 
adjustment, or any other similar mechanism for increasing the 
amount otherwise payable with respect to a discharge under this 
subsection. The Secretary may not establish a separate fee 
schedule for such additional payment for such services and 
technologies, by utilizing a methodology established under 
subsection (a) or (h) of section 1834 to determine the amount 
of such additional payment, or by other similar mechanisms or 
methodologies.
  (vi) For purposes of this subparagraph and subparagraph (L), 
a medical service or technology will be considered a ``new 
medical service or technology'' if the service or technology 
meets criteria established by the Secretary after notice and an 
opportunity for public comment.
  (vii) Under the mechanism under this subparagraph, the 
Secretary shall provide for the addition of new diagnosis and 
procedure codes in April 1 of each year, but the addition of 
such codes shall not require the Secretary to adjust the 
payment (or diagnosis-related group classification) under this 
subsection until the fiscal year that begins after such date.
  (viii) The mechanism established pursuant to clause (i) shall 
be adjusted to provide, before publication of a proposed rule, 
for public input regarding whether a new service or technology 
represents an advance in medical technology that substantially 
improves the diagnosis or treatment of individuals entitled to 
benefits under part A as follows:
          (I) The Secretary shall make public and periodically 
        update a list of all the services and technologies for 
        which an application for additional payment under this 
        subparagraph is pending.
          (II) The Secretary shall accept comments, 
        recommendations, and data from the public regarding 
        whether the service or technology represents a 
        substantial improvement.
          (III) The Secretary shall provide for a meeting at 
        which organizations representing hospitals, physicians, 
        such individuals, manufacturers, and any other 
        interested party may present comments, recommendations, 
        and data to the clinical staff of the Centers for 
        Medicare & Medicaid Services before publication of a 
        notice of proposed rulemaking regarding whether service 
        or technology represents a substantial improvement.
  (ix) Before establishing any add-on payment under this 
subparagraph with respect to a new technology, the Secretary 
shall seek to identify one or more diagnosis-related groups 
associated with such technology, based on similar clinical or 
anatomical characteristics and the cost of the technology. 
Within such groups the Secretary shall assign an eligible new 
technology into a diagnosis-related group where the average 
costs of care most closely approximate the costs of care of 
using the new technology. No add-on payment under this 
subparagraph shall be made with respect to such new technology 
and this clause shall not affect the application of paragraph 
(4)(C)(iii).
  (L)(i) In establishing the mechanism under subparagraph (K), 
the Secretary may establish new-technology groups into which a 
new medical service or technology will be classified if, based 
on the estimated average costs incurred with respect to 
discharges involving such service or technology, the DRG 
prospective payment rate otherwise applicable to such 
discharges under this subsection is inadequate.
  (ii) Such groups--
          (I) shall not be based on the costs associated with a 
        specific new medical service or technology; but
          (II) shall, in combination with the applicable 
        standardized amounts and the weighting factors assigned 
        to such groups under paragraph (4)(B), reflect such 
        cost cohorts as the Secretary determines are 
        appropriate for all new medical services and 
        technologies that are likely to be provided as 
        inpatient hospital services in a fiscal year.
  (iii) The methodology for classifying specific hospital 
discharges within a diagnosis-related group under paragraph 
(4)(A) or a new-technology group shall provide that a specific 
hospital discharge may not be classified within both a 
diagnosis-related group and a new-technology group.
  (6) The Secretary shall provide for publication in the 
Federal Register, on or before the August 1 before each fiscal 
year (beginning with fiscal year 1984), of a description of the 
methodology and data used in computing the adjusted DRG 
prospective payment rates under this subsection, including any 
adjustments required under subsection (e)(1)(B).
  (7) There shall be no administrative or judicial review under 
section 1878 or otherwise of--
          (A) the determination of the requirement, or the 
        proportional amount, of any adjustment effected 
        pursuant to subsection (e)(1) or the determination of 
        the applicable percentage increase under paragraph 
        (12)(A)(ii),
          (B) the establishment of diagnosis-related groups, of 
        the methodology for the classification of discharges 
        within such groups, and of the appropriate weighting 
        factors thereof under paragraph (4), including the 
        selection and revision of codes under paragraph (4)(D), 
        and
          (C) the determination of whether services provided 
        prior to a patient's inpatient admission are related to 
        the admission (as described in subsection (a)(4)).
  (8)(A) In the case of any hospital which is located in an 
area which is, at any time after April 20, 1983, reclassified 
from an urban to a rural area, payments to such hospital for 
the first two cost reporting periods for which such 
reclassification is effective shall be made as follows:
          (i) For the first such cost reporting period, payment 
        shall be equal to the amount payable to such hospital 
        for such reporting period on the basis of the rural 
        classification, plus an amount equal to two-thirds of 
        the amount (if any) by which--
                  (I) the amount which would have been payable 
                to such hospital for such reporting period on 
                the basis of an urban classification, exceeds
                  (II) the amount payable to such hospital for 
                such reporting period on the basis of the rural 
                classification.
          (ii) For the second such cost reporting period, 
        payment shall be equal to the amount payable to such 
        hospital for such reporting period on the basis of the 
        rural classification, plus an amount equal to one-third 
        of the amount (if any) by which--
                  (I) the amount which would have been payable 
                to such hospital for such reporting period on 
                the basis of an urban classification, exceeds
                  (II) the amount payable to such hospital for 
                such reporting period on the basis of the rural 
                classification.
  (B)(i) For purposes of this subsection, the Secretary shall 
treat a hospital located in a rural county adjacent to one or 
more urban areas as being located in the urban metropolitan 
statistical area to which the greatest number of workers in the 
county commute, if the rural county would otherwise be 
considered part of an urban area, under the standards for 
designating Metropolitan Statistical Areas (and for designating 
New England County Metropolitan Areas) described in clause 
(ii), if the commuting rates used in determining outlying 
counties (or, for New England, similar recognized areas) were 
determined on the basis of the aggregate number of resident 
workers who commute to (and, if applicable under the standards, 
from) the central county or counties of all contiguous 
Metropolitan Statistical Areas (or New England County 
Metropolitan Areas).
  (ii) The standards described in this clause for cost 
reporting periods beginning in a fiscal year--
          (I) before fiscal year 2003, are the standards 
        published in the Federal Register on January 3, 1980, 
        or, at the election of the hospital with respect to 
        fiscal years 2001 and 2002, standards so published on 
        March 30, 1990; and
          (II) after fiscal year 2002, are the standards 
        published in the Federal Register by the Director of 
        the Office of Management and Budget based on the most 
        recent available decennial population data.
Subparagraphs (C) and (D) shall not apply with respect to the 
application of subclause (I).
  (C)(i) If the application of subparagraph (B) or a decision 
of the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10), by treating hospitals located 
in a rural county or counties as being located in an urban 
area, or by treating hospitals located in one urban area as 
being located in another urban area--
          (I) reduces the wage index for that urban area (as 
        applied under this subsection) by 1 percentage point or 
        less, the Secretary, in calculating such wage index 
        under this subsection, shall exclude those hospitals so 
        treated, or
          (II) reduces the wage index for that urban area by 
        more than 1 percentage point (as applied under this 
        subsection), the Secretary shall calculate and apply 
        such wage index under this subsection separately to 
        hospitals located in such urban area (excluding all the 
        hospitals so treated) and to the hospitals so treated 
        (as if such hospitals were located in such urban area).
  (ii) If the application of subparagraph (B) or a decision of 
the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10), by treating hospitals located 
in a rural county or counties as not being located in the rural 
area in a State, reduces the wage index for that rural area (as 
applied under this subsection), the Secretary shall calculate 
and apply such wage index under this subsection as if the 
hospitals so treated had not been excluded from calculation of 
the wage index for that rural area.
  (iii) The application of subparagraph (B) or a decision of 
the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10) may not result in the reduction 
of any county's wage index to a level below the wage index for 
rural areas in the State in which the county is located.
  (iv) The application of subparagraph (B) or a decision of the 
Medicare Geographic Classification Review Board or of the 
Secretary under paragraph (10) may not result in a reduction in 
an urban area's wage index if--
          (I) the urban area has a wage index below the wage 
        index for rural areas in the State in which it is 
        located; or
          (II) the urban area is located in a State that is 
        composed of a single urban area.
  (v) This subparagraph shall apply with respect to discharges 
occurring in a fiscal year only if the Secretary uses a method 
for making adjustments to the DRG prospective payment rate for 
area differences in hospital wage levels under paragraph (3)(E) 
for the fiscal year that is based on the use of Metropolitan 
Statistical Area classifications.
  (D) The Secretary shall make a proportional adjustment in the 
standardized amounts determined under paragraph (3) to assure 
that the provisions of subparagraphs (B) and (C) or a decision 
of the Medicare Geographic Classification Review Board or the 
Secretary under paragraph (10) do not result in aggregate 
payments under this section that are greater or less than those 
that would otherwise be made.
  (E)(i) For purposes of this subsection, not later than 60 
days after the receipt of an application (in a form and manner 
determined by the Secretary) from a subsection (d) hospital 
described in clause (ii), the Secretary shall treat the 
hospital as being located in the rural area (as defined in 
paragraph (2)(D)) of the State in which the hospital is 
located.
  (ii) For purposes of clause (i), a subsection (d) hospital 
described in this clause is a subsection (d) hospital that is 
located in an urban area (as defined in paragraph (2)(D)) and 
satisfies any of the following criteria:
          (I) The hospital is located in a rural census tract 
        of a metropolitan statistical area (as determined under 
        the most recent modification of the Goldsmith 
        Modification, originally published in the Federal 
        Register on February 27, 1992 (57 Fed. Reg. 6725)).
          (II) The hospital is located in an area designated by 
        any law or regulation of such State as a rural area (or 
        is designated by such State as a rural hospital).
          (III) The hospital would qualify as a rural, 
        regional, or national referral center under paragraph 
        (5)(C) or as a sole community hospital under paragraph 
        (5)(D) if the hospital were located in a rural area.
          (IV) The hospital meets such other criteria as the 
        Secretary may specify.
  (9)(A) Notwithstanding section 1814(b) but subject to the 
provisions of section 1813, the amount of the payment with 
respect to the operating costs of inpatient hospital services 
of a subsection (d) Puerto Rico hospital for inpatient hospital 
discharges is equal to the sum of--
          (i) the applicable Puerto Rico percentage (specified 
        in subparagraph (E)) of the Puerto Rico adjusted DRG 
        prospective payment rate (determined under subparagraph 
        (B) or (C)) for such discharges,
          (ii) the applicable Federal percentage (specified in 
        subparagraph (E)) of--
                  (I) for discharges beginning in a fiscal year 
                beginning on or after October 1, 1997, and 
                before October 1, 2003, the discharge-weighted 
                average of--
                          (aa) the national adjusted DRG 
                        prospective payment rate (determined 
                        under paragraph (3)(D)) for hospitals 
                        located in a large urban area,
                          (bb) such rate for hospitals located 
                        in other urban areas, and
                          (cc) such rate for hospitals located 
                        in a rural area,
                for such discharges, adjusted in the manner 
                provided in paragraph (3)(E) for different area 
                wage levels; and
                  (II) for discharges in a fiscal year 
                beginning on or after October 1, 2003, the 
                national DRG prospective payment rate 
                determined under paragraph (3)(D)(iii) for 
                hospitals located in any area for such 
                discharges, adjusted in the manner provided in 
                paragraph (3)(E) for different area wage 
                levels.
As used in this section, the term ``subsection (d) Puerto Rico 
hospital'' means a hospital that is located in Puerto Rico and 
that would be a subsection (d) hospital (as defined in 
paragraph (1)(B)) if it were located in one of the 50 States.
  (B) The Secretary shall determine a Puerto Rico adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
in fiscal year 1988 involving inpatient hospital services of a 
subsection (d) Puerto Rico hospital for which payment may be 
made under part A of this title. Such rate shall be determined 
for such hospitals located in urban or rural areas within 
Puerto Rico, as follows:
          (i) The Secretary shall determine the target amount 
        (as defined in subsection (b)(3)(A)) for the hospital 
        for the cost reporting period beginning in fiscal year 
        1987 and increase such amount by prorating the 
        applicable percentage increase (as defined in 
        subsection (b)(3)(B)) to update the amount to the 
        midpoint in fiscal year 1988.
          (ii) The Secretary shall standardize the amount 
        determined under clause (i) for each hospital by--
                  (I) excluding an estimate of indirect medical 
                education costs,
                  (II) adjusting for variations among hospitals 
                by area in the average hospital wage level,
                  (III) adjusting for variations in case mix 
                among hospitals, and
                  (IV) excluding an estimate of the additional 
                payments to certain subsection (d) Puerto Rico 
                hospitals to be made under subparagraph 
                (D)(iii) (relating to disproportionate share 
                payments).
          (iii) The Secretary shall compute a discharge 
        weighted average of the standardized amounts determined 
        under clause (ii) for all hospitals located in an urban 
        area and for all hospitals located in a rural area (as 
        such terms are defined in paragraph (2)(D)).
          (iv) The Secretary shall reduce the average 
        standardized amount by a proportion equal to the 
        proportion (estimated by the Secretary) of the amount 
        of payments under this paragraph which are additional 
        payments described in subparagraph (D)(i) (relating to 
        outlier payments).
          (v) For each discharge classified within a diagnosis-
        related group for hospitals located in an urban or 
        rural area, respectively, the Secretary shall establish 
        a Puerto Rico DRG prospective payment rate equal to the 
        product of--
                  (I) the average standardized amount (computed 
                under clause (iii) and reduced under clause 
                (iv)) for hospitals located in an urban or 
                rural area, respectively, and
                  (II) the weighting factor (determined under 
                paragraph (4)(B)) for that diagnosis-related 
                group.
          (vi) The Secretary shall adjust the proportion (as 
        estimated by the Secretary from time to time) of 
        hospitals' costs which are attributable to wages and 
        wage-related costs, of the Puerto Rico DRG prospective 
        payment rate computed under clause (v) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the Puerto Rican average hospital 
        wage level.
  (C) The Secretary shall determine a Puerto Rico adjusted DRG 
prospective payment rate, for each inpatient hospital discharge 
after fiscal year 1988 involving inpatient hospital services of 
a subsection (d) Puerto Rico hospital for which payment may be 
made under part A of this title. Such rate shall be determined 
for hospitals located in urban or rural areas within Puerto 
Rico as follows:
          (i)(I) For discharges in a fiscal year after fiscal 
        year 1988 and before fiscal year 2004, the Secretary 
        shall compute an average standardized amount for 
        hospitals located in an urban area and for hospitals 
        located in a rural area equal to the respective average 
        standardized amount computed for the previous fiscal 
        year under subparagraph (B)(iii) or under this clause, 
        increased for fiscal year 1989 by the applicable 
        percentage increase under subsection (b)(3)(B), and 
        adjusted for subsequent fiscal years in accordance with 
        the final determination of the Secretary under 
        subsection (e)(4), and adjusted to reflect the most 
        recent case-mix data available.
          (II) For discharges occurring in a fiscal year 
        (beginning with fiscal year 2004), the Secretary shall 
        compute an average standardized amount for hospitals 
        located in any area of Puerto Rico that is equal to the 
        average standardized amount computed under subclause 
        (I) for fiscal year 2003 for hospitals in a large urban 
        area (or, beginning with fiscal year 2005, for all 
        hospitals in the previous fiscal year) increased by the 
        applicable percentage increase under subsection 
        (b)(3)(B) for the fiscal year involved.
          (ii) The Secretary shall reduce each of the average 
        standardized amounts (or for fiscal year 2004 and 
        thereafter, the average standardized amount) by a 
        proportion equal to the proportion (estimated by the 
        Secretary) of the amount of payments under this 
        paragraph which are additional payments described in 
        subparagraph (D)(i) (relating to outlier payments).
          (iii) For each discharge classified within a 
        diagnosis-related group for hospitals located in an 
        urban or rural area, respectively, the Secretary shall 
        establish a Puerto Rico DRG prospective payment rate 
        equal to the product of--
                  (I) the average standardized amount (computed 
                under clause (i) and reduced under clause 
                (ii)), and
                  (II) the weighting factor (determined under 
                paragraph (4)(B)) for that diagnosis-related 
                group.
          (iv)(I) The Secretary shall adjust the proportion (as 
        estimated by the Secretary from time to time) of 
        hospitals' costs which are attributable to wages and 
        wage-related costs, of the Puerto Rico DRG prospective 
        payment rate computed under clause (iii) for area 
        differences in hospital wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        hospital compared to the Puerto Rico average hospital 
        wage level. The second and third sentences of paragraph 
        (3)(E)(i) shall apply to subsection (d) Puerto Rico 
        hospitals under this clause in the same manner as they 
        apply to subsection (d) hospitals under such paragraph 
        and, for purposes of this clause, any reference in such 
        paragraph to a subsection (d) hospital is deemed a 
        reference to a subsection (d) Puerto Rico hospital.
          (II) For discharges occurring on or after October 1, 
        2004, the Secretary shall substitute ``62 percent'' for 
        the proportion described in the first sentence of 
        clause (i), unless the application of this subclause 
        would result in lower payments to a hospital than would 
        otherwise be made.
  (D) The following provisions of paragraph (5) shall apply to 
subsection (d) Puerto Rico hospitals receiving payment under 
this paragraph in the same manner and to the extent as they 
apply to subsection (d) hospitals receiving payment under this 
subsection:
          (i) Subparagraph (A) (relating to outlier payments).
          (ii) Subparagraph (B) (relating to payments for 
        indirect medical education costs), except that for this 
        purpose the sum of the amount determined under 
        subparagraph (A) of this paragraph and the amount paid 
        to the hospital under clause (i) of this subparagraph 
        shall be substituted for the sum referred to in 
        paragraph (5)(B)(i)(I).
          (iii) Subparagraph (F) (relating to disproportionate 
        share payments), except that for this purpose the sum 
        described in clause (ii) of this subparagraph shall be 
        substituted for the sum referred to in paragraph 
        (5)(F)(ii)(I).
          (iv) Subparagraph (H) (relating to exceptions and 
        adjustments).
  (E) For purposes of subparagraph (A), for discharges 
occurring--
          (i) on or after October 1, 1987, and before October 
        1, 1997, the applicable Puerto Rico percentage is 75 
        percent and the applicable Federal percentage is 25 
        percent;
          (ii) on or after October 1, 1997, and before April 1, 
        2004, the applicable Puerto Rico percentage is 50 
        percent and the applicable Federal percentage is 50 
        percent;
          (iii) on or after April 1, 2004, and before October 
        1, 2004, the applicable Puerto Rico percentage is 37.5 
        percent and the applicable Federal percentage is 62.5 
        percent; and
          (iv) on or after October 1, 2004, the applicable 
        Puerto Rico percentage is 25 percent and the applicable 
        Federal percentage is 75 percent.
  (10)(A) There is hereby established the Medicare Geographic 
Classification Review Board (hereinafter in this paragraph 
referred to as the ``Board'').
  (B)(i) The Board shall be composed of 5 members appointed by 
the Secretary without regard to the provisions of title 5, 
United States Code, governing appointments in the competitive 
service. Two of such members shall be representative of 
subsection (d) hospitals located in a rural area under 
paragraph (2)(D). At least 1 member shall be knowledgeable in 
the field of analyzing costs with respect to the provision of 
inpatient hospital services.
  (ii) The Secretary shall make initial appointments to the 
Board as provided in this paragraph within 180 days after the 
date of the enactment of this paragraph.
  (C)(i) The Board shall consider the application of any 
subsection (d) hospital requesting that the Secretary change 
the hospital's geographic classification for purposes of 
determining for a fiscal year--
          (I) the hospital's average standardized amount under 
        paragraph (2)(D), or
          (II) the factor used to adjust the DRG prospective 
        payment rate for area differences in hospital wage 
        levels that applies to such hospital under paragraph 
        (3)(E).
  (ii) A hospital requesting a change in geographic 
classification under clause (i) for a fiscal year shall submit 
its application to the Board not later than the first day of 
the 13-month period ending on September 30 of the preceding 
fiscal year.
  (iii)(I) The Board shall render a decision on an application 
submitted under clause (i) not later than 180 days after the 
deadline referred to in clause (ii).
  (II) Appeal of decisions of the Board shall be subject to the 
provisions of section 557b of title 5, United States Code. The 
Secretary shall issue a decision on such an appeal not later 
than 90 days after the date on which the appeal is filed. The 
decision of the Secretary shall be final and shall not be 
subject to judicial review.
  (D)(i) The Secretary shall publish guidelines to be utilized 
by the Board in rendering decisions on applications submitted 
under this paragraph, and shall include in such guidelines the 
following:
          (I) Guidelines for comparing wages, taking into 
        account (to the extent the Secretary determines 
        appropriate) occupational mix, in the area in which the 
        hospital is classified and the area in which the 
        hospital is applying to be classified.
          (II) Guidelines for determining whether the county in 
        which the hospital is located should be treated as 
        being a part of a particular Metropolitan Statistical 
        Area.
          (III) Guidelines for considering information provided 
        by an applicant with respect to the effects of the 
        hospital's geographic classification on access to 
        inpatient hospital services by medicare beneficiaries.
          (IV) Guidelines for considering the appropriateness 
        of the criteria used to define New England County 
        Metropolitan Areas.
  (ii) Notwithstanding clause (i), if the Secretary uses a 
method for making adjustments to the DRG prospective payment 
rate for area differences in hospital wage levels under 
paragraph (3)(E) that is not based on the use of Metropolitan 
Statistical Area classifications, the Secretary may revise the 
guidelines published under clause (i) to the extent such 
guidelines are used to determine the appropriateness of the 
geographic area in which the hospital is determined to be 
located for purposes of making such adjustments.
  (iii) Under the guidelines published by the Secretary under 
clause (i), in the case of a hospital which has ever been 
classified by the Secretary as a rural referral center under 
paragraph (5)(C), the Board may not reject the application of 
the hospital under this paragraph on the basis of any 
comparison between the average hourly wage of the hospital and 
the average hourly wage of hospitals in the area in which it is 
located.
  (iv) The Secretary shall publish the guidelines described in 
clause (i) by July 1, 1990.
  (v) Any decision of the Board to reclassify a subsection (d) 
hospital for purposes of the adjustment factor described in 
subparagraph (C)(i)(II) for fiscal year 2001 or any fiscal year 
thereafter shall be effective for a period of 3 fiscal years, 
except that the Secretary shall establish procedures under 
which a subsection (d) hospital may elect to terminate such 
reclassification before the end of such period.
  (vi) Such guidelines shall provide that, in making decisions 
on applications for reclassification for the purposes described 
in clause (v) for fiscal year 2003 and any succeeding fiscal 
year, the Board shall base any comparison of the average hourly 
wage for the hospital with the average hourly wage for 
hospitals in an area on--
          (I) an average of the average hourly wage amount for 
        the hospital from the most recently published hospital 
        wage survey data of the Secretary (as of the date on 
        which the hospital applies for reclassification) and 
        such amount from each of the two immediately preceding 
        surveys; and
          (II) an average of the average hourly wage amount for 
        hospitals in such area from the most recently published 
        hospital wage survey data of the Secretary (as of the 
        date on which the hospital applies for 
        reclassification) and such amount from each of the two 
        immediately preceding surveys.
  (E)(i) The Board shall have full power and authority to make 
rules and establish procedures, not inconsistent with the 
provisions of this title or regulations of the Secretary, which 
are necessary or appropriate to carry out the provisions of 
this paragraph. In the course of any hearing the Board may 
administer oaths and affirmations. The provisions of 
subsections (d) and (e) of section 205 with respect to subpenas 
shall apply to the Board to the same extent as such provisions 
apply to the Secretary with respect to title II.
  (ii) The Board is authorized to engage such technical 
assistance and to receive such information as may be required 
to carry out its functions, and the Secretary shall, in 
addition, make available to the Board such secretarial, 
clerical, and other assistance as the Board may require to 
carry out its functions.
  (F)(i) Each member of the Board who is not an officer or 
employee of the Federal Government shall be compensated at a 
rate equal to the daily equivalent of the annual rate of basic 
pay prescribed for grade GS-18 of the General Schedule under 
section 5332 of title 5, United States Code, for each day 
(including travel time) during which such member is engaged in 
the performance of the duties of the Board. Each member of the 
Board who is an officer or employee of the United States shall 
serve without compensation in addition to that received for 
service as an officer or employee of the United States.
  (ii) Members of the Board shall be allowed travel expenses, 
including per diem in lieu of subsistence, at rates authorized 
for employees of agencies under subchapter I of chapter 57 of 
title 5, United States Code, while away from their homes or 
regular places of business in the performance of services for 
the Board.
          (11) Additional payments for managed care 
        enrollees.--
                  (A) In general.--For portions of cost 
                reporting periods occurring on or after January 
                1, 1998, the Secretary shall provide for an 
                additional payment amount for each applicable 
                discharge of any subsection (d) hospital that 
                has an approved medical residency training 
                program.
                  (B) Applicable discharge.--For purposes of 
                this paragraph, the term ``applicable 
                discharge'' means the discharge of any 
                individual who is enrolled under a risk-sharing 
                contract with an eligible organization under 
                section 1876 and who is entitled to benefits 
                under part A or any individual who is enrolled 
                with a Medicare+Choice organization under part 
                C.
                  (C) Determination of amount.--The amount of 
                the payment under this paragraph with respect 
                to any applicable discharge shall be equal to 
                the applicable percentage (as defined in 
                subsection (h)(3)(D)(ii)) of the estimated 
                average per discharge amount that would 
                otherwise have been paid under paragraph (5)(B) 
                if the individuals had not been enrolled as 
                described in subparagraph (B).
                  (D) Special rule for hospitals under 
                reimbursement system.--The Secretary shall 
                establish rules for the application of this 
                paragraph to a hospital reimbursed under a 
                reimbursement system authorized under section 
                1814(b)(3) in the same manner as it would apply 
                to the hospital if it were not reimbursed under 
                such section.
          (12) Payment adjustment for low-volume hospitals.--
                  (A) In general.--In addition to any payments 
                calculated under this section for a subsection 
                (d) hospital, for discharges occurring during a 
                fiscal year (beginning with fiscal year 2005), 
                the Secretary shall provide for an additional 
                payment amount to each low-volume hospital (as 
                defined in subparagraph (C)(i)) for discharges 
                occurring during that fiscal year that is equal 
                to the applicable percentage increase 
                (determined under subparagraph (B) or (D) for 
                the hospital involved) in the amount paid to 
                such hospital under this section for such 
                discharges (determined without regard to this 
                paragraph).
                  (B) Applicable percentage increase.--For 
                discharges occurring in fiscal years 2005 
                through 2010 and for discharges occurring in 
                fiscal year 2018 and subsequent fiscal years, 
                the Secretary shall determine an applicable 
                percentage increase for purposes of 
                subparagraph (A) as follows:
                          (i) The Secretary shall determine the 
                        empirical relationship for subsection 
                        (d) hospitals between the standardized 
                        cost-per-case for such hospitals and 
                        the total number of discharges of such 
                        hospitals and the amount of the 
                        additional incremental costs (if any) 
                        that are associated with such number of 
                        discharges.
                          (ii) The applicable percentage 
                        increase shall be determined based upon 
                        such relationship in a manner that 
                        reflects, based upon the number of such 
                        discharges for a subsection (d) 
                        hospital, such additional incremental 
                        costs.
                          (iii) In no case shall the applicable 
                        percentage increase exceed 25 percent.
                  (C) Definitions.--
                          (i) Low-volume hospital.--For 
                        purposes of this paragraph, the term 
                        ``low-volume hospital'' means, for a 
                        fiscal year, a subsection (d) hospital 
                        (as defined in paragraph (1)(B)) that 
                        the Secretary determines is located 
                        more than 25 road miles (or, with 
                        respect to fiscal years 2011 through 
                        2017, 15 road miles) from another 
                        subsection (d) hospital and has less 
                        than 800 discharges (or, with respect 
                        to fiscal years 2011 through 2017, 
                        1,600 discharges of individuals 
                        entitled to, or enrolled for, benefits 
                        under part A) during the fiscal year or 
                        portion of fiscal year.
                          (ii) Discharge.--For purposes of 
                        subparagraph (B) and clause (i), the 
                        term ``discharge'' means an inpatient 
                        acute care discharge of an individual 
                        regardless of whether the individual is 
                        entitled to benefits under part A.
                  (D) Temporary applicable percentage 
                increase.--For discharges occurring in fiscal 
                years 2011 through 2017, the Secretary shall 
                determine an applicable percentage increase for 
                purposes of subparagraph (A) using a continuous 
                linear sliding scale ranging from 25 percent 
                for low-volume hospitals with 200 or fewer 
                discharges of individuals entitled to, or 
                enrolled for, benefits under part A in the 
                fiscal year or the portion of fiscal year to 0 
                percent for low-volume hospitals with greater 
                than 1,600 discharges of such individuals in 
                the fiscal year.
  (13)(A) In order to recognize commuting patterns among 
geographic areas, the Secretary shall establish a process 
through application or otherwise for an increase of the wage 
index applied under paragraph (3)(E) for subsection (d) 
hospitals located in a qualifying county described in 
subparagraph (B) in the amount computed under subparagraph (D) 
based on out-migration of hospital employees who reside in that 
county to any higher wage index area.
  (B) The Secretary shall establish criteria for a qualifying 
county under this subparagraph based on the out-migration 
referred to in subparagraph (A) and differences in the area 
wage indices. Under such criteria the Secretary shall, 
utilizing such data as the Secretary determines to be 
appropriate, establish--
          (i) a threshold percentage, established by the 
        Secretary, of the weighted average of the area wage 
        index or indices for the higher wage index areas 
        involved;
          (ii) a threshold (of not less than 10 percent) for 
        minimum out-migration to a higher wage index area or 
        areas; and
          (iii) a requirement that the average hourly wage of 
        the hospitals in the qualifying county equals or 
        exceeds the average hourly wage of all the hospitals in 
        the area in which the qualifying county is located.
  (C) For purposes of this paragraph, the term ``higher wage 
index area'' means, with respect to a county, an area with a 
wage index that exceeds that of the county.
  (D) The increase in the wage index under subparagraph (A) for 
a qualifying county shall be equal to the percentage of the 
hospital employees residing in the qualifying county who are 
employed in any higher wage index area multiplied by the sum of 
the products, for each higher wage index area of--
          (i) the difference between--
                  (I) the wage index for such higher wage index 
                area, and
                  (II) the wage index of the qualifying county; 
                and
          (ii) the number of hospital employees residing in the 
        qualifying county who are employed in such higher wage 
        index area divided by the total number of hospital 
        employees residing in the qualifying county who are 
        employed in any higher wage index area.
  (E) The process under this paragraph may be based upon the 
process used by the Medicare Geographic Classification Review 
Board under paragraph (10). As the Secretary determines to be 
appropriate to carry out such process, the Secretary may 
require hospitals (including subsection (d) hospitals and other 
hospitals) and critical access hospitals, as required under 
section 1866(a)(1)(T), to submit data regarding the location of 
residence, or the Secretary may use data from other sources.
  (F) A wage index increase under this paragraph shall be 
effective for a period of 3 fiscal years, except that the 
Secretary shall establish procedures under which a subsection 
(d) hospital may elect to waive the application of such wage 
index increase.
  (G) A hospital in a county that has a wage index increase 
under this paragraph for a period and that has not waived the 
application of such an increase under subparagraph (F) is not 
eligible for reclassification under paragraph (8) or (10) 
during that period.
  (H) Any increase in a wage index under this paragraph for a 
county shall not be taken into account for purposes of--
          (i) computing the wage index for portions of the wage 
        index area (not including the county) in which the 
        county is located; or
          (ii) applying any budget neutrality adjustment with 
        respect to such index under paragraph (8)(D).
  (I) The thresholds described in subparagraph (B), data on 
hospital employees used under this paragraph, and any 
determination of the Secretary under the process described in 
subparagraph (E) shall be final and shall not be subject to 
judicial review.
  (e)(1)(A) For cost reporting periods of hospitals beginning 
in fiscal year 1984 or fiscal year 1985, the Secretary shall 
provide for such proportional adjustment in the applicable 
percentage increase (otherwise applicable to the periods under 
subsection (b)(3)(B)) as may be necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsection (d)(1)(A)(i)(I) for that fiscal year 
        for operating costs of inpatient hospital services of 
        hospitals (excluding payments made under section 
        1866(a)(1)(F)),
are not greater or less than--
          (ii) the target percentage (as defined in subsection 
        (d)(1)(C)) of the payment amounts which would have been 
        payable for such services for those same hospitals for 
        that fiscal year under this section under the law as in 
        effect before the date of the enactment of the Social 
        Security Amendments of 1983 (excluding payments made 
        under section 1866(a)(1)(F));
except that the adjustment made under this subparagraph shall 
apply only to subsection (d) hospitals and shall not apply for 
purposes of making computations under subsection (d)(2)(B)(ii) 
or subsection (d)(3)(A).
  (B) For discharges occurring in fiscal year 1984 or fiscal 
year 1985, the Secretary shall provide under subsections 
(d)(2)(F) and (d)(3)(C) for such equal proportional adjustment 
in each of the average standardized amounts otherwise computed 
for that fiscal year as may be necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsection (d)(1)(A)(i)(II) and (d)(5) for that 
        fiscal year for operating costs of inpatient hospital 
        services of hospitals (excluding payments made under 
        section 1866(a)(1)(F)),
are not greater or less than--
          (ii) the DRG percentage (as defined in subsection 
        (d)(1)(C)) of the payment amounts which would have been 
        payable for such services for those same hospitals for 
        that fiscal year under this section under the law as in 
        effect before the date of the enactment of the Social 
        Security Amendments of 1983 (excluding payments made 
        under section 1866(a)(1)(F)).
  (C) For discharges occurring in fiscal year 1988, the 
Secretary shall provide for such equal proportional adjustment 
in each of the average standardized amounts otherwise computed 
under subsection (d)(3) for that fiscal year as may be 
necessary to assure that--
          (i) the aggregate payment amounts otherwise provided 
        under subsections (d)(1)(A)(iii), (d)(5), and (d)(9) 
        for that fiscal year for operating costs of inpatient 
        hospital services of subsection (d) hospitals and 
        subsection (d) Puerto Rico hospitals,
are not greater or less than--
          (ii) the payment amounts that would have been payable 
        for such services for those same hospitals for that 
        fiscal year but for the enactment of the amendments 
        made by section 9304 of the Omnibus Budget 
        Reconciliation Act of 1986.
  (4)(A) Taking into consideration the recommendations of the 
Commission, the Secretary shall recommend for each fiscal year 
(beginning with fiscal year 1988) an appropriate change factor 
for inpatient hospital services for discharges in that fiscal 
year which will take into account amounts necessary for the 
efficient and effective delivery of medically appropriate and 
necessary care of high quality. The appropriate change factor 
may be different for all large urban subsection (d) hospitals, 
other urban subsection (d) hospitals, urban subsection (d) 
Puerto Rico hospitals, rural subsection (d) hospitals, and 
rural subsection (d) Puerto Rico hospitals, and all other 
hospitals and units not paid under subsection (d), and may vary 
among such other hospitals and units.
  (B) In addition to the recommendation made under subparagraph 
(A), the Secretary shall, taking into consideration the 
recommendations of the Commission under paragraph (2)(B), 
recommend for each fiscal year (beginning with fiscal year 
1992) other appropriate changes in each existing reimbursement 
policy under this title under which payments to an institution 
are based upon prospectively determined rates.
  (5) The Secretary shall cause to have published in the 
Federal Register, not later than--
          (A) the April 1 before each fiscal year (beginning 
        with fiscal year 1986), the Secretary's proposed 
        recommendations under paragraph (4) for that fiscal 
        year for public comment, and
          (B) the August 1 before such fiscal year after such 
        consideration of public comment on the proposal as is 
        feasible in the time available, the Secretary's final 
        recommendations under such paragraph for that year.
The Secretary shall include in the publication referred to in 
subparagraph (A) for a fiscal year the report of the 
Commission's recommendations submitted under paragraph (3) for 
that fiscal year. To the extent that the Secretary's 
recommendations under paragraph (4) differ from the 
Commission's recommendations for that fiscal year, the 
Secretary shall include in the publication referred to in 
subparagraph (A) an explanation of the Secretary's grounds for 
not following the Commission's recommendations.
  (f)(1)(A) The Secretary shall maintain a system for the 
reporting of costs of hospitals receiving payments computed 
under subsection (d).
  (B)(i) Subject to clause (ii), the Secretary shall place into 
effect a standardized electronic cost reporting format for 
hospitals under this title.
  (ii) The Secretary may delay or waive the implementation of 
such format in particular instances where such implementation 
would result in financial hardship (in particular with respect 
to hospitals with a small percentage of inpatients entitled to 
benefits under this title).
  (2) If the Secretary determines, based upon information 
supplied by a quality improvement organization under part B of 
title XI, that a hospital, in order to circumvent the payment 
method established under subsection (b) or (d) of this section, 
has taken an action that results in the admission of 
individuals entitled to benefits under part A unnecessarily, 
unnecessary multiple admissions of the same such individuals, 
or other inappropriate medical or other practices with respect 
to such individuals, the Secretary may--
          (A) deny payment (in whole or in part) under part A 
        with respect to inpatient hospital services provided 
        with respect to such an unnecessary admission (or 
        subsequent admission of the same individual), or
          (B) require the hospital to take other corrective 
        action necessary to prevent or correct the 
        inappropriate practice.
  (3) The provisions of subsections (c) through (g) of section 
1128 shall apply to determinations made under paragraph (2) in 
the same manner as they apply to exclusions effected under 
section 1128(b)(13).
  (g)(1)(A) Notwithstanding section 1861(v), instead of any 
amounts that are otherwise payable under this title with 
respect to the reasonable costs of subsection (d) hospitals and 
subsection (d) Puerto Rico hospitals for capital-related costs 
of inpatient hospital services, the Secretary shall, for 
hospital cost reporting periods beginning on or after October 
1, 1991, provide for payments for such costs in accordance with 
a prospective payment system established by the Secretary. 
Aggregate payments made under subsection (d) and this 
subsection during fiscal years 1992 through 1995 shall be 
reduced in a manner that results in a reduction (as estimated 
by the Secretary) in the amount of such payments equal to a 10 
percent reduction in the amount of payments attributable to 
capital-related costs that would otherwise have been made 
during such fiscal year had the amount of such payments been 
based on reasonable costs (as defined in section 1861(v)). For 
discharges occurring after September 30, 1993, the Secretary 
shall reduce by 7.4 percent the unadjusted standard Federal 
capital payment rate (as described in 42 CFR 412.308(c), as in 
effect on the date of the enactment of the Omnibus Budget 
Reconciliation Act of 1993) and shall (for hospital cost 
reporting periods beginning on or after October 1, 1993) 
redetermine which payment methodology is applied to the 
hospital under such system to take into account such reduction. 
In addition to the reduction described in the preceding 
sentence, for discharges occurring on or after October 1, 1997, 
the Secretary shall apply the budget neutrality adjustment 
factor used to determine the Federal capital payment rate in 
effect on September 30, 1995 (as described in section 412.352 
of title 42 of the Code of Federal Regulations), to (i) the 
unadjusted standard Federal capital payment rate (as described 
in section 412.308(c) of that title, as in effect on September 
30, 1997), and (ii) the unadjusted hospital-specific rate (as 
described in section 412.328(e)(1) of that title, as in effect 
on September 30, 1997), and, for discharges occurring on or 
after October 1, 1997, and before October 1, 2002, reduce the 
rates described in clauses (i) and (ii) by 2.1 percent.
  (B) Such system--
          (i) shall provide for (I) a payment on a per 
        discharge basis, and (II) an appropriate weighting of 
        such payment amount as relates to the classification of 
        the discharge;
          (ii) may provide for an adjustment to take into 
        account variations in the relative costs of capital and 
        construction for the different types of facilities or 
        areas in which they are located;
          (iii) may provide for such exceptions (including 
        appropriate exceptions to reflect capital obligations) 
        as the Secretary determines to be appropriate, and
          (iv) may provide for suitable adjustment to reflect 
        hospital occupancy rate.
  (C) In this paragraph, the term ``capital-related costs'' has 
the meaning given such term by the Secretary under subsection 
(a)(4) as of September 30, 1987, and does not include a return 
on equity capital.
  (2)(A) The Secretary shall provide that the amount which is 
allowable, with respect to reasonable costs of inpatient 
hospital services for which payment may be made under this 
title, for a return on equity capital for hospitals shall, for 
cost reporting periods beginning on or after the date of the 
enactment of this subsection, be equal to amounts otherwise 
allowable under regulations in effect on March 1, 1983, except 
that the rate of return to be recognized shall be equal to the 
applicable percentage (described in subparagraph (B)) of the 
average of the rates of interest, for each of the months any 
part of which is included in the reporting period, on 
obligations issued for purchase by the Federal Hospital 
Insurance Trust Fund.
  (B) In this paragraph, the ``applicable percentage'' is--
          (i) 75 percent, for cost reporting periods beginning 
        during fiscal year 1987,
          (ii) 50 percent, for cost reporting periods beginning 
        during fiscal year 1988,
          (iii) 25 percent, for cost reporting periods 
        beginning during fiscal year 1989, and
          (iv) 0 percent, for cost reporting periods beginning 
        on or after October 1, 1989.
  (3)(A) Except as provided in subparagraph (B), in determining 
the amount of the payments that may be made under this title 
with respect to all the capital-related costs of inpatient 
hospital services of a subsection (d) hospital and a subsection 
(d) Puerto Rico hospital, the Secretary shall reduce the 
amounts of such payments otherwise established under this title 
by--
          (i) 3.5 percent for payments attributable to portions 
        of cost reporting periods occurring during fiscal year 
        1987,
          (ii) 7 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during fiscal year 1988 on or after 
        October 1, 1987, and before January 1, 1988,
          (iii) 12 percent for payments attributable to 
        portions of cost reporting periods or discharges (as 
        the case may be) in fiscal year 1988, occurring on or 
        after January 1, 1988,
          (iv) 15 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during fiscal year 1989, and
          (v) 15 percent for payments attributable to portions 
        of cost reporting periods or discharges (as the case 
        may be) occurring during the period beginning January 
        1, 1990, and ending September 30, 1991.
  (B) Subparagraph (A) shall not apply to payments with respect 
to the capital-related costs of any hospital that is a sole 
community hospital (as defined in subsection (d)(5)(D)(iii)) or 
a critical access hospital (as defined in section 1861(mm)(1)).
  (4) In determining the amount of the payments that are 
attributable to portions of cost reporting periods occurring 
during fiscal years 1998 through 2002 and that may be made 
under this title with respect to capital-related costs of 
inpatient hospital services of a hospital which is described in 
clause (i), (ii), or (iv) of subsection (d)(1)(B) or a unit 
described in the matter after clause (v) of such subsection, 
the Secretary shall reduce the amounts of such payments 
otherwise determined under this title by 15 percent.
  (h) Payments for Direct Graduate Medical Education Costs.--
          (1) Substitution of special payment rules.--
        Notwithstanding section 1861(v), instead of any amounts 
        that are otherwise payable under this title with 
        respect to the reasonable costs of hospitals for direct 
        graduate medical education costs, the Secretary shall 
        provide for payments for such costs in accordance with 
        paragraph (3) of this subsection. In providing for such 
        payments, the Secretary shall provide for an allocation 
        of such payments between part A and part B (and the 
        trust funds established under the respective parts) as 
        reasonably reflects the proportion of direct graduate 
        medical education costs of hospitals associated with 
        the provision of services under each respective part.
          (2) Determination of hospital-specific approved fte 
        resident amounts.--The Secretary shall determine, for 
        each hospital with an approved medical residency 
        training program, an approved FTE resident amount for 
        each cost reporting period beginning on or after July 
        1, 1985, as follows:
                  (A) Determining allowable average cost per 
                fte resident in a hospital's base period.--The 
                Secretary shall determine, for the hospital's 
                cost reporting period that began during fiscal 
                year 1984, the average amount recognized as 
                reasonable under this title for direct graduate 
                medical education costs of the hospital for 
                each full-time-equivalent resident.
                  (B) Updating to the first cost reporting 
                period.--
                          (i) In general.--The Secretary shall 
                        update each average amount determined 
                        under subparagraph (A) by the 
                        percentage increase in the consumer 
                        price index during the 12-month cost 
                        reporting period described in such 
                        subparagraph.
                          (ii) Exception.--The Secretary shall 
                        not perform an update under clause (i) 
                        in the case of a hospital if the 
                        hospital's reporting period, described 
                        in subparagraph (A), began on or after 
                        July 1, 1984, and before October 1, 
                        1984.
                  (C) Amount for first cost reporting period.--
                For the first cost reporting period of the 
                hospital beginning on or after July 1, 1985, 
                the approved FTE resident amount for the 
                hospital is equal to the amount determined 
                under subparagraph (B) increased by 1 percent.
                  (D) Amount for subsequent cost reporting 
                periods.--
                          (i) In general.--Except as provided 
                        in a subsequent clause, for each 
                        subsequent cost reporting period, the 
                        approved FTE resident amount for the 
                        hospital is equal to the approved FTE 
                        resident amount determined under this 
                        paragraph for the previous cost 
                        reporting period updated, through the 
                        midpoint of the period, by projecting 
                        the estimated percentage change in the 
                        consumer price index during the 12-
                        month period ending at that midpoint, 
                        with appropriate adjustments to reflect 
                        previous under-or over-estimations 
                        under this subparagraph in the 
                        projected percentage change in the 
                        consumer price index.
                          (ii) Freeze in update for fiscal 
                        years 1994 and 1995.--For cost 
                        reporting periods beginning during 
                        fiscal year 1994 or fiscal year 1995, 
                        the approved FTE resident amount for a 
                        hospital shall not be updated under 
                        clause (i) for a resident who is not a 
                        primary care resident (as defined in 
                        paragraph (5)(H)) or a resident 
                        enrolled in an approved medical 
                        residency training program in 
                        obstetrics and gynecology.
                          (iii) Floor for locality adjusted 
                        national average per resident amount.--
                        The approved FTE resident amount for a 
                        hospital for the cost reporting period 
                        beginning during fiscal year 2001 shall 
                        not be less than 70 percent, and for 
                        the cost reporting period beginning 
                        during fiscal year 2002 shall not be 
                        less than 85 percent, of the locality 
                        adjusted national average per resident 
                        amount computed under subparagraph (E) 
                        for the hospital and period.
                          (iv) Adjustment in rate of increase 
                        for hospitals with fte approved amount 
                        above 140 percent of locality adjusted 
                        national average per resident amount.--
                                  (I) Freeze for fiscal years 
                                2001 and 2002 and 2004 through 
                                2013.--For a cost reporting 
                                period beginning during fiscal 
                                year 2001 or fiscal year 2002 
                                or during the period beginning 
                                with fiscal year 2004 and 
                                ending with fiscal year 2013, 
                                if the approved FTE resident 
                                amount for a hospital for the 
                                preceding cost reporting period 
                                exceeds 140 percent of the 
                                locality adjusted national 
                                average per resident amount 
                                computed under subparagraph (E) 
                                for that hospital and period, 
                                subject to subclause (III), the 
                                approved FTE resident amount 
                                for the period involved shall 
                                be the same as the approved FTE 
                                resident amount for the 
                                hospital for such preceding 
                                cost reporting period.
                                  (II)  2 percent decrease in 
                                update for fiscal years 2003, 
                                2004, and 2005.--For the cost 
                                reporting period beginning 
                                during fiscal year 2003, if the 
                                approved FTE resident amount 
                                for a hospital for the 
                                preceding cost reporting period 
                                exceeds 140 percent of the 
                                locality adjusted national 
                                average per resident amount 
                                computed under subparagraph (E) 
                                for that hospital and preceding 
                                period, the approved FTE 
                                resident amount for the period 
                                involved shall be updated in 
                                the manner described in 
                                subparagraph (D)(i) except 
                                that, subject to subclause 
                                (III), the consumer price index 
                                applied for a 12-month period 
                                shall be reduced (but not below 
                                zero) by 2 percentage points.
                                  (III) No adjustment below 140 
                                percent.--In no case shall 
                                subclause (I) or (II) reduce an 
                                approved FTE resident amount 
                                for a hospital for a cost 
                                reporting period below 140 
                                percent of the locality 
                                adjusted national average per 
                                resident amount computed under 
                                subparagraph (E) for such 
                                hospital and period.
                  (E) Determination of locality adjusted 
                national average per resident amount.--The 
                Secretary shall determine a locality adjusted 
                national average per resident amount with 
                respect to a cost reporting period of a 
                hospital beginning during a fiscal year as 
                follows:
                          (i) Determining hospital single per 
                        resident amount.--The Secretary shall 
                        compute for each hospital operating an 
                        approved graduate medical education 
                        program a single per resident amount 
                        equal to the average (weighted by 
                        number of full-time equivalent 
                        residents, as determined under 
                        paragraph (4)) of the primary care per 
                        resident amount and the non-primary 
                        care per resident amount computed under 
                        paragraph (2) for cost reporting 
                        periods ending during fiscal year 1997.
                          (ii) Standardizing per resident 
                        amounts.--The Secretary shall compute a 
                        standardized per resident amount for 
                        each such hospital by dividing the 
                        single per resident amount computed 
                        under clause (i) by an average of the 3 
                        geographic index values (weighted by 
                        the national average weight for each of 
                        the work, practice expense, and 
                        malpractice components) as applied 
                        under section 1848(e) for 1999 for the 
                        fee schedule area in which the hospital 
                        is located.
                          (iii) Computing of weighted 
                        average.--The Secretary shall compute 
                        the average of the standardized per 
                        resident amounts computed under clause 
                        (ii) for such hospitals, with the 
                        amount for each hospital weighted by 
                        the average number of full-time 
                        equivalent residents at such hospital 
                        (as determined under paragraph (4)).
                          (iv) Computing national average per 
                        resident amount.--The Secretary shall 
                        compute the national average per 
                        resident amount, for a hospital's cost 
                        reporting period that begins during 
                        fiscal year 2001, equal to the weighted 
                        average computed under clause (iii) 
                        increased by the estimated percentage 
                        increase in the consumer price index 
                        for all urban consumers during the 
                        period beginning with the month that 
                        represents the midpoint of the cost 
                        reporting periods described in clause 
                        (i) and ending with the midpoint of the 
                        hospital's cost reporting period that 
                        begins during fiscal year 2001.
                          (v) Adjusting for locality.--The 
                        Secretary shall compute the product 
                        of--
                                  (I) the national average per 
                                resident amount computed under 
                                clause (iv) for the hospital, 
                                and
                                  (II) the geographic index 
                                value average (described and 
                                applied under clause (ii)) for 
                                the fee schedule area in which 
                                the hospital is located.
                          (vi) Computing locality adjusted 
                        amount.--The locality adjusted national 
                        per resident amount for a hospital 
                        for--
                                  (I) the cost reporting period 
                                beginning during fiscal year 
                                2001 is the product computed 
                                under clause (v); or
                                  (II) each subsequent cost 
                                reporting period is equal to 
                                the locality adjusted national 
                                per resident amount for the 
                                hospital for the previous cost 
                                reporting period (as determined 
                                under this clause) updated, 
                                through the midpoint of the 
                                period, by projecting the 
                                estimated percentage change in 
                                the consumer price index for 
                                all urban consumers during the 
                                12-month period ending at that 
                                midpoint.
                  (F) Treatment of certain hospitals.--In the 
                case of a hospital that did not have an 
                approved medical residency training program or 
                was not participating in the program under this 
                title for a cost reporting period beginning 
                during fiscal year 1984, the Secretary shall, 
                for the first such period for which it has such 
                a residency training program and is 
                participating under this title, provide for 
                such approved FTE resident amount as the 
                Secretary determines to be appropriate, based 
                on approved FTE resident amounts for comparable 
                programs.
          (3) Hospital payment amount per resident.--
                  (A) In general.--The payment amount, for a 
                hospital cost reporting period beginning on or 
                after July 1, 1985, is equal to the product 
                of--
                          (i) the aggregate approved amount (as 
                        defined in subparagraph (B)) for that 
                        period, and
                          (ii) the hospital's medicare patient 
                        load (as defined in subparagraph (C)) 
                        for that period.
                  (B) Aggregate approved amount.--As used in 
                subparagraph (A), the term ``aggregate approved 
                amount'' means, for a hospital cost reporting 
                period, the product of--
                          (i) the hospital's approved FTE 
                        resident amount (determined under 
                        paragraph (2)) for that period, and
                          (ii) the weighted average number of 
                        full-time-equivalent residents (as 
                        determined under paragraph (4)) in the 
                        hospital's approved medical residency 
                        training programs in that period.
        The Secretary shall reduce the aggregate approved 
        amount to the extent payment is made under subsection 
        (k) for residents included in the hospital's count of 
        full-time equivalent residents.
                  (C) Medicare patient load.--As used in 
                subparagraph (A), the term ``medicare patient 
                load'' means, with respect to a hospital's cost 
                reporting period, the fraction of the total 
                number of inpatient-bed-days (as established by 
                the Secretary) during the period which are 
                attributable to patients with respect to whom 
                payment may be made under part A.
                  (D) Payment for managed care enrollees.--
                          (i) In general.--For portions of cost 
                        reporting periods occurring on or after 
                        January 1, 1998, the Secretary shall 
                        provide for an additional payment 
                        amount under this subsection for 
                        services furnished to individuals who 
                        are enrolled under a risk-sharing 
                        contract with an eligible organization 
                        under section 1876 and who are entitled 
                        to part A or with a Medicare+Choice 
                        organization under part C. The amount 
                        of such a payment shall equal, subject 
                        to clause (iii), the applicable 
                        percentage of the product of--
                                  (I) the aggregate approved 
                                amount (as defined in 
                                subparagraph (B)) for that 
                                period; and
                                  (II) the fraction of the 
                                total number of inpatient-bed 
                                days (as established by the 
                                Secretary) during the period 
                                which are attributable to such 
                                enrolled individuals.
                          (ii) Applicable percentage.--For 
                        purposes of clause (i), the applicable 
                        percentage is--
                                  (I) 20 percent in 1998,
                                  (II) 40 percent in 1999,
                                  (III) 60 percent in 2000,
                                  (IV) 80 percent in 2001, and
                                  (V) 100 percent in 2002 and 
                                subsequent years.
                          (iii) Proportional reduction for 
                        nursing and allied health education.--
                        The Secretary shall estimate a 
                        proportional adjustment in payments to 
                        all hospitals determined under clauses 
                        (i) and (ii) for portions of cost 
                        reporting periods beginning in a year 
                        (beginning with 2000) such that the 
                        proportional adjustment reduces 
                        payments in an amount for such year 
                        equal to the total additional payment 
                        amounts for nursing and allied health 
                        education determined under subsection 
                        (l) for portions of cost reporting 
                        periods occurring in that year.
                          (iv) Special rule for hospitals under 
                        reimbursement system.--The Secretary 
                        shall establish rules for the 
                        application of this subparagraph to a 
                        hospital reimbursed under a 
                        reimbursement system authorized under 
                        section 1814(b)(3) in the same manner 
                        as it would apply to the hospital if it 
                        were not reimbursed under such section.
          (4) Determination of full-time-equivalent 
        residents.--
                  (A) Rules.--The Secretary shall establish 
                rules consistent with this paragraph for the 
                computation of the number of full-time- 
                equivalent residents in an approved medical 
                residency training program.
                  (B) Adjustment for part-year or part-time 
                residents.--Such rules shall take into account 
                individuals who serve as residents for only a 
                portion of a period with a hospital or 
                simultaneously with more than one hospital.
                  (C) Weighting factors for certain 
                residents.--Subject to subparagraph (D), such 
                rules shall provide, in calculating the number 
                of full-time-equivalent residents in an 
                approved residency program--
                          (i) before July 1, 1986, for each 
                        resident the weighting factor is 1.00,
                          (ii) on or after July 1, 1986, for a 
                        resident who is in the resident's 
                        initial residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is 1.00,
                          (iii) on or after July 1, 1986, and 
                        before July 1, 1987, for a resident who 
                        is not in the resident's initial 
                        residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is .75, and
                          (iv) on or after July 1, 1987, for a 
                        resident who is not in the resident's 
                        initial residency period (as defined in 
                        paragraph (5)(F)), the weighting factor 
                        is .50.
                  (D) Foreign medical graduates required to 
                pass fmgems examination.--
                          (i) In general.--Except as provided 
                        in clause (ii), such rules shall 
                        provide that, in the case of an 
                        individual who is a foreign medical 
                        graduate (as defined in paragraph 
                        (5)(D)), the individual shall not be 
                        counted as a resident on or after July 
                        1, 1986, unless--
                                  (I) the individual has passed 
                                the FMGEMS examination (as 
                                defined in paragraph (5)(E)), 
                                or
                                  (II) the individual has 
                                previously received 
                                certification from, or has 
                                previously passed the 
                                examination of, the Educational 
                                Commission for Foreign Medical 
                                Graduates.
                          (ii) Transition for current fmgs.--On 
                        or after July 1, 1986, but before July 
                        1, 1987, in the case of a foreign 
                        medical graduate who--
                                  (I) has served as a resident 
                                before July 1, 1986, and is 
                                serving as a resident after 
                                that date, but
                                  (II) has not passed the 
                                FMGEMS examination or a 
                                previous examination of the 
                                Educational Commission for 
                                Foreign Medical Graduates 
                                before July 1, 1986,
                        the individual shall be counted as a 
                        resident at a rate equal to one-half of 
                        the rate at which the individual would 
                        otherwise be counted.
                  (E) Counting time spent in outpatient 
                settings.--Subject to subparagraphs (J) and 
                (K), such rules shall provide that only time 
                spent in activities relating to patient care 
                shall be counted and that--
                          (i) effective for cost reporting 
                        periods beginning before July 1, 2010, 
                        all the time;
                          (ii) effective for cost reporting 
                        periods beginning on or after July 1, 
                        2010, all the time so spent by a 
                        resident shall be counted towards the 
                        determination of full-time equivalency, 
                        without regard to the setting in which 
                        the activities are performed, if a 
                        hospital incurs the costs of the 
                        stipends and fringe benefits of the 
                        resident during the time the resident 
                        spends in that setting. If more than 
                        one hospital incurs these costs, either 
                        directly or through a third party, such 
                        hospitals shall count a proportional 
                        share of the time, as determined by 
                        written agreement between the 
                        hospitals, that a resident spends 
                        training in that setting.
                so spent by a resident under an approved 
                medical residency training program shall be 
                counted towards the determination of full-time 
                equivalency, without regard to the setting in 
                which the activities are performed, if the 
                hospital incurs all, or substantially all, of 
                the costs for the training program in that 
                setting.
                Any hospital claiming under this subparagraph 
                for time spent in a nonprovider setting shall 
                maintain and make available to the Secretary 
                records regarding the amount of such time and 
                such amount in comparison with amounts of such 
                time in such base year as the Secretary shall 
                specify.
                  (F) Limitation on number of residents in 
                allopathic and osteopathic medicine.--
                          (i) In general.--Such rules shall 
                        provide that for purposes of a cost 
                        reporting period beginning on or after 
                        October 1, 1997, subject to paragraphs 
                        (7) and (8), the total number of full-
                        time equivalent residents before 
                        application of weighting factors (as 
                        determined under this paragraph) with 
                        respect to a hospital's approved 
                        medical residency training program in 
                        the fields of allopathic medicine and 
                        osteopathic medicine may not exceed the 
                        number (or, 130 percent of such number 
                        in the case of a hospital located in a 
                        rural area) of such full-time 
                        equivalent residents for the hospital's 
                        most recent cost reporting period 
                        ending on or before December 31, 1996.
                          (ii) Counting primary care residents 
                        on certain approved leaves of absence 
                        in base year fte count.--
                                  (I) In general.--In 
                                determining the number of such 
                                full-time equivalent residents 
                                for a hospital's most recent 
                                cost reporting period ending on 
                                or before December 31, 1996, 
                                for purposes of clause (i), the 
                                Secretary shall count an 
                                individual to the extent that 
                                the individual would have been 
                                counted as a primary care 
                                resident for such period but 
                                for the fact that the 
                                individual, as determined by 
                                the Secretary, was on maternity 
                                or disability leave or a 
                                similar approved leave of 
                                absence.
                                  (II) Limitation to 3 fte 
                                residents for any hospital.--
                                The total number of individuals 
                                counted under subclause (I) for 
                                a hospital may not exceed 3 
                                full-time equivalent residents.
                  (G) Counting interns and residents for fy 
                1998 and subsequent years.--
                          (i) In general.--For cost reporting 
                        periods beginning during fiscal years 
                        beginning on or after October 1, 1997, 
                        subject to the limit described in 
                        subparagraph (F), the total number of 
                        full-time equivalent residents for 
                        determining a hospital's graduate 
                        medical education payment shall equal 
                        the average of the actual full-time 
                        equivalent resident counts for the cost 
                        reporting period and the preceding two 
                        cost reporting periods.
                          (ii) Adjustment for short periods.--
                        If any cost reporting period beginning 
                        on or after October 1, 1997, is not 
                        equal to twelve months, the Secretary 
                        shall make appropriate modifications to 
                        ensure that the average full-time 
                        equivalent resident counts pursuant to 
                        clause (i) are based on the equivalent 
                        of full twelve-month cost reporting 
                        periods.
                          (iii) Transition rule for 1998.--In 
                        the case of a hospital's first cost 
                        reporting period beginning on or after 
                        October 1, 1997, clause (i) shall be 
                        applied by using the average for such 
                        period and the preceding cost reporting 
                        period.
                  (H) Special rules for application of 
                subparagraphs (f) and (g).--
                          (i) New facilities.--The Secretary 
                        shall, consistent with the principles 
                        of subparagraphs (F) and (G) and 
                        subject to paragraphs (7) and (8), 
                        prescribe rules for the application of 
                        such subparagraphs in the case of 
                        medical residency training programs 
                        established on or after January 1, 
                        1995. In promulgating such rules for 
                        purposes of subparagraph (F), the 
                        Secretary shall give special 
                        consideration to facilities that meet 
                        the needs of underserved rural areas.
                          (ii) Aggregation.--The Secretary may 
                        prescribe rules which allow 
                        institutions which are members of the 
                        same affiliated group (as defined by 
                        the Secretary) to elect to apply the 
                        limitation of subparagraph (F) on an 
                        aggregate basis.
                          (iii) Data collection.--The Secretary 
                        may require any entity that operates a 
                        medical residency training program and 
                        to which subparagraphs (F) and (G) 
                        apply to submit to the Secretary such 
                        additional information as the Secretary 
                        considers necessary to carry out such 
                        subparagraphs.
                          (iv) Nonrural hospitals operating 
                        training programs in rural areas.--In 
                        the case of a hospital that is not 
                        located in a rural area but establishes 
                        separately accredited approved medical 
                        residency training programs (or rural 
                        tracks) in an rural area or has an 
                        accredited training program with an 
                        integrated rural track, the Secretary 
                        shall adjust the limitation under 
                        subparagraph (F) in an appropriate 
                        manner insofar as it applies to such 
                        programs in such rural areas in order 
                        to encourage the training of physicians 
                        in rural areas.
                          (v) Special provider agreement.--If 
                        an entity enters into a provider 
                        agreement pursuant to section 1866(a) 
                        to provide hospital services on the 
                        same physical site previously used by 
                        Medicare Provider No. 05-0578--
                                  (I) the limitation on the 
                                number of total full time 
                                equivalent residents under 
                                subparagraph (F) and clauses 
                                (v) and (vi)(I) of subsection 
                                (d)(5)(B) applicable to such 
                                provider shall be equal to the 
                                limitation applicable under 
                                such provisions to Provider No. 
                                05-0578 for its cost reporting 
                                period ending on June 30, 2006; 
                                and
                                  (II) the provisions of 
                                subparagraph (G) and subsection 
                                (d)(5)(B)(vi)(II) shall not be 
                                applicable to such provider for 
                                the first three cost reporting 
                                years in which such provider 
                                trains residents under any 
                                approved medical residency 
                                training program.
                          (vi) Redistribution of residency 
                        slots after a hospital closes.--
                                  (I) In general.--Subject to 
                                the succeeding provisions of 
                                this clause, the Secretary 
                                shall, by regulation, establish 
                                a process under which, in the 
                                case where a hospital (other 
                                than a hospital described in 
                                clause (v)) with an approved 
                                medical residency program 
                                closes on or after a date that 
                                is 2 years before the date of 
                                enactment of this clause, the 
                                Secretary shall increase the 
                                otherwise applicable resident 
                                limit under this paragraph for 
                                other hospitals in accordance 
                                with this clause.
                                  (II) Priority for hospitals 
                                in certain areas.--Subject to 
                                the succeeding provisions of 
                                this clause, in determining for 
                                which hospitals the increase in 
                                the otherwise applicable 
                                resident limit is provided 
                                under such process, the 
                                Secretary shall distribute the 
                                increase to hospitals in the 
                                following priority order (with 
                                preference given within each 
                                category to hospitals that are 
                                members of the same affiliated 
                                group (as defined by the 
                                Secretary under clause (ii)) as 
                                the closed hospital):
                                          (aa) First, to 
                                        hospitals located in 
                                        the same core-based 
                                        statistical area as, or 
                                        a core-based 
                                        statistical area 
                                        contiguous to, the 
                                        hospital that closed.
                                          (bb) Second, to 
                                        hospitals located in 
                                        the same State as the 
                                        hospital that closed.
                                          (cc) Third, to 
                                        hospitals located in 
                                        the same region of the 
                                        country as the hospital 
                                        that closed.
                                          (dd) Fourth, only if 
                                        the Secretary is not 
                                        able to distribute the 
                                        increase to hospitals 
                                        described in item (cc), 
                                        to qualifying hospitals 
                                        in accordance with the 
                                        provisions of paragraph 
                                        (8).
                                  (III) Requirement hospital 
                                likely to fill position within 
                                certain time period.--The 
                                Secretary may only increase the 
                                otherwise applicable resident 
                                limit of a hospital under such 
                                process if the Secretary 
                                determines the hospital has 
                                demonstrated a likelihood of 
                                filling the positions made 
                                available under this clause 
                                within 3 years.
                                  (IV) Limitation.--The 
                                aggregate number of increases 
                                in the otherwise applicable 
                                resident limits for hospitals 
                                under this clause shall be 
                                equal to the number of resident 
                                positions in the approved 
                                medical residency programs that 
                                closed on or after the date 
                                described in subclause (I).
                                  (V) Administration.--Chapter 
                                35 of title 44, United States 
                                Code, shall not apply to the 
                                implementation of this clause.
                  (J) Treatment of certain nonprovider and 
                didactic activities.--Such rules shall provide 
                that all time spent by an intern or resident in 
                an approved medical residency training program 
                in a nonprovider setting that is primarily 
                engaged in furnishing patient care (as defined 
                in paragraph (5)(K)) in non-patient care 
                activities, such as didactic conferences and 
                seminars, but not including research not 
                associated with the treatment or diagnosis of a 
                particular patient, as such time and activities 
                are defined by the Secretary, shall be counted 
                toward the determination of full-time 
                equivalency.
                  (K) Treatment of certain other activities.--
                In determining the hospital's number of full-
                time equivalent residents for purposes of this 
                subsection, all the time that is spent by an 
                intern or resident in an approved medical 
                residency training program on vacation, sick 
                leave, or other approved leave, as such time is 
                defined by the Secretary, and that does not 
                prolong the total time the resident is 
                participating in the approved program beyond 
                the normal duration of the program shall be 
                counted toward the determination of full-time 
                equivalency.
          (5) Definitions and special rules.--As used in this 
        subsection:
                  (A) Approved medical residency training 
                program.--The term ``approved medical residency 
                training program'' means a residency or other 
                postgraduate medical training program 
                participation in which may be counted toward 
                certification in a specialty or subspecialty 
                and includes formal postgraduate training 
                programs in geriatric medicine approved by the 
                Secretary.
                  (B) Consumer price index.--The term 
                ``consumer price index'' refers to the Consumer 
                Price Index for All Urban Consumers (United 
                States city average), as published by the 
                Secretary of Commerce.
                  (C) Direct graduate medical education 
                costs.--The term ``direct graduate medical 
                education costs'' means direct costs of 
                approved educational activities for approved 
                medical residency training programs.
                  (D) Foreign medical graduate.--The term 
                ``foreign medical graduate'' means a resident 
                who is not a graduate of--
                          (i) a school of medicine accredited 
                        by the Liaison Committee on Medical 
                        Education of the American Medical 
                        Association and the Association of 
                        American Medical Colleges (or approved 
                        by such Committee as meeting the 
                        standards necessary for such 
                        accreditation),
                          (ii) a school of osteopathy 
                        accredited by the American Osteopathic 
                        Association, or approved by such 
                        Association as meeting the standards 
                        necessary for such accreditation, or
                          (iii) a school of dentistry or 
                        podiatry which is accredited (or meets 
                        the standards for accreditation) by an 
                        organization recognized by the 
                        Secretary for such purpose.
                  (E) FMGEMS examination.--The term ``FMGEMS 
                examination'' means parts I and II of the 
                Foreign Medical Graduate Examination in the 
                Medical Sciences or any successor examination 
                recognized by the Secretary for this purpose.
                  (F) Initial residency period.--The term 
                ``initial residency period'' means the period 
                of board eligibility, except that--
                          (i) except as provided in clause 
                        (ii), in no case shall the initial 
                        period of residency exceed an aggregate 
                        period of formal training of more than 
                        five years for any individual, and
                          (ii) a period, of not more than two 
                        years, during which an individual is in 
                        a geriatric residency or fellowship 
                        program or a preventive medicine 
                        residency or fellowship program which 
                        meets such criteria as the Secretary 
                        may establish, shall be treated as part 
                        of the initial residency period, but 
                        shall not be counted against any 
                        limitation on the initial residency 
                        period.
                Subject to subparagraph (G)(v), the initial 
                residency period shall be determined, with 
                respect to a resident, as of the time the 
                resident enters the residency training program.
                  (G) Period of board eligibility.--
                          (i) General rule.--Subject to clauses 
                        (ii), (iii), (iv), and (v), the term 
                        ``period of board eligibility'' means, 
                        for a resident, the minimum number of 
                        years of formal training necessary to 
                        satisfy the requirements for initial 
                        board eligibility in the particular 
                        specialty for which the resident is 
                        training.
                          (ii) Application of 1985-1986 
                        directory.--Except as provided in 
                        clause (iii), the period of board 
                        eligibility shall be such period 
                        specified in the 1985-1986 Directory of 
                        Residency Training Programs published 
                        by the Accreditation Council on 
                        Graduate Medical Education.
                          (iii) Changes in period of board 
                        eligibility.--On or after July 1, 1989, 
                        if the Accreditation Council on 
                        Graduate Medical Education, in its 
                        Directory of Residency Training 
                        Programs--
                                  (I) increases the minimum 
                                number of years of formal 
                                training necessary to satisfy 
                                the requirements for a 
                                specialty, above the period 
                                specified in its 1985-1986 
                                Directory, the Secretary may 
                                increase the period of board 
                                eligibility for that specialty, 
                                but not to exceed the period of 
                                board eligibility specified in 
                                that later Directory, or
                                  (II) decreases the minimum 
                                number of years of formal 
                                training necessary to satisfy 
                                the requirements for a 
                                specialty, below the period 
                                specified in its 1985-1986 
                                Directory, the Secretary may 
                                decrease the period of board 
                                eligibility for that specialty, 
                                but not below the period of 
                                board eligibility specified in 
                                that later Directory.
                          (iv) Special rule for certain primary 
                        care combined residency programs.--(I) 
                        In the case of a resident enrolled in a 
                        combined medical residency training 
                        program in which all of the individual 
                        programs (that are combined) are for 
                        training a primary care resident (as 
                        defined in subparagraph (H)), the 
                        period of board eligibility shall be 
                        the minimum number of years of formal 
                        training required to satisfy the 
                        requirements for initial board 
                        eligibility in the longest of the 
                        individual programs plus one additional 
                        year.
                          (II) A resident enrolled in a 
                        combined medical residency training 
                        program that includes an obstetrics and 
                        gynecology program shall qualify for 
                        the period of board eligibility under 
                        subclause (I) if the other programs 
                        such resident combines with such 
                        obstetrics and gynecology program are 
                        for training a primary care resident.
                          (v) Child neurology training 
                        programs.--In the case of a resident 
                        enrolled in a child neurology residency 
                        training program, the period of board 
                        eligibility and the initial residency 
                        period shall be the period of board 
                        eligibility for pediatrics plus 2 
                        years.
                  (H) Primary care resident.--The term 
                ``primary care resident'' means a resident 
                enrolled in an approved medical residency 
                training program in family medicine, general 
                internal medicine, general pediatrics, 
                preventive medicine, geriatric medicine, or 
                osteopathic general practice.
                  (I) Resident.--The term ``resident'' includes 
                an intern or other participant in an approved 
                medical residency training program.
                  (J) Adjustments for certain family practice 
                residency programs.--
                          (i) In general.--In the case of an 
                        approved medical residency training 
                        program (meeting the requirements of 
                        clause (ii)) of a hospital which 
                        received funds from the United States, 
                        a State, or a political subdivision of 
                        a State or an instrumentality of such a 
                        State or political subdivision (other 
                        than payments under this title or a 
                        State plan under title XIX) for the 
                        program during the cost reporting 
                        period that began during fiscal year 
                        1984, the Secretary shall--
                                  (I) provide for an average 
                                amount under paragraph (2)(A) 
                                that takes into account the 
                                Secretary's estimate of the 
                                amount that would have been 
                                recognized as reasonable under 
                                this title if the hospital had 
                                not received such funds, and
                                  (II) reduce the payment 
                                amount otherwise provided under 
                                this subsection in an amount 
                                equal to the proportion of such 
                                program funds received during 
                                the cost reporting period 
                                involved that is allocable to 
                                this title.
                          (ii) Additional requirements.--A 
                        hospital's approved medical residency 
                        program meets the requirements of this 
                        clause if--
                                  (I) the program is limited to 
                                training for family and 
                                community medicine;
                                  (II) the program is the only 
                                approved medical residency 
                                program of the hospital; and
                                  (III) the average amount 
                                determined under paragraph 
                                (2)(A) for the hospital (as 
                                determined without regard to 
                                the increase in such amount 
                                described in clause (i)(I)) 
                                does not exceed $10,000.
                  (K) Nonprovider setting that is primarily 
                engaged in furnishing patient care.--The term 
                ``nonprovider setting that is primarily engaged 
                in furnishing patient care'' means a 
                nonprovider setting in which the primary 
                activity is the care and treatment of patients, 
                as defined by the Secretary.
          (6) Incentive payment under plans for voluntary 
        reduction in number of residents.--
                  (A) In general.--In the case of a voluntary 
                residency reduction plan for which an 
                application is approved under subparagraph (B), 
                subject to subparagraph (F), each hospital 
                which is part of the qualifying entity 
                submitting the plan shall be paid an applicable 
                hold harmless percentage (as specified in 
                subparagraph (E)) of the sum of--
                          (i) the amount (if any) by which--
                                  (I) the amount of payment 
                                which would have been made 
                                under this subsection if there 
                                had been a 5-percent reduction 
                                in the number of full-time 
                                equivalent residents in the 
                                approved medical education 
                                training programs of the 
                                hospital as of June 30, 1997, 
                                exceeds
                                  (II) the amount of payment 
                                which is made under this 
                                subsection, taking into account 
                                the reduction in such number 
                                effected under the reduction 
                                plan; and
                          (ii) the amount of the reduction in 
                        payment under subsection (d)(5)(B) for 
                        the hospital that is attributable to 
                        the reduction in number of residents 
                        effected under the plan below 95 
                        percent of the number of full-time 
                        equivalent residents in such programs 
                        of the hospital as of June 30, 1997.
                The determination of the amounts under clauses 
                (i) and (ii) for any year shall be made on the 
                basis of the provisions of this title in effect 
                on the application deadline date for the first 
                calendar year to which the reduction plan 
                applies.
                  (B) Approval of plan applications.--The 
                Secretary may not approve the application of an 
                qualifying entity unless--
                          (i) the application is submitted in a 
                        form and manner specified by the 
                        Secretary and by not later than 
                        November 1, 1999,
                          (ii) the application provides for the 
                        operation of a plan for the reduction 
                        in the number of full-time equivalent 
                        residents in the approved medical 
                        residency training programs of the 
                        entity consistent with the requirements 
                        of subparagraph (D);
                          (iii) the entity elects in the 
                        application the period of residency 
                        training years (not greater than 5) 
                        over which the reduction will occur;
                          (iv) the entity will not reduce the 
                        proportion of its residents in primary 
                        care (to the total number of residents) 
                        below such proportion as in effect as 
                        of the applicable time described in 
                        subparagraph (D)(v); and
                          (v) the Secretary determines that the 
                        application and the entity and such 
                        plan meet such other requirements as 
                        the Secretary specifies in regulations.
                  (C) Qualifying entity.--For purposes of this 
                paragraph, any of the following may be a 
                qualifying entity:
                          (i) Individual hospitals operating 
                        one or more approved medical residency 
                        training programs.
                          (ii) Two or more hospitals that 
                        operate such programs and apply for 
                        treatment under this paragraph as a 
                        single qualifying entity.
                          (iii) A qualifying consortium (as 
                        described in section 4628 of the 
                        Balanced Budget Act of 1997).
                  (D) Residency reduction requirements.--
                          (i) Individual hospital applicants.--
                        In the case of a qualifying entity 
                        described in subparagraph (C)(i), the 
                        number of full-time equivalent 
                        residents in all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        as follows:
                                  (I) If the base number of 
                                residents exceeds 750 
                                residents, by a number equal to 
                                at least 20 percent of such 
                                base number.
                                  (II) Subject to subclause 
                                (IV), if the base number of 
                                residents exceeds 600 but is 
                                less than 750 residents, by 150 
                                residents.
                                  (III) Subject to subclause 
                                (IV), if the base number of 
                                residents does not exceed 600 
                                residents, by a number equal to 
                                at least 25 percent of such 
                                base number.
                                  (IV) In the case of a 
                                qualifying entity which is 
                                described in clause (v) and 
                                which elects treatment under 
                                this subclause, by a number 
                                equal to at least 20 percent of 
                                the base number.
                          (ii) Joint applicants.--In the case 
                        of a qualifying entity described in 
                        subparagraph (C)(ii), the number of 
                        full-time equivalent residents in the 
                        aggregate for all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        as follows:
                                  (I) Subject to subclause 
                                (II), by a number equal to at 
                                least 25 percent of the base 
                                number.
                                  (II) In the case of such a 
                                qualifying entity which is 
                                described in clause (v) and 
                                which elects treatment under 
                                this subclause, by a number 
                                equal to at least 20 percent of 
                                the base number.
                          (iii) Consortia.--In the case of a 
                        qualifying entity described in 
                        subparagraph (C)(iii), the number of 
                        full-time equivalent residents in the 
                        aggregate for all the approved medical 
                        residency training programs operated by 
                        or through the entity shall be reduced 
                        by a number equal to at least 20 
                        percent of the base number.
                          (iv) Manner of reduction.--The 
                        reductions specified under the 
                        preceding provisions of this 
                        subparagraph for a qualifying entity 
                        shall be below the base number of 
                        residents for that entity and shall be 
                        fully effective not later than the 5th 
                        residency training year in which the 
                        application under subparagraph (B) is 
                        effective.
                          (v) Entities providing assurance of 
                        increase in primary care residents.--An 
                        entity is described in this clause if--
                                  (I) the base number of 
                                residents for the entity is 
                                less than 750 or the entity is 
                                described in subparagraph 
                                (C)(ii); and
                                  (II) the entity represents in 
                                its application under 
                                subparagraph (B) that it will 
                                increase the number of full-
                                time equivalent residents in 
                                primary care by at least 20 
                                percent (from such number 
                                included in the base number of 
                                residents) by not later than 
                                the 5th residency training year 
                                in which the application under 
                                subparagraph (B) is effective.
                        If a qualifying entity fails to comply 
                        with the representation described in 
                        subclause (II) by the end of such 5th 
                        residency training year, the entity 
                        shall be subject to repayment of all 
                        amounts paid under this paragraph, in 
                        accordance with procedures established 
                        to carry out subparagraph (F).
                          (vi) Base number of residents 
                        defined.--For purposes of this 
                        paragraph, the term ``base number of 
                        residents'' means, with respect to a 
                        qualifying entity (or its participating 
                        hospitals) operating approved medical 
                        residency training programs, the number 
                        of full-time equivalent residents in 
                        such programs (before application of 
                        weighting factors) of the entity as of 
                        the most recent residency training year 
                        ending before June 30, 1997, or, if 
                        less, for any subsequent residency 
                        training year that ends before the date 
                        the entity makes application under this 
                        paragraph.
                  (E) Applicable hold harmless percentage.--For 
                purposes of subparagraph (A), the ``applicable 
                hold harmless percentage'' for the--
                          (i) first and second residency 
                        training years in which the reduction 
                        plan is in effect, 100 percent,
                          (ii) third such year, 75 percent,
                          (iii) fourth such year, 50 percent, 
                        and
                          (iv) fifth such year, 25 percent.
                  (F) Penalty for noncompliance.--
                          (i) In general.--No payment may be 
                        made under this paragraph to a hospital 
                        for a residency training year if the 
                        hospital has failed to reduce the 
                        number of full-time equivalent 
                        residents (in the manner required under 
                        subparagraph (D)) to the number agreed 
                        to by the Secretary and the qualifying 
                        entity in approving the application 
                        under this paragraph with respect to 
                        such year.
                          (ii) Increase in number of residents 
                        in subsequent years.--If payments are 
                        made under this paragraph to a 
                        hospital, and if the hospital increases 
                        the number of full-time equivalent 
                        residents above the number of such 
                        residents permitted under the reduction 
                        plan as of the completion of the plan, 
                        then, as specified by the Secretary, 
                        the entity is liable for repayment to 
                        the Secretary of the total amounts paid 
                        under this paragraph to the entity.
                  (G) Treatment of rotating residents.--In 
                applying this paragraph, the Secretary shall 
                establish rules regarding the counting of 
                residents who are assigned to institutions the 
                medical residency training programs in which 
                are not covered under approved applications 
                under this paragraph.
          (7) Redistribution of unused resident positions.--
                  (A) Reduction in limit based on unused 
                positions.--
                          (i) Programs subject to reduction.--
                                  (I) In general.--Except as 
                                provided in subclause (II), if 
                                a hospital's reference resident 
                                level (specified in clause 
                                (ii)) is less than the 
                                otherwise applicable resident 
                                limit (as defined in 
                                subparagraph (C)(ii)), 
                                effective for portions of cost 
                                reporting periods occurring on 
                                or after July 1, 2005, the 
                                otherwise applicable resident 
                                limit shall be reduced by 75 
                                percent of the difference 
                                between such otherwise 
                                applicable resident limit and 
                                such reference resident level.
                                  (II) Exception for small 
                                rural hospitals.--This 
                                subparagraph shall not apply to 
                                a hospital located in a rural 
                                area (as defined in subsection 
                                (d)(2)(D)(ii)) with fewer than 
                                250 acute care inpatient beds.
                          (ii) Reference resident level.--
                                  (I) In general.--Except as 
                                otherwise provided in 
                                subclauses (II) and (III), the 
                                reference resident level 
                                specified in this clause for a 
                                hospital is the resident level 
                                for the most recent cost 
                                reporting period of the 
                                hospital ending on or before 
                                September 30, 2002, for which a 
                                cost report has been settled 
                                (or, if not, submitted (subject 
                                to audit)), as determined by 
                                the Secretary.
                                  (II) Use of most recent 
                                accounting period to recognize 
                                expansion of existing 
                                programs.--If a hospital 
                                submits a timely request to 
                                increase its resident level due 
                                to an expansion of an existing 
                                residency training program that 
                                is not reflected on the most 
                                recent settled cost report, 
                                after audit and subject to the 
                                discretion of the Secretary, 
                                the reference resident level 
                                for such hospital is the 
                                resident level for the cost 
                                reporting period that includes 
                                July 1, 2003, as determined by 
                                the Secretary.
                                  (III) Expansions under newly 
                                approved programs.--Upon the 
                                timely request of a hospital, 
                                the Secretary shall adjust the 
                                reference resident level 
                                specified under subclause (I) 
                                or (II) to include the number 
                                of medical residents that were 
                                approved in an application for 
                                a medical residency training 
                                program that was approved by an 
                                appropriate accrediting 
                                organization (as determined by 
                                the Secretary) before January 
                                1, 2002, but which was not in 
                                operation during the cost 
                                reporting period used under 
                                subclause (I) or (II), as the 
                                case may be, as determined by 
                                the Secretary.
                          (iii) Affiliation.--The provisions of 
                        clause (i) shall be applied to 
                        hospitals which are members of the same 
                        affiliated group (as defined by the 
                        Secretary under paragraph (4)(H)(ii)) 
                        as of July 1, 2003.
                  (B) Redistribution.--
                          (i) In general.--The Secretary is 
                        authorized to increase the otherwise 
                        applicable resident limit for each 
                        qualifying hospital that submits a 
                        timely application under this 
                        subparagraph by such number as the 
                        Secretary may approve for portions of 
                        cost reporting periods occurring on or 
                        after July 1, 2005. The aggregate 
                        number of increases in the otherwise 
                        applicable resident limits under this 
                        subparagraph may not exceed the 
                        Secretary's estimate of the aggregate 
                        reduction in such limits attributable 
                        to subparagraph (A).
                          (ii) Considerations in 
                        redistribution.--In determining for 
                        which hospitals the increase in the 
                        otherwise applicable resident limit is 
                        provided under clause (i), the 
                        Secretary shall take into account the 
                        demonstrated likelihood of the hospital 
                        filling the positions within the first 
                        3 cost reporting periods beginning on 
                        or after July 1, 2005, made available 
                        under this subparagraph, as determined 
                        by the Secretary.
                          (iii) Priority for rural and small 
                        urban areas.--In determining for which 
                        hospitals and residency training 
                        programs an increase in the otherwise 
                        applicable resident limit is provided 
                        under clause (i), the Secretary shall 
                        distribute the increase to programs of 
                        hospitals located in the following 
                        priority order:
                                  (I) First, to hospitals 
                                located in rural areas (as 
                                defined in subsection 
                                (d)(2)(D)(ii)).
                                  (II) Second, to hospitals 
                                located in urban areas that are 
                                not large urban areas (as 
                                defined for purposes of 
                                subsection (d)).
                                  (III) Third, to other 
                                hospitals in a State if the 
                                residency training program 
                                involved is in a specialty for 
                                which there are not other 
                                residency training programs in 
                                the State.
                        Increases of residency limits within 
                        the same priority category under this 
                        clause shall be determined by the 
                        Secretary.
                          (iv) Limitation.--In no case shall 
                        more than 25 full-time equivalent 
                        additional residency positions be made 
                        available under this subparagraph with 
                        respect to any hospital.
                          (v) Application of locality adjusted 
                        national average per resident amount.--
                        With respect to additional residency 
                        positions in a hospital attributable to 
                        the increase provided under this 
                        subparagraph, notwithstanding any other 
                        provision of this subsection, the 
                        approved FTE resident amount is deemed 
                        to be equal to the locality adjusted 
                        national average per resident amount 
                        computed under paragraph (4)(E) for 
                        that hospital.
                          (vi) Construction.--Nothing in this 
                        subparagraph shall be construed as 
                        permitting the redistribution of 
                        reductions in residency positions 
                        attributable to voluntary reduction 
                        programs under paragraph (6), under a 
                        demonstration project approved as of 
                        October 31, 2003, under the authority 
                        of section 402 of Public Law 90-248, or 
                        as affecting the ability of a hospital 
                        to establish new medical residency 
                        training programs under paragraph 
                        (4)(H).
                  (C) Resident level and limit defined.--In 
                this paragraph:
                          (i) Resident level.--The term 
                        ``resident level'' means, with respect 
                        to a hospital, the total number of 
                        full-time equivalent residents, before 
                        the application of weighting factors 
                        (as determined under paragraph (4)), in 
                        the fields of allopathic and 
                        osteopathic medicine for the hospital.
                          (ii) Otherwise applicable resident 
                        limit.--The term ``otherwise applicable 
                        resident limit'' means, with respect to 
                        a hospital, the limit otherwise 
                        applicable under subparagraphs (F)(i) 
                        and (H) of paragraph (4) on the 
                        resident level for the hospital 
                        determined without regard to this 
                        paragraph.
                  (D) Adjustment based on settled cost 
                report.--In the case of a hospital with a dual 
                accredited osteopathic and allopathic family 
                practice program for which--
                          (i) the otherwise applicable resident 
                        limit was reduced under subparagraph 
                        (A)(i)(I); and
                          (ii) such reduction was based on a 
                        reference resident level that was 
                        determined using a cost report and 
                        where a revised or corrected notice of 
                        program reimbursement was issued for 
                        such cost report between September 1, 
                        2006 and September 15, 2006, whether as 
                        a result of an appeal or otherwise, and 
                        the reference resident level under such 
                        settled cost report is higher than the 
                        level used for the reduction under 
                        subparagraph (A)(i)(I);
                the Secretary shall apply subparagraph 
                (A)(i)(I) using the higher resident reference 
                level and make any necessary adjustments to 
                such reduction. Any such necessary adjustments 
                shall be effective for portions of cost 
                reporting periods occurring on or after July 1, 
                2005.
                  (E) Judicial review.--There shall be no 
                administrative or judicial review under section 
                1869, 1878, or otherwise, with respect to 
                determinations made under this this paragraph, 
                paragraph (8), or paragraph (4)(H)(vi).
          (8) Distribution of additional residency positions.--
                  (A) Reductions in limit based on unused 
                positions.--
                          (i) In general.--Except as provided 
                        in clause (ii), if a hospital's 
                        reference resident level (as defined in 
                        subparagraph (H)(i)) is less than the 
                        otherwise applicable resident limit (as 
                        defined in subparagraph (H)(iii)), 
                        effective for portions of cost 
                        reporting periods occurring on or after 
                        July 1, 2011, the otherwise applicable 
                        resident limit shall be reduced by 65 
                        percent of the difference between such 
                        otherwise applicable resident limit and 
                        such reference resident level.
                          (ii) Exceptions.--This subparagraph 
                        shall not apply to--
                                  (I) a hospital located in a 
                                rural area (as defined in 
                                subsection (d)(2)(D)(ii)) with 
                                fewer than 250 acute care 
                                inpatient beds;
                                  (II) a hospital that was part 
                                of a qualifying entity which 
                                had a voluntary residency 
                                reduction plan approved under 
                                paragraph (6)(B) or under the 
                                authority of section 402 of 
                                Public Law 90-248, if the 
                                hospital demonstrates to the 
                                Secretary that it has a 
                                specified plan in place for 
                                filling the unused positions by 
                                not later than 2 years after 
                                the date of enactment of this 
                                paragraph; or
                                  (III) a hospital described in 
                                paragraph (4)(H)(v).
                  (B) Distribution.--
                          (i) In general.--The Secretary shall 
                        increase the otherwise applicable 
                        resident limit for each qualifying 
                        hospital that submits an application 
                        under this subparagraph by such number 
                        as the Secretary may approve for 
                        portions of cost reporting periods 
                        occurring on or after July 1, 2011. The 
                        aggregate number of increases in the 
                        otherwise applicable resident limit 
                        under this subparagraph shall be equal 
                        to the aggregate reduction in such 
                        limits attributable to subparagraph (A) 
                        (as estimated by the Secretary).
                          (ii) Requirements.--Subject to clause 
                        (iii), a hospital that receives an 
                        increase in the otherwise applicable 
                        resident limit under this subparagraph 
                        shall ensure, during the 5-year period 
                        beginning on the date of such increase, 
                        that--
                                  (I) the number of full-time 
                                equivalent primary care 
                                residents, as defined in 
                                paragraph (5)(H) (as determined 
                                by the Secretary), excluding 
                                any additional positions under 
                                subclause (II), is not less 
                                than the average number of 
                                full-time equivalent primary 
                                care residents (as so 
                                determined) during the 3 most 
                                recent cost reporting periods 
                                ending prior to the date of 
                                enactment of this paragraph; 
                                and
                                  (II) not less than 75 percent 
                                of the positions attributable 
                                to such increase are in a 
                                primary care or general surgery 
                                residency (as determined by the 
                                Secretary).
                        The Secretary may determine whether a 
                        hospital has met the requirements under 
                        this clause during such 5-year period 
                        in such manner and at such time as the 
                        Secretary determines appropriate, 
                        including at the end of such 5-year 
                        period.
                          (iii) Redistribution of positions if 
                        hospital no longer meets certain 
                        requirements.--In the case where the 
                        Secretary determines that a hospital 
                        described in clause (ii) does not meet 
                        either of the requirements under 
                        subclause (I) or (II) of such clause, 
                        the Secretary shall--
                                  (I) reduce the otherwise 
                                applicable resident limit of 
                                the hospital by the amount by 
                                which such limit was increased 
                                under this paragraph; and
                                  (II) provide for the 
                                distribution of positions 
                                attributable to such reduction 
                                in accordance with the 
                                requirements of this paragraph.
                  (C) Considerations in redistribution.--In 
                determining for which hospitals the increase in 
                the otherwise applicable resident limit is 
                provided under subparagraph (B), the Secretary 
                shall take into account--
                          (i) the demonstration likelihood of 
                        the hospital filling the positions made 
                        available under this paragraph within 
                        the first 3 cost reporting periods 
                        beginning on or after July 1, 2011, as 
                        determined by the Secretary; and
                          (ii) whether the hospital has an 
                        accredited rural training track (as 
                        described in paragraph (4)(H)(iv)).
                  (D) Priority for certain areas.--In 
                determining for which hospitals the increase in 
                the otherwise applicable resident limit is 
                provided under subparagraph (B), subject to 
                subparagraph (E), the Secretary shall 
                distribute the increase to hospitals based on 
                the following factors:
                          (i) Whether the hospital is located 
                        in a State with a resident-to-
                        population ratio in the lowest quartile 
                        (as determined by the Secretary).
                          (ii) Whether the hospital is located 
                        in a State, a territory of the United 
                        States, or the District of Columbia 
                        that is among the top 10 States, 
                        territories, or Districts in terms of 
                        the ratio of--
                                  (I) the total population of 
                                the State, territory, or 
                                District living in an area 
                                designated (under such section 
                                332(a)(1)(A)) as a health 
                                professional shortage area (as 
                                of the date of enactment of 
                                this paragraph); to
                                  (II) the total population of 
                                the State, territory, or 
                                District (as determined by the 
                                Secretary based on the most 
                                recent available population 
                                data published by the Bureau of 
                                the Census).
                          (iii) Whether the hospital is located 
                        in a rural area (as defined in 
                        subsection (d)(2)(D)(ii)).
                  (E) Reservation of positions for certain 
                hospitals.--
                          (i) In general.--Subject to clause 
                        (ii), the Secretary shall reserve the 
                        positions available for distribution 
                        under this paragraph as follows:
                                  (I) 70 percent of such 
                                positions for distribution to 
                                hospitals described in clause 
                                (i) of subparagraph (D).
                                  (II) 30 percent of such 
                                positions for distribution to 
                                hospitals described in clause 
                                (ii) and (iii) of such 
                                subparagraph.
                          (ii) Exception if positions not 
                        redistributed by july 1, 2011.--In the 
                        case where the Secretary does not 
                        distribute positions to hospitals in 
                        accordance with clause (i) by July 1, 
                        2011, the Secretary shall distribute 
                        such positions to other hospitals in 
                        accordance with the considerations 
                        described in subparagraph (C) and the 
                        priority described in subparagraph (D).
                  (F) Limitation.--A hospital may not receive 
                more than 75 full-time equivalent additional 
                residency positions under this paragraph.
                  (G) Application of per resident amounts for 
                primary care and nonprimary care.--With respect 
                to additional residency positions in a hospital 
                attributable to the increase provided under 
                this paragraph, the approved FTE per resident 
                amounts are deemed to be equal to the hospital 
                per resident amounts for primary care and 
                nonprimary care computed under paragraph (2)(D) 
                for that hospital.
                  (H) Definitions.--In this paragraph:
                          (i) Reference resident level.--The 
                        term ``reference resident level'' 
                        means, with respect to a hospital, the 
                        highest resident level for any of the 3 
                        most recent cost reporting periods 
                        (ending before the date of the 
                        enactment of this paragraph) of the 
                        hospital for which a cost report has 
                        been settled (or, if not, submitted 
                        (subject to audit)), as determined by 
                        the Secretary.
                          (ii) Resident level.--The term 
                        ``resident level'' has the meaning 
                        given such term in paragraph (7)(C)(i).
                          (iii) Otherwise applicable resident 
                        limit.--The term ``otherwise applicable 
                        resident limit'' means, with respect to 
                        a hospital, the limit otherwise 
                        applicable under subparagraphs (F)(i) 
                        and (H) of paragraph (4) on the 
                        resident level for the hospital 
                        determined without regard to this 
                        paragraph but taking into account 
                        paragraph (7)(A).
                  (I) Affiliation.--The provisions of this 
                paragraph shall be applied to hospitals which 
                are members of the same affiliated group (as 
                defined by the Secretary under paragraph 
                (4)(H)(ii)) and the reference resident level 
                for each such hospital shall be the reference 
                resident level with respect to the cost 
                reporting period that results in the smallest 
                difference between the reference resident level 
                and the otherwise applicable resident limit.
  (i) Avoiding Duplicative Payments to Hospitals Participating 
in Rural Demonstration Programs.--The Secretary shall reduce 
any payment amounts otherwise determined under this section to 
the extent necessary to avoid duplication of any payment made 
under section 4005(e) of the Omnibus Budget Reconciliation Act 
of 1987.
  (j) Prospective Payment for Inpatient Rehabilitation 
Services.--
          (1) Payment during transition period.--
                  (A) In general.--Notwithstanding section 
                1814(b), but subject to the provisions of 
                section 1813, the amount of the payment with 
                respect to the operating and capital costs of 
                inpatient hospital services of a rehabilitation 
                hospital or a rehabilitation unit (in this 
                subsection referred to as a ``rehabilitation 
                facility''), other than a facility making an 
                election under subparagraph (F) in a cost 
                reporting period beginning on or after October 
                1, 2000, and before October 1, 2002, is equal 
                to the sum of--
                          (i) the TEFRA percentage (as defined 
                        in subparagraph (C)) of the amount that 
                        would have been paid under part A with 
                        respect to such costs if this 
                        subsection did not apply, and
                          (ii) the prospective payment 
                        percentage (as defined in subparagraph 
                        (C)) of the product of (I) the per unit 
                        payment rate established under this 
                        subsection for the fiscal year in which 
                        the payment unit of service occurs, and 
                        (II) the number of such payment units 
                        occurring in the cost reporting period.
                  (B) Fully implemented system.--
                Notwithstanding section 1814(b), but subject to 
                the provisions of section 1813, the amount of 
                the payment with respect to the operating and 
                capital costs of inpatient hospital services of 
                a rehabilitation facility for a payment unit in 
                a cost reporting period beginning on or after 
                October 1, 2002, or, in the case of a facility 
                making an election under subparagraph (F), for 
                any cost reporting period described in such 
                subparagraph, is equal to the per unit payment 
                rate established under this subsection for the 
                fiscal year in which the payment unit of 
                service occurs.
                  (C) TEFRA and prospective payment percentages 
                specified.--For purposes of subparagraph (A), 
                for a cost reporting period beginning--
                          (i) on or after October 1, 2000, and 
                        before October 1, 2001, the ``TEFRA 
                        percentage'' is 66\2/3\ percent and the 
                        ``prospective payment percentage'' is 
                        33\1/3\ percent; and
                          (ii) on or after October 1, 2001, and 
                        before October 1, 2002, the ``TEFRA 
                        percentage'' is 33\1/3\ percent and the 
                        ``prospective payment percentage'' is 
                        66\2/3\ percent.
                  (D) Payment unit.--For purposes of this 
                subsection, the term ``payment unit'' means a 
                discharge.
                  (E) Construction relating to transfer 
                authority.--Nothing in this subsection shall be 
                construed as preventing the Secretary from 
                providing for an adjustment to payments to take 
                into account the early transfer of a patient 
                from a rehabilitation facility to another site 
                of care.
                  (F) Election to apply full prospective 
                payment system.--A rehabilitation facility may 
                elect, not later than 30 days before its first 
                cost reporting period for which the payment 
                methodology under this subsection applies to 
                the facility, to have payment made to the 
                facility under this subsection under the 
                provisions of subparagraph (B) (rather than 
                subparagraph (A)) for each cost reporting 
                period to which such payment methodology 
                applies.
          (2) Patient case mix groups.--
                  (A) Establishment.--The Secretary shall 
                establish--
                          (i) classes of patient discharges of 
                        rehabilitation facilities by 
                        functional-related groups (each in this 
                        subsection referred to as a ``case mix 
                        group''), based on impairment, age, 
                        comorbidities, and functional 
                        capability of the patient and such 
                        other factors as the Secretary deems 
                        appropriate to improve the explanatory 
                        power of functional independence 
                        measure-function related groups; and
                          (ii) a method of classifying specific 
                        patients in rehabilitation facilities 
                        within these groups.
                  (B) Weighting factors.--For each case mix 
                group the Secretary shall assign an appropriate 
                weighting which reflects the relative facility 
                resources used with respect to patients 
                classified within that group compared to 
                patients classified within other groups.
                  (C) Adjustments for case mix.--
                          (i) In general.--The Secretary shall 
                        from time to time adjust the 
                        classifications and weighting factors 
                        established under this paragraph as 
                        appropriate to reflect changes in 
                        treatment patterns, technology, case 
                        mix, number of payment units for which 
                        payment is made under this title, and 
                        other factors which may affect the 
                        relative use of resources. Such 
                        adjustments shall be made in a manner 
                        so that changes in aggregate payments 
                        under the classification system are a 
                        result of real changes and are not a 
                        result of changes in coding that are 
                        unrelated to real changes in case mix.
                          (ii) Adjustment.--Insofar as the 
                        Secretary determines that such 
                        adjustments for a previous fiscal year 
                        (or estimates that such adjustments for 
                        a future fiscal year) did (or are 
                        likely to) result in a change in 
                        aggregate payments under the 
                        classification system during the fiscal 
                        year that are a result of changes in 
                        the coding or classification of 
                        patients that do not reflect real 
                        changes in case mix, the Secretary 
                        shall adjust the per payment unit 
                        payment rate for subsequent years so as 
                        to eliminate the effect of such coding 
                        or classification changes.
                  (D) Data collection.--The Secretary is 
                authorized to require rehabilitation facilities 
                that provide inpatient hospital services to 
                submit such data as the Secretary deems 
                necessary to establish and administer the 
                prospective payment system under this 
                subsection.
          (3) Payment rate.--
                  (A) In general.--The Secretary shall 
                determine a prospective payment rate for each 
                payment unit for which such rehabilitation 
                facility is entitled to receive payment under 
                this title. Subject to subparagraph (B), such 
                rate for payment units occurring during a 
                fiscal year shall be based on the average 
                payment per payment unit under this title for 
                inpatient operating and capital costs of 
                rehabilitation facilities using the most recent 
                data available (as estimated by the Secretary 
                as of the date of establishment of the system) 
                adjusted--
                          (i) by updating such per-payment-unit 
                        amount to the fiscal year involved by 
                        the weighted average of the applicable 
                        percentage increases provided under 
                        subsection (b)(3)(B)(ii) (for cost 
                        reporting periods beginning during the 
                        fiscal year) covering the period from 
                        the midpoint of the period for such 
                        data through the midpoint of fiscal 
                        year 2000 and by an increase factor 
                        (described in subparagraph (C)) 
                        specified by the Secretary for 
                        subsequent fiscal years up to the 
                        fiscal year involved;
                          (ii) by reducing such rates by a 
                        factor equal to the proportion of 
                        payments under this subsection (as 
                        estimated by the Secretary) based on 
                        prospective payment amounts which are 
                        additional payments described in 
                        paragraph (4) (relating to outlier and 
                        related payments);
                          (iii) for variations among 
                        rehabilitation facilities by area under 
                        paragraph (6);
                          (iv) by the weighting factors 
                        established under paragraph (2)(B); and
                          (v) by such other factors as the 
                        Secretary determines are necessary to 
                        properly reflect variations in 
                        necessary costs of treatment among 
                        rehabilitation facilities.
                  (B) Budget neutral rates.--The Secretary 
                shall establish the prospective payment amounts 
                under this subsection for payment units during 
                fiscal years 2001 and 2002 at levels such that, 
                in the Secretary's estimation, the amount of 
                total payments under this subsection for such 
                fiscal years (including any payment adjustments 
                pursuant to paragraphs (4) and (6) but not 
                taking into account any payment adjustment 
                resulting from an election permitted under 
                paragraph (1)(F)) shall be equal to 98 percent 
                for fiscal year 2001 and 100 percent for fiscal 
                year 2002 of the amount of payments that would 
                have been made under this title during the 
                fiscal years for operating and capital costs of 
                rehabilitation facilities had this subsection 
                not been enacted. In establishing such payment 
                amounts, the Secretary shall consider the 
                effects of the prospective payment system 
                established under this subsection on the total 
                number of payment units from rehabilitation 
                facilities and other factors described in 
                subparagraph (A).
                  (C) Increase factor.--
                          (i) In general.--For purposes of this 
                        subsection for payment units in each 
                        fiscal year (beginning with fiscal year 
                        2001), the Secretary shall establish an 
                        increase factor subject to clauses (ii) 
                        and (iii). Such factor shall be based 
                        on an appropriate percentage increase 
                        in a market basket of goods and 
                        services comprising services for which 
                        payment is made under this subsection, 
                        which may be the market basket 
                        percentage increase described in 
                        subsection (b)(3)(B)(iii). The increase 
                        factor to be applied under this 
                        subparagraph for each of fiscal years 
                        2008 and 2009 shall be 0 percent.
                          (ii) Productivity and other 
                        adjustment.--Subject to clause (iii), 
                        after establishing the increase factor 
                        described in clause (i) for a fiscal 
                        year, the Secretary shall reduce such 
                        increase factor--
                                  (I) for fiscal year 2012 and 
                                each subsequent fiscal year, by 
                                the productivity adjustment 
                                described in section 
                                1886(b)(3)(B)(xi)(II); and
                                  (II) for each of fiscal years 
                                2010 through 2019, by the other 
                                adjustment described in 
                                subparagraph (D).
                        The application of this clause may 
                        result in the increase factor under 
                        this subparagraph being less than 0.0 
                        for a fiscal year, and may result in 
                        payment rates under this subsection for 
                        a fiscal year being less than such 
                        payment rates for the preceding fiscal 
                        year.
                          (iii) Special rule for fiscal year 
                        2018.--The increase factor to be 
                        applied under this subparagraph for 
                        fiscal year 2018, after the application 
                        of clause (ii), shall be 1 percent.
                  (D) Other adjustment.--For purposes of 
                subparagraph (C)(ii)(II), the other adjustment 
                described in this subparagraph is--
                          (i) for each of fiscal years 2010 and 
                        2011, 0.25 percentage point;
                          (ii) for each of fiscal years 2012 
                        and 2013, 0.1 percentage point;
                          (iii) for fiscal year 2014, 0.3 
                        percentage point;
                          (iv) for each of fiscal years 2015 
                        and 2016, 0.2 percentage point; and
                          (v) for each of fiscal years 2017, 
                        2018, and 2019, 0.75 percentage point.
          (4) Outlier and special payments.--
                  (A) Outliers.--
                          (i) In general.--The Secretary may 
                        provide for an additional payment to a 
                        rehabilitation facility for patients in 
                        a case mix group, based upon the 
                        patient being classified as an outlier 
                        based on an unusual length of stay, 
                        costs, or other factors specified by 
                        the Secretary.
                          (ii) Payment based on marginal cost 
                        of care.--The amount of such additional 
                        payment under clause (i) shall be 
                        determined by the Secretary and shall 
                        approximate the marginal cost of care 
                        beyond the cutoff point applicable 
                        under clause (i).
                          (iii) Total payments.--The total 
                        amount of the additional payments made 
                        under this subparagraph for payment 
                        units in a fiscal year may not exceed 5 
                        percent of the total payments projected 
                        or estimated to be made based on 
                        prospective payment rates for payment 
                        units in that year.
                  (B) Adjustment.--The Secretary may provide 
                for such adjustments to the payment amounts 
                under this subsection as the Secretary deems 
                appropriate to take into account the unique 
                circumstances of rehabilitation facilities 
                located in Alaska and Hawaii.
          (5) Publication.--The Secretary shall provide for 
        publication in the Federal Register, on or before 
        August 1 before each fiscal year (beginning with fiscal 
        year 2001), of the classification and weighting factors 
        for case mix groups under paragraph (2) for such fiscal 
        year and a description of the methodology and data used 
        in computing the prospective payment rates under this 
        subsection for that fiscal year.
          (6) Area wage adjustment.--The Secretary shall adjust 
        the proportion (as estimated by the Secretary from time 
        to time) of rehabilitation facilities' costs which are 
        attributable to wages and wage-related costs, of the 
        prospective payment rates computed under paragraph (3) 
        for area differences in wage levels by a factor 
        (established by the Secretary) reflecting the relative 
        hospital wage level in the geographic area of the 
        rehabilitation facility compared to the national 
        average wage level for such facilities. Not later than 
        October 1, 2001 (and at least every 36 months 
        thereafter), the Secretary shall update the factor 
        under the preceding sentence on the basis of 
        information available to the Secretary (and updated as 
        appropriate) of the wages and wage-related costs 
        incurred in furnishing rehabilitation services. Any 
        adjustments or updates made under this paragraph for a 
        fiscal year shall be made in a manner that assures that 
        the aggregated payments under this subsection in the 
        fiscal year are not greater or less than those that 
        would have been made in the year without such 
        adjustment.
          (7) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--For purposes of 
                        fiscal year 2014 and each subsequent 
                        fiscal year, in the case of a 
                        rehabilitation facility that does not 
                        submit data to the Secretary in 
                        accordance with subparagraphs (C) and 
                        (F) with respect to such a fiscal year, 
                        after determining the increase factor 
                        described in paragraph (3)(C), and 
                        after application of subparagraphs 
                        (C)(iii) and (D) of paragraph (3), the 
                        Secretary shall reduce such increase 
                        factor for payments for discharges 
                        occurring during such fiscal year by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in the 
                        increase factor described in paragraph 
                        (3)(C) being less than 0.0 for a fiscal 
                        year, and may result in payment rates 
                        under this subsection for a fiscal year 
                        being less than such payment rates for 
                        the preceding fiscal year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the fiscal year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                this subsection for a subsequent fiscal year.
                  (C) Submission of quality data.--Subject to 
                subparagraph (G), for fiscal year 2014 and each 
                subsequent fiscal year, each rehabilitation 
                facility shall submit to the Secretary data on 
                quality measures specified under subparagraph 
                (D). Such data shall be submitted in a form and 
                manner, and at a time, specified by the 
                Secretary for purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to fiscal year 
                        2014.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                and subparagraph (F)(i) available to the 
                public. Such procedures shall ensure that a 
                rehabilitation facility has the opportunity to 
                review the data that is to be made public with 
                respect to the facility prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in 
                rehabilitation facilities on the Internet 
                website of the Centers for Medicare & Medicaid 
                Services.
                  (F) Submission of additional data.--
                          (i) In general.--For the fiscal year 
                        beginning on the specified application 
                        date (as defined in subsection 
                        (a)(2)(E) of section 1899B), as 
                        applicable with respect to inpatient 
                        rehabilitation facilities and quality 
                        measures under subsection (c)(1) of 
                        such section and measures under 
                        subsection (d)(1) of such section, and 
                        each subsequent fiscal year, in 
                        addition to such data on the quality 
                        measures described in subparagraph (C), 
                        each rehabilitation facility shall 
                        submit to the Secretary data on the 
                        quality measures under such subsection 
                        (c)(1) and any necessary data specified 
                        by the Secretary under such subsection 
                        (d)(1).
                          (ii) Standardized patient assessment 
                        data.--For fiscal year 2019 and each 
                        subsequent fiscal year, in addition to 
                        such data described in clause (i), each 
                        rehabilitation facility shall submit to 
                        the Secretary standardized patient 
                        assessment data required under 
                        subsection (b)(1) of section 1899B.
                          (iii) Submission.--Such data shall be 
                        submitted in the form and manner, and 
                        at the time, specified by the Secretary 
                        for purposes of this subparagraph.
                  (G) Non-duplication.--To the extent data 
                submitted under subparagraph (F) duplicates 
                other data required to be submitted under 
                subparagraph (C), the submission of such data 
                under subparagraph (F) shall be in lieu of the 
                submission of such data under subparagraph (C). 
                The previous sentence shall not apply insofar 
                as the Secretary determines it is necessary to 
                avoid a delay in the implementation of section 
                1899B, taking into account the different 
                specified application dates under subsection 
                (a)(2)(E) of such section.
          (8) Limitation on review.--There shall be no 
        administrative or judicial review under section 1869, 
        1878, or otherwise of the establishment of--
                  (A) case mix groups, of the methodology for 
                the classification of patients within such 
                groups, and of the appropriate weighting 
                factors thereof under paragraph (2),
                  (B) the prospective payment rates under 
                paragraph (3),
                  (C) outlier and special payments under 
                paragraph (4), and
                  (D) area wage adjustments under paragraph 
                (6).
  (k) Payment to Nonhospital Providers.--
          (1) In general.--For cost reporting periods beginning 
        on or after October 1, 1997, the Secretary may 
        establish rules for payment to qualified nonhospital 
        providers for their direct costs of medical education, 
        if those costs are incurred in the operation of an 
        approved medical residency training program described 
        in subsection (h). Such rules shall specify the 
        amounts, form, and manner in which such payments will 
        be made and the portion of such payments that will be 
        made from each of the trust funds under this title.
          (2) Qualified nonhospital providers.--For purposes of 
        this subsection, the term ``qualified nonhospital 
        providers'' means--
                  (A) a Federally qualified health center, as 
                defined in section 1861(aa)(4);
                  (B) a rural health clinic, as defined in 
                section 1861(aa)(2);
                  (C) Medicare+Choice organizations; and
                  (D) such other providers (other than 
                hospitals) as the Secretary determines to be 
                appropriate.
  (l) Payment for Nursing and Allied Health Education for 
Managed Care Enrollees.--
          (1) In general.--For portions of cost reporting 
        periods occurring in a year (beginning with 2000), the 
        Secretary shall provide for an additional payment 
        amount for any hospital that receives payments for the 
        costs of approved educational activities for nurse and 
        allied health professional training under section 
        1861(v)(1).
          (2) Payment amount.--The additional payment amount 
        under this subsection for each hospital for portions of 
        cost reporting periods occurring in a year shall be an 
        amount specified by the Secretary in a manner 
        consistent with the following:
                  (A) Determination of managed care enrollee 
                payment ratio for graduate medical education 
                payments.--The Secretary shall estimate the 
                ratio of payments for all hospitals for 
                portions of cost reporting periods occurring in 
                the year under subsection (h)(3)(D) to total 
                direct graduate medical education payments 
                estimated for such portions of periods under 
                subsection (h)(3).
                  (B) Application to fee-for-service nursing 
                and allied health education payments.--Such 
                ratio shall be applied to the Secretary's 
                estimate of total payments for nursing and 
                allied health education determined under 
                section 1861(v) for portions of cost reporting 
                periods occurring in the year to determine a 
                total amount of additional payments for nursing 
                and allied health education to be distributed 
                to hospitals under this subsection for portions 
                of cost reporting periods occurring in the 
                year; except that in no case shall such total 
                amount exceed $60,000,000 in any year.
                  (C) Application to hospital.--The amount of 
                payment under this subsection to a hospital for 
                portions of cost reporting periods occurring in 
                a year is equal to the total amount of payments 
                determined under subparagraph (B) for the year 
                multiplied by the ratio of--
                          (i) the product of (I) the 
                        Secretary's estimate of the ratio of 
                        the amount of payments made under 
                        section 1861(v) to the hospital for 
                        nursing and allied health education 
                        activities for the hospital's cost 
                        reporting period ending in the second 
                        preceding fiscal year, to the 
                        hospital's total inpatient days for 
                        such period, and (II) the total number 
                        of inpatient days (as established by 
                        the Secretary) for such period which 
                        are attributable to services furnished 
                        to individuals who are enrolled under a 
                        risk sharing contract with an eligible 
                        organization under section 1876 and who 
                        are entitled to benefits under part A 
                        or who are enrolled with a 
                        Medicare+Choice organization under part 
                        C; to
                          (ii) the sum of the products 
                        determined under clause (i) for such 
                        cost reporting periods.
  (m) Prospective Payment for Long-Term Care Hospitals.--
          (1) Reference to establishment and implementation of 
        system.--For provisions related to the establishment 
        and implementation of a prospective payment system for 
        payments under this title for inpatient hospital 
        services furnished by a long-term care hospital 
        described in subsection (d)(1)(B)(iv), see section 123 
        of the Medicare, Medicaid, and SCHIP Balanced Budget 
        Refinement Act of 1999 and section 307(b) of the 
        Medicare, Medicaid, and SCHIP Benefits Improvement and 
        Protection Act of 2000.
          (2) Update for rate year 2008.--In implementing the 
        system described in paragraph (1) for discharges 
        occurring during the rate year ending in 2008 for a 
        hospital, the base rate for such discharges for the 
        hospital shall be the same as the base rate for 
        discharges for the hospital occurring during the rate 
        year ending in 2007.
          (3) Implementation for rate year 2010 and subsequent 
        years.--
                  (A) In general.--Subject to subparagraph (C), 
                in implementing the system described in 
                paragraph (1) for rate year 2010 and each 
                subsequent rate year, any annual update to a 
                standard Federal rate for discharges for the 
                hospital during the rate year, shall be 
                reduced--
                          (i) for rate year 2012 and each 
                        subsequent rate year, by the 
                        productivity adjustment described in 
                        section 1886(b)(3)(B)(xi)(II); and
                          (ii) for each of rate years 2010 
                        through 2019, by the other adjustment 
                        described in paragraph (4).
                  (B) Special rule.--The application of this 
                paragraph may result in such annual update 
                being less than 0.0 for a rate year, and may 
                result in payment rates under the system 
                described in paragraph (1) for a rate year 
                being less than such payment rates for the 
                preceding rate year.
                  (C) Additional special rule.--For fiscal year 
                2018, the annual update under subparagraph (A) 
                for the fiscal year, after application of 
                clauses (i) and (ii) of subparagraph (A), shall 
                be 1 percent.
          (4) Other adjustment.--For purposes of paragraph 
        (3)(A)(ii), the other adjustment described in this 
        paragraph is--
                  (A) for rate year 2010, 0.25 percentage 
                point;
                  (B) for rate year 2011, 0.50 percentage 
                point;
                  (C) for each of the rate years beginning in 
                2012 and 2013, 0.1 percentage point;
                  (D) for rate year 2014, 0.3 percentage point;
                  (E) for each of rate years 2015 and 2016, 0.2 
                percentage point; and
                  (F) for each of rate years 2017, 2018, and 
                2019, 0.75 percentage point.
          (5) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--Under the system 
                        described in paragraph (1), for rate 
                        year 2014 and each subsequent rate 
                        year, in the case of a long-term care 
                        hospital that does not submit data to 
                        the Secretary in accordance with 
                        subparagraphs (C) and (F) with respect 
                        to such a rate year, any annual update 
                        to a standard Federal rate for 
                        discharges for the hospital during the 
                        rate year, and after application of 
                        paragraph (3), shall be reduced by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in such 
                        annual update being less than 0.0 for a 
                        rate year, and may result in payment 
                        rates under the system described in 
                        paragraph (1) for a rate year being 
                        less than such payment rates for the 
                        preceding rate year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the rate year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                the system described in paragraph (1) for a 
                subsequent rate year.
                  (C) Submission of quality data.--Subject to 
                subparagraph (G), for rate year 2014 and each 
                subsequent rate year, each long-term care 
                hospital shall submit to the Secretary data on 
                quality measures specified under subparagraph 
                (D). Such data shall be submitted in a form and 
                manner, and at a time, specified by the 
                Secretary for purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to rate year 
                        2014.
                          (iv) Additional quality measures.--
                        Not later than October 1, 2015, the 
                        Secretary shall establish a functional 
                        status quality measure for change in 
                        mobility among inpatients requiring 
                        ventilator support.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                and subparagraph (F)(i) available to the 
                public. Such procedures shall ensure that a 
                long-term care hospital has the opportunity to 
                review the data that is to be made public with 
                respect to the hospital prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in long-term 
                care hospitals on the Internet website of the 
                Centers for Medicare & Medicaid Services.
                  (F) Submission of additional data.--
                          (i) In general.--For the rate year 
                        beginning on the specified application 
                        date (as defined in subsection 
                        (a)(2)(E) of section 1899B), as 
                        applicable with respect to long-term 
                        care hospitals and quality measures 
                        under subsection (c)(1) of such section 
                        and measures under subsection (d)(1) of 
                        such section, and each subsequent rate 
                        year, in addition to the data on the 
                        quality measures described in 
                        subparagraph (C), each long-term care 
                        hospital (other than a hospital 
                        classified under subsection 
                        (d)(1)(B)(iv)(II)) shall submit to the 
                        Secretary data on the quality measures 
                        under such subsection (c)(1) and any 
                        necessary data specified by the 
                        Secretary under such subsection (d)(1).
                          (ii) Standardized patient assessment 
                        data.--For rate year 2019 and each 
                        subsequent rate year, in addition to 
                        such data described in clause (i), each 
                        long-term care hospital (other than a 
                        hospital classified under subsection 
                        (d)(1)(B)(iv)(II)) shall submit to the 
                        Secretary standardized patient 
                        assessment data required under 
                        subsection (b)(1) of section 1899B.
                          (iii) Submission.--Such data shall be 
                        submitted in the form and manner, and 
                        at the time, specified by the Secretary 
                        for purposes of this subparagraph.
                  (G) Non-duplication.--To the extent data 
                submitted under subparagraph (F) duplicates 
                other data required to be submitted under 
                subparagraph (C), the submission of such data 
                under subparagraph (F) shall be in lieu of the 
                submission of such data under subparagraph (C). 
                The previous sentence shall not apply insofar 
                as the Secretary determines it is necessary to 
                avoid a delay in the implementation of section 
                1899B, taking into account the different 
                specified application dates under subsection 
                (a)(2)(E) of such section.
          (6) Application of site neutral ipps payment rate in 
        certain cases.--
                  (A) General application of site neutral ipps 
                payment amount for discharges failing to meet 
                applicable criteria.--
                          (i) In general.--For a discharge in 
                        cost reporting periods beginning on or 
                        after October 1, 2015, except as 
                        provided in clause (ii) and 
                        subparagraph (C), payment under this 
                        title to a long-term care hospital for 
                        inpatient hospital services shall be 
                        made at the applicable site neutral 
                        payment rate (as defined in 
                        subparagraph (B)).
                          (ii) Exception for certain discharges 
                        meeting criteria.--Clause (i) shall not 
                        apply (and payment shall be made to a 
                        long-term care hospital without regard 
                        to this paragraph) for a discharge if--
                                  (I) the discharge meets the 
                                ICU criterion under clause 
                                (iii) or the ventilator 
                                criterion under clause (iv); 
                                and
                                  (II) the discharge does not 
                                have a principal diagnosis 
                                relating to a psychiatric 
                                diagnosis or to rehabilitation.
                          (iii) Intensive care unit (icu) 
                        criterion.--
                                  (I) In general.--The 
                                criterion specified in this 
                                clause (in this paragraph 
                                referred to as the ``ICU 
                                criterion''), for a discharge 
                                from a long-term care hospital, 
                                is that the stay in the long-
                                term care hospital ending with 
                                such discharge was immediately 
                                preceded by a discharge from a 
                                stay in a subsection (d) 
                                hospital that included at least 
                                3 days in an intensive care 
                                unit (ICU), as determined by 
                                the Secretary.
                                  (II) Determining icu days.--
                                In determining intensive care 
                                unit days under subclause (I), 
                                the Secretary shall use data 
                                from revenue center codes 020x 
                                or 021x (or such successor 
                                codes as the Secretary may 
                                establish).
                          (iv) Ventilator criterion.--The 
                        criterion specified in this clause (in 
                        this paragraph referred to as the 
                        ``ventilator criterion''), for a 
                        discharge from a long-term care 
                        hospital, is that--
                                  (I) the stay in the long-term 
                                care hospital ending with such 
                                discharge was immediately 
                                preceded by a discharge from a 
                                stay in a subsection (d) 
                                hospital; and
                                  (II) the individual 
                                discharged was assigned to a 
                                Medicare-Severity-Long-Term-
                                Care-Diagnosis-Related-Group 
                                (MS-LTC-DRG) based on the 
                                receipt of ventilator services 
                                of at least 96 hours.
                  (B) Applicable site neutral payment rate 
                defined.--
                          (i) In general.--In this paragraph, 
                        the term ``applicable site neutral 
                        payment rate'' means--
                                  (I) for discharges in cost 
                                reporting periods beginning 
                                during fiscal year 2016 or 
                                fiscal year 2017, the blended 
                                payment rate specified in 
                                clause (iii); and
                                  (II) for discharges in cost 
                                reporting periods beginning 
                                during fiscal year 2018 or a 
                                subsequent fiscal year, the 
                                site neutral payment rate (as 
                                defined in clause (ii)).
                          (ii) Site neutral payment rate 
                        defined.--In this paragraph, the term 
                        ``site neutral payment rate'' means the 
                        lower of--
                                  (I) the IPPS comparable per 
                                diem amount determined under 
                                paragraph (d)(4) of section 
                                412.529 of title 42, Code of 
                                Federal Regulations, including 
                                any applicable outlier payments 
                                under section 412.525 of such 
                                title; or
                                  (II) 100 percent of the 
                                estimated cost for the services 
                                involved.
                          (iii) Blended payment rate.--The 
                        blended payment rate specified in this 
                        clause, for a long-term care hospital 
                        for inpatient hospital services for a 
                        discharge, is comprised of--
                                  (I) half of the site neutral 
                                payment rate (as defined in 
                                clause (ii)) for the discharge; 
                                and
                                  (II) half of the payment rate 
                                that would otherwise be 
                                applicable to such discharge 
                                without regard to this 
                                paragraph, as determined by the 
                                Secretary.
                  (C) Limiting payment for all hospital 
                discharges to site neutral payment rate for 
                hospitals failing to meet applicable ltch 
                discharge thresholds.--
                          (i) Notice of ltch discharge payment 
                        percentage.--For cost reporting periods 
                        beginning during or after fiscal year 
                        2016, the Secretary shall inform each 
                        long-term care hospital of its LTCH 
                        discharge payment percentage (as 
                        defined in clause (iv)) for such 
                        period.
                          (ii) Limitation.--For cost reporting 
                        periods beginning during or after 
                        fiscal year 2020, if the Secretary 
                        determines for a long-term care 
                        hospital that its LTCH discharge 
                        payment percentage for the period is 
                        not at least 50 percent--
                                  (I) the Secretary shall 
                                inform the hospital of such 
                                fact; and
                                  (II) subject to clause (iii), 
                                for all discharges in the 
                                hospital in each succeeding 
                                cost reporting period, the 
                                payment amount under this 
                                subsection shall be the payment 
                                amount that would apply under 
                                subsection (d) for the 
                                discharge if the hospital were 
                                a subsection (d) hospital.
                          (iii) Process for reinstatement.--The 
                        Secretary shall establish a process 
                        whereby a long-term care hospital may 
                        seek to and have the provisions of 
                        subclause (II) of clause (ii) 
                        discontinued with respect to that 
                        hospital.
                          (iv) LTCH discharge payment 
                        percentage.--In this subparagraph, the 
                        term ``LTCH discharge payment 
                        percentage'' means, with respect to a 
                        long-term care hospital for a cost 
                        reporting period beginning during or 
                        after fiscal year 2020, the ratio 
                        (expressed as a percentage) of--
                                  (I) the number of Medicare 
                                fee-for-service discharges for 
                                such hospital and period for 
                                which payment is not made at 
                                the site neutral payment rate, 
                                to
                                  (II) the total number of 
                                Medicare fee-for-service 
                                discharges for such hospital 
                                and period.
                  (D) Inclusion of subsection (d) puerto rico 
                hospitals.--In this paragraph, any reference in 
                this paragraph to a subsection (d) hospital 
                shall be deemed to include a reference to a 
                subsection (d) Puerto Rico hospital.
          (7) Treatment of high cost outlier payments.--
                  (A) Adjustment to the standard federal 
                payment rate for estimated high cost outlier 
                payments.--Under the system described in 
                paragraph (1), for fiscal years beginning on or 
                after October 1, 2016, the Secretary shall 
                reduce the standard Federal payment rate as if 
                the estimated aggregate amount of high cost 
                outlier payments for standard Federal payment 
                rate discharges for each such fiscal year would 
                be equal to 8 percent of estimated aggregate 
                payments for standard Federal payment rate 
                discharges for each such fiscal year.
                  (B) Limitation on high cost outlier payment 
                amounts.--Notwithstanding subparagraph (A), the 
                Secretary shall set the fixed loss amount for 
                high cost outlier payments such that the 
                estimated aggregate amount of high cost outlier 
                payments made for standard Federal payment rate 
                discharges for fiscal years beginning on or 
                after October 1, 2016, shall be equal to 
                99.0625 percent of 8 percent of estimated 
                aggregate payments for standard Federal payment 
                rate discharges for each such fiscal year.
                  (C) Waiver of budget neutrality.--Any 
                reduction in payments resulting from the 
                application of subparagraph (B) shall not be 
                taken into account in applying any budget 
                neutrality provision under such system.
                  (D) No effect on site neutral high cost 
                outlier payment rate.--This paragraph shall not 
                apply with respect to the computation of the 
                applicable site neutral payment rate under 
                paragraph (6), except for the standard Federal 
                payment rate portion of blended payment rates 
                determined under subparagraph (B)(iii)(II) of 
                such paragraph.
  (n) Incentives for Adoption and Meaningful Use of Certified 
EHR Technology.--
          (1) In general.--Subject to the succeeding provisions 
        of this subsection, with respect to inpatient hospital 
        services furnished by an eligible hospital during a 
        payment year (as defined in paragraph (2)(G)), if the 
        eligible hospital is a meaningful EHR user (as 
        determined under paragraph (3)) for the EHR reporting 
        period with respect to such year, in addition to the 
        amount otherwise paid under this section, there also 
        shall be paid to the eligible hospital, from the 
        Federal Hospital Insurance Trust Fund established under 
        section 1817, an amount equal to the applicable amount 
        specified in paragraph (2)(A) for the hospital for such 
        payment year.
          (2) Payment amount.--
                  (A) In general.--Subject to the succeeding 
                subparagraphs of this paragraph, the applicable 
                amount specified in this subparagraph for an 
                eligible hospital for a payment year is equal 
                to the product of the following:
                          (i) Initial amount.--The sum of--
                                  (I) the base amount specified 
                                in subparagraph (B); plus
                                  (II) the discharge related 
                                amount specified in 
                                subparagraph (C) for a 12-month 
                                period selected by the 
                                Secretary with respect to such 
                                payment year.
                          (ii) Medicare share.--The Medicare 
                        share as specified in subparagraph (D) 
                        for the eligible hospital for a period 
                        selected by the Secretary with respect 
                        to such payment year.
                          (iii) Transition factor.--The 
                        transition factor specified in 
                        subparagraph (E) for the eligible 
                        hospital for the payment year.
                  (B) Base amount.--The base amount specified 
                in this subparagraph is $2,000,000.
                  (C) Discharge related amount.--The discharge 
                related amount specified in this subparagraph 
                for a 12-month period selected by the Secretary 
                shall be determined as the sum of the amount, 
                estimated based upon total discharges for the 
                eligible hospital (regardless of any source of 
                payment) for the period, for each discharge up 
                to the 23,000th discharge as follows:
                          (i) For the first through 1,149th 
                        discharge, $0.
                          (ii) For the 1,150th through the 
                        23,000th discharge, $200.
                          (iii) For any discharge greater than 
                        the 23,000th, $0.
                  (D) Medicare share.--The Medicare share 
                specified under this subparagraph for an 
                eligible hospital for a period selected by the 
                Secretary for a payment year is equal to the 
                fraction--
                          (i) the numerator of which is the sum 
                        (for such period and with respect to 
                        the eligible hospital) of--
                                  (I) the estimated number of 
                                inpatient-bed-days (as 
                                established by the Secretary) 
                                which are attributable to 
                                individuals with respect to 
                                whom payment may be made under 
                                part A; and
                                  (II) the estimated number of 
                                inpatient-bed-days (as so 
                                established) which are 
                                attributable to individuals who 
                                are enrolled with a Medicare 
                                Advantage organization under 
                                part C; and
                          (ii) the denominator of which is the 
                        product of--
                                  (I) the estimated total 
                                number of inpatient-bed-days 
                                with respect to the eligible 
                                hospital during such period; 
                                and
                                  (II) the estimated total 
                                amount of the eligible 
                                hospital's charges during such 
                                period, not including any 
                                charges that are attributable 
                                to charity care (as such term 
                                is used for purposes of 
                                hospital cost reporting under 
                                this title), divided by the 
                                estimated total amount of the 
                                hospital's charges during such 
                                period.
                Insofar as the Secretary determines that data 
                are not available on charity care necessary to 
                calculate the portion of the formula specified 
                in clause (ii)(II), the Secretary shall use 
                data on uncompensated care and may adjust such 
                data so as to be an appropriate proxy for 
                charity care including a downward adjustment to 
                eliminate bad debt data from uncompensated care 
                data. In the absence of the data necessary, 
                with respect to a hospital, for the Secretary 
                to compute the amount described in clause 
                (ii)(II), the amount under such clause shall be 
                deemed to be 1. In the absence of data, with 
                respect to a hospital, necessary to compute the 
                amount described in clause (i)(II), the amount 
                under such clause shall be deemed to be 0.
                  (E) Transition factor specified.--
                          (i) In general.--Subject to clause 
                        (ii), the transition factor specified 
                        in this subparagraph for an eligible 
                        hospital for a payment year is as 
                        follows:
                                  (I) For the first payment 
                                year for such hospital, 1.
                                  (II) For the second payment 
                                year for such hospital, \3/4\.
                                  (III) For the third payment 
                                year for such hospital, \1/2\.
                                  (IV) For the fourth payment 
                                year for such hospital, \1/4\.
                                  (V) For any succeeding 
                                payment year for such hospital, 
                                0.
                          (ii) Phase down for eligible 
                        hospitals first adopting ehr after 
                        2013.--If the first payment year for an 
                        eligible hospital is after 2013, then 
                        the transition factor specified in this 
                        subparagraph for a payment year for 
                        such hospital is the same as the amount 
                        specified in clause (i) for such 
                        payment year for an eligible hospital 
                        for which the first payment year is 
                        2013. If the first payment year for an 
                        eligible hospital is after 2015 then 
                        the transition factor specified in this 
                        subparagraph for such hospital and for 
                        such year and any subsequent year shall 
                        be 0.
                  (F) Form of payment.--The payment under this 
                subsection for a payment year may be in the 
                form of a single consolidated payment or in the 
                form of such periodic installments as the 
                Secretary may specify.
                  (G) Payment year defined.--
                          (i) In general.--For purposes of this 
                        subsection, the term ``payment year'' 
                        means a fiscal year beginning with 
                        fiscal year 2011.
                          (ii) First, second, etc. payment 
                        year.--The term ``first payment year'' 
                        means, with respect to inpatient 
                        hospital services furnished by an 
                        eligible hospital, the first fiscal 
                        year for which an incentive payment is 
                        made for such services under this 
                        subsection. The terms ``second payment 
                        year'', ``third payment year'', and 
                        ``fourth payment year'' mean, with 
                        respect to an eligible hospital, each 
                        successive year immediately following 
                        the first payment year for that 
                        hospital.
          (3) Meaningful ehr user.--
                  (A) In general.--For purposes of paragraph 
                (1), an eligible hospital shall be treated as a 
                meaningful EHR user for an EHR reporting period 
                for a payment year (or, for purposes of 
                subsection (b)(3)(B)(ix), for an EHR reporting 
                period under such subsection for a fiscal year) 
                if each of the following requirements are met:
                          (i) Meaningful use of certified ehr 
                        technology.--The eligible hospital 
                        demonstrates to the satisfaction of the 
                        Secretary, in accordance with 
                        subparagraph (C)(i), that during such 
                        period the hospital is using certified 
                        EHR technology in a meaningful manner.
                          (ii) Information exchange.--The 
                        eligible hospital demonstrates to the 
                        satisfaction of the Secretary, in 
                        accordance with subparagraph (C)(i), 
                        that during such period such certified 
                        EHR technology is connected in a manner 
                        that provides, in accordance with law 
                        and standards applicable to the 
                        exchange of information, for the 
                        electronic exchange of health 
                        information to improve the quality of 
                        health care, such as promoting care 
                        coordination, and the hospital 
                        demonstrates (through a process 
                        specified by the Secretary, such as the 
                        use of an attestation) that the 
                        hospital has not knowingly and 
                        willfully taken action (such as to 
                        disable functionality) to limit or 
                        restrict the compatibility or 
                        interoperability of the certified EHR 
                        technology.
                          (iii) Reporting on measures using 
                        ehr.--Subject to subparagraph (B)(ii) 
                        and using such certified EHR 
                        technology, the eligible hospital 
                        submits information for such period, in 
                        a form and manner specified by the 
                        Secretary, on such clinical quality 
                        measures and such other measures as 
                        selected by the Secretary under 
                        subparagraph (B)(i).
                The Secretary shall seek to improve the use of 
                electronic health records and health care 
                quality over time by requiring more stringent 
                measures of meaningful use selected under this 
                paragraph.
                  (B) Reporting on measures.--
                          (i) Selection.--The Secretary shall 
                        select measures for purposes of 
                        subparagraph (A)(iii) but only 
                        consistent with the following:
                                  (I) The Secretary shall 
                                provide preference to clinical 
                                quality measures that have been 
                                selected for purposes of 
                                applying subsection 
                                (b)(3)(B)(viii) or that have 
                                been endorsed by the entity 
                                with a contract with the 
                                Secretary under section 
                                1890(a).
                                  (II) Prior to any measure 
                                (other than a clinical quality 
                                measure that has been selected 
                                for purposes of applying 
                                subsection (b)(3)(B)(viii)) 
                                being selected under this 
                                subparagraph, the Secretary 
                                shall publish in the Federal 
                                Register such measure and 
                                provide for a period of public 
                                comment on such measure.
                          (ii) Limitations.--The Secretary may 
                        not require the electronic reporting of 
                        information on clinical quality 
                        measures under subparagraph (A)(iii) 
                        unless the Secretary has the capacity 
                        to accept the information 
                        electronically, which may be on a pilot 
                        basis.
                          (iii) Coordination of reporting of 
                        information.--In selecting such 
                        measures, and in establishing the form 
                        and manner for reporting measures under 
                        subparagraph (A)(iii), the Secretary 
                        shall seek to avoid redundant or 
                        duplicative reporting with reporting 
                        otherwise required, including reporting 
                        under subsection (b)(3)(B)(viii).
                  (C) Demonstration of meaningful use of 
                certified ehr technology and information 
                exchange.--
                          (i) In general.--An eligible hospital 
                        may satisfy the demonstration 
                        requirement of clauses (i) and (ii) of 
                        subparagraph (A) through means 
                        specified by the Secretary, which may 
                        include--
                                  (I) an attestation;
                                  (II) the submission of claims 
                                with appropriate coding (such 
                                as a code indicating that 
                                inpatient care was documented 
                                using certified EHR 
                                technology);
                                  (III) a survey response;
                                  (IV) reporting under 
                                subparagraph (A)(iii); and
                                  (V) other means specified by 
                                the Secretary.
                          (ii) Use of part d data.--
                        Notwithstanding sections 1860D-
                        15(d)(2)(B) and 1860D-15(f)(2), the 
                        Secretary may use data regarding drug 
                        claims submitted for purposes of 
                        section 1860D-15 that are necessary for 
                        purposes of subparagraph (A).
          (4) Application.--
                  (A) Limitations on review.--There shall be no 
                administrative or judicial review under section 
                1869, section 1878, or otherwise, of--
                          (i) the methodology and standards for 
                        determining payment amounts under this 
                        subsection and payment adjustments 
                        under subsection (b)(3)(B)(ix), 
                        including selection of periods under 
                        paragraph (2) for determining, and 
                        making estimates or using proxies of, 
                        discharges under paragraph (2)(C) and 
                        inpatient-bed-days, hospital charges, 
                        charity charges, and Medicare share 
                        under paragraph (2)(D);
                          (ii) the methodology and standards 
                        for determining a meaningful EHR user 
                        under paragraph (3), including 
                        selection of measures under paragraph 
                        (3)(B), specification of the means of 
                        demonstrating meaningful EHR use under 
                        paragraph (3)(C), and the hardship 
                        exception under subsection 
                        (b)(3)(B)(ix)(II); and
                          (iii) the specification of EHR 
                        reporting periods under paragraph 
                        (6)(B) and the selection of the form of 
                        payment under paragraph (2)(F).
                  (B) Posting on website.--The Secretary shall 
                post on the Internet website of the Centers for 
                Medicare & Medicaid Services, in an easily 
                understandable format, a list of the names of 
                the eligible hospitals that are meaningful EHR 
                users under this subsection or subsection 
                (b)(3)(B)(ix) (and a list of the names of 
                critical access hospitals to which paragraph 
                (3) or (4) of section 1814(l) applies), and 
                other relevant data as determined appropriate 
                by the Secretary. The Secretary shall ensure 
                that an eligible hospital (or critical access 
                hospital) has the opportunity to review the 
                other relevant data that are to be made public 
                with respect to the hospital (or critical 
                access hospital) prior to such data being made 
                public.
          (5) Certified ehr technology defined.--The term 
        ``certified EHR technology'' has the meaning given such 
        term in section 1848(o)(4).
          (6) Definitions.--For purposes of this subsection:
                  (A) EHR reporting period.--The term ``EHR 
                reporting period'' means, with respect to a 
                payment year, any period (or periods) as 
                specified by the Secretary.
                  (B) Eligible hospital.--The term ``eligible 
                hospital'' means a subsection (d) hospital.
  (o) Hospital Value-Based Purchasing Program.--
          (1) Establishment.--
                  (A) In general.--Subject to the succeeding 
                provisions of this subsection, the Secretary 
                shall establish a hospital value-based 
                purchasing program (in this subsection referred 
                to as the ``Program'') under which value-based 
                incentive payments are made in a fiscal year to 
                hospitals that meet the performance standards 
                under paragraph (3) for the performance period 
                for such fiscal year (as established under 
                paragraph (4)).
                  (B) Program to begin in fiscal year 2013.--
                The Program shall apply to payments for 
                discharges occurring on or after October 1, 
                2012.
                  (C) Applicability of program to hospitals.--
                          (i) In general.--For purposes of this 
                        subsection, subject to clause (ii), the 
                        term ``hospital'' means a subsection 
                        (d) hospital (as defined in subsection 
                        (d)(1)(B)).
                          (ii) Exclusions.--The term 
                        ``hospital'' shall not include, with 
                        respect to a fiscal year, a hospital--
                                  (I) that is subject to the 
                                payment reduction under 
                                subsection (b)(3)(B)(viii)(I) 
                                for such fiscal year;
                                  (II) for which, during the 
                                performance period for such 
                                fiscal year, the Secretary has 
                                cited deficiencies that pose 
                                immediate jeopardy to the 
                                health or safety of patients;
                                  (III) for which there are not 
                                a minimum number (as determined 
                                by the Secretary) of measures 
                                that apply to the hospital for 
                                the performance period for such 
                                fiscal year; or
                                  (IV) for which there are not 
                                a minimum number (as determined 
                                by the Secretary) of cases for 
                                the measures that apply to the 
                                hospital for the performance 
                                period for such fiscal year.
                          (iii) Independent analysis.--For 
                        purposes of determining the minimum 
                        numbers under subclauses (III) and (IV) 
                        of clause (ii), the Secretary shall 
                        have conducted an independent analysis 
                        of what numbers are appropriate.
                          (iv) Exemption.--In the case of a 
                        hospital that is paid under section 
                        1814(b)(3), the Secretary may exempt 
                        such hospital from the application of 
                        this subsection if the State which is 
                        paid under such section submits an 
                        annual report to the Secretary 
                        describing how a similar program in the 
                        State for a participating hospital or 
                        hospitals achieves or surpasses the 
                        measured results in terms of patient 
                        health outcomes and cost savings 
                        established under this subsection.
          (2) Measures.--
                  (A) In general.--The Secretary shall select 
                measures, other than measures of readmissions, 
                for purposes of the Program. Such measures 
                shall be selected from the measures specified 
                under subsection (b)(3)(B)(viii).
                  (B) Requirements.--
                          (i) For fiscal year 2013.--For value-
                        based incentive payments made with 
                        respect to discharges occurring during 
                        fiscal year 2013, the Secretary shall 
                        ensure the following:
                                  (I) Conditions or 
                                procedures.--Measures are 
                                selected under subparagraph (A) 
                                that cover at least the 
                                following 5 specific conditions 
                                or procedures:
                                          (aa) Acute myocardial 
                                        infarction (AMI).
                                          (bb) Heart failure.
                                          (cc) Pneumonia.
                                          (dd) Surgeries, as 
                                        measured by the 
                                        Surgical Care 
                                        Improvement Project 
                                        (formerly referred to 
                                        as ``Surgical Infection 
                                        Prevention'' for 
                                        discharges occurring 
                                        before July 2006).
                                          (ee) Healthcare-
                                        associated infections, 
                                        as measured by the 
                                        prevention metrics and 
                                        targets established in 
                                        the HHS Action Plan to 
                                        Prevent Healthcare-
                                        Associated Infections 
                                        (or any successor plan) 
                                        of the Department of 
                                        Health and Human 
                                        Services.
                                  (II) HCAHPS.--Measures 
                                selected under subparagraph (A) 
                                shall be related to the 
                                Hospital Consumer Assessment of 
                                Healthcare Providers and 
                                Systems survey (HCAHPS).
                          (ii) Inclusion of efficiency 
                        measures.--For value-based incentive 
                        payments made with respect to 
                        discharges occurring during fiscal year 
                        2014 or a subsequent fiscal year, the 
                        Secretary shall ensure that measures 
                        selected under subparagraph (A) include 
                        efficiency measures, including measures 
                        of ``Medicare spending per 
                        beneficiary''. Such measures shall be 
                        adjusted for factors such as age, sex, 
                        race, severity of illness, and other 
                        factors that the Secretary determines 
                        appropriate.
                  (C) Limitations.--
                          (i) Time requirement for prior 
                        reporting and notice.--The Secretary 
                        may not select a measure under 
                        subparagraph (A) for use under the 
                        Program with respect to a performance 
                        period for a fiscal year (as 
                        established under paragraph (4)) unless 
                        such measure has been specified under 
                        subsection (b)(3)(B)(viii) and included 
                        on the Hospital Compare Internet 
                        website for at least 1 year prior to 
                        the beginning of such performance 
                        period.
                          (ii) Measure not applicable unless 
                        hospital furnishes services appropriate 
                        to the measure.--A measure selected 
                        under subparagraph (A) shall not apply 
                        to a hospital if such hospital does not 
                        furnish services appropriate to such 
                        measure.
                  (D) Replacing measures.--Subclause (VI) of 
                subsection (b)(3)(B)(viii) shall apply to 
                measures selected under subparagraph (A) in the 
                same manner as such subclause applies to 
                measures selected under such subsection.
          (3) Performance standards.--
                  (A) Establishment.--The Secretary shall 
                establish performance standards with respect to 
                measures selected under paragraph (2) for a 
                performance period for a fiscal year (as 
                established under paragraph (4)).
                  (B) Achievement and improvement.--The 
                performance standards established under 
                subparagraph (A) shall include levels of 
                achievement and improvement.
                  (C) Timing.--The Secretary shall establish 
                and announce the performance standards under 
                subparagraph (A) not later than 60 days prior 
                to the beginning of the performance period for 
                the fiscal year involved.
                  (D) Considerations in establishing 
                standards.--In establishing performance 
                standards with respect to measures under this 
                paragraph, the Secretary shall take into 
                account appropriate factors, such as--
                          (i) practical experience with the 
                        measures involved, including whether a 
                        significant proportion of hospitals 
                        failed to meet the performance standard 
                        during previous performance periods;
                          (ii) historical performance 
                        standards;
                          (iii) improvement rates; and
                          (iv) the opportunity for continued 
                        improvement.
          (4) Performance period.--For purposes of the Program, 
        the Secretary shall establish the performance period 
        for a fiscal year. Such performance period shall begin 
        and end prior to the beginning of such fiscal year.
          (5) Hospital performance score.--
                  (A) In general.--Subject to subparagraph (B), 
                the Secretary shall develop a methodology for 
                assessing the total performance of each 
                hospital based on performance standards with 
                respect to the measures selected under 
                paragraph (2) for a performance period (as 
                established under paragraph (4)). Using such 
                methodology, the Secretary shall provide for an 
                assessment (in this subsection referred to as 
                the ``hospital performance score'') for each 
                hospital for each performance period.
                  (B) Application.--
                          (i) Appropriate distribution.--The 
                        Secretary shall ensure that the 
                        application of the methodology 
                        developed under subparagraph (A) 
                        results in an appropriate distribution 
                        of value-based incentive payments under 
                        paragraph (6) among hospitals achieving 
                        different levels of hospital 
                        performance scores, with hospitals 
                        achieving the highest hospital 
                        performance scores receiving the 
                        largest value-based incentive payments.
                          (ii) Higher of achievement or 
                        improvement.--The methodology developed 
                        under subparagraph (A) shall provide 
                        that the hospital performance score is 
                        determined using the higher of its 
                        achievement or improvement score for 
                        each measure.
                          (iii) Weights.--The methodology 
                        developed under subparagraph (A) shall 
                        provide for the assignment of weights 
                        for categories of measures as the 
                        Secretary determines appropriate.
                          (iv) No minimum performance 
                        standard.--The Secretary shall not set 
                        a minimum performance standard in 
                        determining the hospital performance 
                        score for any hospital.
                          (v) Reflection of measures applicable 
                        to the hospital.--The hospital 
                        performance score for a hospital shall 
                        reflect the measures that apply to the 
                        hospital.
          (6) Calculation of value-based incentive payments.--
                  (A) In general.--In the case of a hospital 
                that the Secretary determines meets (or 
                exceeds) the performance standards under 
                paragraph (3) for the performance period for a 
                fiscal year (as established under paragraph 
                (4)), the Secretary shall increase the base 
                operating DRG payment amount (as defined in 
                paragraph (7)(D)), as determined after 
                application of paragraph (7)(B)(i), for a 
                hospital for each discharge occurring in such 
                fiscal year by the value-based incentive 
                payment amount.
                  (B) Value-based incentive payment amount.--
                The value-based incentive payment amount for 
                each discharge of a hospital in a fiscal year 
                shall be equal to the product of--
                          (i) the base operating DRG payment 
                        amount (as defined in paragraph (7)(D)) 
                        for the discharge for the hospital for 
                        such fiscal year; and
                          (ii) the value-based incentive 
                        payment percentage specified under 
                        subparagraph (C) for the hospital for 
                        such fiscal year.
                  (C) Value-based incentive payment 
                percentage.--
                          (i) In general.--The Secretary shall 
                        specify a value-based incentive payment 
                        percentage for a hospital for a fiscal 
                        year.
                          (ii) Requirements.--In specifying the 
                        value-based incentive payment 
                        percentage for each hospital for a 
                        fiscal year under clause (i), the 
                        Secretary shall ensure that--
                                  (I) such percentage is based 
                                on the hospital performance 
                                score of the hospital under 
                                paragraph (5); and
                                  (II) the total amount of 
                                value-based incentive payments 
                                under this paragraph to all 
                                hospitals in such fiscal year 
                                is equal to the total amount 
                                available for value-based 
                                incentive payments for such 
                                fiscal year under paragraph 
                                (7)(A), as estimated by the 
                                Secretary.
          (7) Funding for value-based incentive payments.--
                  (A) Amount.--The total amount available for 
                value-based incentive payments under paragraph 
                (6) for all hospitals for a fiscal year shall 
                be equal to the total amount of reduced 
                payments for all hospitals under subparagraph 
                (B) for such fiscal year, as estimated by the 
                Secretary.
                  (B) Adjustment to payments.--
                          (i) In general.--The Secretary shall 
                        reduce the base operating DRG payment 
                        amount (as defined in subparagraph (D)) 
                        for a hospital for each discharge in a 
                        fiscal year (beginning with fiscal year 
                        2013) by an amount equal to the 
                        applicable percent (as defined in 
                        subparagraph (C)) of the base operating 
                        DRG payment amount for the discharge 
                        for the hospital for such fiscal year. 
                        The Secretary shall make such 
                        reductions for all hospitals in the 
                        fiscal year involved, regardless of 
                        whether or not the hospital has been 
                        determined by the Secretary to have 
                        earned a value-based incentive payment 
                        under paragraph (6) for such fiscal 
                        year.
                          (ii) No effect on other payments.--
                        Payments described in items (aa) and 
                        (bb) of subparagraph (D)(i)(II) for a 
                        hospital shall be determined as if this 
                        subsection had not been enacted.
                  (C) Applicable percent defined.--For purposes 
                of subparagraph (B), the term ``applicable 
                percent'' means--
                          (i) with respect to fiscal year 2013, 
                        1.0 percent;
                          (ii) with respect to fiscal year 
                        2014, 1.25 percent;
                          (iii) with respect to fiscal year 
                        2015, 1.5 percent;
                          (iv) with respect to fiscal year 
                        2016, 1.75 percent; and
                          (v) with respect to fiscal year 2017 
                        and succeeding fiscal years, 2 percent.
                  (D) Base operating drg payment amount 
                defined.--
                          (i) In general.--Except as provided 
                        in clause (ii), in this subsection, the 
                        term ``base operating DRG payment 
                        amount'' means, with respect to a 
                        hospital for a fiscal year--
                                  (I) the payment amount that 
                                would otherwise be made under 
                                subsection (d) (determined 
                                without regard to subsection 
                                (q)) for a discharge if this 
                                subsection did not apply; 
                                reduced by
                                  (II) any portion of such 
                                payment amount that is 
                                attributable to--
                                          (aa) payments under 
                                        paragraphs (5)(A), 
                                        (5)(B), (5)(F), and 
                                        (12) of subsection (d); 
                                        and
                                          (bb) such other 
                                        payments under 
                                        subsection (d) 
                                        determined appropriate 
                                        by the Secretary.
                          (ii) Special rules for certain 
                        hospitals.--
                                  (I) Sole community hospitals 
                                and medicare-dependent, small 
                                rural hospitals.--In the case 
                                of a medicare-dependent, small 
                                rural hospital (with respect to 
                                discharges occurring during 
                                fiscal year 2012 and 2013) or a 
                                sole community hospital, in 
                                applying subparagraph (A)(i), 
                                the payment amount that would 
                                otherwise be made under 
                                subsection (d) shall be 
                                determined without regard to 
                                subparagraphs (I) and (L) of 
                                subsection (b)(3) and 
                                subparagraphs (D) and (G) of 
                                subsection (d)(5).
                                  (II) Hospitals paid under 
                                section 1814.--In the case of a 
                                hospital that is paid under 
                                section 1814(b)(3), the term 
                                ``base operating DRG payment 
                                amount'' means the payment 
                                amount under such section.
          (8) Announcement of net result of adjustments.--Under 
        the Program, the Secretary shall, not later than 60 
        days prior to the fiscal year involved, inform each 
        hospital of the adjustments to payments to the hospital 
        for discharges occurring in such fiscal year under 
        paragraphs (6) and (7)(B)(i).
          (9) No effect in subsequent fiscal years.--The value-
        based incentive payment under paragraph (6) and the 
        payment reduction under paragraph (7)(B)(i) shall each 
        apply only with respect to the fiscal year involved, 
        and the Secretary shall not take into account such 
        value-based incentive payment or payment reduction in 
        making payments to a hospital under this section in a 
        subsequent fiscal year.
          (10) Public reporting.--
                  (A) Hospital specific information.--
                          (i) In general.--The Secretary shall 
                        make information available to the 
                        public regarding the performance of 
                        individual hospitals under the Program, 
                        including--
                                  (I) the performance of the 
                                hospital with respect to each 
                                measure that applies to the 
                                hospital;
                                  (II) the performance of the 
                                hospital with respect to each 
                                condition or procedure; and
                                  (III) the hospital 
                                performance score assessing the 
                                total performance of the 
                                hospital.
                          (ii) Opportunity to review and submit 
                        corrections.--The Secretary shall 
                        ensure that a hospital has the 
                        opportunity to review, and submit 
                        corrections for, the information to be 
                        made public with respect to the 
                        hospital under clause (i) prior to such 
                        information being made public.
                          (iii) Website.--Such information 
                        shall be posted on the Hospital Compare 
                        Internet website in an easily 
                        understandable format.
                  (B) Aggregate information.--The Secretary 
                shall periodically post on the Hospital Compare 
                Internet website aggregate information on the 
                Program, including--
                          (i) the number of hospitals receiving 
                        value-based incentive payments under 
                        paragraph (6) and the range and total 
                        amount of such value-based incentive 
                        payments; and
                          (ii) the number of hospitals 
                        receiving less than the maximum value-
                        based incentive payment available to 
                        the hospital for the fiscal year 
                        involved and the range and amount of 
                        such payments.
          (11) Implementation.--
                  (A) Appeals.--The Secretary shall establish a 
                process by which hospitals may appeal the 
                calculation of a hospital's performance 
                assessment with respect to the performance 
                standards established under paragraph (3)(A) 
                and the hospital performance score under 
                paragraph (5). The Secretary shall ensure that 
                such process provides for resolution of such 
                appeals in a timely manner.
                  (B) Limitation on review.--Except as provided 
                in subparagraph (A), there shall be no 
                administrative or judicial review under section 
                1869, section 1878, or otherwise of the 
                following:
                          (i) The methodology used to determine 
                        the amount of the value-based incentive 
                        payment under paragraph (6) and the 
                        determination of such amount.
                          (ii) The determination of the amount 
                        of funding available for such value-
                        based incentive payments under 
                        paragraph (7)(A) and the payment 
                        reduction under paragraph (7)(B)(i).
                          (iii) The establishment of the 
                        performance standards under paragraph 
                        (3) and the performance period under 
                        paragraph (4).
                          (iv) The measures specified under 
                        subsection (b)(3)(B)(viii) and the 
                        measures selected under paragraph (2).
                          (v) The methodology developed under 
                        paragraph (5) that is used to calculate 
                        hospital performance scores and the 
                        calculation of such scores.
                          (vi) The validation methodology 
                        specified in subsection 
                        (b)(3)(B)(viii)(XI).
                  (C) Consultation with small hospitals.--The 
                Secretary shall consult with small rural and 
                urban hospitals on the application of the 
                Program to such hospitals.
          (12) Promulgation of regulations.--The Secretary 
        shall promulgate regulations to carry out the Program, 
        including the selection of measures under paragraph 
        (2), the methodology developed under paragraph (5) that 
        is used to calculate hospital performance scores, and 
        the methodology used to determine the amount of value-
        based incentive payments under paragraph (6).
  (p) Adjustment to Hospital Payments for Hospital Acquired 
Conditions.--
          (1) In general.--In order to provide an incentive for 
        applicable hospitals to reduce hospital acquired 
        conditions under this title, with respect to discharges 
        from an applicable hospital occurring during fiscal 
        year 2015 or a subsequent fiscal year, the amount of 
        payment under this section or section 1814(b)(3), as 
        applicable, for such discharges during the fiscal year 
        shall be equal to 99 percent of the amount of payment 
        that would otherwise apply to such discharges under 
        this section or section 1814(b)(3) (determined after 
        the application of subsections (o) and (q) and section 
        1814(l)(4) but without regard to this subsection).
          (2) Applicable hospitals.--
                  (A) In general.--For purposes of this 
                subsection, the term ``applicable hospital'' 
                means a subsection (d) hospital that meets the 
                criteria described in subparagraph (B).
                  (B) Criteria described.--
                          (i) In general.--The criteria 
                        described in this subparagraph, with 
                        respect to a subsection (d) hospital, 
                        is that the subsection (d) hospital is 
                        in the top quartile of all subsection 
                        (d) hospitals, relative to the national 
                        average, of hospital acquired 
                        conditions during the applicable 
                        period, as determined by the Secretary.
                          (ii) Risk adjustment.--In carrying 
                        out clause (i), the Secretary shall 
                        establish and apply an appropriate risk 
                        adjustment methodology.
                  (C) Exemption.--In the case of a hospital 
                that is paid under section 1814(b)(3), the 
                Secretary may exempt such hospital from the 
                application of this subsection if the State 
                which is paid under such section submits an 
                annual report to the Secretary describing how a 
                similar program in the State for a 
                participating hospital or hospitals achieves or 
                surpasses the measured results in terms of 
                patient health outcomes and cost savings 
                established under this subsection.
          (3) Hospital acquired conditions.--For purposes of 
        this subsection, the term ``hospital acquired 
        condition'' means a condition identified for purposes 
        of subsection (d)(4)(D)(iv) and any other condition 
        determined appropriate by the Secretary that an 
        individual acquires during a stay in an applicable 
        hospital, as determined by the Secretary.
          (4) Applicable period.--In this subsection, the term 
        ``applicable period'' means, with respect to a fiscal 
        year, a period specified by the Secretary.
          (5) Reporting to hospitals.--Prior to fiscal year 
        2015 and each subsequent fiscal year, the Secretary 
        shall provide confidential reports to applicable 
        hospitals with respect to hospital acquired conditions 
        of the applicable hospital during the applicable 
        period.
          (6) Reporting hospital specific information.--
                  (A) In general.--The Secretary shall make 
                information available to the public regarding 
                hospital acquired conditions of each applicable 
                hospital.
                  (B) Opportunity to review and submit 
                corrections.--The Secretary shall ensure that 
                an applicable hospital has the opportunity to 
                review, and submit corrections for, the 
                information to be made public with respect to 
                the hospital under subparagraph (A) prior to 
                such information being made public.
                  (C) Website.--Such information shall be 
                posted on the Hospital Compare Internet website 
                in an easily understandable format.
          (7) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) The criteria described in paragraph 
                (2)(A).
                  (B) The specification of hospital acquired 
                conditions under paragraph (3).
                  (C) The specification of the applicable 
                period under paragraph (4).
                  (D) The provision of reports to applicable 
                hospitals under paragraph (5) and the 
                information made available to the public under 
                paragraph (6).
  (q) Hospital Readmissions Reduction Program.--
          (1) In general.--With respect to payment for 
        discharges from an applicable hospital (as defined in 
        paragraph (5)(C)) occurring during a fiscal year 
        beginning on or after October 1, 2012, in order to 
        account for excess readmissions in the hospital, the 
        Secretary shall make payments (in addition to the 
        payments described in paragraph (2)(A)(ii)) for such a 
        discharge to such hospital under subsection (d) (or 
        section 1814(b)(3), as the case may be) in an amount 
        equal to the product of--
                  (A) the base operating DRG payment amount (as 
                defined in paragraph (2)) for the discharge; 
                and
                  (B) the adjustment factor (described in 
                paragraph (3)(A)) for the hospital for the 
                fiscal year.
          (2) Base operating drg payment amount defined.--
                  (A) In general.--Except as provided in 
                subparagraph (B), in this subsection, the term 
                ``base operating DRG payment amount'' means, 
                with respect to a hospital for a fiscal year--
                          (i) the payment amount that would 
                        otherwise be made under subsection (d) 
                        (determined without regard to 
                        subsection (o)) for a discharge if this 
                        subsection did not apply; reduced by
                          (ii) any portion of such payment 
                        amount that is attributable to payments 
                        under paragraphs (5)(A), (5)(B), 
                        (5)(F), and (12) of subsection (d).
                  (B) Special rules for certain hospitals.--
                          (i) Sole community hospitals and 
                        medicare-dependent, small rural 
                        hospitals.--In the case of a medicare-
                        dependent, small rural hospital (with 
                        respect to discharges occurring during 
                        fiscal years 2012 and 2013) or a sole 
                        community hospital, in applying 
                        subparagraph (A)(i), the payment amount 
                        that would otherwise be made under 
                        subsection (d) shall be determined 
                        without regard to subparagraphs (I) and 
                        (L) of subsection (b)(3) and 
                        subparagraphs (D) and (G) of subsection 
                        (d)(5).
                          (ii) Hospitals paid under section 
                        1814.--In the case of a hospital that 
                        is paid under section 1814(b)(3), the 
                        Secretary may exempt such hospitals 
                        provided that States paid under such 
                        section submit an annual report to the 
                        Secretary describing how a similar 
                        program in the State for a 
                        participating hospital or hospitals 
                        achieves or surpasses the measured 
                        results in terms of patient health 
                        outcomes and cost savings established 
                        herein with respect to this section.
          (3) Adjustment factor.--
                  (A) In general.--For purposes of paragraph 
                (1), the adjustment factor under this paragraph 
                for an applicable hospital for a fiscal year is 
                equal to the greater of--
                          (i) the ratio described in 
                        subparagraph (B) for the hospital for 
                        the applicable period (as defined in 
                        paragraph (5)(D)) for such fiscal year; 
                        or
                          (ii) the floor adjustment factor 
                        specified in subparagraph (C).
                  (B) Ratio.--The ratio described in this 
                subparagraph for a hospital for an applicable 
                period is equal to 1 minus the ratio of--
                          (i) the aggregate payments for excess 
                        readmissions (as defined in paragraph 
                        (4)(A)) with respect to an applicable 
                        hospital for the applicable period; and
                          (ii) the aggregate payments for all 
                        discharges (as defined in paragraph 
                        (4)(B)) with respect to such applicable 
                        hospital for such applicable period.
                  (C) Floor adjustment factor.--For purposes of 
                subparagraph (A), the floor adjustment factor 
                specified in this subparagraph for--
                          (i) fiscal year 2013 is 0.99;
                          (ii) fiscal year 2014 is 0.98; or
                          (iii) fiscal year 2015 and subsequent 
                        fiscal years is 0.97.
          (4) Aggregate payments, excess readmission ratio 
        defined.--For purposes of this subsection:
                  (A) Aggregate payments for excess 
                readmissions.--The term ``aggregate payments 
                for excess readmissions'' means, for a hospital 
                for an applicable period, the sum, for 
                applicable conditions (as defined in paragraph 
                (5)(A)), of the product, for each applicable 
                condition, of--
                          (i) the base operating DRG payment 
                        amount for such hospital for such 
                        applicable period for such condition;
                          (ii) the number of admissions for 
                        such condition for such hospital for 
                        such applicable period; and
                          (iii) the excess readmissions ratio 
                        (as defined in subparagraph (C)) for 
                        such hospital for such applicable 
                        period minus 1.
                  (B) Aggregate payments for all discharges.--
                The term ``aggregate payments for all 
                discharges'' means, for a hospital for an 
                applicable period, the sum of the base 
                operating DRG payment amounts for all 
                discharges for all conditions from such 
                hospital for such applicable period.
                  (C) Excess readmission ratio.--
                          (i) In general.--Subject to clause 
                        (ii), the term ``excess readmissions 
                        ratio'' means, with respect to an 
                        applicable condition for a hospital for 
                        an applicable period, the ratio (but 
                        not less than 1.0) of--
                                  (I) the risk adjusted 
                                readmissions based on actual 
                                readmissions, as determined 
                                consistent with a readmission 
                                measure methodology that has 
                                been endorsed under paragraph 
                                (5)(A)(ii)(I), for an 
                                applicable hospital for such 
                                condition with respect to such 
                                applicable period; to
                                  (II) the risk adjusted 
                                expected readmissions (as 
                                determined consistent with such 
                                a methodology) for such 
                                hospital for such condition 
                                with respect to such applicable 
                                period.
                          (ii) Exclusion of certain 
                        readmissions.--For purposes of clause 
                        (i), with respect to a hospital, excess 
                        readmissions shall not include 
                        readmissions for an applicable 
                        condition for which there are fewer 
                        than a minimum number (as determined by 
                        the Secretary) of discharges for such 
                        applicable condition for the applicable 
                        period and such hospital.
          (5) Definitions.--For purposes of this subsection:
                  (A) Applicable condition.--The term 
                ``applicable condition'' means, subject to 
                subparagraph (B), a condition or procedure 
                selected by the Secretary among conditions and 
                procedures for which--
                          (i) readmissions (as defined in 
                        subparagraph (E)) that represent 
                        conditions or procedures that are high 
                        volume or high expenditures under this 
                        title (or other criteria specified by 
                        the Secretary); and
                          (ii) measures of such readmissions--
                                  (I) have been endorsed by the 
                                entity with a contract under 
                                section 1890(a); and
                                  (II) such endorsed measures 
                                have exclusions for 
                                readmissions that are unrelated 
                                to the prior discharge (such as 
                                a planned readmission or 
                                transfer to another applicable 
                                hospital).
                  (B) Expansion of applicable conditions.--
                Beginning with fiscal year 2015, the Secretary 
                shall, to the extent practicable, expand the 
                applicable conditions beyond the 3 conditions 
                for which measures have been endorsed as 
                described in subparagraph (A)(ii)(I) as of the 
                date of the enactment of this subsection to the 
                additional 4 conditions that have been 
                identified by the Medicare Payment Advisory 
                Commission in its report to Congress in June 
                2007 and to other conditions and procedures as 
                determined appropriate by the Secretary. In 
                expanding such applicable conditions, the 
                Secretary shall seek the endorsement described 
                in subparagraph (A)(ii)(I) but may apply such 
                measures without such an endorsement in the 
                case of a specified area or medical topic 
                determined appropriate by the Secretary for 
                which a feasible and practical measure has not 
                been endorsed by the entity with a contract 
                under section 1890(a) as long as due 
                consideration is given to measures that have 
                been endorsed or adopted by a consensus 
                organization identified by the Secretary.
                  (C) Applicable hospital.--The term 
                ``applicable hospital'' means a subsection (d) 
                hospital or a hospital that is paid under 
                section 1814(b)(3), as the case may be.
                  (D) Applicable period.--The term ``applicable 
                period'' means, with respect to a fiscal year, 
                such period as the Secretary shall specify.
                  (E) Readmission.--The term ``readmission'' 
                means, in the case of an individual who is 
                discharged from an applicable hospital, the 
                admission of the individual to the same or 
                another applicable hospital within a time 
                period specified by the Secretary from the date 
                of such discharge. Insofar as the discharge 
                relates to an applicable condition for which 
                there is an endorsed measure described in 
                subparagraph (A)(ii)(I), such time period (such 
                as 30 days) shall be consistent with the time 
                period specified for such measure.
          (6) Reporting hospital specific information.--
                  (A) In general.--The Secretary shall make 
                information available to the public regarding 
                readmission rates of each subsection (d) 
                hospital under the program.
                  (B) Opportunity to review and submit 
                corrections.--The Secretary shall ensure that a 
                subsection (d) hospital has the opportunity to 
                review, and submit corrections for, the 
                information to be made public with respect to 
                the hospital under subparagraph (A) prior to 
                such information being made public.
                  (C) Website.--Such information shall be 
                posted on the Hospital Compare Internet website 
                in an easily understandable format.
          (7) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) The determination of base operating DRG 
                payment amounts.
                  (B) The methodology for determining the 
                adjustment factor under paragraph (3), 
                including excess readmissions ratio under 
                paragraph (4)(C), aggregate payments for excess 
                readmissions under paragraph (4)(A), and 
                aggregate payments for all discharges under 
                paragraph (4)(B), and applicable periods and 
                applicable conditions under paragraph (5).
                  (C) The measures of readmissions as described 
                in paragraph (5)(A)(ii).
          (8) Readmission rates for all patients.--
                  (A) Calculation of readmission.--The 
                Secretary shall calculate readmission rates for 
                all patients (as defined in subparagraph (D)) 
                for a specified hospital (as defined in 
                subparagraph (D)(ii)) for an applicable 
                condition (as defined in paragraph (5)(B)) and 
                other conditions deemed appropriate by the 
                Secretary for an applicable period (as defined 
                in paragraph (5)(D)) in the same manner as used 
                to calculate such readmission rates for 
                hospitals with respect to this title and posted 
                on the CMS Hospital Compare website.
                  (B) Posting of hospital specific all patient 
                readmission rates.--The Secretary shall make 
                information on all patient readmission rates 
                calculated under subparagraph (A) available on 
                the CMS Hospital Compare website in a form and 
                manner determined appropriate by the Secretary. 
                The Secretary may also make other information 
                determined appropriate by the Secretary 
                available on such website.
                  (C) Hospital submission of all patient 
                data.--
                          (i) Except as provided for in clause 
                        (ii), each specified hospital (as 
                        defined in subparagraph (D)(ii)) shall 
                        submit to the Secretary, in a form, 
                        manner and time specified by the 
                        Secretary, data and information 
                        determined necessary by the Secretary 
                        for the Secretary to calculate the all 
                        patient readmission rates described in 
                        subparagraph (A).
                          (ii) Instead of a specified hospital 
                        submitting to the Secretary the data 
                        and information described in clause 
                        (i), such data and information may be 
                        submitted to the Secretary, on behalf 
                        of such a specified hospital, by a 
                        state or an entity determined 
                        appropriate by the Secretary.
                  (D) Definitions.--For purposes of this 
                paragraph:
                          (i) The term ``all patients'' means 
                        patients who are treated on an 
                        inpatient basis and discharged from a 
                        specified hospital (as defined in 
                        clause (ii)).
                          (ii) The term ``specified hospital'' 
                        means a subsection (d) hospital, 
                        hospitals described in clauses (i) 
                        through (v) of subsection (d)(1)(B) 
                        and, as determined feasible and 
                        appropriate by the Secretary, other 
                        hospitals not otherwise described in 
                        this subparagraph.
  (r) Adjustments to Medicare DSH Payments.--
          (1) Empirically justified dsh payments.--For fiscal 
        year 2014 and each subsequent fiscal year, instead of 
        the amount of disproportionate share hospital payment 
        that would otherwise be made under subsection (d)(5)(F) 
        to a subsection (d) hospital for the fiscal year, the 
        Secretary shall pay to the subsection (d) hospital 25 
        percent of such amount (which represents the 
        empirically justified amount for such payment, as 
        determined by the Medicare Payment Advisory Commission 
        in its March 2007 Report to the Congress).
          (2) Additional payment.--In addition to the payment 
        made to a subsection (d) hospital under paragraph (1), 
        for fiscal year 2014 and each subsequent fiscal year, 
        the Secretary shall pay to such subsection (d) 
        hospitals an additional amount equal to the product of 
        the following factors:
                  (A) Factor one.--A factor equal to the 
                difference between--
                          (i) the aggregate amount of payments 
                        that would be made to subsection (d) 
                        hospitals under subsection (d)(5)(F) if 
                        this subsection did not apply for such 
                        fiscal year (as estimated by the 
                        Secretary); and
                          (ii) the aggregate amount of payments 
                        that are made to subsection (d) 
                        hospitals under paragraph (1) for such 
                        fiscal year (as so estimated).
                  (B) Factor two.--
                          (i) Fiscal years 2014, 2015, 2016, 
                        and 2017.--For each of fiscal years 
                        2014, 2015, 2016, and 2017, a factor 
                        equal to 1 minus the percent change in 
                        the percent of individuals under the 
                        age of 65 who are uninsured, as 
                        determined by comparing the percent of 
                        such individuals--
                                  (I) who are uninsured in 
                                2013, the last year before 
                                coverage expansion under the 
                                Patient Protection and 
                                Affordable Care Act (as 
                                calculated by the Secretary 
                                based on the most recent 
                                estimates available from the 
                                Director of the Congressional 
                                Budget Office before a vote in 
                                either House on the Health Care 
                                and Education Reconciliation 
                                Act of 2010 that, if determined 
                                in the affirmative, would clear 
                                such Act for enrollment); and
                                  (II) who are uninsured in the 
                                most recent period for which 
                                data is available (as so 
                                calculated),
                        minus 0.1 percentage points for fiscal 
                        year 2014 and minus 0.2 percentage 
                        points for each of fiscal years 2015, 
                        2016, and 2017.
                          (ii) 2018 and subsequent years.--For 
                        fiscal year 2018 and each subsequent 
                        fiscal year, a factor equal to 1 minus 
                        the percent change in the percent of 
                        individuals who are uninsured, as 
                        determined by comparing the percent of 
                        individuals--
                                  (I) who are uninsured in 2013 
                                (as estimated by the Secretary, 
                                based on data from the Census 
                                Bureau or other sources the 
                                Secretary determines 
                                appropriate, and certified by 
                                the Chief Actuary of the 
                                Centers for Medicare & Medicaid 
                                Services); and
                                  (II) who are uninsured in the 
                                most recent period for which 
                                data is available (as so 
                                estimated and certified),
                        minus 0.2 percentage points for each of 
                        fiscal years 2018 and 2019.
                  (C) Factor three.--A factor equal to the 
                percent, for each subsection (d) hospital, that 
                represents the quotient of--
                          (i) the amount of uncompensated care 
                        for such hospital for a period selected 
                        by the Secretary (as estimated by the 
                        Secretary, based on appropriate data 
                        (including, in the case where the 
                        Secretary determines that alternative 
                        data is available which is a better 
                        proxy for the costs of subsection (d) 
                        hospitals for treating the uninsured, 
                        the use of such alternative data)); and
                          (ii) the aggregate amount of 
                        uncompensated care for all subsection 
                        (d) hospitals that receive a payment 
                        under this subsection for such period 
                        (as so estimated, based on such data).
          (3) Limitations on review.--There shall be no 
        administrative or judicial review under section 1869, 
        section 1878, or otherwise of the following:
                  (A) Any estimate of the Secretary for 
                purposes of determining the factors described 
                in paragraph (2).
                  (B) Any period selected by the Secretary for 
                such purposes.
  (s) Prospective Payment for Psychiatric Hospitals.--
          (1) Reference to establishment and implementation of 
        system.--For provisions related to the establishment 
        and implementation of a prospective payment system for 
        payments under this title for inpatient hospital 
        services furnished by psychiatric hospitals (as 
        described in clause (i) of subsection (d)(1)(B)) and 
        psychiatric units (as described in the matter following 
        clause (v) of such subsection), see section 124 of the 
        Medicare, Medicaid, and SCHIP Balanced Budget 
        Refinement Act of 1999.
          (2) Implementation for rate year beginning in 2010 
        and subsequent rate years.--
                  (A) In general.--In implementing the system 
                described in paragraph (1) for the rate year 
                beginning in 2010 and any subsequent rate year, 
                any update to a base rate for days during the 
                rate year for a psychiatric hospital or unit, 
                respectively, shall be reduced--
                          (i) for the rate year beginning in 
                        2012 and each subsequent rate year, by 
                        the productivity adjustment described 
                        in section 1886(b)(3)(B)(xi)(II); and
                          (ii) for each of the rate years 
                        beginning in 2010 through 2019, by the 
                        other adjustment described in paragraph 
                        (3).
                  (B) Special rule.--The application of this 
                paragraph may result in such update being less 
                than 0.0 for a rate year, and may result in 
                payment rates under the system described in 
                paragraph (1) for a rate year being less than 
                such payment rates for the preceding rate year.
          (3) Other adjustment.--For purposes of paragraph 
        (2)(A)(ii), the other adjustment described in this 
        paragraph is--
                  (A) for each of the rate years beginning in 
                2010 and 2011, 0.25 percentage point;
                  (B) for each of the rate years beginning in 
                2012 and 2013, 0.1 percentage point;
                  (C) for the rate year beginning in 2014, 0.3 
                percentage point;
                  (D) for each of the rate years beginning in 
                2015 and 2016, 0.2 percentage point; and
                  (E) for each of the rate years beginning in 
                2017, 2018, and 2019, 0.75 percentage point.
          (4) Quality reporting.--
                  (A) Reduction in update for failure to 
                report.--
                          (i) In general.--Under the system 
                        described in paragraph (1), for rate 
                        year 2014 and each subsequent rate 
                        year, in the case of a psychiatric 
                        hospital or psychiatric unit that does 
                        not submit data to the Secretary in 
                        accordance with subparagraph (C) with 
                        respect to such a rate year, any annual 
                        update to a standard Federal rate for 
                        discharges for the hospital during the 
                        rate year, and after application of 
                        paragraph (2), shall be reduced by 2 
                        percentage points.
                          (ii) Special rule.--The application 
                        of this subparagraph may result in such 
                        annual update being less than 0.0 for a 
                        rate year, and may result in payment 
                        rates under the system described in 
                        paragraph (1) for a rate year being 
                        less than such payment rates for the 
                        preceding rate year.
                  (B) Noncumulative application.--Any reduction 
                under subparagraph (A) shall apply only with 
                respect to the rate year involved and the 
                Secretary shall not take into account such 
                reduction in computing the payment amount under 
                the system described in paragraph (1) for a 
                subsequent rate year.
                  (C) Submission of quality data.--For rate 
                year 2014 and each subsequent rate year, each 
                psychiatric hospital and psychiatric unit shall 
                submit to the Secretary data on quality 
                measures specified under subparagraph (D). Such 
                data shall be submitted in a form and manner, 
                and at a time, specified by the Secretary for 
                purposes of this subparagraph.
                  (D) Quality measures.--
                          (i) In general.--Subject to clause 
                        (ii), any measure specified by the 
                        Secretary under this subparagraph must 
                        have been endorsed by the entity with a 
                        contract under section 1890(a).
                          (ii) Exception.--In the case of a 
                        specified area or medical topic 
                        determined appropriate by the Secretary 
                        for which a feasible and practical 
                        measure has not been endorsed by the 
                        entity with a contract under section 
                        1890(a), the Secretary may specify a 
                        measure that is not so endorsed as long 
                        as due consideration is given to 
                        measures that have been endorsed or 
                        adopted by a consensus organization 
                        identified by the Secretary.
                          (iii) Time frame.--Not later than 
                        October 1, 2012, the Secretary shall 
                        publish the measures selected under 
                        this subparagraph that will be 
                        applicable with respect to rate year 
                        2014.
                  (E) Public availability of data submitted.--
                The Secretary shall establish procedures for 
                making data submitted under subparagraph (C) 
                available to the public. Such procedures shall 
                ensure that a psychiatric hospital and a 
                psychiatric unit has the opportunity to review 
                the data that is to be made public with respect 
                to the hospital or unit prior to such data 
                being made public. The Secretary shall report 
                quality measures that relate to services 
                furnished in inpatient settings in psychiatric 
                hospitals and psychiatric units on the Internet 
                website of the Centers for Medicare & Medicaid 
                Services.

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