[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 2. Medicare]
[From the U.S. Government Printing Office, www.gpo.gov]
SECTION 2-MEDICARE
(Note: This chapter does not include information or data on the changes
to the Medicare Program from Public Law 108-173, signed on December 8,
2003).
CONTENTS
Overview
Coverage
Benefits
Payments for Services
Administration
Financing
Federal Outlays
Eligibility and Coverage
Aged
Disabled
Benefits and Beneficiary Cost-Sharing
Part A
Part B
Financing
Hospital Insurance Trust Fund - Income
Supplementary Medical Insurance Trust Fund - Income
Financial Status of Hospital Insurance Trust Fund
Financial Status of Supplementary Medical Insurance Trust Fund
Part A Services - Coverage and Payments
Hospitals
Short-Term General Hospitals
Specialty Hospitals and Distinct Part Units
Skilled Nursing Facility Services
Home Health Services
Hospice Services
Part B Services - Coverage and Payments
Physicians' Services
Nonphysician Practitioner Services
Clinical Laboratory Services
Durable Medical Equipment and Prosthetics and Orthotics
Hospital Outpatient Department Services
Ambulatory Surgical Center Services
Ambulance Services
Home Health Services
Prescription Drugs
Other Part B Services
End Stage Renal Disease Services
Coverage
Treatment
Reimbursement
Medicare+Choice
Selected Issues
Secondary Payer
Supplementing Medicare Coverage
Legislative History, 1997-2003
Balanced Budget Act (BBA) of 1997 (P.L.105-33)
Balanced Budget Refinement Act (BBRA) of 1999 (P. L. 106-113)
Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act (BIPA) of 2000 (P.L. 106-554)
Public Health Security and Bioterrorism Preparedness and
Response Act (P.L. 107-188)
Consolidated Appropriations Resolution, 2003 (P.L.108-7)
To Extend the Temporary Assistance for Needy Families Block
Grant Program, and for Other Purposes (P.L. 108-89)
CBO Savings and Revenue Estimates for Budget Reconciliation and
Related Acts, 1981-2003
Medicare Historical Data
References
OVERVIEW
Medicare is a nationwide health insurance program for the aged
and certain disabled persons. The program consists of two partsBPart A,
hospital insurance (HI) and Part B, supplementary medical insurance
(SMI). Total program outlays were $256.8 billion in fiscal year 2002.
Net outlays, after deduction of beneficiary premiums, were $230.9
billion.
COVERAGE
Almost all persons over age 65 are automatically entitled to Medicare
Part A. Part A also provides coverage, after a 24-month waiting period,
for persons under age 65 who are receiving Social Security cash
benefits on the basis of disability. Most persons who need a kidney
transplant or renal dialysis also may be covered, regardless of age.
In fiscal year 2003, Part A covered an estimated 40.3 million aged and
disabled persons (including those with chronic kidney disease). Medicare
Part B is voluntary. All persons over age 65 and all persons enrolled
in Part A may enroll in Part B by paying a monthly premium - $58.70 in
2003. In fiscal year 2003, Part B covered an estimated 38.3 million
aged and disabled persons.
BENEFITS
Part A provides coverage for inpatient hospital services, up to
100 days of post hospital skilled nursing facility (SNF) care, some home
health services, and hospice care. Patients must pay a deductible ($840
in 2003) each time their hospital admission begins a benefit period.
(A benefit period begins when a patient enters a hospital and ends when
she has not been in a hospital or SNF for 60 days.) Medicare pays the
remaining costs for the first 60 days of hospital care. The limited
number of beneficiaries requiring care beyond 60 days are subject to
additional charges. Patients requiring SNF care are subject to a daily
coinsurance charge for days 21-100 ($105 in 2003). There are no cost-
sharing charges for home health care and limited charges for hospice
care. Part B provides coverage for physicians' services, laboratory
services, durable medical equipment (DME), hospital outpatient
department (OPD) services, and other medical services. The program
generally pays 80 percent of Medicare's fee schedule or other
approved amount after the beneficiary has met the annual $100
deductible. The beneficiary is liable for the remaining 20 percent.
PAYMENTS FOR SERVICES
Taken together, spending for inpatient hospital and physicians'
and related services accounts for close to 75 percent of Medicare fee-
for-service payments (spending for managed care plans is not broken
down by service category). Medicare makes payments for inpatient
hospital services under a prospective payment system (PPS); a
predetermined rate is paid for each inpatient stay based on the
patient's diagnosis at discharge. Payment for physicians' services
is made on the basis of a fee schedule. Specific payment rules are
also used for other services.
ADMINISTRATION
Medicare is administered by the Centers for Medicare & Medicaid
Services (CMS) within the U.S. Department of Health and Human Services
(DHHS). (Prior to June 14, 2001, this agency was known as the Health
Care Financing Administration (HCFA).) Much of the day-to-day work
of reviewing claims and making payments is done by fiscal intermediaries
(for Part A) and carriers (for Part B). These are commercial health
insurers or Blue Cross Blue Shield plans.
FINANCING
Medicare Part A is financed primarily through the HI payroll
tax levied on current workers and their employers. Employers and
employees each pay a tax of 1.45 percent on all earnings. The self-
employed pay a single tax of 2.9 percent on earnings.
Part B is financed through a combination of monthly premiums
levied on program beneficiaries and Federal general revenues. In
2003, the premium is $58.70. Beneficiary premiums have generally
represented about 25 percent of Part B costs; Federal general
revenues (i.e., tax dollars) account for the remaining 75 percent.
FEDERAL OUTLAYS
Total program outlays were $256.8 billion in fiscal year 2002.
Net outlays (i.e., net of premiums beneficiaries pay for enrollment,
largely for Part B) were $230.9 billion. Tables 2-1, 2-2, and 2-3
provide historical spending and coverage data for Medicare.
TABLE 2-1--MEDICARE OUTLAYS, SELECTED FISCAL YEARS 1967-2008
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
ELIGIBILITY AND COVERAGE
AGED
Part A
Most Americans age 65 or older are automatically entitled to
protection under Part A. These individuals (or their spouses)
established entitlement during their working careers by paying the
HI payroll tax on earnings covered by either the Social Security or
Railroad Retirement Systems.
The HI tax was extended to Federal employment with respect
to wages paid on or after January 1, 1983. Beginning January 1, 1983,
Federal employment is included in determining eligibility for
protection under Medicare Part A. A transitional provision allows
individuals who were in the employ of the Federal Government both
before and during January 1, 1983, to have their prior Federal
employment considered as employment for purposes of providing Medicare
coverage. Employees of State and local governments, hired after March
31, 1986, are also liable for the HI tax.
Persons age 65 or older who are not automatically entitled to
Part A may obtain coverage, providing they pay the full actuarial cost.
The 2003 monthly premium is $316 ($174 for persons who have at least
30 quarters of covered employment).
Part B
Part B of Medicare is voluntary. All persons age 65 or older
(even those not entitled to Part A) may elect to enroll in the SMI
Program by paying the monthly premium. The 2003 premium is $58.70
per month. Persons who voluntarily enroll in Part A are required to
enroll in Part B.
DISABLED
Part A
Part A also covers, after a 2-year waiting period, people under
age 65 who are either receiving monthly Social Security benefits on the
basis of disability or receiving payments as disabled Railroad
Retirement System annuitants. (Dependents of the disabled are not
eligible.) The 24-month waiting period is waived for persons with
amyotrophic lateral sclerosis. In addition, most people who need a
kidney transplant or renal dialysis because of chronic kidney disease
are entitled to benefits under Part A regardless of age.
Part B
Persons eligible for Part A by virtue of disability or chronic
kidney disease may also elect to enroll in Part B.
TABLE 2-2--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF
ENTITLEMENT, SELECTED YEARS 1968-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-2--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF
ENTITLEMENT, SELECTED YEARS 1968-2001-continued
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-3--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE
AND SERVICE, SELECTED CALENDAR YEARS 1975-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-3--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE
AND TYPE OF
SERVICE, AND BY CALENDAR YEAR OR TYPE OF ENROLLEE- Continued
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
BENEFITS AND BENEFICIARY COST-SHARING
PART A
Part A coverage includes:
Inpatient hospital care--The first 60 days of inpatient hospital
services in a benefit period are subject to a deductible ($840 in
calendar year 2003). A benefit period begins when a patient enters a
hospital and ends when he or she has not been in a hospital or SNF for
60 days. For days 61-90 in a benefit period, a daily coinsurance amount
($210 in calendar year 2003) is imposed. When more than 90 days are
required in a benefit period, a patient may elect to draw upon a 60-day
lifetime reserve. A coinsurance amount ($420 in calendar year 2003) is
imposed for each reserve day. No coverage is provided for stays in
excess of 150 days in a benefit period.
Skilled Nursing Facility (SNF) care--The program covers up to
100 days of post-hospital SNF care for persons in need of continued
skilled nursing care and/or skilled rehabilitation services on a daily
basis. After the first 20 days, there is a daily coinsurance charge
($105 in calendar year 2003).
Home health care--Home health visits are provided to persons
who need skilled care on an intermittent basis. The Balanced Budget
Act (BBA) of 1997 gradually transferred from Part A to Part B home
health visits that are not part of the first 100 visits following a
beneficiary's stay in a hospital or SNF (i.e., postinstitutional
visits) and during a home health spell of illness. Beginning January 1,
2003, Part A covers only postinstitutional home health services for up
to 100 visits during a home health spell of illness, except for those
persons with Part A coverage only, who are covered for services
without regard to the postinstitutional limitation.
Hospice care--Hospice care services are provided to terminally
ill Medicare beneficiaries with a life expectancy of 6 months or less
for two 90-day periods, followed by an unlimited number of 60-day
periods. The medical director or physician member of the hospice
nterdisciplinary team must recertify, at the beginning of 60-day
periods, that the beneficiary is terminally ill.
PART B
Part B of Medicare generally pays 80 percent of the approved
amount (generally a fee schedule or other predetermined amount) for
covered services in excess of an annual deductible ($100). Services
covered include:
Doctor's services--This category includes surgery, consultation,
and home, office and institutional visits. Certain limitations apply for
services rendered by dentists, podiatrists, and chiropractors and for
the treatment of mental illness.
Services of nonphysician practitioners--This category includes
physician assistants, nurse practitioners, certified registered nurse
anesthetists, clinical psychologists, and clinical social workers.
Other medical and health services--This category includes
laboratory and other diagnostic tests, x-ray and other radiation
therapy, outpatient hospital services, rural health clinic services,
DME, home dialysis supplies and equipment, artificial devices (other
than dental), physical and speech therapy, and ambulance services.
Specified preventive services--These services include: an
annual screening mammography for all women over age 40; a screening
Pap smear and a screening pelvic exam once every 2 years, except for
women who are at a high risk of developing cervical cancer; specified
colorectal cancer screening procedures; diabetes self-management
training services; bone mass measurements for high-risk persons; and
prostate cancer screenings.
Drugs and vaccines--Generally Medicare does not pay for
outpatient prescription drugs or biologicals. Part B does pay for
immunosuppressive drugs following a covered organ transplant,
erythropoietin (EPO) for treatment of anemia for persons with
chronic kidney failure, and certain oral cancer drugs. The program
also covers flu shots, pneumococcal pneumonia vaccines, and hepatitis B
vaccines for those at risk. [Note: H.R. 1, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173)
provides for prescription drug benefits through Medicare.)
Home health services--Home health services include those
not covered under Part A. (As noted above, BBA 1997 transferred some
home health costs from Part A to Part B.) Part B also covers all
medically necessary home health visits for persons not covered under
Part A. The 20-percent coinsurance and $100 deductible do not apply
for such benefits.
Table 2-4 illustrates the deductible, coinsurance, and
premium amounts for both Part A and Part B services from the inception
of Medicare.
FINANCING
The Medicare Hospital Insurance (HI) Trust Fund finances services
covered under Medicare Part A. The Supplementary Medical Insurance (SMI)
Trust Fund finances services covered under Medicare Part B. The trust
funds are maintained by the Department of the Treasury. Each trust fund
is actually an accounting mechanism; there is no actual transfer of
money into and out of the fund. Income to each trust fund is credited
to the fund in the form of interest-bearing government securities. The
securities represent obligations that the government has issued to
itself. Expenditures for services and administrative costs are recorded
against the fund.
HOSPITAL INSURANCE TRUST FUND--INCOME
The primary source of income to the HI fund is HI payroll taxes.
This source accounted for $152.7 billion (85.5 percent) of the total
$178.6 billion in income for fiscal year 2002. Additional income sources
include premiums paid by voluntary enrollees, government credits,
interest on Federal securities, and taxation of a portion of Social
Security benefits.
TABLE 2-4--PART A AND PART B DEDUCTIBLE, COINSURANCE, AND PREMIUMS,1
SELECTED YEARS 1966-2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Payroll taxes
The HI Trust Fund is financed primarily through Social Security
payroll tax contributions paid by employees and employers. Each pays a
tax of 1.45 percent on all earnings in covered employment. The self-
employed pay 2.9 percent. Prior to 1994, there was an upper limit on
earnings subject to the tax. An upper limit ($87,000 in 2003) continues
to apply under Social Security. Therefore incomes up to $87,000 have a
combined tax rate of 7.65 percent (6.2 percent for Social Security and
1.45 percent for Medicare). Only the Medicare tax applies to any income
in excess of $87,000.
Other income
The following are additional sources of income to the HI fund:
Railroad retirement account transfers--In fiscal year 2002,
$425 million was transferred from the railroad retirement fund. This
is the estimated amount that would have been in the fund if railroad
employment had always been covered under the Social Security Act.
Reimbursements for uninsured person--HI benefits are provided to
certain uninsured persons who turned 65 before 1968. Persons who turned
65 after 1967 but before 1974 are covered under transitional provisions.
Similar transitional entitlement applies to Federal employees who retire
before earning sufficient quarters of Medicare-qualified Federal
employment provided they were employed before and during January 1983.
Payments for these persons are made initially from the HI Trust Fund,
with reimbursement from the general fund of the Treasury for the costs,
including administrative expenses, of the payments. In fiscal year
2002, $442 million was transferred to HI on this basis.
Premiums from voluntary enrollees--Certain persons not eligible
for HI protection either on an insured basis or on the uninsured basis
described above may obtain protection by enrolling in the program and
paying a monthly premium ($316 in 2003; for persons who have at least
30 quarters of covered employment, $174 in 2003). This accounted for
an estimated $1.6 billion of financing in fiscal year 2002.
Payments for military wage credits--Periodic transfers are
authorized between the general fund and the treasury and the HI trust
fund, if needed, to adjust prior payments for the costs arising from
wage credits granted to military service before 1957. The law
authorizes a quinquennial adjustment to the amount transferred in 1983.
No adjustment was made in FY 2002.
Tax on Social Security benefits--Beginning in 1994, the trust
fund acquired an additional funding source. The Omnibus Budget
Reconciliation Act of 1993 (OBRA 1993) increased the maximum amount of
Social Security benefits subject to income tax from 50 to 85 percent
and provided that the additional revenues would be credited to the HI
Trust Fund. Revenue from this source totaled $8.3 billion in fiscal
year 2002.
Interest--The remaining income to the trust fund consists
almost entirely of interest on the investments of the trust fund.
Interest amounted to an estimated $15.1 billion in fiscal year 2002.
SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND--INCOME
Part B is financed from premiums paid by the aged, disabled and
chronic renal disease enrollees and from general revenues. The premium
rate is derived annually based on the projected costs of the program for
the coming year. The monthly premium amount in calendar year 2003 is
$58.70.
When the program first went into effect in July 1966, the Part
B monthly premium was set at a level to finance one-half of Part B
program costs. Legislation enacted in 1972 limited the annual
percentage increase in the premium to the same percentage by which
Social Security benefits were adjusted for changes in cost of living
(i.e., cost-of-living adjustments). Under this formula, revenues from
premiums soon dropped from 50 to below 25 percent of program costs
because Part B program costs increased much faster than inflation as
measured by the Consumer Price Index (CPI) on which the Social Security
cost-of-living adjustment is based. Beginning in the early 1980s,
Congress regularly voted to set Part B premiums at a level to cover
5 percent of program costs, in effect overriding the cost-of-living
adjustment limitation. BBA 1997 permanently set the Part B premium
equal to 25 percent of program costs. General revenues cover the
remaining 75 percent of Part B program costs.
FINANCIAL STATUS OF HOSPITAL INSURANCE TRUST FUND
The Hospital Insurance (HI) Trust Fund balance is dependent on
total income to the HI Trust Fund exceeding total outlays from the fund.
Tables 2-5 and 2-6 show historical information from the 2003 Trustees'
Report on the operation of the trust fund. Each year, the HI Trustees
make projections for the date the trust fund will become insolvent
(Table 2-7). The 1997 report stated that under the Trustees
intermediate assumptions, the fund would become insolvent in 2001.
Subsequent reports significantly delayed the projected insolvency date.
However, the 2003 report projects that the fund will become insolvent 4
years earlier (2026) than had been projected in the 2002 report.
The initial improvements after 1997 reflected a number of
factors including improvements in the economy as a whole (which were
reflected in higher payroll tax revenues) and a lower rate of growth
in program expenditures. A key factor was the enactment of BBA 1997.
This legislation provided for the transfer of a portion of home health
spending (which at the time was the fastest growing component of Part A
expenditures) from Part A to Part B. It also included additional
provisions to stem the growth in Part A expenditures. These provisions
included the implementation of new payment limits for home health
services, a prospective payment system (PPS) for skilled nursing
facility (SNF) services, and limits on the increases in hospital payments.
BBA 1997 also established the Medicare+Choice (M+C) Program and modified
the calculation of payments to managed care entities.
TABLE 2-5--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED
FISCAL YEARS 1970-2012
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-6--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED
CALENDAR YEARS 1970-2012
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Following enactment of BBA 1997, a number of observers claimed
that the actual savings achieved by BBA 1997 were larger than was
intended when the legislation was enacted. As a result, legislation
was enacted in 1999 (Balanced Budget Refinement Act of 1999 (BBRA))
and in 2000 (the Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 (BIPA)) which mitigated the impact of BBA
1997 on providers.
TABLE 2-7--HISTORICAL PROJECTIONS OF HI TRUST FUND INSOLVENCY, 1970-2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
FINANCIAL STATUS OF SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND
Because the SMI Trust Fund is financed through beneficiary
premiums and Federal general revenues, it does not face the prospect
of depletion, as does the HI Trust Fund. However, the rising cost of
the program is placing a burden on the trust fund, and by extension on
beneficiaries (in the form of premiums) and Federal general revenues.
Table 2-8 shows historical information from the 2003 Trustees' Report.
PART A SERVICES - COVERAGE AND PAYMENTS
HOSPITALS
Trends in Medicare Hospital Utilization and Spending
As shown in Table 2-9, Medicare program spending on hospital
services has increased from approximately $77.8 billion in calendar
year (CY) 1995 to $92.5 billion in CY2001, about a 19 percent change
over the time period. The number of acute, short-term general hospitals
paid under the inpatient prospective payment system (IPPS) has declined
from 5,166 to 4,361, a drop of over 15 percent that can be attributed,
in part, to hospital closures, mergers, and the growth in Medicare's
critical access hospital program. Despite the drop in the number of
IPPS hospitals, IPPS program spending has increased from over $69
billion in CY1995 to over $81 billion in CY2001, an increase of
approximately 17 percent. In contrast to the overall decline in
number of hospitals, the number of specialty hospitals, particularly
long-term care hospitals but also rehabilitation hospitals and distinct
part units, has increased. Medicare program spending, particularly in
long-term care hospitals and in rehabilitation units, has increased
significantly over the period. Table 2-10 shows hospital utilization
for Medicare enrollees by type of hospital in CY2001. 96.4 percent of
Medicare's hospital discharges were from IPPS hospitals and averaged
about $7,262 in program spending per discharge. Discharges from
specialty hospitals comprised about 3.6 percent of total Medicare
discharges in CY2001 and averaged about $9,178 in Medicare spending per
discharge. Table 2-11 shows the Medicare hospital discharges as well
as program and beneficiary payments from short-stay hospitals, ranked
by diagnosis-related groups (DRGs), for FY2001. The top 25 DRGs
represented 51.5 percent of total discharges and close to 53 percent
of total payments to these hospitals. In fact, over 31 percent of
the total discharges and almost 28 percent of the total spending
is represented by the top 10 DRGs on the list. Finally, Table 2-12
shows the trendsin factors affecting hospital expenditures, from FY1983
to FY2002. The annual update represents a payment-weighted average
annual increase for IPPS hospitals and IPPS excluded hospitals. A
hospital's case mix is a measure of the relative costliness and
changes in coding of its Medicare patients compared with the national
average. The change in case mix shown in the table represents the
change in the average case mix for hospitals in one fiscal year
compared to the preceding fiscal year. In FY2002, the average update
received by hospitals was 2.56 percent, the case mix change for the
average hospital increased 0.5 percent, and Medicare's average payment
per discharge increased 5.04 percent.
Hospital payment systems
This section will discuss the major provisions establishing
Medicare's payment systems for inpatient services provided by different
types of hospitals. The section will first describe the separate
operating and capital prospective payment systems (PPS) for acute
inpatient care in short-term, general hospitals. Those costs that
have been excluded from the inpatient PPS (IPPS) will then be described
and this will be followed by a discussion of short-term hospitals that
receive special treatment under IPPS: sole community hospitals (SCHs),
rural referral centers (RRCs) and Medicare dependent hospitals (MDHs).
Medicare's swing bed program which permits certain small rural hospitals
to provide Medicare covered acute and post acute care in the same bed
(that is, are permitted to swing the bed from providing acute care to
post-acute care) and the critical access hospital (CAH) program where
certain small, limited service facilities can now optout of IPPS will
then be discussed. Geographic reclassification procedures for IPPS
hospitals will also be described. This will be followed by description
of the payment systems used to pay those hospitals that were originally
exempt from IPPS: inpatient rehabilitation facilities (including
distinct part units in general hospitals), long-term care hospitals,
psychiatric facilities (including distinct part units in general
hospitals) and finally cancer and children's hospitals.
TABLE 2-8--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST
FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-2012
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-9--USE OF INPATIENT HOSPITAL SERVICES BY TYPE OF HOSPITAL,
CALENDAR YEAR 2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-10--USE OF INPATIENT HOSPITAL SERVICES BY TYPE OF HOSPITAL,
CALENDAR YEAR 2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
SHORT-TERM GENERAL HOSPITALS
Operating prospective payment system
Medicare Part A pays for the operating costs associated with
acute inpatient care in short-term hospitals using the inpatient
prospective payment system (IPPS), established by Congress in the
Social Security Amendments of 1983 (Public Law 98-21). Before the
enactment of IPPS, Medicare paid hospitals retrospectively for incurred
costs, subject to certain limits, definitions of allowable costs, and
tests of reasonableness. Despite these limits, medical costs continued
to grow faster than the rate of inflation in the early 1980s. IPPS was
enacted to constrain the growth of Medicare's inpatient hospital
payments by providing incentives for these acute hospitals to provide
care more efficiently. Under IPPS, Medicare payments are made at
predetermined, specific rates which represent the average cost,
nationwide, of treating a Medicare patient according to his or her
medical condition. Hospitals that are able to provide services for
less than the fixed IPPS payment may keep the difference. Hospitals
with costs that exceed the fixed IPPS payment lose money on the case.
In general, the components of IPPS have served as a model for
prospective payment systems subsequently developed for other types of
hospitals. The foundation for Medicare's prospective rates for both
inpatient operating and inpatient capital payments is a patient
classification system which now encompasses 518 diagnosis related
groups (DRGs). A hospital's payment will vary depending upon the
DRG assigned to a Medicare discharge. DRG assignment is primarily
based on a patient's discharge diagnoses and type of treatment received
(either medical or surgical with certain classifications dependent upon
the hospital procedures provided during the stay). Depending upon the
DRG, a patient's age, sex, and discharge destination may be considered
as well. Each DRG has a relative value (or case-mix weight) that
reflectsthe cost of treating Medicare patients in that particular
group in comparison to the treatment cost of the average Medicare
case. DRGs that are expected to use more resources than the average
Medicare case have a relative value above one; those DRGs that are
expected to be less costly have a value of less than one. The Centers
for Medicare & Medicaid Services (CMS) annually reviews the DRG
classification system to insure that clinically similar cases with
relatively comparable costs are grouped together which may result in
the reassignment of procedure codes to other DRGs as well as the
creation or discontinuation of specificDRGs. For example, from FY2003
to FY2004, 5 DRGs were discontinued and 13 DRGs were created. CMS also
recalibrates the relative values associated with each DRG annually
using hospitals' average standardized billed charges for each DRG; such
recalibration is subject to a budget neutrality adjustment to ensure
that Medicare's aggregate payments do not increase because of the
recalibrated DRG weights. The relative weight of any DRG may change
from year to year. The weights for 223 DRGs for FY2004 declined from
those for FY2003 (all but 38 DRGs by less than 5 percent) while the
weights for 280 DRGs for FY2004 increased from those for FY2003 (all
but 46 DRGs by less than 5 percent). Data for DRG relative weights
may be found at http:www.cms.gov.
TABLE 2-11--MEDICARE SHORT-STAY HOSPITAL DIAGNOSIS-RELATED GROUPS
RANKED BY DISCHARGE, FISCAL YEAR 2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-12--TRENDS IN FACTORS AFFECTING MEDICARE HOSPITAL SPENDING AND
AVERAGE PAYMENTS PER CASE, SELECTED FISCAL YEARS 1983-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
A hospital's DRG payment is the product of two components:
(1) a standardized amount (or base rate) which is adjusted by the
hospital's area average wage level; and (2) the DRG's relative weight.
The base rate is intended to represent the cost of a typical (average)
Medicare inpatient discharge. Presently, two separate standardized
amounts are calculated: one amount is used to pay for Medicare
discharges from hospitals in large urban areas (either metropolitan
statistical areas that have a population of more than a million or New
England County metropolitan areas that have a population of more than
970,000) and the other amount is used to pay for discharges from
hospitals in other areas. The large urban area standardized amount
is 1.6 percent larger than the other area amount. However, the
Consolidated Appropriations Resolution, 2003 (CAR) (P.L.108-7) provided
for a temporary payment increase for rural and small urban hospitals;
all Medicare discharges from April 1, 2003 to September 30, 2003 were
paid on the basis of the large urban area amount. The temporary
authorization legislation that extended transitional Medicaid (P.L.
108-89) also extended Medicare's payment equalization between large
urban hospitals and other hospitals until March 31, 2004. That law
signed October 1, 2003 requires the Secretary to equalize the base
amounts by November 1, 2003 and compensate hospitals for missed
payments. Two amounts are still calculated for hospitals in Puerto
Rico based on a 50/50 blend of a Federal amount and a Puerto Rico-
specific amount.
The hospital wage index is used to adjust the standardized
amount to account for the local wage variation or cost of labor in the
hospital's area. This adjustment is accomplished by multiplying a
portion of the national standardized payment amount by a wage index.
Presently approximately 71 percent of the base rate is adjusted by the
wage index. The wage index is intended to measure the average wage l
evel for hospital workers in each urban area (metropolitan statistical
area or MSA) or rural area (comprised of counties that have not been
assigned to MSAs) relative to the national average wage level. Some
states, such as New Jersey and Rhode Island, where every county is
included in a MSA have no rural wage index.
The Secretary is required to update the wage index annually
based on a survey of wages and wage-related costs of short-term acute
care hospitals. An area's aggregate hospital compensation is divided
by aggregate paid hours of hospital employment in the area to produce
the area's average hourly wage. The area's wage index is calculated
by dividing the average hourly wage for each area by the national
average hourly wage (determined by dividing national aggregate
compensation by national aggregate paid hours of employment). A wage
index used to calculate a hospital's Medicare payment will be that
index associated with the area where the hospital is located or that
associated with the area where the hospital has been reclassified or
redesignated. The index number, such as 0.7492 for hospitals in rural
Alabama or 1.5119 for hospitals in Oakland, CA, for each rural area
(or non-MSA) or MSA in the United States is published by CMS in the
Federal Register in August of each year. A separate wage index for
hospitals in Puerto Rico is calculated using only data from those
hospitals as well. Any updates or adjustments to the wage index
are done in a budget neutral fashion, so that aggregate payments to
hospitals are not affected by the annual changes. Since the national
average wage level is represented by an index value of 1.000, the
wage index value for any area has a direct and simple interpretation.
The value of 1.5119 for Oakland, CA means that the hourly wage rate
for hospital workers is about 51 percent higher in that MSA than
nationwide. In FY2004, the average annual wage in Oakland, CA was
$36.87 and the national average hourly wage was $24.72. When
computing the hospital payment rates applicable for hospitals in the
Oakland, CA MSA, which has a population of more than 1 million, the
labor-related share or 71 percent of the large urban area standardized
amount is multiplied by 1.5119 in order to adjust for the higher level
of hourly wage rates in this area. Similarly, the calculation of the
per discharge payment for hospitals in rural Alabama would involve a
reduction to the labor-related component of its standardized payment
amount to reflect the fact that the average hourly wage in this
area is $18.50 or about 25 percent lower than the national average
(as indicated by the rural Alabama's wage index value of 0.7492).
To calculate Medicare's base payment for hospitals in each of these
areas, the nonlabor related share of the standardized amount is added
to the wage-adjusted labor related share. The calculation of the
base payment amount for both areas is shown in Table 2-13. This amount
would be multiplied by the applicable DRG weight to calculate Medicare's
payment for a specific discharge.
TABLE 2-13--EXAMPLE OF WAGE-ADJUSTED PER DISCHARGE BASE IPPS PAYMENT
CALCULATIONS FOR RURAL ALABAMA AND OAKLAND, CA FOR FISCAL YEAR 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
In general, the differences in the amount of these per discharge
payments would reflect both the 1.6 percent differential in the
standardized amount between large urban and other areas as well as the
differences in the relative area wages. However, the 1.6 percent payment
differential between the standardized amounts has been eliminated for
discharges from October 1, 2003 until March 31, 2004. All hospitals
will be reimbursed using the large urban area amount. Also, the per
discharge payments for hospitals in Alaska and Hawaii would reflect a
cost-of-living adjustment to the nonlabor related portion of the
standardized amount to recognize the higher cost of supplies and other
nonlabor inputs. In FY2004, the nonlabor portion of the base rate
(approximately 29 percent of the standardized amount) for hospitals in
these states is increased by up to 25 percent.
Other Operating PPS Payment Adjustments--Factors other than a
hospital's location will affect the amount of Medicare payment received
for a particular DRG.
In addition to the basic DRG payment for each case, teaching hospitals
or those hospitals that serve a large number of Medicaid or poor
Medicare beneficiaries may receive supplemental IPPS payments. A typical
or outlier cases may result in additional IPPS payments; under certain
circumstances, cases that are transferred to other acute hospitals or
certain post-acute settings may receive special treatment under IPPS.
Finally, hospitals may receive additional payments to compensate for
use of specifically identified new technologies.
Indirect Medical Education Adjustment--Medicare recognizes the
costs of graduate medical education (GME) under two mechanisms: an
indirect medical education (IME) adjustment within IPPS and, as
discussed later, direct graduate medical education (DGME) payments
made outside of IPPS. An IME adjustment provides additional IPPS
payments to hospitals for the indirect costs attributable to approved
medical education programs for physicians; Medicare does not recognize
the indirect costs associated with the education of other health
professions. A teaching hospital's higher patient care costs relative
to nonteaching hospitals may be due to a variety of factors, including
patient severity of illness that is not fully captured by the DRG
patient classification system, the extra demands placed on the hospital
staff as a result of the teaching activity, or additional tests and
procedures that may be ordered by residents. About 1,100 hospitals,
constituting about one fourth of all IPPS hospitals, receive IME
payments. According to CBO's most recent estimate, Medicare's spending
on IME for both operating and capital IPPS systems will be $6.1 billion
in FY2003. This includes payments to teaching hospitals for patients
enrolled in Medicare +Choice plans. MedPAC has found that Medicare's
IME payments exceed the estimated cost relationship between teaching
intensity and costs per case. Using 1999 cost data, MedPAC estimates
that approximately half of the total IME payments in FY2003 are above
the estimated impact of teaching on hospital costs.
A hospital's IME payment is based on a percentage add-on to the
IPPS rate that is established by a complicated curvilinear formula that
currently provides a payment increase of approximately 5.5 percent for
each 10 percent increase in the hospital's intern and resident-to-bed
(IRB) ratio. Hospitals with a higher IRB ratio, a measure of teaching
intensity, receive a larger add-on adjustment to their DRG payments.
For example, a hospital with 5 residents for every 100 beds (an IRB
of 0.05) would have a 2.7 percent increase in its DRG payments; a
hospital with 25 residents for every 100 beds (an IRB of 0.25) would
receive a 12.8 percent IME adjustment to its DRG payments.
With certain exceptions, BBA 1997 limits the number of
allopathic and osteopathic residents that Medicare will count in the
IME formula (the numerator of the IRB ratio) at the level reported by
the hospital in its most recent cost report ending on or before
December 31, 1996. Effective for cost reporting periods on or after
October 1, 1997, the IME resident counts are based on a 3-year rolling
average of the resident counts, subject to the resident limits or full-
time equivalent (FTE) cap. If a hospital is above its limit, the count
for the purposes of the rolling average is the FTE cap. In addition to
the resident limit, BBA 1997 also placed a
limit on the IRB ratio itself. A hospital's IRB ratio used to calculate
its IME adjustment for the current payment year cannot exceed its IRB
ratio from the immediately preceding cost reporting period.
Disproportionate Share Hospital Adjustment--Since 1986, an
increasing number of hospitals have received additional payments
because they serve a disproportionate share of low-income patients.
The justification for DSH spending has changed over time. Originally,
the DSH adjustment was intended to compensate hospitals that treat a
large proportion of low-income patients for the higher costs associated
with their treatment. Now, the adjustment is considered as
a way to protect access to care for vulnerable populations.
Most DSH hospitals, approximately 2,800 hospitals, receive the
additional payments based on a formula calculated using the proportion
of the hospital's Medicare inpatient days provided to poor Medicare
beneficiaries (those who receive Supplemental Security Income or SSI)
added to the proportion of total hospital days provided to Medicaid
recipients. A few urban hospitals receive DSH payments under an
alternative formula that considers the proportion of a hospital's
patient care revenues that are received from State and local indigent
care funds. CBO estimates that DSH spending (in both operating and
capital PPS) will be $6.3 billion in FY2003
The DSH threshold is the minimum percentage of measured DSH care
(measured under either the disproportionate day or Pickle formula) that
must be provided by a hospital in order to qualify for additional
payments. A hospital will not receive operating DSH payments unless
its low- income patient share exceeds 15 percent or, as discussed
earlier, it qualifies as a Pickle hospital. After that minimum
threshold of 15 percent is met, a hospital's DSH adjustment, the
percentage add-on to the hospital's IPPS payment, will vary by the
hospital's bed size or urban or rural location. Under the current
operating DSH thresholds and formulas, the DSH adjustment that a small
urban or rural hospital can receive is capped at 5.25 percent while
large (100 beds and more) urban hospitals and large rural hospitals
(500 beds and more) can still receive an uncapped adjustment that
can be significantly greater. However, certain rural hospitals, those
that are sole community hospitals (SCHs) or rural referral centers
(RRCs), may receive a higher DSH adjustment than other rural hospitals.
Table 2-14 shows the minimum DSH thresholds required to qualify for
the additional DSH payments and the formulas for computing the
adjustment for different hospitals effective for discharges after
April 1, 2001 authorized by the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000 (BIPA).
TABLE 2-14--CURRENT OPERATING DISPROPORTIONATE SHARE THRESHOLDS AND
FORMULAS, BY HOSPITAL TYPE AND SIZE, AS ESTABLISHED IN BIPA
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Outliers--Additional amounts are paid to hospitals for a
typical cases known as "outliers." These are cases that have
extraordinarily high costs compared to most discharges classified in the
same DRG. Prior to FY1998 certain cases with extraordinarily long
lengths of stay would have qualified for outlier payments as well.
Outlier payments are financed by an offset or reduction in the base
payment amount per discharge. The statute requires that total outlier
payments to all hospitals covered by the system represent no less than
5 percent and no more than 6 percent of the total estimated PPS payments
for the fiscal year. Generally, CMS has established 5.1 percent as
the target for outlier spending.
To qualify as a cost outlier, a hospital's charges for a case,
adjusted to its costs, must exceed a hospital's IPPS payment rate
(including payments for IME, DSH, and for new technology) for the DRG
by a certain threshold. Generally, the cost for a case is calculated
by multiplying the charges for the inpatient stay by the hospital's
ratio of cost to charges as reported in its most recent settled, or
the most recent tentatively settled, cost report, whichever is from
the later cost reporting period. The additional payment amount is equal
to 80 percent of the difference (90 percent for certain DRGs for burn
victims) between the hospital's entire cost for the stay and the
threshold amount. The threshold, which is adjusted by the hospital's
wage index, is published every year in the Federal Register. For
FY2004, the threshold is $31,000.
Outlier payments have never equaled their targeted offset. In
earlier years, Medicare underspent its target; most recently, outlier
payments have exceeded the budgeted target, in part because of abrupt
increases in certain hospitals' charges. CMS analyses indicates that
years in which outlier payments have been more than expected have been
offset by outlier spending in years when it has been less than expected.
Since FY1997, however, actual outlier payments have exceeded the 5.1
percent offset by an aggregate of 11.2 percentage points; outlier
spending has been $8.5 billion more than anticipated; an estimated
$1.5 billion of that overspending occurred in FY2002. Total outlier
spending in FY2002 is estimated to be approximately $5.4 billion.
Certain changes, such as elimination of the use of statewide average
cost to charge ratios and use of more recent hospital specific cost
to charge ratios (from tentatively settled cost reports), in Medicare's
outlier payment policies were instituted late in FY2003 or in FY2004 to
address outlier overspending.
Transfers--Prior to BBA 1997, cases that were designated and
reimbursed as transfer cases were for those patients that were
discharged from one short-term general hospital and readmitted to
another on the same day. Under the current payment policy for these
cases, the sending acute hospital (the hospital that transfers the
patient to another acute hospital) is paid twice the DRG per diem for
the first day and the per diem for all remaining days up to the full
payment amount. The final discharging acute hospital (the hospital
that receives the patient) receives the full DRG payment amount.
Both hospitals remain eligible for cost outliers, DSH payments and
GME payments for these transfer cases. The per diem payment is
calculated as the hospital-specific DRG payment divided by the national
geometric mean length of stay for all discharges in that DRG.
Patients discharged from an acute care hospital to postacute
care settings were not initially included under this transfer policy.
BBA 1997 directed that the Secretary select 10 DRGs with a high volume
of discharges to postacute care or a disproportionate use of postacute
services and pay these cases as transfers beginning in FY 1999.
Postacute care includes those providers excluded from IPPS (including
long-term care hospitals, inpatient rehabilitation facilities or
distinct part units, psychiatric hospitals or units), skilled nursing
facilities, and clinically related home health care provided within 3
days after the date of discharge. Acute patients in these DRGs that
are transferred to swing beds for skilled nursing care are not
considered to be postacute transfers. After FY 2000, the Secretary
was authorized to expand this policy to additional DRGs. In FY2004,
the transfer policy was codified to cover 29 DRGs; 2 of the original
DRGs were eliminated and 21 other DRGs were added to the transfer policy.
Generally, to be included under the policy, a DRG must have at least
14,000 postacute care transfer cases; at least 10 percent of its
postacure care transfers occurring before the geometric mean length of
stay; and a geometric mean length of stay of at least 3 days for both of
the 2 most recent years for which data are available. For a new DRG to
be included under this policy, its geometric mean length of stay must
decline by at least 7 percent during the most recent 5-year period. To
minimize coding distortions, CMS includes both DRGs from a paired DRG
combination (where a patient's assignment in one or the other of the
DRGs depends on the presence of a complication or comorbid condition)
automatically under the policy even if only one of the DRGs meet these
criteria. Under the postacute transfer policy, the sending hospital
will receive twice the per diem rate for the first day and the per diem
rate for each following day of the stay up to the full DRG payment amount.
However, 3 of the 29 selected DRGs have a disproportionate share of the
costs early in the hospital stay. For these DRGs, a sending hospital
receives 50 percent of the full DRG payment plus the per diem amount for
the first day of the stay and 50 percent of the per diem amount for
each of the remaining days of the stay, up to the full DRG payment.
Medicare payment to any postacute providers involved in the stay are
not affected by this policy.
Additional Payments for New Technology--BIPA established a
process of identifying and paying more for new medical services and
technologies provided to Medicare beneficiaries by short-term general
hospitals. As defined by CMS, new technologies are those that represent
an advance in medical technology that substantially improves diagnosis
and treatment of Medicare beneficiaries when compared to previously
available technologies. It takes 2 to 3 years from the point when a new
technology is brought to market to the point where that data is
incorporated in the Medicare charge data used to calculate DRG weights.
To qualify for an additional IPPS payment, these technologies must be
inadequately paid by the existing DRG system with costs that are not
captured by the recalibration of DRG weights. As implemented by CMS,
a new technology will qualify for special payments if the applicant can
show that average charge for a case using the new technology is one
standard deviation above the geometric mean of the standardized charges
for all cases in the relevant DRG (or when a case may be assigned to
multiple DRGs, the weighted average of all DRGs to which the case
may be assigned). Medicare pays 50 percent of the costs of the new
technology that are above the DRG payment, up to a maximum of 50 percent
of the estimated cost of the new technology. The add-on payments are
budget-neutral with a target limit of 1 percent of total operating
prospective payments. If the target limit is exceeded, the marginal
payment rate for new technologies would be reduced.
For FY2003, CMS received 5 applications for new technologies
to be considered for the inpatient add-on payment; one biotechnology
treatment for sepsis was approved for the add-on payment. However,
in FY 2003, CMS recognized the likely introduction of a new
technology in a different, unprecedented fashion. In that year, CMS
created 2 new DRGs for patients receiving an angioplasty that uses
drug-eluting stents, a higher cost technology that was expected to be
widely adopted once approved by the Food and Drug Administration
(FDA). Subject to a positive decision by FDA, the DRGs became active
for appropriate discharges occurring on or after April, 2003. CMS
constructed the weights for the new DRGs using non-Medicare price data
and utilization assumptions as explained in the August 1, 2003 Federal
Register. For FY2004, CMS received 2 applications for new technologies
to be considered for inpatient add-on payments and granted one for a
spinal fusion technology. For FY2005 and in subsequent years, CMS has
reduced the qualifying threshold to 75 percent of one standard deviation
beyond the geometric mean standardized charges for all cases in
the DRG to which the new medical service or technology is assigned.
Capital prospective payment system
Unlike the prospective payment systems that have been recently
implemented for specialty hospitals, Medicare sets separate per discharge
payment rates to cover the costs for depreciation, interest, rent and
other property-related expenses in short-term general hospitals. Until
FY1992, Medicare paid its share of acute hospitals' reasonable capital-
related costs, based on the percentage of hospital services used by
Medicare beneficiaries. Starting in FY1992, subject to a 10-year
transition period extending through FY2001, inpatient capital costs were
paid on the basis of an increasing proportion of an annual Federal rate
and a decreasing proportion of a hospital's historic costs for capital.
For all cost reporting periods beginning in FY 2002, all hospitals,
except new hospitals, are paid based on 100 percent of the Federal rate.
As in the case with operating IPPS, standardized capital payment
amounts are reduced to finance outlier payments and adjusted to account
for the effect of DRG reclassifications and hospital reassignments,
special exceptions payments as well as other mandated budget neutrality
factors. In FY2004 the Federal rate for capital was set at about $427
for Medicare discharges from hospitals in large urban areas and about
$415 for Medicare discharges from hospitals in other areas. Capital IPPS
payments typically constitute about 10 percent of total Medicare IPPS
inpatient payments to short-term hospitals for inpatient care, a
percentage that has fluctuated over time and can vary by type and
location of hospital.
Medicare's capital IPPS for acute hospitals includes similar
adjustment factors as its operating IPPS; however, the adjustments in
capital IPPS can be structured differently than those in the IPPS.
Generally, under capital IPPS, the Federal rate is based on average
base year capital costs per case in FY1989, updated by inflation and
other cost changes. Hospitals in large urban areas receive an
additional 3 percent increase to their Federal rate. Hospitals in
Alaska and Hawaii receive an additional cost of living adjustment in
capital IPPS.
Capital IPPS payments are adjusted using a hospital;s geographic
adjustment factor (GAF, which is calculated from the hospital's wage
index) and Medicare patients' case-mix intensity which uses the same
DRG patient classification system used in operating IPPS. Medicare's
capital IPPS also incorporates special payments for outliers as well
as payments for DSH and IME. With respect to outlier reimbursement, a
single set of thresholds is used to identify outlier cases for both
inpatient operating and capital-related IPPS. Although the outlier
reduction factor for operating IPPS is statutorily set between
5 percent and 6 percent, the outlier reduction factor for capital PPS
is not. In FY2004, the capital outlier reduction factor was 4.79 percent.
With respect to the capital DSH adjustment, only urban hospitals
with more than 100 beds may receive a DSH adjustment; there is no
qualifying threshold specified. Rather, any hospital with a positive
DSH percentage will receive approximately a 2.1 percent increase in its
capital payments for each 0.01 increase in its DSH percentage. The
''Pickle'' hospitals (that qualify for a 35 percent operating DSH
adjustment because at least 30 percent of their inpatient revenues
are from State or local indigent care funds) are given a capital DSH
adjustment of 14.16 percent.
With respect to the capital IME adjustment, teaching hospitals
receive additional IPPS payments based on the ratio of residents to
average daily inpatient census, rather than the ratio of residents to
beds as in operating IPPS. The adjustment factor will increase capital
payments approximately 2.8 percentage points for each 10 percent
increase in this IME measure.
Finally, capital IPPS incorporates special exception payments
for different categories of hospitals. CMS has established a special
exceptions process which provides for additional payments to eligible
hospitals for up to 10 years from the year that it completes a
replacement or renovation project that meets certain criteria. The
project must have been completed no later than the end of the
hospital's last cost reporting period before October 1, 2001. Eligible
hospitals include sole community hospitals; urban hospitals with at
least 100 beds with a minimum DSH adjustment of 20.2 percent; hospitals
that receive DSH as a Pickle hospital; and hospitals that have a
combined Medicaid and Medicare utilization of at least 70 percent.
These hospitals must meet specified project need and project size
requirements. CMS estimates that 27 hospitals will qualify for special
exception payments in cost reporting periods beginning in FY 2000.
Capital exception payments are also made to hospitals that incur
unanticipated capital expenses due to circumstances beyond the
hospital's control. Specifically, these would include unanticipated
capital expenditures in excess of $5 million (net of insurance proceeds
or other Federal or State monies) attributed to extraordinary
circumstances including floods, fires, or earthquakes. Hospitals will
receive a minimum of 85 percent of Medicare's share of the allowable
capital-related costs attributed to these circumstances. SCHs will
receive at least 100 percent of these allowable costs.
Annual Updates
The IPPS standardized amounts are increased each year using an
update factor which may be determined, in part, by the projected
increase in the hospital market basket (MB) index. CMS rebases the
operating MB index every 5 years to reflect the changing composition of
hospital inputs being purchased. Most recently, the MB was rebased and
revised for FY2003 payments to reflect FY1997 cost data and to
incorporate a separate category for blood and blood products.
The hospital input price index reflects the average change in
the price of a set of mutually exclusive spending categories. The
relative importance of the spending categories (cost or expenditure
weights) are calculated using Medicare cost reports and other data from
a base year. These are the numerical shares that each category
contributes to the total MB; the cost weights over all categories add
up to 100 percent. The more that an input good is used in the
production of inpatient hospital care, the higher the associated
expenditure weight will be and the greater the influence the projected
inflation in that category will have on the change in the MB. Price
proxies (or measures of price inflation) are selected for each spending
category. The proxies are derived from publicly available statistical
series published on a routine basis, preferably no less often than each
quarter. For example, the proxy selected for the wages and salary
expense category is the employment cost index for civilian hospital
workers. To calculate the MB, the weight for each category is
multiplied by the level of the price proxy. The sum of these
products for all cost categories equals the composite index level
of the MB in a given year. Dividing this sum by the index level
from an earlier year produces an estimate of the growth rate in the
MB over that time period. As shown in Table 2-15, the projected
inflation of 3.8 percent for wages and salaries comprise 50.69
percent of the estimate of total hospital operating MB used to set
the FY2004 IPPS rates.
Generally, Congress sets the update for operating payments for
several years in advance in statute. According to CMS, the IPPS update
is the single most important payment variable for the hospital sector
as it affects nearly $100 billion per year in Medicare hospital
payments. Typically, over the life of IPPS, the operating update has
been set at a level below a full MB update. For example, in FY2003,
the update for operating costs was set at MB - 0.55 percentage
points; the best estimate of the MB available when the final
regulation was issued was 3.5 percent. The FY2003 update equaled a
2.95 percent increase. However, for FY2004 and in subsequent years,
absent further legislation, the operating update will equal the
change in the MB. The MB update reflected in the IPPS operating
update each year is the most recently available forecast when
the final regulation is published. Unlike the capital IPPS update,
the operating update does not include a correction for forecast error.
As indicated by Table 2-16, for most of IPPS, the forecasted value of
the MB incorporated in the IPPS update has been larger than the
final estimate of the MB change.
TABLE 2-15--INPATIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM INPUT
PRICE INDEX ("THE MARKET BASKET") EXPENSE CATEGORIES AND RATES OF
CHANGE, FOR EACH PRICE PROXY, FISCAL YEAR 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Although Congress sets the operating update, CMS sets the
capital update using an update framework that consists of a capital
input price index (CIPI) and several adjustment factors. In FY2003,
CMS rebased and revised the CIPI to incorporate a FY1997 base year
and to reflect a more recent structure of capital costs. The capital
price index is structured differently from the operating MB, because
capital is acquired and paid for over time instead of being consumed
in the same time period in which it is purchased. The CIPI incorporates
2 sets of weights: one set identifies the relative importance of each
of the cost categories to the average capital costs in a hospital and
the other set of weights (called vintage weights) identifies the
proportion of capital spending within each cost category that is
attributable to each year of the useful life of the capital asset.
The capital cost categories include depreciation (physical capital
including both building and fixed equipment as well as moveable
equipment), interest (financial capital) and other related capital
expenses (such as insurance). With respect to the relative importance
of each of the capital cost categories, depreciation of building and
fixed equipment comprises 34.22 percent of the CIPI; depreciation of
movable equipment comprises 37.13 percent of the CIPI and interest
costs comprises 23.46 percent of the CIPI. Lease expenses are not a
separate cost category in the CIPI, but are distributed among the
other capital cost categories with 10 percent of lease costs assumed
to be overhead.
TABLE 2-16--FORECASTED INCREASE IN THE IPPS MARKET BASKET, ACTUAL
INCREASE IN THE IPPS MARKET BASKET, AND THE IPPS UPDATE, FISCAL
YEARS 1984-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
CMS sets the capital update using their update framework which
includes the CIPI rate of increase adjusted for patient care intensity
(or efficiency) changes, case-mix adjustments, DRG reclassifications
and recalibrations and a correction for the forecast error from
2 years earlier. CMS includes an intensity adjustment to reflect
policy considerations with respect to assessed improvements in
efficiency, within-DRG severity increases and the adoption of quality
enhancing technology. Other adjustments within the update framework
are based on CMS's attribution of the source of observed changes in
the case-mix index for Medicare discharges. The change in the
case-mix index can result from changes in the average resource use
of Medicare patients (a ''real'' case-mix change), changes in
hospital coding practices that would result in higher weight DRG
assignments (coding effects), and changes in DRG reclassification
and recalibration. To the extent that the real case-mix increase
is captured by the observed change in the case mix index measure,
no additional adjustment will be incorporated in the capital update
framework. Also, the DRG reclassification effect is included with
a 2-year lag. For example, the FY2003 capital update framework
included a -0.3 percent reduction attributed to an overstatement
of the change originally attributed to DRG recalibration and
reclassification that occurred in FY2001. Finally, CMS will make
an adjustment for forecast error if their estimate of the CIPI for
any year is off by 0.25 percentage points or more; again there is
a 2-year lag between the forecast and the measurement of forecast
error. For example, the -0.3 percent forecast correction factor
in FY2003 indicates that the current data establishes that the
forecasted value of the CIPI used in the FY2001 update framework
was overstated. The impact of the policy adjustments vary from year
to year. For example, in FY2003, the CIPI was 0.7, but the capital
update was 1.1 percent due to the influence of other factors.
However in FY2004, the capital update was 0.7 percent, an
increase that was entirely driven by the rate of change in the CIPI;
other adjustments were deemed to either have a negligible impact or
cancelled each other out. Table 2-17 shows the capital update
framework and associated adjustments from FY1999 to FY2004.
TABLE 2-17 -- CAPITAL IPPS UPDATE FRAMEWORK, FISCAL YEARS 1999-2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
For both operating and capital IPPS, the annual increase to
the base rates will depend not only on the update amounts, but will
also be affected by the annual budget neutrality offsets attributed
to DRG recalibrations, wage index changes, hospital reclassifications,
and outliers.
Payments made outside capital and operating IPPS
Specific categories of hospital expenses, including direct
medical education costs, are not included in the hospital prospective
payment system. Direct medical education costs--The direct
costs of approved medical education programs (such as the salaries
of residents and teachers and other education costs for residents,
for nurses, and for allied health professionals trained in provider-
operated programs) are paid separately from IPPS. The direct medical
education costs for the training of nurses and allied health
professionals in provider-operated programs are paid for on a
reasonable cost basis. The direct costs of residency training
programs for physicians are paid according to a formula that uses
each hospital' per resident costs, updated from a base year and
subject to certain limits as explained below. CMS estimates
Medicare spending on direct graduate medical education (DGME)
payments for allied health professionals at $250 million for fee-
for-service beneficiaries and an additional payment of up to $60 million
made to hospital-based nursing and allied health programs to account
for utilization by beneficiaries who are enrolled in Medicare+Choice
programs; CMS estimates Medicare spending on DGME payments for
residency training programs for physicians at $2.3 billion in FY2002.
Medicare's payment to each hospital for the direct costs of
physician's residency training programs equals the hospital's cost
per full-time equivalent (FTE) resident, times the weighted average
number of FTE residents, times the percentage of inpatient days
attributable to Medicare Part A beneficiaries, including days provided
to Medicare +Choice enrollees. Generally, each hospital's per resident
amount (PRA) is calculated using data from the hospital's cost reporting
period that began in fiscal year 1984, increased by 1 percent for
hospital cost reporting periods beginning July 1, 1985, and updated in
subsequent cost reporting periods by the change in the Consumer Price
Index (CPI). Hospitals with both primary care and obstetrics and
gynecology residents and nonprimary care residents in FY1994 or
FY1995 may have two separate PRAs: one for primary care and obstetrics
and gynecology and one for nonprimary care. Primary care residents are
defined to include family medicine, general internal medicine, general
pediatrics, preventive medicine, geriatric medicine, and osteopathic
general practice.
Although teaching hospitals' per resident costs vary greatly
between hospitals, recently some of the variation in Medicare
reimbursement for these amounts has been reduced. Starting in
FY2001, hospitals with PRAs below 70 percent of the national average
were increased to 70 percent of the geographically adjusted value or
the floor amount. Starting during FY2002, this floor was increased
to 85 percent of the locality adjusted, updated, and weighted national
PRA. Also hospitals with PRAs above 140 percent of the geographically
adjusted national average or the ceiling amount did not receive an
inflation update for 2 years (FY2001 and FY2002) and will receive a
lower update than other hospitals (CPI minus 2 percent) for 3 years
(FY2003- FY2005).
Only residents in their initial residency period are counted as
a full FTE. Residents who are not in their initial residency period are
counted as one-half of an FTE. There is no limit on the number of years
that an individual resident can be counted as 0.5 FTE as long as the
resident continues to train in an approved program. Generally, the
initial residency period is the minimum number of years required for
a resident to become board eligible in the specialty in which the
resident first began training, not to exceed 5 years. The number of
years considered as an initial residency period varies by physician
specialty. The initial residency program in combined residency
programs is defined as the time required for certification in the
longer of the programs. In certain combined programs, an additional
year in the initial period is permitted. Residents who are foreign
or international medical graduates are not counted as FTE residents
unless they have passed certain examinations.
In general, Medicare's DGME payment to any hospital is limited
by a cap that is based on the number of allopathic and osteopathic
residents that the hospital counted for the purposes of DGME payments
on its cost report ending on or before December 31, 1996. Generally,
a hospital's unweighted FTE count may not exceed this limit, but
certain adjustments may be made for newly established medical residency
training programs, terminations of teaching programs, rural training
programs, and affiliated groups of teaching hospitals. A hospital's
DGME payments are based on a 3-year rolling average of resident counts
(using data from the payment year cost reporting period and the
preceding two cost reporting periods), subject to the resident limits.
This rolling average calculation will include dental and podiatry
residents.
Payments for Other Excluded Cost Categories--Certain hospitals
receive additional payments for different categories of services that
have been excluded from IPPS and are paid separately. Medicare pays
for a percentage of the bad debts attributable to unpaid deductible
and copayment amounts related to covered services received by
Medicare beneficiaries. In FY1998, approximately 3,900 hospitals
received $409 million in bad debt payments. The estimated net expenses
associated with Medicare organ acquisition in certified transplantation
centers are excluded from IPPS and paid on a reasonable cost basis. In
FY1998, 208 hospitals received about $340.3 million for net organ
acquisition costs. Qualifying rural hospitals are paid on a reasonable
cost basis for anesthesia services furnished by hospital employed
nonphysician anesthetists (certified registered nurse anesthetists
and anesthesiologist's assistants) or obtained under arrangement. In
FY1999, 639 hospitals received approximately $33.9 million in Medicare
payments for these services. Finally, teaching hospitals can elect to
receive reasonable cost payments in lieu of fee schedule payments that
might otherwise be made for direct medical and surgical services of
physicians who are employees or who otherwise agree not to bill
separately for such services. The services include the services and the
supervision of interns and residents providing care to Medicare
beneficiaries. In FY1998, 14 teaching hospitals were paid about $25.6
million for these services.
Special Treatment for Certain Acute Care Facilities--Certain
facilities receive special treatment under IPPS, particularly those
facilities identified as isolated or essential hospitals primarily
located in rural areas, including rural referral centers, sole
community hospitals, and Medicare dependent hospitals. Small rural
facilities have been able to offer long-term care services without
establishing a distinct unit by offering such care in hospital swing
beds (beds that swing between offering acute care and long-term care
services.) Starting in 1998, small, limited service facilities have
been able to opt out of Medicare IPPS under the critical access
hospital program and receive reasonable cost reimbursement for their
services.
Sole Community Hospitals (SCHs)--SCHs are hospitals that,
because of factors such as isolated location, weather conditions,
travel conditions, or absence of other hospitals, are the sole source
of inpatient services reasonably available in a geographic area. Any
hospital seeking SCH status can qualify if it is located more than 35
miles from a like hospital. Depending upon its circumstances, including
its bed size, a hospital can qualify as a SCH under various distance,
market share or travel time standards. Specifically, a hospital that is
located more than 35 miles from other like hospitals or one with at
least 45 minutes of travel time between it and its nearest like hospital
because of distance, posted speed limits, and predictable weather
conditions will qualify as a SCH. A rural hospital that is located
between 25 and 35 miles from another like hospital can qualify as a SCH
if it: (1) passes a market share test where no more than 25 percent of
the Medicare beneficiaries or population within its service area can be
admitted to other like hospitals located within a 35-mile radius or in
its service area, whichever is larger; (2) has fewer than 50 beds,
does not offer specialty services that are needed by some of the
Medicare beneficiaries or other residents in its service area, and
has its Medicare fiscal intermediary certify that it would have
otherwise met the market share test if it did offer the needed services;
or (3) had its like hospitals inaccessible for at least 30 days in each
2 out of the 3 preceding years. For these purposes, a hospital's
service area is defined, generally speaking, as the smallest number
of zip codes from which it draws 75 percent of its admissions during
the most recent 12-month cost reporting period ending before its
SCH application. A rural hospital that is located between 15 and 25
miles from other like hospitals can qualify as a SCH if its other
like hospitals are inaccessible for at least 30 days in each 2 out
of the 3 preceding years.
The rural SCH qualification criteria may be applicable to urban
hospitals. BBRA provided that an urban hospital may be redesignated as
being located in a rural area if it meets one of several criteria.
Specifically an urban hospital can apply to the Secretary and be
reclassified to a rural area if (1) it is in a rural census tract of a
metropolitan area; (2) it is designated by the State as in a rural
area or as a rural hospital; or (3) it meets all the requirements for
rural SCHs except that it is located in an urban area. An urban
hospital that qualifies as a rural SCH and reclassifies to a rural area
through this process is not permitted to be reclassified subsequently
through the Medicare Geographic Classification Review Board (MGCRB).
CMS does not consider all providers offering inpatient services
to be ''like hospitals'' when determining whether an applicant can
qualify as an SCH. Specifically, critical access hospitals (CAHs) are
not considered like hospitals by CMS, because these facilities are not
full-service inpatient providers. Moreover, CMS will not consider a
nearby hospital to be a like hospital unless the inpatient services
provided by the nearby hospital ''overlap'' with those offered by the
SCH or SCH applicant. As established in regulation, effective for
cost reporting periods on or after October 1, 2002, a nearby hospital
will not be considered a like hospital unless the percentage of its
total inpatient days equals 8 percent or more of the total patient
days provided by the SCH or SCH applicant. The comparison includes
all days provided in units that provide the level of care payable
under IPPS; days provided in PPS-exempt, distinct part units would
not be included in the comparison. This regulatory provision was
adopted because of the development of freestanding specialty
hospitals that focus on specific cardiovascular, orthopedic, or
other surgical procedures.
The primary advantage of the SCH classification is the option to
use a hospital's updated historical operating costs when calculating
Medicare inpatient payments when this results in higher payments to the
hospital. Specifically, an SCH may use the higher of the following
payment rates as the basis of its Medicare reimbursement: the current
IPPS base payment rate in comparison to its hospital-specific per
discharge costs from either FY1982, FY1987, or FY1996 updated to the
current year. The FY1996 base year option became effective for
discharges on or after FY2001 on a phased-in basis and is fully
implemented for SCH discharges beginning in FY2004. An SCH will only
receive outlier payments, disproportionate share hospital payments, or
indirect medical education payments (adjustments within the IPPS system)
when it is paid using the current IPPS base rate (and not the rates
based on its updated hospital specific per discharge costs). An SCH's
Medicare payments will be calculated using the rate that results in the
highest payment as established by its fiscal intermediary in the
settlement of the hospital's cost report.
Another significant advantage for an SCH is the ability to
request additional payments for any year if the hospital experiences a
decrease of more than 5 percent in its total inpatient cases due to
circumstances beyond its control. The request must include an
analysis of the reasons for the decrease in discharges, explain the
resulting effect on the per discharge costs, and show that the decrease
is due to circumstances beyond the hospital's control. There are other
special inpatient payment considerations an SCH may receive.
Specifically, those rural SCHs that are paid on the basis of the current
IPPS base rate (and not on the basis of their hospital-specific costs)
that qualify for disproportionate share hospital (DSH) payments will
receive a 10 percent payment increase rather than the maximum 5.25
percent DSH adjustment received by other rural hospitals. Moreover,
SCHs are not required to meet one of the tests, the proximity
requirement, in order to reclassify to a different geographic area and
receive a higher wage index, base payment rate (if applicable) or both.
In terms of payments for outpatient services, the outpatient laboratory
fee schedule can be increased by 2 percentage points for these services
provided by an SCH.
Certain SCHs not meeting the criteria have been allowed to
continue to qualify for payments as an SCH. Under most circumstances,
hospitals designated as SCHs prior to December 19, 1989 are permitted
to retain their SCH status. Generally, an approved SCH classification
will remain in effect without the need for approval unless there is a
noticeable change in the circumstances under which the classification
was approved. However, a hospital (even a "grandfathered" SCH) can
lose its special status as an SCH if successfully reclassified by the
MGCRB for the purposes of using a higher base payment.
Medicare Dependent Hospitals--Small rural hospitals that treat
a relatively high proportion of Medicare patients can be classified as
Medicare dependent hospitals (MDHs). Generally speaking, a MDH is
located in a rural area, has 100 beds or less, is not classified as
an SCH, and has at least 60 percent of acute inpatient days or
discharges attributable to Medicare in the hospital cost reporting
period that began during fiscal year 1987 or in two of the three most
recently audited cost reporting periods for which there is a settled
cost report. Originally intended to be a temporary classification
status, Congress has extended the MDH designation several times.
BBRA extended the sunset date for MDH classification to September 30,
2006.
The financial advantages of an MDH designation are less than
those afforded to an SCH designation. An MDH can receive higher
Medicare payments than other acute care hospitals in the same
circumstances. Specifically, an MDH hospital will be paid based on
its adjusted FY1982 or FY1987 hospital specific costs rather than the
national base rate if that will result in higher payments. However, an
MDH will receive only 50 percent of the difference between the base rate
and its adjusted FY1982 or FY1987 hospital-specific costs. The other
benefit is that an MDH, like an SCH, continues to be protected from a
decrease of more than 5 percent in its total inpatient cases due
to circumstances beyond its control.
Rural Referral Centers (RRCs)--RRCs are relatively large rural
hospitals that generally provide a broad array of services and treat
patients from a wide geographic area. These rural hospitals are thought
to have operating costs more similar to urban hospitals than to the
average smaller community hospitals, because of bed size, a large number
of complicated cases, a high number of discharges, or a large number of
referrals from other hospitals or from physicians outside the hospital's
service area. Originally, only rural hospitals with 500 or more beds
received special treatment as a referral center. Presently, RRCs must
have at least 275 beds or meet specific criteria which indicate that the
facility receives a high referral volume from other hospitals.
A rural hospital can qualify as a RRC if it meets the bed size
criteria of 275 or more beds and meets the following referral standards
and service area standards: at least 50 percent of its Medicare patients
are referred from other hospitals or from physicians not on the
hospital's staff and at least 60 percent of its Medicare patients reside
more than 25 miles from the hospital. Alternatively, a rural hospital
must meet certain case-mix and discharge standards. Specifically, the
hospital must have (1) a case-mix index equal to or greater than the
national or regional median case mix index for all urban hospitals,
excluding hospitals with approved teaching programs; and (2) at least
5,000 discharges per year (3,000 discharge for osteopathic hospitals)
or at least the median number of discharges for urban hospitals in the
same region. Under this alternative standard, a hospital must meet
one of the following referral or service area standards: more than
50 percent of the hospital's medical staff are specialists, at least
60 percent of its discharges are for inpatients who reside more than
25 miles from the hospital, or at least 40 percent of inpatients
treated at the hospital have been referred either from physicians
not on the hospital's staff or from other hospitals.
Under the original structure of IPPS, RRCs received the urban
rather than the rural base payment rate. When the other urban and
rural payment rates were equalized in FY1995, RRCs lost some of the
benefit of their classification status. However, qualifying RRCs
receive a higher DSH adjustment than do other rural hospitals. Also,
as discussed subsequently, RRCs continue to be entitled to preferential
consideration before the Medicare Geographic Classification Review
Board. An RRC does not need to demonstrate proximity to an area or
establish that its wages exceed 106 percent of the average wage in the
area where it seeks to be redesignated.
Hospital Swing Beds--Small rural hospitals have had difficulty
in establishing separately identifiable units for Medicare and Medicaid
long-term care because of limitations in their physical plant and
accounting capabilities. These hospitals had an excess of hospital
beds and their communities had a scarcity of long-term care beds in
Medicare and Medicaid participating facilities. Under the swing bed
program started under OBRA 1980 (P.L. 96-499), certain rural hospitals
with fewer than 50 beds were permitted to use their inpatient
facilities, as necessary, to furnish long-term care services. OBRA
1987 extended the Medicare swing-bed program to rural hospitals with
less than 100 beds with certain payment limitations. Prior to the
skilled nursing facility (SNF) PPS described subsequently, hospitals
with swing beds were paid the average Medicare rate per patient day
for routine services provided in freestanding SNFs in their census
region; ancillary services were reimbursed on a reasonable cost basis.
Most swing bed providers have been paid using the SNF PPS, starting
for cost reporting periods on or after July 1, 2002. Critical access
hospitals (discussed subsequently) with swing beds are exempt from the
SNF PPS. In 2002, there were 1,067 swing-bed hospitals certified to
provide acute care or SNF services.
Critical Access Hospitals--BBA 1997 provided for the Rural
Hospital Flexibility Program which created a new Medicare category of
rural entities, critical access hospitals (CAHs), and authorized a
companion grant program of $25 million annually for 5 years to establish
networks for improving access to health care services in rural
communities. Based on earlier demonstration programs of rural primary
care hospitals and medical assistance facilities, CAHs provide
emergency, outpatient and limited inpatient services in rural areas.
Before a hospital can be designated as a CAH, the State must submit and
have approved a rural health plan implementing the Medicare Rural
Hospital Flexibility Program. The original CAH provisions were
subsequently modified. Currently, to qualify as a CAH, the rural,
for-profit, nonprofit, or public hospital must be located more than
35 miles from another hospital or 15 miles in areas with mountainous
terrain or those where only secondary roads are available. These milage
standards may be waived if the hospital has been designated by the State
as a necessary provider of health care. Under certain circumstances,
hospitals that have closed within the past 10 years may be designated
as CAHs. All CAHs must provide 24-hour emergency services; and operate
a limited number of inpatient beds in which hospital stays can average
no more than 96 hours. Although CAHs are limited to 15 acute-care beds,
these facilities may have an additional 10 swing beds that are set up
for skilled nursing facility level care. While all 25 beds can be used
as swing beds, only 15 of the 25 can be used for acute care at any time.
Any bed of a unit of the facility that is licensed as a distinct-part
SNF is not included in these bed counts. Generally, a rural hospital
designated as a CAH receives reasonable, cost based reimbursement for
care rendered to Medicare beneficiaries. CAHs may elect either a cost-
based hospital outpatient service payment or an all-inclusive rate
which is equal to a reasonable cost payment for facility services plus
115 percent of the fee schedule payment for professional services. The
reasonable cost of outpatient CAH services may include the reasonable
compensation and related costs for an emergency room physician who is
on call but not present on the premise of the CAH, if the physician is
not otherwise furnishing physicians' services and is not on call at
any other provider or facility. Ambulance services that are owned
and operated by CAHs are reimbursed on a reasonable cost basis if
these ambulance services are 35 miles from another ambulance system.
As of April 2003, 763 hospitals have been certified by CMS as CAHs;
442 of these CAHS have been governor-designated as necessary providers as
opposed to meeting the Federally mandated mileage and location standards.
More than half (51 percent) of all CAHs are located in 10 States; 3
States, Delaware, New Jersey, and Rhode Island, do not participate in
the program. Sixty-nine additional hospitals have CAH designations
that are pending.
Geographic Reclassification of Hospitals--Unlike other
providers, acute hospitals may apply to the Medicare Geographic
Classification Review Board (MGCRB) for a change in classification from
a rural area to an urban area, or reassignment from one urban area to
another urban area. The MGCRB was created to determine whether a
hospital should be redesignated to an area with which it has close
proximity for purposes of using the other area's standardized amount,
wage index, or both. If reclassification is granted, the new wage index
will be used to calculate Medicare's payment for inpatient and outpatient
services. Other services offered by the hospital such as rehabilitation
services in a distinct part unit will be paid using the wage index from
the hospital's original area. Hospital reclassifications are established
on a budget neutral basis so aggregate IPPS payments will not increase
as a result. A hospital may apply for reclassification individually,
as a member of a group of hospitals, and as a member of a statewide
wage index area; depending upon the type of application, different
criteria apply.
Generally, for an individual hospital to qualify for
reclassification, it must demonstrate a close proximity to the areas
where they seek to be reclassified. This proximity can be established
if one of two conditions is met: (1) an urban hospital must be no more
than 15 miles and a rural hospital must be no more than 35 miles from
the area where it wants to be reclassified; or (2) at least 50 percent
of the hospital's employees reside in the area. A RRC or a SCH (or a
hospital that is both a RRC and a SCH) does not have to meet the
proximity test. If qualified, it can be redesignated to the urban area
that is closest to the hospital. If a rural area is closer, then the SCH
or the RRC may seek reclassification to either the closest rural area or
the closest urban area.
After establishing appropriate proximity, a hospital may qualify
for the payment rate of another area if it proves that its incurred
costs are comparable to those of hospitals in that area. To use an
area's base payment, a hospital must demonstrate that its average
case-mix adjusted cost per discharge is equal to or more than its
current rate plus 75 percent of the difference between that rate and
the rate it would receive if reclassified. To use an area's wage index,
a hospital must demonstrate that its average hourly wage is equal to at
least 82 percent (a rural hospital) or 84 percent (an urban hospital) of
the average hourly wage of hospitals in the area to which it seeks
redesignation. Also an urban hospital cannot be reclassified unless its
average hourly wage is at least 108 percent of the average hourly wage of
the area in which it is located; this standard is 106 percent for rural
hospitals seeking reclassification to an area. An exception to these
standards has been established for a dominating hospital that comprises
at least 40 percent of the area's total wages.
For redesignations starting in FY2003, the average hourly wage
comparisons used to determine whether a hospital can use another area's
wage index are based on 3 years worth of lagged data submitted by
hospitals as part of their cost report. For instance, FY2004 wage index
reclassifications were based on weighted 3-year averages of average
hourly wages using data from FY1998, FY1999, and FY2000 cost reports.
Starting in FY2003, redesignations are for 3 years unless a hospital
withdraws or terminates the redesignation.
There are some limitations on reassignment. Effective for
FY2002 and subsequently, a hospital may not be reclassified for purposes
of using another area's standardized amount if the area to which the
hospital seeks reclassification does not have a higher standardized
amount than that currently received by the hospital. A hospital that
seeks reclassification for the purpose of using another area's wage
index may apply for reclassification only to an area that has a higher
pre-reclassified average hourly wage than that of the hospital's original
geographic area.
In addition, a hospital seeking reclassification for both wage index
and base payments purposes may not be redesignated to more than one area.
Under certain circumstances, all the hospitals in a rural county can be
redesignated into an urban area; all the hospitals in an urban county can
be redesignated into another urban area; and all the hospitals in the
State can be redesignated and paid using a statewide wage index.
Certain rules have been established in statute and by regulation
that specify the changes to an area's wage index value that occur when
hospitals are reclassified by the MGCRB. For example, an MSA's wage
index value is never lower than its State's rural wage index value.
If a hospital reclassification causes the wage index in the new area to
fall by 1 percent or less, the area's original wage index applies to
these newly assigned hospitals (as well as to the original hospitals in
the area). However, if reclassification causes the wage index value to
fall by more than 1 percent, the area's wage index is recalculated
(with the wage data from the redesignated hospitals) and the combined
wage index value applies to redesignated hospitals; the wage index
values for hospitals located in the area are not affected. In MSAs where
the wage index value increases because of reclassification, all
hospitals in the area (those that are physically located there and
those that have been reassigned) use the higher wage index. Hospitals
in areas whose wage index values would be reduced by excluding the wage
data for hospitals that have be reclassified continue to have their wage
indexes calculated as if no reclassification occurred. Hospitals in
rural areas whose wage index values increase because of reclassification
are allowed to benefit through recalculation.
Aside from reclassifications through the MGCRB, hospitals have
also been reclassified by law. Specifically certain rural hospitals can
reclassify as urban if the county in which the hospital is located is
adjacent to two or more MSAs and meets criteria regarding commuting
patterns of its residents to the central counties of the adjacent MSAs.
BBRA 1999 provided for an update of the standards used for the
geographic reclassification of these ''rural deemed urban'' hospitals.
BBRA 1999 also provided that certain urban hospitals could be
reclassified as rural hospitals if the hospital is located in a rural
census tract of an MSA (as determined under the most recent Goldsmith
Modification); is located in an area designated by State law or
regulation as a rural area; or the hospital would qualify as a referral
center or as an SCH if the hospital were located in a rural area; or
the hospital meets other criteria as specified by the Secretary.
Finally, BBRA 1999 established that certain counties should be
considered as part of specified urban areas for the purposes of Medicare
inpatient reimbursement.
SPECIALITY HOSPITALS AND DISTINCT PART UNITS
Certain facilities were excluded from IPPS when it was
implemented in 1984 because the DRGs were thought not to adequately
represent their patients' resource needs or the volume of Medicare
patients was deemed to be insufficient so that payments based on averages
and made on a per discharge basis would be inadequate. The excluded
providers include rehabilitation, long-term care, psychiatric,
children's, and cancer hospitals, rehabilitation and psychiatric
hospital distinct part units, religious nonmedical heath care
institutions, and hospitals located outside the 50 States and Puerto
Rico. Hospitals in certain States have been excluded from IPPS and
operate under a State hospital reimbursement control system approved
by the Secretary under Section 1886(c) of the Social Security Act
(as added by Tax Equity and Fiscal Responsibility Act of 1982 or
TEFRA and subsequently modified). At this point, only hospitals
in Maryland are paid according to a State reimbursement control system.
This section will primarily discuss the payment systems for
those specialty hospitals and units that have been excluded from IPPS
and paid on the basis of reasonable costs subject to the TEFRA limits:
cancer hospitals; children's hospitals; psychiatric hospitals and
units; rehabilitation hospitals and units; and long-term care hospitals.
Certain of these facilities are currently paid under different,
recently implemented provider-specific prospective payment systems.
Inpatient rehabilitation facilities (IRFs) began to be reimbursed under
a PPS in January 2002; long-term care hospitals (LTCHs) began to be
reimbursed under a PPS in October, 2002. The section will begin with
brief background information on the TEFRA payment system still used to
pay cancer, children's, and psychiatric hospitals and units, followed
by descriptions of the IRF-PPS and LTCH-PPS.
Cancer Hospitals, Children's Hospitals, and Psychiatric Hospitals and
Units
In order to qualify for exemption from IPPS, a psychiatric
hospital or distinct part unit must be primarily engaged in providing,
by or under the supervision of a psychiatrist, psychiatric services for
the diagnosis and treatment of persons with mental illness as well as
meet the conditions of participation for hospitals and the special
conditions of participation for psychiatric hospitals. A distinct part
psychiatric unit must meet the requirements established for distinct
part units in hospitals including separately identifiable admission and
discharge records, physically separate beds and must also meet
additional requirements established in regulation. Eleven cancer
hospitals are currently exempt from IPPS. These hospitals generally are
recognized by the National Cancer Institute as either a comprehensive or
clinical cancer research center; are primarily organized for the
treatment of and research on cancer (not as a subunit of an acute
general hospital or university-based medical center); and have at
least 50 percent of its discharges with a diagnosis of neoplastic
disease. Eighty-one children's hospitals are currently exempt from
IPPS. These hospitals are those engaged in furnishing services to
inpatients who are predominantly individuals under the age of 18.
Essentially, under TEFRA rate of increase limits, a specialty
hospital is paid on a reasonable cost basis subject to the rate of
increase ceiling. A TEFRA hospital is paid the lower of its actual
operating costs or a facility-specific target amount and will receive
additional payments depending upon the relationship of its cost per
discharge to its target amount. Generally, a provider with costs under
its target will be rewarded with a bonus payment; a provider with costs
per discharge above its target will receive a relief payment. A
provider's target amount is based on its Medicare allowable costs per
discharge in a base year, updated to the current year by an annual
update factor. In FY2004, the update is the increase in the MB for
excluded hospital which is 3.4 percent. Medicare pays the capital
costs in these providers on a reasonable cost basis.
Generally, new providers have had significantly higher costs
(and subsequently higher target amounts) than older, established
providers. In an effort to reduce disparities, BBA 1997 modified the
way in which bonus and relief payments are calculated. Also, facilities
and exempt units that were excluded from IPPS before FY1991 were
permitted to update (or rebase) their target amount for FY1998 and beyond.
New providers that are exempt from IPPS (those that receive payments for
the first time on or after October 1, 1997) will receive the lesser of
their operating costs or 110 percent of the national median of the
updated, locality adjusted target amount for similarly situated hospitals
for each of its first two cost reporting periods for which it has a
settled cost report. This payment option for new providers now applies
only to new psychiatric hospitals and units.
Inpatient Rehabilitation Facilities and Distinct Part Units
An inpatient rehabilitation facility (IRF), both freestanding IRFs
and distinct part rehabilitation units of acute hospitals, must meet
certain requirements to be excluded from IPPS and paid as an IRF. At least
75 percent of a facility's inpatient population must require intensive
rehabilitation services for one of 10 conditions including treatment of
stoke, spinal cord injury, major multiple trauma, brain injury,
polyarthritis, and other specific conditions. Also a rehabilitation unit
must have beds that are physically separate from the hospital's other
beds, separately identified admission and discharge records from those
of the hospital, and policies that specify that necessary clinical
information is sent to the unit upon transfer of a hospital's patient
to the unit. Simply stated, under PPS, Medicare pays an IRF a
predetermined, fixed amount per discharge, depending upon a patient's
impairment level, functional status, comorbid conditions and age.
Certain adjustments are made for facility level characteristics to
account for area wage variations, rural location and the percentage of
low-income patients (LIPs) served. IRF-PPS also includes case level
adjustments. Specifically, reduced or additional amounts are paid for
early transfers, short-stay outliers, patients who die before transfer
and patients who are extraordinarily costly (outliers). These payments
encompass inpatient operating and capital costs of furnishing covered
rehabilitation services, but not the costs of approved educational
activities, Medicare bad debts and other services that are paid outside
of the IRF-PPS. Medicare's PPS payment to an IRF for any patient will
depend upon a clinician's comprehensive assessment of that patient
upon admission and again at discharge. These documented assessments
must be based on the direct observation of and communication with the
patient; information may be supplemented with information from other
sources, including family members or other clinicians. The prescribed
patient assessment instrument (PAI) form, the Uniform Data Set for
Medical Rehabilitation (UDSmr), encompasses about 55 questions used
to ascertain a patient's functional independence including motor
skills and cognitive capacities and to establish a patient's
comorbidities. A patient's assessments (from both admission and
discharge) are transmitted to CMS electronically once and at the
same time. Failure to meet the IRF PAI transmission deadlines
results in a 25 percent reduction in Medicare's payment in all but
extraordinary circumstances.
Using data from the patient's initial assessment, each Medicare
patient is classified into one of 100 mutually exclusive case-mix groups
(CMGs). First, a patient is placed into one of 21 rehabilitation
impairment categories (RICs) that encompass clinically similar
conditions, such as stroke or traumatic brain injury, as the primary
cause of admission. Next, a patient is placed into a CMG within the
RIC; the CMG assignment depends upon the patient's functional status
and, in some instances, age. Within a CMG, a patient is assigned to
one of 4 categories or comorbidity tiers using clinical information
from the patient's discharge assessment. The presence of
comorbidities was found to substantially increase the average cost
of a specific CMG. Patients with the most serious conditions are
assigned to tier 1; patients with the least serious conditions are
assigned to tier 3; those without any relevant comorbidities are
assigned to the "none" tier. 95 CMGs encompass the 21 RICs; 5 other
CMGs have been established for patients with special circumstances;
one of the 5 CMGs is for patients with very short stays and the 4
remaining are for patients who die before treatment is completed.
Each of these 5 special CMGs have only one payment rate and no
comorbidity tiers. CMS established relative or cost weights
using cost report data from FY1996, FY1997, and FY1998 and charge
data from calendar year (CY) 1999. The relative weights account for a
patient's resource needs for each of the CMGs and payment tiers; 385
relative weights are used to determine Medicare payment rates. Unlike
those used in IPPS, these relative weights are not updated annually.
Within any given CMG, the cost weight for a patient with a high
comorbidity is greater than the cost weights for those patients with
low or no comorbidities. This cost weight is multiplied by a
standardized payment conversion factor (also referred to as the
budget neutral conversion factor) to calculate the payment for a given
patient. The standard payment amount was originally constructed using
the facility-specific information from 508 facilities, including cost
reports from FY1995, FY1996, and FY1997; applicable target amounts,
as well as Medicare claims (including corresponding UDSmr data) from
CY1996 and CY1997. CMS estimated payments that would have been made
under the prior payment system; calculated the average weighted payment
per discharge under the IRF-PPS, and determined a budget neutral
conversion factor. This payment amount was then subject to a
behavioral offset of 1.16 percent to account for coding improvements
and patient discharges that would occur earlier in the IRF stay. In
FY2004, the standard payment amount is $12,525.
For FY2004 IRF-PPS payments, CMS uses FY1999 acute care hospital
wage data (used in the FY2003 IPPS but with no accounting for geographic
assignments) to compute the IRF wage index values. The labor-related
portion (72.395 percent) of the Federal payment rate is multiplied by
the IPPS wage index value for the IRF's area (either MSA or rural area).
This wage-adjusted amount is added to the non-labor related portion of
the rate to determine the wage-adjusted Federal payment rate. IRFs in
rural areas receive an additional 19.14 percent increase to the Federal
payment rate. An additional payment is made to IRFs that serve low-
income patients (LIPs). The same measure, the percentage of poor
Medicare and Medicaid days in a given facility, that is used to
establish DSH payments for most IPPS hospitals is used as the measure
for LIPs served in an IRF. In the IRF-PPS, the additional payments
are calculated using a logarithmic formula where the LIP measure is
raised to the power of .4839. An IRF will receive additional payments
if it serves at least one low-income patient.
Table 2-18 shows the IRF-PPS adjusted payment calculation for
CMG 0112 (without comorbidities) in 2 different facilities. CMG 0112
is used to establish Medicare payments for stroke patients from 82 to
88 years old who have motor scores that range from 12 and 26 (without
comorbidities). It has a relative weight of 2.0015; Medicare's Federal
prospective payment rate for this CMG is $25,068.79 ($12,525*2.0015'
$25,068.79). This represents the Federal rate before the relevant
facility-level adjustments are applied. IRF-PPS payments will be
adjusted to account for a facility's relative area wage, rural
location, and low-income percentage. In FY2004 a facility in rural
Alabama has a wage index value of 0.7660 and one in the Oakland, CA
MSA has a wage index value of 1.5072. Both facilities have a 26
percent DSH percentage which qualifies them for a LIP adjustment of
11.82 percent.
TABLE 2-18-EXAMPLE OF IRF-PPS PAYMENT CALCULATION FOR CMG 0112 (FOR
CERTAIN STROKE PATIENTS WITHOUT COMORBIDITIES) INCLUDING FACILITY
LEVEL ADJUSTMENTS, FISCAL YEAR 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
In addition to facility level adjustments, an IRF may receive
additional or reduced Medicare payment for any given case, depending
upon the Medicare patient's circumstances. Additional payments are
made for cases that are high cost outliers. A patient will be
considered to be an outlier if the estimated cost of the case exceeds
an adjusted threshold amount. This cost is calculated by multiplying
the charge by the facility's overall cost-to-charge ratio obtained
from the latest settled or tentatively settled cost report. An IRF
will receive 80 percent of the difference between the estimated cost
of the case and the outlier threshold. In this instance, the threshold
amount is the sum of the facility level CMG payment and the threshold
amount multiplied by those facility level adjustments. For FY2004,
the unadjusted threshold amount is $11,211, which CMS estimates will
result in total estimated outlier payments of approximately 3 percent
of total IRF-PPS payments.
Medicare pays a reduced amount for a patient who is an early
transfer. The patient has a length of stay that is greater than 3 days
but less than the average for the assigned CMG and is transferred to
another rehabilitation facility (which has been defined as a
rehabilitation facility, a long-term care hospital, a short-term
hospital, or a nursing home.) No payment reduction applies for patients
who are discharged to a home health agency or other outpatient therapy
setting.
Also, the IRF will receive the full amount if the transfer
occurs after the patient has been treated for the average length of
stay associated with the CMG. The payment rate for early transfers
is based on the per diem payment for the applicable CMG (to which the
patient has been assigned). The IRF will receive an additional one half-
day payment to recognize the higher costs generally associated with the
patient's first day of care. The early transfer payment would include
any facility level payment adjustments.
Medicare pays for short-stay outliers using one of the 5 special
CMGs. These are patients who are not transfers, but are discharged from
the facility after being hospitalized no more than 3 days. These short-
stay outliers may occur because the patient could not tolerate a full
course of intensive inpatient rehabilitation treatment, left against
medical advice, or died within 3 days of admission. Also, patients who
are discharged from and return to the same IRF by midnight of the 3rd
consecutive calendar day are considered interrupted stays. Medicare
makes only one IRF-PPS payment for these cases. In addition to PPS
payments, Medicare will pay IRFs for certain items such as Medicare
beneficiaries' bad debts, the costs of approved educational programs and
for blood clotting factors provided to Medicare inpatients who have
hemophilia outside of the PPS.
Each year the IRF-PPS standardized payment amount in increased
based on the modified MB for excluded hospitals (those not paid under
IPPS). This MB is based on cost report data from Medicare participating
inpatient rehabilitation and psychiatric facilities as well as long-
term, children's and cancer hospitals which were subject to TEFRA
payment limitations. The TEFRA MB only includes operating costs, so
the IRF-PPS update is based on a modified TEFRA MB that reflects capital
costs. CMS revised and rebased the MB with capital for excluded
hospitals to incorporate 1997 cost report data starting in FY2004. The
new MB includes an explicit cost category for blood and blood products.
Also, the calculation of this modified MB with capital is based on a
ratio of operating to capital costs where operating costs account for
91.032 percent of the total costs and capital costs account for the
remaining 8.968 percent of the total costs.
Long-Term Care Hospitals
Long-term care hospitals (LTCHs) are designed to provide
extended medical and rehabilitative care for patients who are
clinically complex and have multiple acute or chronic conditions.
Most patients in LTCHs have several diagnosis codes on their Medicare
claims. Approximately one-half of the patients have five or more
diagnoses on their claims. LTCHs consist of a relatively heterogeneous
group of providers that typically provide a range of services,
including comprehensive rehabilitation, head trauma treatment, and pain
management. Although some LTCHs treat a wide range of conditions,
others specialize in one or two types of conditions. The country's
oldest LTCHs evolved from tuberculosis and chronic disease hospitals
and may now still focus on patients with chronic conditions. The newer
facilities are designed primarily to care for ventilator dependent
patients. Finally LTCHs are distributed unevenly across the United
States; one third of the facilities are located in Massachusetts,
Texas, and Louisiana. Old LTCHs (those participating in Medicare when
IPPS was implemented) are generally located in the northeastern region
of the United States, while new LTCHs are typically located in the
southern region. Old LTCHs are either government controlled or nonprofit.
In contrast, one half of the LTCHs that began participation in Medicare
between 1983 and 1993 and two-thirds of those that began participation in
Medicare in FY1994 or later are proprietary facilities. In recent years,
the LTCH group has evolved to include hospitals-within-hospitals (or co-
located hospitals) and satellite facilities in addition to traditional
freestanding facilities. The best available information indicates that
as of 1997, roughly 21 percent of the LTCHs were co-located hospitals
and 68 percent were freestanding; the affiliation status of the remaining
11 percent could not be identified. The number of LTCHs participating
in Medicare has significantly increased. In 1991, there were 91 LTCHs,
a number that increased to 155 in 1994, 225 in 1999, 252 in 2000, and
297 in April 2003.
LTCHs are certified under Medicare as short-term acute care
hospitals which have been excluded from IPPS. An LTCH has a Medicare
inpatient average length of stay (ALOS) greater than 25 days or an
ALOS for all patients of greater than 20 days if the hospital meets
certain requirements. Both covered and noncovered medically necessary
days for Medicare patients are included in the 25-day ALOS calculation.
Although, by statute, there are no LTCH distinct part units, there are
satellite and hospital-within-a-hospital LTCHs that are co-located or
share the same campus with acute care hospitals and other Medicare
providers. To be exempt from IPPS, a hospital-within-a-hospital must
have a separate governing body, chief executive officer, chief medical
officer, and medical staff and meet one of the following criteria: (1)
perform basic functions independently from the host hospital; (2) incur
no more than 15 percent of its total inpatient operating costs for items
and services supplied by the hospital in which it is located; or (3) have
at least 75 percent of its patients admitted from sources other than the
host hospital. A satellite provider is a hospital-within-a-hospital
facility that is owned by a separate, existing LTCH and is subject to
distinct criteria established by regulation. Different payment rules
can apply to these co-located Medicare providers, depending on the
number and percentage of Medicare discharges and readmissions between
the entities.
Effective for the first cost reporting period beginning on or
after October 1, 2002, LTCHs are paid under a PPS, subject to a 5-year
transition period. During the transition period, a facility's percentage
payment based on the Federal rate increases by increments of 20
percentage points over the 5 year period. For instance, in the first
year of its transition period, a LTCH was paid on a blended rate based
on 20 percent of the Federal rate and 80 percent of its TEFRA target
amount; the transition blend is based on 40 percent of the Federal rate
and 60 percent of its TEFRA target amount in the second year. By cost
reporting periods beginning or after October 1, 2006, the transition
period will be complete. Alternatively, a LTCH may elect the one time
option to be paid based on 100 percent of the Federal prospective rate.
Also, any new LTCH must be paid on 100 percent of the Federal rate.
Under this PPS, Medicare pays a LTCH a predetermined amount per
discharge, depending upon the patient's assignment into one of 510 LTC-
DRGs. The patient classification system, LTC-DRGs, is based on IPPS DRGs
that are reweighted to reflect the resource use of longer stay patients.
Only one LTC-DRG is assigned to a hospitalization at the patient's
discharge. The LTCH-PPS includes several facility level adjustments such
as the area wage index and a cost of living adjustment (COLA) of up to
25 percent for LTCHs in Alaska and Hawaii, but it does not include
adjustments for rural location, low income patients served, or IME.
With respect to case level adjustments, the LTCH-PPS will pay reduced
amounts for short-stay outliers (but not cases that are deemed to be
interrupted stays) and additional amounts for high cost outliers. Unlike
the IRF-PPS, there are no special payment policies for transfer cases or
deaths. The LTCH-PPS payment encompasses payments for both operating
and capital-related costs of inpatient care, but certain costs,
including those associated with approved educational programs,
Medicare's bad debt expenses, or blood clotting factors, are paid for
separately. Starting July 1, 2003, CMS changed the LTCH-PPS from the
Federal fiscal year (from October 1 through September 30) to a rate
year that begins July 1 through June 30, of each year. This date
change affects the timing of the annual issuance of the LTCH update,
Federal rate, and applicable facility and case level payment
adjustments such as revisions to the wage index values and the fixed
loss amount or high cost outlier threshold. Changes to the LTC-DRGs
classifications and their relative weights will remain on a Federal fiscal
year schedule as will the effective dates for the LTCH-PPS transition
blend period.
CMS has adapted the IPPS patient classification system to
better reflect the resource use and patient load in LTCHs. Because
LTCHs often specialize in certain types of cases, such as ventilator
dependent patients, CMS uses a hospital-specific relative value method
to calculate the relative weights for LTC-DRGs that differs from the
method used to calculate the IPPS DRG relative weights. Generally,
the charges associated with a given LTC-DRG at each facility are
adjusted to remove the effect of its pricing strategy (the facility's
average markup in charges) and patient intensity (the facility's case
mix index). In calculating these relative weights, statistical
outliers and cases with a length of stay of 7 days or less are removed.
Weights also are adjusted for cases where the LTCH stay is less than
five-sixths of the geometric average length of stay. Unlike IPPS, low
volume LTC-DRGs, (those with less than 25 cases) are used to construct
LTC-DRG weights. The 161 low volume LTC-DRGs are grouped into 5
quintiles based on average charge per discharge. CMS calculates a
relative weight and average length of stay for these quintiles using
the same formula as the regular LTC-DRGs; those values are then
assigned to each of the low volume LTC-DRGs that are included in the
quintile. CMS identified 159 of the 510 LTC-DRGs with no LTCH cases
in the FY2001 claims data used to establish the cost weights. These
no volume LTC-DRGs are crosswalked to other clinically similar LTC-
DRGs and then grouped into the most appropriate of the 5 quintiles
established for low volume LTC-DRGs. CMS made other adjustments to
certain paired LTC-DRGs to correct for incompletely coded claims.
Finally, LTC-DRGs representing organ transplants were given a 0.00
cost weight, since none of the currently participating LTCHs are
Medicare-approved transplant centers (or apparently, have ever
expressed any interest in becoming such providers.) The cost
weight for a LTC-DRG multiplied by a standard Federal rate represents
the framework for Medicare's payment for a given patient which, as
mentioned earlier, is then subject to facility level and case level
payment adjustments. CMS used cost report data from FY1996 through
FY1999 and FY2001 claims data, updated to FY2003, to calculate the
LTCH standard Federal payment rate. Data from certain providers
that did not maintain charge data (providers that billed using an all
inclusive rate) or that operated under demonstration projects were
excluded. CMS adjusts the standard Federal rate by a reduction
factor of 8 percent as an offset for the estimated LTCH outlier
payments. By statute, total payments under LTCH-PPS must be equal to
the amount that would have been paid if the PPS had not been
implemented. Accordingly, CMS included a 0.34 percent reduction in
the Federal rate to account for behavioral changes that would occur
as LTCH respond to incentives inherent in the new payment system.
CMS includes a budget neutrality offset to account for the increased
spending that results from LTCHs electing full Federal payment during
the transition period. The amount of the offset is re-estimated each
year. In FY2003, CMS imposed a 6.6 percent budget neutrality offset
(using a factor of 0.934 which is 1.0 minus .066) to account for $50
million in projected additional costs that would occur that year because
of the number of LTCH that CMS anticipated would elect payment based on
the Federal rate. In the 2004 rate year, the budget neutrality offset
was established at 6 percent to account for the $120 million in
additional payments attributed to the LTCH-PPS transition period. The
budget offset applies to all LTCH payments, not just those computed
using the full Federal payment during the transition period; a LTCH
that is being paid on a transition blend with some proportion of its
payments based on its TEFRA rate would have its TEFRA based payments
reduced as well. Finally, CMS will review LTCH payments and may make
a one-time prospective adjustment to the LTCH PPS by October 1, 2006,
to correct for any errors in the original budget neutrality
calculations.
Like the IRF-PPS, the LTCH-PPS uses the IPPS wage index data for
its adjustment. However, because CMS did not find a significant
relationship between LTCHs' costs and their geographic location, the
LTCH wage index adjustment is being phased in using 20 percentage point
increments each year over a 5-year period, starting with cost reporting
periods beginning on or after October 1, 2002. The timing of the
implementation of the wage index adjustment is linked to the provider's
actual cost reporting period. Annual updates to the wage index, however,
are linked to the LTCH rate year. Consequently, the wage adjustment for
a particular LTCH may change during its cost reporting period. For
instance, a LTCH with a cost reporting period from January 1, 2003
through December 31, 2003 is paid using 1/5th of the applicable wage
index value for that entire cost reporting period. From January 1, 2003
to June 30, 2003, its payments will be based on 1/5th of the FY2002
IPPS wage index value for its area; from July 1, 2003 to December 1,
2003, its payments will be based on 1/5th of the FY2003 IPPS wage index
value for its area. Starting January 1, 2004, it will receive 2/5ths
of the FY2003 IPPS wage index value.
To illustrate this wage adjustment, assume the LTCH with a cost
reporting period beginning on January 1 is located in the Chicago, MSA.
This MSA has an FY2002 IPPS wage index value of 1.1008, so the LTCH
would receive a wage index adjustment of 1.0202 starting CY2003, the
first year of its phase-in period. It would receive this wage index
adjustment until June 30, 2003. Starting for discharges on July 1,
2003, all LTCHs will be paid using the FY2003 IPPS wage index values
(with no accounting for geographic reclassifications); the applicable
FY2003 wage index value for the Chicago MSA is 1.15. The LTCH would
receive a wage index adjustment of 1.0209 for discharges from July 1,
2003 to December 31, 2003 (1/5th of 1.1044) when it is still in its
first year of the wage index phase-in period. Starting in CY2004, the
LTCH will be paid using 2/5ths of the applicable wage index value. The
LTCH would receive a wage index adjustment of 1.0418 (2/5ths of 1.15)
starting on January 1, 2004 for the next 6 months; this adjustment
would change on July 1, 2004 when the LTCH wage index would be updated.
CMS has established the Federal rate of $35,726 for the 2004
LTCH-PPS rate year. The labor-related portion (72.885 percent) of the
Federal payment rate is multiplied by the applicable area's wage index
value of the physical location of the LTCH. This wage-adjusted amount
is added to the non-labor related portion of the rate which will be
adjusted for COLA if applicable to determine the adjusted Federal
payment rate. Table 2-19 illustrates the LTCH-PPS adjusted payment
calculation for the LTCH in Chicago discussed earlier and a case in
LTCH-DRG 09, Spinal Disorders and Injuries, which has a relative weight
of 1.4118. This particular LTCH has opted for payment based on 100
percent of the Federal rate. As mentioned earlier, the budget offset
would apply equally to LTCH that is being paid on a transition blend;
its TEFRA based payments would be reduced as well.
TABLE 2-19-EXAMPLE OF LTCH-PPS PAYMENT CALCULATION, WITH FACILITY LEVEL
ADJUSTMENTS, FOR DISCHARGE STARTING JULY 1, 2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Aside from facility level adjustments, the LTCH-PPS includes
certain case level adjustments as well. Generally, a short-stay outlier
will be paid the lesser of 120 percent of the cost of the case, 120
percent of the LTC-DRG specific per diem payment, or the full LTC-DRG
payment. In this PPS, a short-stay outlier is a case that has a length
of stay less than or equal to 5/6s of the ALOS for the LTC-DRG to which
the case is assigned. For example, if the ALOS for a particular
LTC-DRG is 30 days, then the short-stay outlier policy would apply to
any stays that are 25 days or less in length (5/6s of 30 days is 25
days).
An interrupted stay is a case where a LTCH patient is discharged
and then admitted directly to an inpatient acute care hospital, an IRF,
a skilled nursing facility, or a swing-bed and then returns to the same
LTCH within a fixed period of time which varies by provider type. The
limit is 9 days or less in an acute hospital; 27 days or less in an IRF;
45 days or less in an SNF or in a swing-bed. If the patient returns to
the LTCH within these fixed limits, Medicare treats the case as an
interrupted stay and only one payment to the LTCH is made.
Finally, Medicare pays additional amounts for cases that are
high cost outliers where the estimated cost of the case exceeds the
outlier threshold. This threshold is the LTC-DRG payment plus a
fixed-loss amount. CMS establishes the fixed loss amount annually so
that projected outlier payments equal 8 percent of estimated total LTCH-
PPS payments. The fixed-loss amount for the 2004 rate year is $19,590.
CMS will pay 80 percent of cost above the outlier threshold for high
cost outlier cases.
Like the IRF-PPS, the LTCH-PPS Federal payment rate is increased
annually based on most recent estimate of the modified TEFRA MB for
excluded hospitals (those not paid under IPPS) adjusted for capital
costs. CMS revised and rebased the excluded hospital with capital MB
to a 1997 base year and included an explicit cost category for blood
and blood products. As mentioned earlier, the calculation of this
modified MB with capital reflects a ratio of operating-to-capital costs
where operating costs comprise 91.032 percent of the total costs
and capital costs account for the remaining 8.968 percent of total costs.
Starting July 1, 2003, CMS changed the annual update to the LTCH Federal
payment rate from the Federal fiscal year (from October 1 through
September 30) to a rate year that begins July 1 through June 30, of each
year. The 2004 update calculation included an adjustment for the change
in the update cycle. The full 12-month MB with capital increase was
estimated to be 3.3 percent which was reduced by -0.8 percent; the
2004 LTCH PPS rate year increase was 2.5 percent.
SKILLED NURSING FACILITY SERVICES
Coverage
Medicare covers extended care services provided in nursing homes
for beneficiaries who require additional skilled nursing care and
rehabilitation services following a hospitalization. These extended
care services, commonly known as skilled nursing facility (SNF) benefits,
are covered under Part A for up to 100 days per spell of illness and
must be provided in an SNF certified to participate in Medicare. A spell
of illness is that period which begins when a beneficiary is furnished
inpatient hospital or SNF care and ends when the beneficiary has been
neither an inpatient of a hospital nor an SNF for 60 consecutive days.
A beneficiary may have more than one spell of illness per year.
In order to be eligible for SNF care, the beneficiary must have
been an inpatient of a hospital for at least 3 consecutive days and must
be transferred to an SNF, usually within 30 days of discharge from the
hospital. Furthermore, a physician must certify that the beneficiary is
in need of skilled nursing care or other skilled rehabilitation services
on a daily basis, which, as a practical matter, can only be provided on
an inpatient basis and which are related to the condition for which the
beneficiary was hospitalized.
Payment
Prior to a congressionally mandated prospective payment system,
Medicare paid for SNF care on a retrospective cost-based basis. This
meant that SNFs were paid for the reasonable costs (as defined by the
program) they incurred for the care they provided as determined at the
end of the SNF's fiscal year. SNFs had few incentives to maximize
efficiency and minimize their costs, and little inducement to control
the amount or number of services they provided.
Prospective payment system--In BBA 1997, Congress required that
a prospective payment system (PPS) for SNF care be phased in over 3
years, beginning with the SNF's first cost reporting period after July
1, 1998. SNF prospective payment involves grouping patients according
to the type and intensity of services they require and setting a daily
payment rate for each payment group. Like other PPSs that pay health
care providers for care to Medicare beneficiaries on the basis of
predetermined, fixed amounts, Medicare payments to SNFs are intended to
pay the provider for its Medicare beneficiary costs on average. That
is, although the payment is a predetermined daily rate, a facility's
actual costs may be above or below that amount for an individual
patient. The incentive facilities have is to manage costs so that, on
average, costs do not exceed the PPS average amounts. SNFs that provide
the services at lower costs than the Medicare payment are able to keep
the difference.
Unit of Payment--Under SNF PPS, a SNF receives a daily payment
that covers all the services provided to the beneficiary that day
including room and board, nursing, therapy, food, and medicine with
very limited exceptions. Some care costs are paid separately under
the statute such as physician visits and dialysis services. The daily base
payment, called the ''Federal per-diem rate,'' is based on actual 1995
SNF costs that have been trended forward for inflation and varies by the
urban or rural location of the SNF. The Federal per-diem rate is broken
down into four components, two of which are adjusted for case mix: nursing
componentBadjusted for case-mix; therapy componentBadjusted for case mix;
therapy componentBnot adjusted for case mix; and the non-case mix adjusted
component.
Case-Mix System--The statute requires the Secretary to develop an
appropriate adjustment to the Federal rate to account for case mix. The
case mix system developed adjusts the Federal per-diem rate for treatment
and care needs of the beneficiary and is called Resource Utilization
Groups, version III (RUG-III). RUG-III is composed of 7 major categories
that are further differentiated into 44 specific patient groupings.
The 7 major categories are ''hierarchical,'' that is, patients are
automatically grouped into the highest paying groups given their
condition. The 7 categories, in hierarchical order, are:
Rehabilitation, Extensive Services, Special Care, Clinically Complex,
Impaired Cognition, Behavior Problems, and Reduced Physical Function
(see Table 2-20.) Patients in need of rehabilitative therapy services
are automatically assigned one of the 14 rehabilitation groups,
depending upon the minutes of rehabilitative services they receive
in a week, the combinations of disciplines providing the services,
and the patient's activities of daily living (ADL) scores (ADL scores
measure patients' abilities in toileting, grooming, dressing and so
forth). The next category, Extensive Services, is composed of 3
groups which use services requiring more technical knowledge and
skill as the variables for patient assignment, rather than ADL scores.
The third category, Special Care, is made up of 3 groups composed of
patients with one or more of the conditions in this category. ADL
scores determine group assignment within this category. The fourth
category, Clinically Complex, is composed of 6 groups comprising
patients with a variety of conditions including burns, septicemia and
pneumonia or who require more complex care. ADL scores and patient
depression determine group assignment within this category. The fifth
category is Impaired Cognition, which is comprised of 4 groups of
patients with poor cognitive performance. Patients receiving care that
falls within this category are unlikely to qualify for Medicare
coverage of their stay because of the skilled care requirements. The
sixth category is Behavior Only, which has 4 groups. Patients receiving
care that falls in this category have exhibited behaviors that include
resisting care, being combative or who have hallucinations or delusions.
These patients are unlikely to qualify for Medicare coverage of their
stay because they may not require skilled care. The final RUG category
is Physical Function Reduced which contains 10 groups. Patients in this
category are those who do not have any of the conditions or
characteristics for the other groups. As with the earlier two RUGs,
patients in this group are unlikely to require the skilled care needed
to qualify for Medicare payment.
TABLE 2-20--RESOURCE UTILIZATION GROUPS (RUGS) CATEGORIES AND PAYMENT
ADD-ONS
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
BBRA 99 increased payments for 15 RUGS by 20 percent beginning
April 1, 2000 and ending when the Secretary implements refinements to the
RUGs. The RUGs that were increased were for rehabilitation services,
extensive services, special care services, and clinically complex
services. BIPA 2000 modified the add-on to correct for a payment
anomaly created by BBRA 99 where several of the mid-intensity
rehabilitation RUGs were paid at a higher rate than the high intensity
rehabilitation RUGS. These temporary increases result in additional
payments to SNFs of approximately $1 billion a year.
Since the inception of SNF PPS, CMS has been conducting research
on refinements to the RUGs. In April, 2000 the Secretary proposed
refining the RUGs by adding payment categories to better compensate
SNFs for providing care to medically complex patients as well as to
better account for the "non-therapy ancillary service" costs (such as
prescription drugs and respiratory therapy). However, the proposal was
withdrawn when, upon further analysis, CMS determined that the existing
RUGs did a better job than the proposed ones in describing differences
in patient resource use. Since then, the Secretary has not proposed
any refinements. In the SNF PPS proposed rule published May 16,
2003, CMS announced that the RUGs would not be refined for FY 2004, thus
keeping in place the temporary add-on payments. A press release on the
proposed rule stated, "After careful review of the available data, CMS
determined that the research is not sufficiently advanced at the present
time to implement the refinements this year." CMS is continuing its
research on refinements to the RUGs system. BIPA 2000 requires the
Secretary to study different systems for categorizing SNF patients and
to report to Congress by January 1, 2005 with the results and any
recommendations for changing the SNF PPS statute.
Wage Adjustment--The final adjustment under SNF PPS is to
adjust for differences in wages between geographic areas. The labor-
related portion of the payment rate is approximately 76 percent. The
statute gives the Secretary discretion to use the wage index he finds
appropriate. The Secretary uses the most recent hospital wage index
to adjust SNF PPS payments. In 2001, the Secretary explored using SNF
wages to construct a SNF PPS wage index. The proposal was not adopted
for several reasons: reliability of the existing data (there were
significant variations in the SNF-specific wage data and a large number
of SNFs were unable to provide adequate wage and hourly data); SNF
record keeping burden (SNFs would have to keep detailed data, submitting
it to fiscal intermediaries annually, and facing audit of those data);
and significant resource commitment by CMS (the editing, reviewing, and
auditing of the data for approximately 14,000 SNFs would require
significant new resources).
Payment Calculation--As discussed above, SNF PPS payments are
daily payments. The urban or rural unadjusted Federal per diem rate is
broken down into four categories, two of which are adjusted for case mix
using the patient's RUG. Each of the RUGs is then broken into a labor-
related and non labor-related share and the labor portion is multiplied
by the wage index for the area in which the SNF is located. The non-
labor portion of the base payment amount is added back in to arrive at
the total daily payment. The payment formula is: Daily payment =
(Labor-related case-mix adjusted rate x area wage index) + (non-labor-
related case-mix adjusted rate). An example of the calculations is
shown in Table 2-21. The case-mix adjusted rate = (Nursing component of
Federal Rate x Nursing weight for RUG)+(Therapy component of Federal
Rate x Therapy weight for RUG)+ (Therapy non-case mix component)+(Non-
case mix component).
Outliers--The statute does not permit payments for outliers
under SNF PPS.
In the other PPSs that have outlier payments, the statute contains
explicit authority for the Secretary to make outlier payments.
Updates--The SNF Federal rates are updated annually using the
SNF market basket index. The SNF market basket index is a measure of
change in the price of goods and services used in providing care for
Medicare beneficiaries in a SNF. For FY 2004, SNFs received a full
market basket update of 3.0 percent. In addition, for FY 2004, the
Secretary issued a regulation that corrected cumulative forecast error
in the market basket since SNF PPS began on July 1, 1998. As a result
the FY 2004 rates will be increased by an additional 3.26 percent.
TABLE 2-21--EXAMPLE OF SNF PPS DAILY PAYMENT CALCULATION FOR A SNF
LOCATED IN CHICAGO, ILLINOIS FOR SELECTED RUGS
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Payments Outside the PPS--BBRA expanded the list of services
that are excluded by statute from the SNF PPS: certain chemotherapy
items and administration services, certain radioisotope services,
certain prosthetic devices, and ambulance services furnished in
conjunction with renal dialysis treatments. BBRA required that any
increase in total payments that result from these exclusions be budget
neutral, that is, that the Federal per-diem amounts be reduced
proportionate to the payments.
SNF payments and utilization
For a number of years, SNF care was one of Medicare's fastest
growing benefits. Table 2-22 shows that SNF utilization and spending
first began to increase substantially in 1988 and 1989. These increases
can be traced to changes that occurred in the benefit at that time.
First, HCFA issued new coverage guidelines that became effective early
in 1988. Prior to this time, studies had pointed to a lack of adequate
written guidance on coverage criteria that led to inconsistencies in
coverage decisions for a benefit that was intended to be uniform across
the country. As a result, many SNFs were reluctant to accept Medicare
beneficiaries because of the possibility that a submitted claim would
be retroactively denied. The 1988 guidelines clarified coverage
criteria by providing numerous examples of covered and noncovered care.
Furthermore, the guidelines explained that even when a patient's full or
partial recovery is not possible, care could be covered if it were
needed to prevent deterioration or to maintain current capabilities.
Previously, some care had been denied coverage because patients'
health status was not expected to improve.
The second major, though temporary, change in Medicare's SNF
benefit came in 1988 with the enactment of the Medicare Catastrophic
Coverage Act (MCCA). Effective beginning in 1989, this legislation
eliminated the SNF benefit's prior hospitalization requirement; revised
the coinsurance requirement to be equal to 20 percent of the national
average estimated per-diem cost of SNF services for the first 8 days of
care; and authorized coverage of up to 150 days of care per calendar
year (rather than 100 days per spell of illness). These changes were
repealed in 1989, and the SNF benefit's structure assumed its prior
form. Studies have suggested that the coverage guidelines and MCCA
changes together might have caused a long-run shift in the nursing home
industry toward Medicare patients that did not end with repeal of MCCA.
Table 2-22 shows that SNF spending in calendar year 1990 stood
at $2.3 billion; by 1997 it had increased to $12.9 billion, for an
average annual growth rate of 28 percent. With implementation of the
PPS payment system in mid-1998, however, the rate of increase dropped
precipitously: between 1997 and 1998 payments decreased 0.9 percent,
and payments decreased by 18.3 percent in 1999. Between 1992 and 1997
the number of Medicare beneficiaries receiving SNF care doubled from
778,000 to 1.5 million. The number of covered days grew from 27 million
to 50 million, or by 85 percent. After the implementation of SNF PPS in
July 1998, spending dropped below that of earlier years. Not until
2001 did SNF spending exceed 1998 levels. This drop in spending has
been attributed to both increased activities in preventing fraud and
abuse and to the implementation of the new PPS. Payment increases
contained in BBRA 99 and BIPA 2000 helped account for the increase in
payments seen after 1999.
TABLE 2-22--SKILLED NURSING FACILITY PAYMENTS, PEOPLE SERVED, AND DAYS
COVERED BY MEDICARE, CALENDAR YEARS 1988-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
HOME HEALTH SERVICES
Coverage and Benefits
The Medicare home health benefit has specific statutory
eligibility criteria: a beneficiary must be confined to his or her home
(that is, be ''homebound'', be under the care of a physician, and need
skilled nursing care on an intermittent basis or other skilled therapy
care. A homebound individual is defined as one who cannot leave home
without a considerable and taxing effort, or who requires the aid of a
supportive device (such as crutches, a cane, a wheelchair, or a walker),
or if the individual has a condition such that leaving the home is
medically contraindicated. Absences from home may occur infrequently
for short periods of time for purposes such as to receive medical
treatment, attend certain adult day care programs, or attend church.
Skilled care includes skilled nursing or therapy (physical, speech/
language, occupational) services that are delivered under the care of
a physician and in accordance with a plan of care that is periodically
reviewed by a physician. Skilled nursing care and home health aide
services must be provided on a part-time or intermittent basis, which
is defined as ''less than 8 hours each day and 28 or fewer hours each
week (or, subject to review on a case-by-case basis as the need for
care, less than 8 hours each day or 35 or fewer hours per week).''
For beneficiaries meeting the qualifying criteria, Medicare's
home health benefit covers the following services:
1. Part-time or intermittent nursing care provided by or under the
supervision of a registered nurse;
2. Physical or occupational therapy or speech-language pathology
services;
3. Medical social services;
4. Part-time or intermittent services of a home health aide who has
successfully completed a training program approved by the Secretary;
5. Medical supplies (excluding drugs and biologicals) and durable
medical equipment (DME);
6. Medical services provided by an intern or resident in training
under an approved training program with which the agency may be
affiliated; and
7. Certain other outpatient services which involve the use of
equipment that cannot readily be made available in the beneficiary's
home.
Home health care is covered by Medicare as long as the care is
medically reasonable and necessary for the treatment of illness or
injury. Although the number of home health visits a beneficiary may
receive is unlimited, services must be provided pursuant to a plan of
care that is prescribed and periodically reviewed by a physician. In
general, Medicare's home health benefit is intended to serve
beneficiaries needing acute medical care requiring the services of
skilled health care personnel. It was never envisioned as providing
coverage for the nonmedical supportive care and personal care
assistance needed by chronically impaired persons. It is not a
long-term care program for the disabled or the frail elderly.
Beneficiaries do not have any copayments for home health services.
Home health aide visits include ''hands-on personal care to
the beneficiary or services that are needed to maintain the
beneficiary's health or to facilitate treatment of the beneficiary's
illness or injury.'' Covered home health aide services include personal
care of a patient, simple dressing changes that do not require the
skills of a licensed nurse and assistance with medications that
ordinarily are self-administered and do not require the skills of a
licensed nurse.
Home health services are provided by private or public home
health agencies (HHAs) that specialize in provision of such services
and that are certified to participate in Medicare by CMS. HHAs may
be public or government-sponsored entities, private nonprofit
agencies, or proprietary for-profit agencies. Hospitals may own or
sponsor an HHA. Home health care givers may be employees of the HHA or
may work for an agency under contract. Often, Medicare beneficiaries
constitute the great majority of an HHA's caseload, although other users
include individuals covered by Medicaid and those with private
insurance or who pay out of pocket.
Financing for Home Health Benefits
The financing for the home health care benefit is split between
the Hospital Insurance Trust Fund (Part A) and the Supplementary Medical
Insurance Trust Fund (Part B). At the inception of the home health
benefit, Part A paid for up to 100 home health visits for beneficiaries
enrolled in Part A and who had had a 3-day prior hospitalization.
Home health care was also covered under Part B, up to 100 visits, for
beneficiaries who had no prior hospitalization, or who had exhausted
their 100 Part A visits, or who had Part B coverage only. The Omnibus
Budget Reconciliation Act of 1980 liberalized the rules governing
Medicare's coverage of home health services, including eliminating the
requirement for a prior hospitalization and removing the limitation on
the number of visits. This had the effect of shifting the financing for
home health services almost entirely over to the Part A Trust Fund.
The only beneficiaries for whom Part B payments were made were those who
had no Part A coverage.
BBA 97 reimposed joint financing of the home health benefit
between Parts A and B by gradually transferring those home health
services unassociated with a hospital stay from Part A to Part B.
Medicare Part A covers the first 100 visits following a 3-day hospital
stay or a SNF stay. The transfer was phased in over a 6-year period.
Transferring certain certain home health service costs to the Part B
Trust fund results in increased outlays and thus increased Part B premium
costs to beneficiaries. This increased cost in premiums was phased in
over 7 years. Beneficiaries without Part B coverage receive unlimited
Part A coverage for home health services.
Payment
Prior to implementation of a congressionally mandated
prospective payment system, Medicare paid for home health care on a
retrospective cost-based basis. This meant that HHAs were paid for
the reasonable costs (as defined by the program) they incurred in
providing care to Medicare beneficiaries. These reasonable costs
were determined at the end of the HHAs fiscal year, and were
subject to certain limitations. Prior to BBA 97, HHAs had one cost
limit: a limit on the costs of providing each visit. This ''per-
visit cost limit'' was applied in the aggregate B that is, the
limit was calculated by multiplying the cost limit by all the
Medicare visits the agency made in the year -- not to individual
visits. The per-visit cost limit gave agencies an incentive to
control the costliness of the visits provided. However,
agencies could easily circumvent the limit by providing two short
visits rather than one long visit. In the period preceding BBA 97,
the number of visits provided to Medicare beneficiaries increased
dramatically as did Medicare expenditures for home health services (see
Table 2-25). In an attempt to control the costs of the care provided to
Medicare beneficiaries, Congress, in BBA 97, reduced the per-visit cost
limits and imposed an additional cost limit, the aggregate per
beneficiary limit, until prospective payment could be implemented.
The reduced and new cost limits were called the interim payment system.
The aggregate per beneficiary limit was calculated by multiplying the
limit by the number of Medicare beneficiaries served by the agency.
It was based on the average costs incurred by agencies during agencies'
fiscal year ending before October 1, 1994. After BBA 97, HHAs were
reimbursed the lesser of: (1) their actual reasonable costs; (2)
their reasonable costs subject to the per visit limit; or (3) their
reasonable costs subject to the aggregate per beneficiary limit.
Prospective payment system--In BBA 97, Congress required that a
prospective payment system (PPS) for home health care be implemented for
cost reporting periods beginning on or after October 1, 1999. The
effective date of home health PPS was amended to October 1, 2000, for
all agencies, because of the inability of CMS to make systems changes
for the new payment system while the agency was fixing its computer
systems for the year 2000 computer problems.
Home health prospective payment involves grouping patients
according to the type and intensity of services they require and setting
a payment rate for each payment group. Payment is based on the unit of
payment adjusted for the area wages in which a beneficiary resides and
is adjusted for the care needs of the beneficiary. Like other PPSs
that pay health care providers for care to Medicare beneficiaries on
the basis of predetermined, fixed amounts, Medicare payments to HHAs
are intended to pay the agency for its Medicare beneficiary costs on
average. That is, although the payment is a predetermined rate, an
agency's actual costs may be above or below that amount for an
individual patient. The incentive agencies have is to manage costs so
that, on average, costs do not exceed the PPS average amounts. HHAs
that provide the services at lower costs than the Medicare payment
are able to keep the difference.
Unit of Payment--Under home health (HH) PPS, an HHA receives
a payment for a 60-day episode of care for beneficiaries. The 60-day
episode includes skilled nursing, therapy, aide visits, medical
supplies, and medical social workers. Physician services, durable
medical equipment and osteoporosis drugs are not included in the HH PPS.
The 60-day episode base payment, called the ''national standardized
60-day episode rate'' is based on actual, audited FY 1997 home health
costs that have been trended forward for inflation. The base payment
amount for FY2003 is $2,159.39 for a 60-day episode of care. There
is not a distinction between urban and rural base payment amounts.
Wage Adjustment--The unit of payment is adjusted to account for
differences in the area wages. The statute gives the Secretary
discretion to use the wage index he finds appropriate and explicitly
authorizes the Secretary to use the hospital wage index for home
health PPS. The Secretary uses the previous year's hospital wage
index (that does not contain the reclassifications or floors in the
hospital wage index used to adjust hospital PPS payments) to adjust
for differences in area wages. In FY 2004, the FY 2003 pre-floor and
pre-reclassified hospital wage index is used to adjust payments. The
wage index for the area in which the beneficiary is actually served is
used to adjust the payments. CMS has explored
using a wage index specific to HHAs in the past, but has not adopted
one because the earlier efforts had data and methodological issues.
Case Mix System--The statute requires the Secretary to develop
"...appropriate case mix adjustment factors for home health services in
a manner that explains a significant amount of the variation in cost
among different units of services." The case mix system developed
adjusts the base payment rate for the treatment and care needs of
beneficiaries and is called Home Health Resource Groups (HHRGs). The
HHRGs estimate the resource use for specific combinations of clinical,
functional and service levels. There are 4 clinical severity levels,
5 functional severity levels, and 4 services utilization levels. The
combinations result in 80 HHRGs. Each combination defines one of the
80 groups in the case-mix system. Each patient is assigned to one of
the groups as determined following an assessment of the patient's
condition and care needs using the Outcome and Assessment Information
Set (OASIS). A patient with high clinical severity, moderate
functional severity, and low services utilization severity is placed in
the same group (C3F2S1) with all other patients whose summed scores
place them in the same set of severity levels for the three dimensions.
Table 2-23 shows the HHRGs and their relative case mix weights.
Payment Calculation--The standardized 60-day episode rate is
adjusted for the area wage index where the beneficiary served resides
and for case mix using the applicable HHRG. To calculate payment, the
episode rate (in column a of Table 2-24) is multiplied by the labor
portion (0.77668) and then by the appropriate area wage index
(column c). The result is added to the non-labor portion of the
episode rate (column d). That sum (in column e) is multiplied by
the appropriate HHRG weight (column g) to arrive at a 60-day episode
payment.
TABLE 2-23--HOME HEALTH RESOURCE GROUPS AND RELATIVE CASE-MIX WEIGHTS,
FISCAL YEAR 2000
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-24-EXAMPLE OF HOME HEALTH PPS 60-DAY EPISODE PAYMENT
CALCULATION FOR AN HHA LOCATED IN CHICAGO, IL FOR SELECTED HHRGS
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
HHAs are paid 60 percent of the wage- and case mix- adjusted
payment after submitting a request for anticipated payment (RAP). The
RAP may be submitted at the beginning of a beneficiary's care once the
HHA has received verbal orders from the beneficiary's physician and
the assessment is completed. The remaining payment is made when the
beneficiary's care is completed or the 60-day episode ends. Depending
upon the circumstances additional adjustments such as an outlier
payment or a significant change in condition adjustment may be made to
the adjusted episode payment. These additional adjustments are
described below.
Updates--The home health 60-day episode rate is updated annually
using the home health market basket index. The home health market
basket index is a measure of change in the price of goods and services
used in providing care for Medicare beneficiaries receiving home care.
For FY 2004, agencies received a full market basket update of 3.3
percent.
Outliers--The outlier adjustment provides additional payment to
an HHA when the cost of an episode of care is unusually large. Outlier
payments are made for episodes whose estimated costs exceed a
threshold amount for each HHRG. Five percent of total home health
payments are set aside for outlier payments.
Significant Change in a Beneficiary's Condition (SCIC)--An
HHA's payments can be modified within a patient's 60-day episode when
a significant change in a beneficiary's condition occurs. To obtain
this adjustment, an HHA must obtain the necessary change order from the
physician; note the required changes in treatment in the beneficiary's
plan of care; and complete a new OASIS evaluation, which will produce a
new case-mix adjustment factor. Payment will be an amount that is
proportional between the HHRG prior to the change and
the HHRG after the significant change in condition.
Partial Episode Payment--The partial episode payment adjustment
is made if a beneficiary transfers from one HHA to another HHA during a
60-day episode. The first HHA to provide care will have its payment
reduced by a portion equal to the amount of time during the 60-day
episode in which care was provided. The second HHA will conduct an
assessment, and a new, 60-day episode of care will begin.
Low Utilization Payment Adjustment (LUPA)--The PPS payment for
an agency is adjusted if a beneficiary's care is delivered in 4 or
fewer visits. The payment is a standardized, service-specific per-visit
amount multiplied by the number of visits actually provided during the
episode.
Background and Trends in Medicare HHA Utilization and Spending
During the first 10 years of the Medicare Program, home health
care accounted for less than 2 percent of total Medicare spending.
Although home health spending was increasing rapidly (at an average
annual rate of about 23 percent between 1970 and 1980), Medicare
spending overall was also increasing significantly (the average annual
rate of growth was about 17 percent between 1970 and 1980). Between
1980 and about 1990 home health grew to 2 to 3 percent of total program
spending reflecting the faster growth in home health spending than
Medicare as a whole. This small increase reflected the 1980
liberalizations in the home health benefit as well as the effect the
inpatient hospital prospective payment system had on overall Medicare
spending. Some analysts had predicted that the inpatient PPS (which
began in 1984) would lead to even larger growth in home health care
utilization by Medicare beneficiaries than had occurred in the prior
decade. However, home health care spending increases that might have
occurred as a result of the inpatient PPS were offset by changes in
the law and in certain administrative procedures. For instance, the 1984
Deficit Reduction Act required HCFA to reduce the number of ''fiscal
intermediaries'' with which HCFA contracts to process Medicare home
health care claims. These entities approve or deny beneficiary
eligibility for home health care as well as HHA claims for payment. As
HCFA reduced the number of fiscal intermediaries, eligibility and
claims decisions became more standardized. HCFA also intensified
educational programs for claims processors, required HHAs to submit
increased documentation with each claim, and increased the number of
claims subjected to in-depth medical reviews. The home health care
claims denial rate rose from 3.4 percent in 1985 to 7.9 percent in 1987.
These actions served to moderate the rate of growth of the home health
benefit.
A significant event in the history of the Medicare home health
benefit was settlement of a class action lawsuit filed in 1988 (Duggan
v. Bowen) which challenged HCFA's interpretation of the ''part-time or
intermittent'' provision in section 1861(m) of the Social Security Act.
As a result of the decision, HCFA revised the agency's policy regarding
the interpretation of the statutory language, changing the policy
interpretation from part-time and intermittent to part-time or
intermittent. This change allowed the number of visits to be increased
because they no longer had to be ''intermittent'' but could be made on
a daily basis.HCFA's revised guidelines also loosened the claims
procedures that had been tightened between 1985 and 1987. The revised
guidelines may have opened the door to eligibility for persons who have
ongoing medical problems that require personal care assistance
associated more with long-term care rather than acute care. From 1987
to 1997 the number of beneficiaries receiving home health services more
than doubled and the average number of visits per home care patient
increased more than threefold, from 23 visits in 1987 to 73 in 1997
(Table 2-25). During this time period, the number of HHAs participating
in Medicare also increased sharply, growing from 5,686 agencies in 1989
to 10,492 in 1997. This dramatic growth in the number of beneficiaries
served and the number of visits provided also resulted in similarly
dramatic increase in Medicare spending for home health. Home health
spending rose from $1.9 billion in 1987 to about $17.5 billion in 1997,
an average annual increase of almost 25 percent (Table 2-25). This
growth led to changes in payment in the BBA, as well as other provisions
that affected HHAs, and also led to scrutiny by the HHS Office of the
Inspector General and the General Accounting Office regarding fraudulent
practices by some home health agency operators. CMS changed a number of
practices regarding home health agencies and initiated a moratorium on
allowing new HHAs to enter the Medicare program from September 1997
through January 1998.
After the BBA, Medicare payments to HHAs decreased sharply,
falling more than 35 percent in the first full year the aggregate per
beneficiary cost limits were in place and an additional 24 percent in
the second year. The number of beneficiaries served decreased more than
10 percent a year for the three years after BBA passed. This decrease
was due to the stepped up program integrity activities directed at HHAs
and to a change in a qualifying service by BBA. The average number of
visits per beneficiary served also decreased dramatically, falling
almost 30 percent in the first full year after BBA due to the application
of the interim payment system.
After implementation of the HH PPS October 1, 2000, payments
increased by 8.5 percent in 2001 and by 13 percent in 2002. The number of
visits and, to a lesser degree, the number of beneficiaries served,
continued to decline after the implementation of PPS. In 2001, the
average number of visits per person dropped to 28 and the number of
beneficiaries served per thousand dropped to 71.
HOSPICE SERVICES
Coverage and benefits
Medicare covers hospice care for terminally ill beneficiaries,
in lieu of most other Medicare services related to the curative treatment
of their illness. Beneficiaries who elect hospice may still receive
curative treatments for illnesses or injuries unrelated to their
terminal illness and they may disenroll from hospice at any time.
Congress established the hospice benefit in the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA) for a period of 3 years. Congress
made the benefit permanent in the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA).
TABLE 2-25 -- MEDICARE HOME HEALTH AGENCY PAYMENTS, PEOPLE SERVED,
AND VISITS, CALENDAR YEARS 1987-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Hospice care emphasizes palliative medical care, that is, relief
from pain, and supportive social and counseling services for terminally
ill beneficiaries and their families. Services are provided primarily in
the patient's home. Hospice is designed to provide a broad range of
services including prescription drugs for pain control and symptom
management, skilled nursing care, physician services, home health aide
services, homemaker services, patient counseling, and family bereavement
counseling.
For a person to be considered terminally ill and eligible for
Medicare's hospice benefit, the beneficiary's attending physician and
the medical director of the hospice (or physician member of the hospice
team) must certify that the individual has a life expectancy of 6 months
or less. Beneficiaries electing hospice are covered for two 90-day
periods, followed by an unlimited number of 60-day periods. The medical
director or physician member of the hospice team must recertify at the
beginning of each period that the beneficiary is terminally ill. Services
must be provided under a written plan of care established and
periodically reviewed by the individual's attending physician and by
the medical director of the hospice.
Covered hospice services include the following: (1) nursing care
provided by or under the supervision of a registered nurse; (2) physical
or occupational therapy or speech-language pathology services; (3) medical
social services; (4) services of a home health aide who has successfully
completed a training program approved by the Secretary of the U.S.
Department of Health and Human Services (DHHS); (5) homemaker services;
(6) medical supplies (including drugs and biologicals) and the use of
medical appliances; (7) physician services; (8) short-term inpatient care
(including both respite care and procedures necessary for pain control
and acute and chronic symptom management); (9) counseling, including
dietary counseling, for care of the terminally ill beneficiary and for
family adjustment to the patient's death (bereavement counseling is not
a reimbursable service); and (10) any other item or service which is
specified in a patient's plan of care and which Medicare can pay for.
Medicare's hospice benefit is intended to be principally an
in-home benefit. For this reason, Medicare law prescribes that respite
care, or relief for the primary care giver of the terminally ill patient,
may be provided only on an intermittent, nonroutine, and occasional
basis and may not be provided consecutively over longer than 5 days.
In addition, the aggregate number of inpatient care days provided in any
12-month period to Medicare beneficiaries electing hospice care can not
exceed 20 percent of the total number of days of hospice coverage
provided to these persons.
Only two covered hospice servicesBoutpatient drugs or
biologicals and respite careBare subject to coinsurance. Outpatient
drugs and biologicals are subject to a coinsurance amount that
approximates 5 percent of the cost of the drug to the hospice program,
except that the amount may not exceed $5 per prescription. For respite
care, coinsurance equals 5 percent of program payments for respite, but
may not exceed Medicare's inpatient hospital deductible during a hospice
coinsurance period (defined as the period when hospice election is not
broken by more than 14 days).
Covered services must be provided by a Medicare-certified
hospice. Certified hospices must be either public agencies or private
organizations primarily engaged in providing covered hospice services
and must make services available on a 24-hour basis, in individuals'
homes, on an outpatient basis, and on a short-term inpatient basis.
Hospices must routinely and directly provide substantially all of the
following "core" services: nursing care, medical social services, and
counseling services. The remaining hospice services may be provided
either directly by the hospice or under arrangements with others. If
services are provided through arrangements with other providers, the
hospice must maintain professional management responsibility for all
such services, regardless of the facility in which the services are
furnished.
The hospice program must also have an interdisciplinary group of
personnel which includes at least one registered professional nurse and
one social worker employed by the hospice; one physician employed by or
under contract with the hospice; plus at least one pastoral or other
counselor.
Prospective Payment System
In implementing Medicare's hospice benefit, HCFA established a
prospective payment methodology in 1983. This early prospective payment
system pays hospices according to the general type of care provided to a
beneficiary on a daily basis. Unlike other PPSs there is no additional
adjustment for case mix. Like other PPSs that pay health care providers
for care to Medicare beneficiaries on the basis of predetermined, fixed
amounts, Medicare payments to hospices are intended to pay for the costs
of care for a hospice beneficiary, on average. That is, although the
payment is a predetermined daily rate, a hospice's actual costs may be
above or below that amount for an individual patient. The incentive
facilities have is to manage costs so that, on average, costs do not
exceed the PPS average amounts. Hospices that provide the services at
lower costs than the Medicare payment are able to keep the difference.
Unit of Payment-- Under the hospice prospective payment,
hospices are paid one of four prospectively determined rates, which
correspond to four different levels of care, for each day a Medicare
beneficiary is under the care of the hospice. Payment will thus vary by
the length of the patient's period in the hospice program as well as by
the characteristics of the services (intensity and site) furnished to
the beneficiary. Each rate is adjusted for the geographic location in
which the service is delivered to account for variations in area wages
as described below.
The four rate categories are:
1. Routine home careBRoutine home care payment is made for a day on
which an individual is at home and is not receiving continuous home
care. The routine home care rate is paid for every day a patient is
at home and under the care of the hospice regardless of whether the
hospice actually visits the home and regardless of the volume or
intensity of the services provided on any given day as long as fewer
than 8 hours of care is provided. The FY 2004 base routine home care
rate is $118.08 per day.
2. Continuous home careBContinuous home care payment is made
for a day on which an individual receives hospice care consisting
predominantly of nursing care on a continuous basis at home. Home
health aide or homemaker services or both may also be provided on a
continuous basis. Continuous home care is furnished only during brief
periods of crisis and only as necessary to maintain the terminally ill
patient at home. Home care must be provided for a period of at least
8 hours before it would be considered to fall within the category of
continuous home care. Payment for continuous home care will vary
depending on the number of hours of continuous services provided.
For FY 2004, the base continuous home
care rate is $689.18 for 24 hours or $28.72 per hour.
3. Inpatient respite careB Inpatient respite care payment is made for a
day on which the individual who has elected hospice care receives care
in an approved facility on a short- term (not more than 5 days at a
time) basis for the respite of his or her caretakers. For FY 2004, the
base inpatient respite care rate is $122.15 per day.
4. General inpatient careB General inpatient care payment is made for
a day on which an individual receives general inpatient care in an
inpatient facility for pain control or acute or chronic symptom
management which cannot be managed in other settings. Care may be
provided in a hospital, skilled nursing facility (SNF), or inpatien
unit of a freestanding hospice. For FY 2004, the base general inpatient
care rate is $525.28 per day.
Wage Adjustment--Each of the four payment rates is adjusted for
differences in wages between geographic areas. The labor-related
portion of the payment rate is approximately 69 percent. The hospital
wage index is used to adjust the labor-related portion of the hospice
payment rates. The use of the hospital wage index to adjust hospice
payments was determined using negotiated rulemaking. As a result, CMS
uses the most recent hospital wage index available at the time the
Federal Register notice announcing the wage index is published. In
addition, also as a product of the negotiated rulemaking, wage index
values greater than 0.8 are multiplied by a budget neutrality
adjustment. Wage index values below 0.8 are adjusted to be the greater
of: (1) a 15 percent increase, subject to a maximum wage index value of
0.8, or (2) the product of multiplying the hospital wage index value
for a given area by the budget neutrality adjustment. The budget
neutrality adjustment for FY 2004 is 1.061238. For FY 2004, the FY 2003
hospital wage index, adjusted as described above, will be used.
Payment Calculation--The applicable hospice rate category is
adjusted for the area wage index where the beneficiary served resides.
To calculate payment, the applicable rate category labor portion (in
column b of Table 2-26) is multiplied by the appropriate area wage
index (column c). The result is added to the non-labor portion of the
episode rate (column d). That sum (in column e) is the daily hospice
payment amount.
TABLE 2-26-EXAMPLE OF DAILY HOSPICE PAYMENT CALCULATION FOR A HOSPICE
LOCATED IN CHICAGO, IL FOR THE FOUR RATE CATEGORIES
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Cap Amount-- Medicare law requires that payments to a hospice
for care furnished over the period of a year be limited to a "cap
amount." The cap amount is a per beneficiary amount applied on an
aggregate rather than a case-by-case basis. Therefore, each individual
hospice's cap amount is calculated by multiplying the yearly per
beneficiary cap amount by the number of Medicare beneficiaries who
received hospice care from the hospice during the cap period. Medicare
defines a cap year as the period from November 1 through October 31 of
the following year. The hospice cap for the period November 1, 2002,
through October 31, 2003, is $18,661.29 per beneficiary per year, and
is not adjusted for variations in area wages.
Updates--Hospice daily payment rates for routine home care,
continuous home care, inpatient respite care, and general inpatient
care are updated annually by the increase in the hospital market basket.
For FY 2004 the update is the full hospital market basket increase of
3.4 percent.
The hospice cap amount is adjusted annually by the percentage
change in the medical care component of the Consumer Price Index for
All Urban Consumers (CPI-U).
Hospice program data
Table 2-27 shows that the number of hospices participating in
Medicare grew from 553 in July, 1988 to 2,325 in December, 2002.
Freestanding hospices grew at the fastest average annual rate (13
percent) followed by hospital-based hospices (10 percent) and home
health agency-based hospices (9 percent). Medicare payments for
hospice care in FY 1991 were $446 million and grew to $3.6 billion in
FY 2001, an average annual increase of 23 percent (Table 2-28). This
growth in spending was fueled by the increased number of beneficiaries
using the hospice benefit rather than an increase in the intensity of
services provided to beneficiaries. From FY 1991 through FY 2001, the
number of beneficiaries using Medicare's hospice benefit increased at
an average annual rate of 18 percent. However the average dollar amount
spent per beneficiary grew at a more modest 4 percent average annual
rate between FY 1991 and FY 2001. The number of days that a
beneficiary elects hospice care increased steadily from FY 1991 through
1995, then decreased between 1996 and 1999, before increasing in FY
2000 and FY 2001. The large declines in the number of days in the FY
1996 through FY 1999 period has been attributed to increased enforcement
of the "life expectancy" requirement. The increase in days in FY 2000
and 2001 is attributable to educational efforts by CMS regarding the
life expectancy requirement B that is, CMS wrote to hospices that
hospices will not be penalized if a beneficiary lives longer than 6
months and that the hospice benefit is not limited to 6 months. Of
the types of care provided by hospices, continuous home care grew at
the fastest rate over the FY 1991 through FY 2001 time period,
increasing at an average annual rate of 31 percent. Routine home
care had the next highest growth rate, an average annual rate of
24 percent, followed by physician services (21 percent) and general
inpatient care (19 percent).
TABLE 2-27--NUMBER OF HOSPICES PARTICIPATING IN MEDICARE BY TYPE OF
HOSPICE, 1988-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PART B SERVICES - COVERAGE AND PAYMENTS
PHYSICIANS' SERVICES
Coverage
Medicare provides coverage for physicians' services. This
category includes surgery, consultation, and home, office and
institutional visits. Certain limitations apply for services rendered
by dentists, podiatrists, and chiropractors and for the treatment of
mental illness. These are referred to as limited licensed practitioners.
Reimbursement - In General
Medicare pays for physicians' services on the basis of a fee
schedule which went into effect in 1992. The fee schedule assigns
relative values to services. Each of the approximately 7,500 physician
service codes is assigned its own relative value. Relative values
reflect three factors: physician work, practice expenses, and
malpractice costs. These relative values are adjusted for geographic
variations in the costs of practicing medicine. Geographically-
adjusted relative values are then converted into a dollar payment
amount by multiplying by a dollar figure known as the conversion
factor. The annual percentage update to the conversion factor equals
the Medicare economic index (which measures inflation) subject to an
adjustment to match spending for physicians' services under the
sustainable growth rate system.
TABLE 2-28 -- MEASURES OF MEDICARE HOSPICE CARE, SELECTED FISCAL
YEARS 1991-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Calculation of Fee Schedule
The fee schedule has three components: the relative value for
the service; a geographic adjustment, and a national dollar conversion
factor.
Relative Value--The relative value for a service compares the
relative physician work involved in performing one service with the
work involved in providing other physician' services. It also reflects
average practice expenses and malpractice expenses associated with the
particular service. The relative value for each service is the sum of
three components:
- Physician work component, which measures physician time,
skill, and intensity in providing a service;
- Practice expense component, which measures average practice
expenses
such as office rents and employee wages (which, for certain services
can vary depending on whether the service is performed in a facility,
such as an ambulatory surgical facility, or in a non-facility setting);
and
- Malpractice expense component, which reflects average
professional liability insurance costs.
Geographic Adjustment--The geographic adjustment is designed
to account for variations in the costs of practicing medicine. A
separate geographic adjustment is made for each of the three components
of the relative value unit, namely a work adjustment, a practice
expense adjustment, and a malpractice adjustment. These are added
together to produce an indexed relative value unit for the service for
the locality. There are 92 service localities nationwide.
(Table 2-29 shows the geographic indices used for the 2002-2003 period.)
The geographic adjustments are indexes that reflect cost
differences among areas compared to the national average in a ''market
basket'' of goods. The work adjustment is based on a sample of median
hourly earnings of workers in six professional specialty occupation
categories. The practice expense adjustment is based on employee wages,
office rents, medical equipment and supplies, and other miscellaneous
expenses. The malpractice adjustment reflects malpractice insurance
costs. The law specifies that the practice expense and malpractice
indices reflect the full relative differences. However, the work
index must reflect only one-quarter of the difference. Using only
one-quarter of the difference generally means that rural and small
urban areas would receive higher payments and large urban areas lower
payments than if the full difference were used.
Conversion Factor--The conversion factor is a dollar figure. The
payment for a service equals the geographically adjusted relative value
for the service multiplied by the conversion factor. The conversion
factor is the same for all services. The conversion factor is updated
each year. (See below.) The 2003 conversion factor, which became
effective March 1, 2003, is $36.7856. Anesthesiologists are paid under
a separate fee schedule which uses base and time units; a separate
conversion factor ($17.05 in 2003) applies.
Table 2-30 shows the conversion factors that have applied since
implementation of the fee schedule in 1992. For several years during
this period, more than one conversion factor applied. However,
beginning in 1998, one conversion factor applied for all services.
Annual Update to the Conversion Factor
The conversion factor is updated each year according to a
formula specified in law. The intent of the formula is to place a
restraint on overall spending for physicians' services. Several factors
enter into the calculation of the formula. These include: 1) the Medicare
economic index (MEI) which measures inflation in the inputs needed to
produce physicians services; 2) the sustainable growth rate (SGR) which
is essentially a target for Medicare spending growth; and 3) the update
adjustment factor which modifies the update, which would otherwise be
allowed by the MEI, to bring spending in line with the SGR target.
The SGR system was established because of the concern that the
fee schedule itself would not adequately constrain increases in
spending for physicians' services. While the fee schedule specifies a
limit on payments per service, it does not place a limit on the volume or
mix of services. The use of SGR targets is intended to serve as a
restraint on aggregate spending. The SGR targets are not limits on
expenditures. Rather the fee schedule update reflects the success or
failure in meeting the target. If total physician expenditures exceed
the target, the update for a future year is reduced. If expenditures
are less than the target, the update is increased.
TABLE 2-29--GEOGRAPHIC PRACTICE COST INDICES BY MEDICARE CARRIER AND
LOCALITY, 2002-2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-30--CONVERSION FACTORS: CALENDAR YEARS 1992-2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
General Requirements--The annual percentage update to the
conversion factor, equals the MEI, subject to an adjustment (known as
the update adjustment factor) to match target spending for physicians'
services under the SGR system. The conversion factor is further
adjusted to meet certain budget neutrality requirements.
Update Adjustment Factor--The update adjustment sets the
conversion factor at a level so that projected spending for the year
will meet allowed spending by the end of the year. Allowed spending
for the year is calculated using the SGR. However, in no case can the
update adjustment factor be less than minus 7 percent or more than plus
3 percent.
Beginning in 2001, the update adjustment factor is the sum of:
1) the prior year adjustment component, and 2) the cumulative adjustment
component. The prior year adjustment component is determined by: 1)
computing the difference between allowed expenditures for physicians'
services for the prior year and the amount of actual expenditures for
that year; 2) dividing this amount by the actual expenditures for that
year; and 3) multiplying that amount by 0.75. The cumulative adjustment
component is determined by: 1) computing the difference between allowed
expenditures for physicians' services from April 1, 1996 through
the end of the prior year and the amount of actual expenditures during
such period; 2) dividing that difference by actual expenditures for
the prior year as increased by the SGR for the year for which the
update adjustment factor is to be determined; and 3) multiplying that
amount by 0.33. Use of both the prior year adjustment component and
the cumulative adjustment component allows any deviation between
cumulative actual expenditures and cumulative allowed expenditures to be
corrected over several years rather than a single year.
Sustainable Growth Rate--The law specifies a formula for
calculating the SGR. It is based on changes in four factors: 1)
estimated changes in fees; 2) estimated change in the average number
of Part B enrollees (excluding Medicare+Choice beneficiaries); 3)
estimated projected growth in real gross domestic product (GDP) growth
per capita; and 4) estimated change in expenditures due to changes in
law or regulations.
By November 1 of each year, (using the best data available as
of September 1), CMS is required to publish in the Federal Register,
the SGRs for three time periods. These periods are the upcoming year,
the current year, and the preceding year. Thus the SGR is estimated
and revised twice, based on later data.
By November 1, 2002, CMS was to publish an estimate of the SGR
for CY2003, a revision of the CY2002 SGR estimated in 2001 and a
revision of the CY2001 SGR first estimated 2 years earlier and
revised 1 year earlier. Publication of these amounts was first
delayed until December 31, 2002. These amounts were subsequently
revised as a result of the enactment of the Consolidated Appropriations
Resolution, 2003 (CAR) (P.L.108-7) which allowed CMS to go back and use
actual data to determine the SGRs for FY 1998 and FY1999 for the
purposes of determining future fee schedule updates. Two factors in the
SGR calculation accounted for the major differences between estimated
and actual data. These were fee-for-service enrollment in Medicare
(because fewer people than expected enrolled in managed care) and
changes in the real per capita growth in the GDP. Changing the FY
1998 and FY 1999 numbers to reflect actual data had the effect of
increasing the SGR used for the calculation of the 2003 update.
Calculation of the Conversion Factor for 2002 and 2003
As noted above, the annual update to the conversion factor
reflects the MEI plus an adjustment to reflect the success or failure in
meeting the SGR target. In 2002, the update derived from these
calculations resulted in an update of: -4.8 percent. In addition,
certain required budget neutrality adjustments were made through
adjustments to the conversion factor. The final update to the
conversion factor was: -5.4 percent. Thus, the conversion factor
for 2002 ($36.1992) was 5.4 percent less than the conversion factor for
2001 ($38.2581). Despite the negative update in 2002, CBO estimates
that payments under the physician fee schedule increased from $40.4
billion in 2001 to $44.2 billion in 2002. This is largely attributable
to the increase in the volume of services provided to beneficiaries.
As noted, the law requires the fee schedule for the following
year to be issued by November 1. However, due to technical
complications, publication of the 2003 fee schedule was first delayed
until December 31, 2002. It would have provided for an additional
4.4 percent cut. It was revised on February 28, 2003 in response to
the enactment of the Consolidated Appropriations Resolution, 2003
(CAR) (P.L.108-7). As a result of the CAR provision, the update for
2003 is 1.6 percent. As a result of the delays, the 2003 fee schedule
became effective March 1, 2003.
Table 2-31 shows how the 2003 conversion factor was calculated.
The MEI for 2003 is 3.0 percent. The update adjustment factor (after
applying the formula described above) is 0.989. An additional statutory
reduction (-0.2 percent) applies in 2003. An additional budget
neutrality adjustment (-0.4) is made to account for the increase in work
relative values for anesthesia services resulting from the 5-year review.
This results in a 2003 conversion factor of $36.7856.
TABLE 2-31--CALCULATION OF THE 2003 CONVERSION FACTOR
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Bonus Payments
The law specifies that physicians who provide covered services
in any rural or urban health professional shortage area (HPSA) are
entitled to an incentive payment. This is a 10 percent bonus over the
amount which would otherwise be paid under the fee schedule. The bonus
is only paid if the services are actually provided in the HPSA, as
designated under the Public Health Service Act.
Limits on Beneficiary Liability
In General--Medicare payments are made for physicians' services
after the annual deductible requirement of $100 has been satisfied.
Payment is set at 80 percent of the fee schedule with beneficiaries
responsible for the remaining 20 percent, which is referred to as
coinsurance. Medicare payment is made either on an "assigned" or
"unassigned" basis. By accepting assignment, physicians agree to take
the Medicare fee schedule amount as payment in full. Thus, if assignment
is accepted, beneficiaries are not liable for any additional out-of-
pocket payments. In contrast, if assignment is not accepted,
beneficiaries may be liable for charges in excess of the Medicare
approved charge, subject to limits. This process is known as balance
billing.
When a physician agrees to accept assignment on all Medicare
claims in a given year, the physician is referred to as a participating
physician. Physicians who do not agree to accept assignment on all
Medicare claims in a given year are referred to as nonparticipating
physicians. It should be noted that the term "nonparticipating
physician" does not mean that the physician doesn't deal with Medicare.
Nonparticipating physicians still treat Medicare patients and receive
Medicare payments for providing covered services.. There are a number of
incentives for physicians to become participating physicians, the chief
of which is that the fee schedule payment amount for nonparticipating
physicians is only 95 percent of the recognized amount paid to
participating physicians. Additional incentives include more rapid
claims payment and widespread distribution of participating physician
directories. Nonparticipating physicians may not charge more than 115
percent of Medicare's allowed amount for any service. Medicare's allowed
amount for nonparticipating physicians is set at 95 percent of that for
participating physicians. Thus, nonparticipating physicians are only
able to bill 9.25 percent (115 percent times 95 percent) over the
approved amount for participating physicians.
Mental Health Services Payment Limitation--Certain mental
health services are subject to a payment limitation under which 50
percent cost-sharing, rather than 20 percent cost-sharing applies.
Services subject to the higher cost-sharing are services provided in
connection with the treatment of mental, psychoneurotic, and personality
disorders of a patient who is not an inpatient of a hospital. The term
"mental, psychoneurotic, and personality disorders" is defined as the
specific psychiatric conditions described in the American Psychiatric
Association's (APA) Diagnostic and Statistical Manual of Mental
Disorders. The payment limitation applies only to treatment services.
It does not apply to diagnostic services. Testing services performed
to evaluate a patient's progress during treatment are considered part
of treatment and are subject to the higher cost-sharing. The limitation
does not apply to partial hospitalization services that are not directly
provided by a physician.
Assignment and Participation Data
The total number of assigned claims as a percentage of total
claims received by Medicare carriers is known as the assignment rate.
Table 2-32 shows the assignment rate for services provided by physicians,
limited licensed practitioners (podiatrists, chiropractors, and
optometrists) and non-physician practitioners (such as nurse
practitioners and clinical social workers). The assignment rate declined
until the mid-1970s when the rate leveled off at about 50 percent. Since
1985, the rate has increased significantly, rising to 98.3 percent of
claims and 99.3 percent of covered charges in 2002. Table 2-33 shows
the state-by-state assignment rates for services provided by physicians
and limited licensed practitioners. Virtually all of these claims (when
measured as a percentage of covered charges) are paid on assignment. In
2002, the lowest such rate was in South Dakota and Idaho (94.9 percent)
while the highest rate (100 percent) was in Massachusetts. Physician
participation rates have risen significantly since the inception of the
participation program in 1984. For the calendar year 2002 participation
period, the physician participation rate (including limited licensed
practitioners) had risen to 89.7 percent, accounting for 96.7 percent
of covered charges (Table 2-34). Specialists in cardiovascular disease
had the highest assignment rates. Table 2-35 shows the participation
rates by specialty. Table 2-36 shows the percentage of participating
physicians and limited licensed practitioners as a percentage of total
physicians and limited licensed practitioners for each State.
TABLE 2-32--NET ASSIGNMENT RATES, IN PERCENT, SELECTED FISCAL YEARS
1969-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-33--PHYSICIAN ASSIGNMENT RATES AS PERCENT OF COVERED CHARGES
BY STATE, SELECTED YEARS 1985-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-34--MEDICARE PHYSICIAN PARTICIPATION RATES: PERCENT OF
PHYSICIANS AND LIMITED LICENSED PRACTITIONERS WITH AGREEMENTS AND
THEIR SHARE OF ALLOWED CHARGES, 1984-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-35--PARTICIPATION RATES AS PERCENTAGE OF PHYSICIANS, BY
SPECIALTY FOR SELECTED PARTICIPATION PERIODS, 1990-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-36--PHYSICIAN AND LIMITED LICENSED PRACTITIONER
PARTICIPATION RATES AS PERCENTAGE OF PHYSICIANS AND LIMITED
LICENSED PRACTITIONERS, BY STATE, FOR SELECTED PARTICIPATION
PERIODS 1985-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
NONPHYSICIAN PRACTITIONER SERVICES
Medicare covers certain services provided by nonphysician
practitioners such as nurse practitioners and physician assistants.
These practitioners are paid under the physician fee schedule and
are required to accept assignment on all claims. Nonphysician
practitioners are different from limited licensed practitioners
(such as podiatrists and chiropractors) who have the option of
whether or not to accept assignment.
Physician Assistants and Nurse Practitioners
Separate payments are made for physician assistant services,
when provided under the supervision of a physician. Separate payments
are also made for nurse practitioner services, provided in
collaboration with a physician. Payment for these services can only
be made if no facility or other provider charges are paid in connection
with the service. Payment equals 80 percent of the lesser of either
the actual charge or 85 percent of the fee schedule amount for the same
service if provided by a physician. For assistant-at-surgery services,
payment equals 80 percent of the lesser of either the actual charge or
85 percent of the amount that would have been recognized for a physician
serving as an assistant- at-surgery. The physician assistant may be in
an independent contractor relationship with the physician.
Certified Nurse Midwife Services
Certified nurse midwife services are paid at 65 percent of the
physician fee schedule amount.
Certified Registered Nurse Anesthetists
Certified registered nurse anesthetists are paid under the same
fee schedule used for anesthesiologists (see above). Payments for
services furnished by an anesthesia care team composed of an
anesthesiologist and a certified registered nurse anesthetist are capped
at 100 percent of the amount that would be paid if the anesthesiologist
were practicing alone. The payments are evenly split between each
practitioner.
Clinical Psychologists and Clinical Social Workers
Diagnostic and therapeutic services provided by clinical
psychologists are paid under the physician fee schedule. Payments for
services provided by clinical social workers are equal to 75 percent
of the amount allowed for clinical psychologists. Some services are
subject to the psychiatric services limitation which limits Medicare
payments for some services to 50 percent of incurred expenses.
Physical or Occupational Therapists
Payments for physical therapy and occupational therapy services
are made under the physician fee schedule. In 1999, an annual $1,500
per-beneficiary limit applied to all outpatient physical therapy services
(including speech-language pathology services), except for those
furnished by a hospital outpatient department (OPD). A separate $1,500
limit applied to all outpatient occupational therapy services except for
those furnished by hospital OPDs. Therapy services furnished as incident
to physicians' professional services were included in these limits.
The $1,500 limits were to apply each year, with updates for inflation
beginning in 2002. However, BBRA 1999 suspended application of these
limits in 2000 and 2001 and BIPA suspended application in 2002. Thus,
no limits applied in these 3 years. CMS implemented the limit $1,590
(reflecting inflation updates) September 1, 2003.
CLINICAL LABORATORY SERVICES
Coverage
Medicare provides coverage for diagnostic clinical laboratory
services. These services may be provided by an independent laboratory,
a physician's office laboratory, or a hospital laboratory to outpatients.
Laboratories must meet the requirements of the Clinical Laboratory
Improvement Act Amendments of 1988. This legislation, which focused on the
quality and reliability of medical tests, expanded Federal oversight to
virtually all laboratories in the country, including physician office
laboratories.
BBA 1997 required the Secretary to adopt uniform coverage
policies for laboratory tests using a negotiated rulemaking process. The
policies would be designed to eliminate variation among carriers and to
simplify administrative requirements. A final rule detailing national
coverage and administrative policies for labs paid under Part B was
published on November 23, 2001. It was effective November 25, 2002,
except that labs could request up to an additional 12 months to make
the necessary changes to their computer systems.
The rule establishes 23 national coverage determinations (NCDs)
for the most commonly ordered lab tests. For each of the 23 clinical
diagnosis lab service NCDs listed in the final rule, there is a list of
current procedural technology (CPT) codes identifying the test, panel
of tests, or group of tests covered under the NCD. In addition, for each
NCD there are 3 lists of diagnosis codes, known as ICD-9-CM codes
(International Classification of Diseases, Ninth Revision, Clinical
Modification). The first list, "ICD-9-CM codes covered by Medicare"
includes codes where there is a presumption of medical necessity,
though the claim may be subject to review. The second list, "ICD-9-CM
codes denied," includes lists of codes that are never covered. The
third list, "ICD-9-CM codes that do not support medical necessity"
include diagnoses that generally are not covered for the test, but for
which there are limited exceptions. Additional documentation could
support a determination of medical necessity in certain cases. For
each of the 23 NCDs, each ICD-9-CM code falls into one of the 3
ICD-9-CM lists.
Payment
Since 1984, Medicare has paid for clinical laboratory
services on the basis of a fee schedule. Fee schedules have been
established on a carrier service area basis. The law set the initial
payment amount for services performed in physicians' offices or
independent laboratories at the 60th percentile of the prevailing
charge established for the 12-month period beginning July 1, 1984.
Similarly, the initial fee schedule payment amount for services provided
by hospital-based laboratories serving hospital outpatients was set at
the 62d percentile of the prevailing charge level. Subsequent
amendments to the payment rules limited application of the hospital
fee schedule to "qualified hospitals." A qualified hospital is a sole
community hospital (as that term is used for payment purposes under
Medicare's hospital inpatient prospective payment system (IPPS)) which
provides some clinical diagnostic tests 24 hours a day in order to serve
a hospital emergency room which is available to provide services 24 hours
a day, 7 days a week.
Payments under the fee schedule equal the lesser of the actual
charge billed for the test, the local fee or the national limitation
amount (NLA). For tests for which NLAs were set before 2001, the NLA is
74 percent of the median of local fees. For tests for which NLAs are
first established after such date, the NLA is 100 percent of the median
of the local fees. A national minimum payment amount is established for
Pap smears; in 2003, this minimum payment is $14.76.
The fee schedule payment amounts have been increased periodically
since 1984 to account for inflation. The updates have generally occurred
on January 1 of each year. BBA 97 eliminated the updates for 1998-2002.
The update for 2003 is 1.1 percent.
Payment for clinical laboratory services (except for those
provided by a rural health clinic) may only be made on the basis of
assignment. Payment for clinical laboratory services equals 100 percent
of the fee schedule amount; no beneficiary cost sharing is imposed.
DURABLE MEDICAL EQUIPMENT AND PROSTHETICS AND ORTHOTICS
Medicare Part B covers a wide variety of medical supplies if
they are medically necessary and are prescribed by a physician. Under
the program, durable medical equipment (DME) includes such items as
hospital beds, blood glucose monitors, and wheelchairs. The benefit
also includes related supplies, such as drugs and biologicals that are
necessary for the effective use of the product. Guidelines define DME as
equipment that: (1) can withstand repeated use; (2) is used to serve a
medical purpose; (3) generally is not useful in the absence of an
illness or injury; and (4) is appropriate for use in the home. All of
these requirements must be met before an item can be covered.
Medicare also covers prosthetic devices. These are defined as
items that replace all or part of an internal body organ, such as
colostomy bags, pacemakers, and breast prostheses for postmastectomy
patients. Prosthetics and orthotics include such items as leg, arm,
back and neck braces, and artificial legs, arms, and eyes.
Reimbursement for durable medical equipment
Medicare pays for DME on the basis of a fee schedule originally
established by the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987).
Under the DME fee schedule, Medicare pays 80 percent of the lower of
either the item's actual charge or the fee schedule amount. The
beneficiary is responsible for the remaining 20 percent. Under the
fee schedule, covered DME items are classified into five groups: (1)
inexpensive or routinely purchased DME; (2) items requiring frequent
and substantial servicing; (3) customized items (equipment constructed
or modified substantially to meet the needs of an individual patient);
(4) other items of DME (frequently referred to as the ''capped rental''
category); and (5) oxygen and oxygen equipment. Some items that do not
meet the definition of DME, such as disposable surgical dressings,
are also covered under the fee schedule.
In general, the fee schedule payment rates for DME are
determined locally (on a statewide basis). However, these local
payments are subject to floor and ceiling limits determined nationally.
Medicare will not pay less than 85 percent of the weighted average of
all local payment amounts (floor), and will not pay more than 100
percent of this average (ceiling).
Prosthetics and orthotics are also paid according to a fee
schedule similar to the DME fee schedule. The payment rates are
determined regionally (there are 10 regions) and are subject to national
limits which also have ceilings and floors. The floor is 90 percent of
the weighted average of all regional payment amounts, and the ceiling is
120 percent of this weighted average.
The fee schedules are generally updated annually by the CPIBU.
However, BBA 1997 eliminated updates for DME for fiscal years 1998B2002.
In 2003, the update returned to the CPI-U. The update for prosthetics
and orthotics was limited to 1.0 percent through fiscal year 2002.
Subsequent legislation temporarily restored payment updates. For oxygen
and oxygen equipment, BBA 1997 set the national payment limits beginning
in fiscal year 1999 to 70 percent of 1997 levels.
Medicare pays for a few items of medical equipment on a
reasonable cost basis, rather than under the fee schedule. These include
medical supplies; home dialysis equipment; therapeutic shoes; parenteral
and enteral nutrients (PEN), equipment, and supplies; transfusion
medicine; and blood products. BBA 1997 authorized the Secretary to
establish fee schedules for these items. The final regulation,
issued August 2001, however, established a fee schedule only for PEN.
Its amounts are based on the reasonable charges that would have been
used in 2002. It will be updated by the CPI-U.
Table 2-37 shows total Medicare spending in calendar year 2001
for DME, prosthetics and orthotics, and certain other items.
TABLE 2-37--MEDICARE SPENDING FOR DURABLE MEDICAL EQUIPMENT, PROSTHETICS,
ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Inherent reasonableness authority--If the Secretary determines
that using standard procedures to calculate payment for an item under
the fee schedule results in an amount which is ''grossly excessive or
grossly deficient and not inherently reasonable,'' the Secretary is
authorized to increase or decrease the payment amount accordingly. The
authority to make these adjustments is generally referred to as the
inherent reasonableness authority. It involves a complex procedure of
investigation, commentary, and notification.
BBA 1997 sought to simplify the procedure and widen the
application of this authority, requiring that new criteria be
established for determining if a fee schedule charge was inherently
unreasonable, and the factors to be used in determining charges that are
realistic and equitable. Using these criteria, the Secretary would be
permitted to adjust payment levels. An interim final rule was issued in
December 2002. Significantly, the rule states that the inherent
reasonableness authority will not be used in situations where there is
less than a 15 percent difference between the current payment rate and
a proposed payment rate.
Administering the DME benefit
CMS enters into contracts with insurance companies known as
carriers under Part B of Medicare, to administer the program, i.e., to
process claims and make payments. In the case of DME, administration is
centralized in four regional carriers (known as DME regional carriers,
or DMERCs) who are responsible for processing claims for all
beneficiaries living within their areas. As a result of the
consolidation, which occurred in 1992, variation in coverage policy and
utilization patterns has been reduced. Suppliers provide Medicare
beneficiaries with medical equipment and bill the regional carrier in
their area. Before being issued a Medicare supplier number, suppliers
must comply with various standards, including maintaining a physical
location, being responsible for deliveries to beneficiaries and
honoring all product warranties, and providing proof of appropriate
liability insurance.
Competitive bidding
Investigations have shown that Medicare pays higher prices for
certain medical supplies than those paid by other health care insurers
and other government agencies, including the Department of Veterans
Affairs. BBA 1997 provided authority for Medicare to establish five
3-year demonstration projects under which suppliers competitively bid
for contracts to deliver specific items of DME to beneficiaries. The
first project was established in 1999 in Polk County, Florida. Suppliers
submitted bids, competing for the right to provide certain medical
equipment to the 92,000 Medicare beneficiaries in the area. Bids were
evaluated on the basis of quality and price. Numerous suppliers were
chosen for each item to maintain beneficiary access. The demonstration
project ended September 2002. A second demonstration project began
operations in San Antonio, Texas, in February 2001, where approximately
112,000 Medicare beneficiaries were involved. That project terminated
in December 2002. CMS estimated that competitive bidding in the two
projects resulted in overall savings of approximately 19.9 percent
over fee schedule prices.
HOSPITAL OUTPATIENT DEPARTMENT SERVICES
Table 2-38 summarizes the history of Medicare payments for
hospital outpatient services from 1974 through 2001. Medicare payments
increased almost 55-fold, from $323 million in 1974 to $17.7 billion in
2001, with annual rates of increase averaging as high as 26.5 percent
from 1974 to 1984, falling to 13.3 percent from 1984 to 1994. Most
recently, from 1995 to 2001, the annual rate of change has been 5.4
percent per year. The substantial rates of increase in OPD payments
per Part B enrollee (from $14 in 1974 to $563 in 2001) reflect the
increase in the volume of services provided in OPDs as well as growth
in payments for those services under the retrospective cost-based
payment system. Since 1974, hospital charges for outpatient services
provided to Medicare beneficiaries increased by almost 20 percent per
year, on average. Medicare's payments for OPD services increased by 16
percent per year during that time period. Medicare's payments for
covered OPD services as a proportion of hospital charges has declined
from nearly 70 percent in 1983 to 25 percent in 2001. This declining
ratio reflects primarily the high rates of increase in hospital charges
and, to a lesser extent, limits on the rate of increase in Medicare's
payments for outpatient services due to fee schedules and blended
payment formulas.
TABLE 2-38--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS
BY TYPE OF ENROLLMENT AND YEAR OF SERVICE, SELECTED YEARS 1974-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
As Table 2-39 shows, although the number of hospitals has
fallen over past decade (from 5,191 in 1991 to 4,347 in 2001), the
proportion of these hospitals that offer outpatient surgery and
emergency services has increased. Almost all hospitals provide
outpatient services and a significant percentage provide outpatient
surgery.
TABLE 2-39--PROVIDERS OF HOSPITAL OUTPATIENT SERVICES, SELECTED
YEARS 1991-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Medicare beneficiaries receive a wide range of services in
hospital outpatient departments (HOPD), from injections to surgical
procedures under general anesthesia. Services provided in HOPDs which
are paid under Medicare Part B include: (1) emergency room and clinic
services; (2) operating and recovery room services; (3) laboratory
and pharmacy services; (4) physical therapy and rehabilitation
services; (5) DME; and (6) chemotherapy and radiation therapy. HOPDs
also provide diagnostic and preventive procedures such as radiology,
computer axial tomography (CAT) scans, magnetic resonance imaging,
endoscopies, and colonoscopies. Table 2-40 shows the percent
distribution of HOPD charges by type of service provided to Medicare
beneficiaries in 2001. Radiology and laboratory services comprise about
a third of the total hospital outpatient charges.
TABLE 2-40--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT DEPARTMENT
CHARGES UNDER MEDICARE, BY TYPE OF SERVICE, 2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
In 2001, about 62 percent of the Medicare beneficiaries that
received fee-for-service Medicare used hospital outpatient services;
about 150 million outpatient services were paid for under the
outpatient prospective payment system (OPPS) implemented in short-
term general hospitals. In 2001, the first full year of the new
outpatient payment system, OPPS spending was $18.4 billion, including
$10.4 billion by the program and $8.0 billion in beneficiary cost
sharing. In 2001, beneficiary cost sharing (which has historically
been higher for hospital outpatient services than the typical 20
percent cost sharing for other Part B services) was about 42 percent
of total payments.
Background
In the early years of the Medicare program, Medicare paid
for both inpatient and outpatient hospital care based on a hospital's
reasonable costs attributable to providing covered services for
Medicare beneficiaries. Using these retrospective payment systems,
Medicare paid the allowable costs incurred in providing care, the
amount of which was determined and made after the service was rendered.
Medicare's payment systems for hospital inpatient care and outpatient
services were separated in 1983 when a new prospective system was
implemented for inpatient care. Under that arrangement, a hospital
receives a fixed payment, known in advance of providing care, covering
all care and services required by a patient during a hospital stay
(exclusive of physician fees) and determined by the diagnosis-related
group (DRG) into which the patient is classified at admission. However,
outpatient services remained under the costs-or-charges retrospective
payment arrangement. Throughout the 1980s, Medicare payments for
hospital outpatient services grew as the volume of services provided
in that setting increased. Although growth in the Medicare population
contributed to increased utilization of outpatient care, a substantial
share of the growth in the volume of outpatient services is attributable
to advances in medicine and technology that permit procedures formerly
restricted to the inpatient hospital setting to be provided safely on
an outpatient basis. Aggressive management of inpatient utilization
attributed to the incentives inherent in the IPPS payment system may
also have influenced the shift in care from hospital inpatient to
hospital outpatient departments. Outpatient services have become an
important revenue source for hospitals; outpatient revenue is relatively
more important to rural than to urban hospitals.
Since the early 1980s, Medicare's payments for HOPD services
have grown for reasons other than increased volume, and that growth is
often attributed to the lack of incentives for efficiency or cost
control inherent in the retrospective cost-based payment system.
Congress sought to contain the rate of increase in Medicare payments
for certain outpatient services by requiring implementation of fee
schedules to pay for those services. For example, Congress required
the Health Care Financing Administration (HCFA, now called the Centers
for Medicare & Medicaid Services, or CMS) to establish fee schedules
for many outpatient diagnostic laboratory procedures and tests; for
orthotics, prosthetics, and DME; dialysis for persons with end-stage
renal disease (ESRD); and surgeries that might also take place in
another outpatient setting such as ambulatory surgical centers (ASCs).
In the Omnibus Budget Reconciliation Acts of 1986 and 1990, Congress
directed the Secretary of Health and Human Services (the Secretary)
to develop a PPS for all HOPD care. In addition, to achieve more
immediate savings, legislation required across-the-board reductions in
Medicare payments for hospital operating costs and capital costs
(including those associated with outpatient care) starting in 1990.
Over time, a fairly complex set of Medicare payment rules for
outpatient hospital services evolved. Although Medicare implemented
fee schedules for some HOPD services, payment for other services
remained under the retrospective payment system. For instance, payments
for clinic and emergency room visits were paid based on the lesser of
a hospital's reasonable costs or customary charges. Certain surgeries
carried out in the HOPDs, but which are also approved by Medicare to be
provided in ASCs were paid the lower of costs, charges, or a blended
payment that incorporated the ASC fee schedule amount (again, excluding
physicians service which are paid separately). Payment for certain
radiology services and diagnostic procedures were based on a blended
payment that included, in part, the Medicare fee schedule for physician
services. Moreover, these blended payment calculations varied among
different types of hospitals.
The calculation of a beneficiary's coinsurance amount was
similarly complex. A beneficiary's coinsurance payment was calculated
based on 20 percent of the hospital's charges for those services where
Medicare's payment was based on 80 percent of the lower of reasonable
costs or customary charges. For most services, Medicare's payment was
offset by the beneficiary's payment, so that hospitals were not paid
more than 100 percent of the Medicare approved amount. Over time, as
charges for hospital outpatient services increased faster than hospital
costs (and Medicare's payments), beneficiaries' coinsurance payments
began to represent a larger and larger share of total payments to
hospitals for outpatient services. Also, for certain services, such
as ASC approved surgical procedures, Medicare's program payment was not
fully reduced by the beneficiary's coinsurance payment; hospitals
received payments that were greater than the Medicare approved amount.
These formula driven overpayments (FDOs) were estimated to be
approximately $850 million by industry representatives at the time of
implementation of OPPS.
Despite implementation of fee schedules, blended payment
amounts, and across-the-board reductions in payments, Medicare HOPD
payments rose at an annual rate of over 12 percent from 1983 to 1997
and increased from 7 percent to 20 percent as a share of all Medicare
payments to hospitals. Many saw the patchwork payment arrangements for
outpatient services as fraught with disincentives for hospitals to
provide care efficiently. Accordingly, BBA 1997 extended the across-
the-board reductions of 5.8 percent for operating costs and 10 percent
for capital costs through 1999 and directed the Secretary to implement
OPPS in 1999. BBA 1997 also eliminated the formula-driven overpayment,
effective at the start of FY1998, a move that resulted in an almost
immediate reduction in payments to hospitals. The legislation
established a buy-down procedure to reduce beneficiary cost sharing
for OPD services gradually to 20 percent of Medicare approved amounts.
Beneficiary coinsurance would be established at 20 percent of the median
of all hospital outpatient charges per procedure in 1996, updated to
the time of implementation of OPPS and ''frozen'' at those dollar
amounts. Over time, as Medicare's program payments under the new OPPS
increase with beneficiary payments frozen, the beneficiary payment
amounts would come to equal 20 percent of Medicare's PPS payments.
However, the buy down for those services where the difference between
the median charge and the PPS approved amount is large could take decades.
Under BBA 1997, hospitals were permitted to limit beneficiary copayments
to 20 percent voluntarily as well as disseminate information regarding
their reduced beneficiary charges.
The proposed OPPS regulations were published on September 8,
1998, for public comment with implementation of the new payment system
scheduled for implementation in 1999. Implementation of the changes
were delayed until after the start of the year 2000 in order to
accommodate resolution of Y2K data processing problems. In the
meantime significant legislative changes to OPPS were enacted.
The Balanced Budget Refinement Act (BBRA) required the implementation
of: (1) budget neutral outlier payments, within specified limits,
for certain high cost patients; (2) budget neutral pass-through
payments for certain new and innovative high cost devices, drugs, and
biologicals for 2-3 years; (3) a "2 times" rule which limits the cost
range of items or services that are included in any one APC (or
ambulatory payment classification which is the classification system
for outpatient services described subsequently) so that the highest cost
item or service in the group cannot be more than two times higher than
the lowest cost item or service within the group; (4) an annual review
and update of the APCs and relative weights; (5) transitional corridors
through 2003 which phase-in reductions in aggregate Medicare payments
that individual hospitals experience due to OPPS implementation; (6)
special ``hold harmless'' payments, for small, rural hospitals until
January 1, 2004, to ensure that they receive no less under OPPS than
they would have received in aggregate under the prior payment
system; (7) permanent hold harmless payments for cancer hospitals;
(8) a limit on beneficiary copayments for HOPD care set at the annual
beneficiary deductible for inpatient care; (9) a budget neutrality
benchmark for Medicare spending that includes beneficiary coinsurance
amounts paid under the prior system; (10) coverage of the cost of
implantable items; (11) use of either the mean or the median of hospital
costs when establishing relative APC weights; (12) across-the-board
reductions in payments for hospital operating costs and capital costs
until implementation of OPPS; and (13) use of the IPPS wage index that
accounts for hospitals' reclassification to different geographic areas.
Medicare's hospital outpatient payment system was subsequently modified
by BIPA to include: (1) scheduled reductions to beneficiary's coinsurance
payments from 2002 through 2006 until the maximum rate is 40 percent in
2006; (2) an increase in the 2001 update to the full increase in the
market basket as well as other increases to the 2001 OPPS rates; (3)
appropriate adjustments to the conversion factor in later years to
eliminate the effect of coding or classification changes; (4)
modifications to the procedures and standards by which certain
medical devices are categorized and determined eligible for pass-
through payments under the OPPS; and (5) a permanent hold harmless
provision for children's hospitals. Implementation of OPPS began
August 1, 2000.
Medicare's hospital outpatient payment system
The OPPS payment is intended to cover hospitals' operating and
capital costs for the facility services that are furnished. Under OPPS,
the unit of payment is the individual service or procedure as assigned to
one of about 570 ambulatory payment classification groups (APCs). Services
are classified into APCs based on their Healthcare Common Procedure Coding
System (HCPCS), a standardized coding system used to identify products,
supplies, and services for claims processing and payment purposes. Some
new services are assigned to certain ''new technology'' APCs based only
on similarity of resource use. Individual outpatient services that are
similar clinically and comparable in terms of resource utilization are
arranged into groups according to an APC system. To the extent possible,
integral services and items are bundled within each APC; for example, an
APC for a surgical procedure will include operating and recovery room
services, anesthesia, and surgical supplies. Each APC has a status
indicator to identify which particular OPPS payment policy is
applicable. For instance, payments for those APCs with a status
indicator of ''T'' are reduced if multiple procedures are performed on
the same visit; payments for those APCs with a status indicator of
''S'' are not reduced if multiple procedures are performed.
Medicare's payment for these services is calculated by
multiplying the relative weight associated with an APC by a conversion
factor. A relative value is established for each group and is the same
for each service assigned to the group. Except for the new technology
APCs, each APC has a relative weight that is based on the median cost
of services in that APC. The CY2003 APC relative weight calculation
used selected claims from April 1, 2001 through March 31, 2002. CMS
converted billed charges to costs using cost-to-charge ratios by cost
centers specific to each hospital. Data from claims with single or
multiple procedure codes were aggregated differently to establish the
median cost for each APC. The median costs of each APC was scaled to the
median cost associated with APC 0601, the mid-level clinic visit. The
relative weights for those APCs that significantly decreased from 2002
to 2003 were subject to a dampening calculation; the decrease was
limited to 15 percent plus half the difference of the remaining change
from 2002 to 2003.
New Technology APCs--In contrast to other APC groups, services
are assigned to the new technology APCs based on their expected costs;
the groups do not account for clinical aspects of its packaged services.
There are 17 new technology APCs that range from $0-$50 to $5,000 to
$6,000, with an additional category at $19,500-$20,500. The relative
weights for these APCs are set at the midpoint of the range. Services
are included in the new technology APCs for at least 2 years, but no more
than 3 years. To be considered for assignment into one of these APCs, the
technology must be a complete service or procedure that cannot be
adequately described by an existing payment category. The covered service
must be new and ineligible for an additional transitional pass-through
payment that is described subsequently. Spending in these new technology
APCs are not subject to a budget neutrality limit.
Like other Part B fee schedules, the conversion factor
translates the relative weights into dollar payment amounts. The
conversion factor for 2003 is $52.151. For most APCs, the conversion
factor is adjusted to account for geographic variations in cost. The
labor related portion (60 percent) of the conversion factor is adjusted
by the IPPS wage index accounting for hospital's geographic
reclassifications. The conversion factor is updated on a calendar year
schedule and the annual updates are based on the hospital market basket
(MB) offset by mandated budget neutrality factors associated with wage-
index changes, changes to APC groups, and the APC relative weights.
Currently, the 2003 HOPD update was the projected change in the hospital
inpatient MB of 3.5 percent adjusted by a budget neutrality factor of
0.98715.
Medicare's outpatient PPS includes budget neutral case level
adjustments including pass-through payments for new technology and
outlier payments for high-cost services. Transitional corridor
payments that limit hospitals' losses under OPPS have been established
through 2003 as well. Small rural hospitals with 100 or fewer beds
have such protections through 2003. Also, permanent hold harmless payments
for cancer, and children's hospitals have been established.
Transitional pass-through payments for new technology--
Transitional pass-through payments are supplemental payments to cover
the incremental cost associated with certain medical devices, drugs and
biologicals that are inputs to an existing service. The additional
payment for a given item is established for a limited period of time from
2 to 3 years and then the costs are incorporated into the APC relative
weights. By law, total pass-through payments are limited to a given
percentage of total OPPS payments. In 2003, spending on pass-through
items cannot exceed 2.5 percent of total outpatient PPS payments; in
CY2004 and subsequently, the percentage is 2.0 percent. If CMS
expects that pass-through payments will exceed this limit during a
year, the agency is required to impose a uniform reduction in pass-
through payments to meet that limit. CMS did not maintain the
required budget neutrality from August 2000 to April 2002.
Current drugs and biologicals that have been in transitional
pass-through status on or prior to January 1, 2000 were removed from
that payment status effective January 1, 2003. CMS established separate
APC payments for certain of these drugs, including selected orphan
drugs, blood and blood products, and selected higher cost drugs in
CY2003. CMS established a threshold of $150 per claim line for a drug
to qualify for a separate APC payment as a higher-cost drug, other
drugs that had qualified for a transitional pass-through payment were
packaged into procedural APCs. For example, in some instances,
brachytherapy seeds (radioactive isotopes used in cancer treatments)
were packaged into payments for brachytherapy procedures. The payment
rates for these APCs are based on a relative weight calculated in the
same way as procedural APCs are calculated.
Generally, medical devices as well as drugs and biologicals are
eligible for transitional pass-through payments when the cost of the
device is not insignificant in relation to the OPPS payment amount; no
existing or previously existing payment category is appropriate; and
payment was not being made for the device as a HOPD services as of
December 31, 1996. Under certain circumstances, the latter requirement
may not apply. The cost of a given drug, biological or device is
considered not insignificant in relation to the amount payable for the
applicable APC according to certain thresholds established by CMS.
Medicare payment for devices is based on the amount that a hospital's
charges, adjusted to costs exceeds the portion of the OPPS payment
associated with the device. Medicare payments for drugs and biologicals
is based on the difference between 95 percent of their average wholesale
price and the portion of the otherwise applicable APC payment rate
attributable to the existing drug, subject to a budget neutrality
provision. The pass-through amount for new drugs with a substitute
drug recognized in a separate drug APC payment is the difference
between 95 percent of new drug's AWP and the payment rate for the
comparable dose of the associated drug's APC. Although transitional
pass-through payments are subject to a budget neutrality requirement,
the applicable budget neutrality requirement (2.5 percent through
CY2003) was not effective until April, 2002. In 2002, after imposing
the uniform reduction, CMS paid hospitals about 72 percent of AWP for
transitional pass-through payments for these drugs and biologicals.
Outliers--Outlier payments are made for certain cases with
high costs relative to the payment rate for the applicable APC group.
In 2003, outliers are defined as services with estimated costs that
exceed a threshold of 2.75 times its APC payment rate. Hospitals
will be paid for 45 percent of the difference between the threshold
and the estimated cost of the service. Aggregate outlier payments
are limited to 2 percent of total OPPS payments and are financed by
reducing the conversion factor by 2 percent.
Transitional corridor payments--A hospital may receive
transitional corridor payments through 2003, the amount of which
will depend upon the difference between a hospital's OPPS payments
and what it would have received under the previous payment policy.
Corridor payments will compensate a significant portion of a
hospital's small loss and a smaller portion of a hospital's larger
loss. These payments have diminished over the transition period. In
2003, corridor payments will compensate a hospital up to 60 percent of
the difference that is less than 10 percent of what the hospital would
have received under the previous policy, but only 6 percent of any
difference that is greater than 10 percent.
AMBULATORY SURGICAL CENTER SERVICES
Services provided in an ambulatory surgical center (ASC) are
paid under Medicare Part B. An ASC is a facility where surgeries that
do not require an inpatient hospital admission are performed. ASCs
treat only patients who have already seen a health care provider and
for whom surgery has been selected as an appropriate treatment. All
ASCs must have at least one dedicated operating room and the equipment
needed to perform surgery safely and to provide for recovery from
anesthesia. Patients electing to have surgery in an ASC arrive for a
scheduled appointment on the day of the procedure, have the surgery in
an operating room, and recover under the care of the nursing staff
before leaving for home. According to MedPAC, the number of Medicare-
certified ASCs more that doubled from 1,460 in 1991 to 3,371 in 2001.
From 1997 through 2001, an average of over 270 new facilities began
participating in Medicare a year, an increase that was partially
offset by the average of 52 ASCs that closed or merged each year.
Medicare began covering ASC services in 1982 as a way to
reduce costs for surgeries generally carried out on a hospital
inpatient basis but that could be performed safely in a less costly
outpatient setting. ASCs must meet certain conditions specified by
Medicare in order to participate in the program. Some ASCs limit
services to one type of surgery, such as ophthalmology, and others
provide a variety of procedures, including gastroenterological,
orthopedic, pain block, urology, podiatry, and ear, nose, and throat
procedures. About half of all Medicare payments to ASCs in 2001 were
related to cataract removal or lens insertion.
Payment for ambulatory surgical centers
From the start of Medicare coverage of ASC services, Medicare
based its payments on a prospective payment fee schedule. This system
was one of the first applications of a fee schedule for outpatient or
ambulatory care. The two primary cost components of a surgical
procedure are the physician's (or practitioner's) professional fees
for performing the procedure and the costs associated with services
furnished by the facility where the surgery is performed. Medicare pays
ASCs for facility and nonphysician personnel costs incurred in connection
with performing specific surgical procedures. As with other Medicare
services, physician and certain practitioner fees are paid under the
physician fee schedule.
Currently, over 2,400 procedures are included on the Medicare-
approved list of ASC procedures. CMS determines which procedures will
constitute the ASC list on the basis of certain criteria related to the
safety, appropriateness, and effectiveness of performing the procedure
in an ASC setting. CMS is required by law to update the list of
procedures performed in ASCs that are eligible for Medicare pavement.
The list of approved procedures was most recently updated in 2003.
These Medicare-approved ASC procedures are consolidated into 9 payment
groupings, each of which has one payment amount. The national payment
rate for each of the groups equals the estimated median cost of
procedures in the group. CMS adjusts the labor-related portion of the
rate (currently 34.45 percent) using the hospital wage index for the
ASC's location. Payments are also adjusted when multiple surgical
procedures are performed at the same time. Generally, the ASC
will receive full payment for the most expensive procedure and will
receive 50 percent payment for the other procedures.
Medicare is required to update ASC rates every 5 years based
on a survey of the actual audited costs incurred by a representative
sample of ASCs for a representative sample of procedures. Between
revisions, the rates are to be increased by the Consumer Price Index
for All Urban Consumers (CPI-U). However, for fiscal years 1998-2002,
BBA 1997 reduced the annual update to the CPI-U increase minus
2 percentage points. ASC's received an increase of approximately
2 percent for FY2003. The current projection of the CPI-U for
FY2004 is 1.0145 percent.
For services on or after October 1, 2003, Medicare's base
rates (prior to geographic adjustments) for ASC services are:
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Proposed changes to ASC Medicare payments
On June 12, 1998, HCFA issued proposed rules which would make
major changes in Medicare payments to ASCs. The major changes include
replacing the payment groupings with an APC system comprised of 105
payment groups; updating underlying cost data using 1994 survey data
updated to the present; and making additions to and deletions from the
list of Medicare covered ASC procedures. Payments would range from $53
to $2,107 and would be updated by the CPI-U annually on a calendar year
basis. BBRA 1999 did not address ASC payment rates, the proposed APC
system, or update procedures. However, it requires that, if the
Secretary implements new rates based on the 1994 data (or any rates
based on pre-99 Medicare cost survey data), those new rates must be
phased in by basing payments one-third on the new rates in the first
year, two-thirds in the second year, and fully in the third year.
BIPA prohibited implementation of a revised payment system for ASC
facility services before January 1, 2002, extended the phase in of
the APC system for ASCs to 4 years and required that by January 1,
2003, ASC rates be rebased using data from a 1999 or later Medicare
survey. In its March 28, 2003 regulation, CMS stated that it has
developed an ASC survey instrument, but believes that developing
useful cost data will take at least 2 years. Moreover, CMS is
studying its rate setting approach to ensure that its ASC payment
system does not inadvertently worsen payment differentials across the
various ambulatory sites of service that provide the same care.
AMBULANCE SERVICES
Covered Services
Medicare covers ambulance services only if they are furnished
to a beneficiary whose condition is such that other means of
transportation are contraindicated. The beneficiary's condition
must require both the transportation itself and the level of service
provided in order for the billed service to be considered medically
necessary. Nonemergency transportation is considered appropriate
if: 1) the patient is bed confined and it is documented that the
beneficiary's condition is such that other methods of transportation
are contraindicated; or 2) if the medical condition is such that
ambulance transportation is required. Special rules apply for
nonemergency services. In the case of scheduled repetitive services, the
ambulance provider or supplier must obtain an order from the
beneficiary's attending physician; the order must certify that the
medical necessity requirements have been met. The following requirements
apply for services that are unscheduled, or scheduled on a nonrepetitive
basis:
- The ambulance provider or supplier must obtain, within 48 hours
after transport, a written order from the beneficiary's attending
physician if the beneficiary is a resident of a facility. No order is
required for a beneficiary residing at home or not under the care of a
physician.
- If the ambulance provider or supplier is unable to obtain the
statement from the attending physician, then a statement must be
obtained from a physician assistant, nurse practitioner, clinical nurse
specialist, registered nurse or discharge planner. Such individual
must have personal knowledge of the beneficiary's condition at the
time the transport is ordered or the service is furnished. The
individual must be employed by either the patient's attending
physician, or the hospital or facility where the beneficiary is
being treated and from which the beneficiary is transported.
- If the required certification is not obtained within 21 days,
the supplier must document attempts to obtain such certification.
Medicare covers transportation from the point of origin to
the nearest hospital, critical access hospital or skilled nursing
facility that is capable of furnishing the required level and type of
care for the beneficiary's illness or injury.
The facility must have available the type of physician or physician
specialist needed to treat the beneficiary's condition. The program
also covers trips from such facilities to the beneficiary's home. In
addition, the program covers trips from a SNF to the nearest supplier of
medically necessary services not available at the SNF where the
beneficiary is a resident. Beneficiaries receiving renal dialysis
treatments for ESRD can be transported to the nearest facility
furnishing such services.
Payments for Services
Medicare pays for ambulance services on the basis of a fee
schedule. The fee schedule, which went into effect April 1, 2002, is
being phased-in over a five-year period. This fee schedule replaces
the reasonable cost payment system that had applied for hospital
providers of ambulance services and the reasonable charge payment
system that had applied to other suppliers of ambulance services.
(Critical access hospitals are exempt from the fee schedule and continue
to be paid for ambulance services on the basis of reasonable costs.)
During a transition period (2002- 2006), payment under the
program is based on a blend with a gradually increasing portion of the
payment based on the fee schedule and a decreasing portion on the former
payment methodology. In 2002, the payment equaled 20 percent of the
fee schedule plus 80 percent of the previous reasonable cost or charge
rates. In 2003, the blend is 40 percent of the fee schedule rates and
20 percent of cost or charge rates. In 2004, the blend will be 60
percent of the fee schedule, 40 percent of the cost or charge rates; in
2005 the blend will be 80 percent of the fee schedule and 20 percent of
the cost or charge rates. In 2006, the payment will be based entirely
on the fee schedule.
The fee schedule establishes seven categories of ground
ambulance services and two categories of air ambulance services. The
ground ambulance categories are: basic life support (BLS), both
emergency and nonemergency; advanced life support Level 1 (ALS1), both
emergency and nonemergency; advanced life support level 2 (ALS2);
speciality care transport (SCT); and paramedic ALS intercept (PI). The
air ambulance categories are: fixed wing air ambulance (FW) and rotary
wing air ambulance (RW).
The fee schedule payment for an ambulance service equals a base
rate for the level of service plus payment for mileage. Geographic
adjustments are made to a portion of the base rate to reflect the
relative costs of providing services in various areas of the country.
Additionally, the base rate is increased for air ambulance trips
originating in rural areas and mileage payments are increased for
all trips originating in rural areas.
The calculation for ground ambulance services is made as
follows:
- The relative value assigned to the category of service is
multiplied by the national dollar conversion factor. This is the
unadjusted base rate.
- Seventy percent of the unadjusted base rate is multiplied by the
geographic practice expense adjustment used for the physician fee
schedule. This is added to thirty percent of the unadjusted base rate.
The sum is the adjusted base rate.
- A mileage calculation is made. For urban areas, the regular
mileage rate is multiplied by the number of miles. For rural areas,
the regular mileage rate is increased by fifty percent for miles 1 -
17 and by 25 percent for miles 18 - 50; the regular mileage rate
applies for all miles over 50. (No mileage rate applies for paramedic
ALS intercept services).
- The adjusted base rate payment amount is added to the mileage
payment. The sum is the fee schedule payment amount.
There are no relative values or conversion factor for air
ambulance services.
The fee schedule amount for these services is calculated as follows:
- Fifty percent of the published unadjusted base rate (for fixed
or rotary wing, as appropriate) is multiplied by the geographic
practice expense adjustment used for the physician fee schedule.
This is added to fifty percent of the unadjusted base rate. The sum
is the adjusted base rate payment.
- A mileage calculation is made by multiplying the mileage rate
by the number of miles.
- The adjusted base rate payment amount is added to the mileage
payment.
The sum is the fee schedule payment amount.
For both ground and air ambulance services in 2003, 40 percent
of the fee schedule payment amount is added to 60 percent of the payment
calculated using the reasonable charge or cost method (whichever is
appropriate) to give the actual payment amount.
The fee schedule amount is updated each year by the CPI-U. The
update for 2003 is 1.1 percent.
HOME HEALTH SERVICES
Home health services are covered under both Medicare Part A
and Medicare Part B. For a discussion of the benefit, see Part A
discussion above.
PRESCRIPTION DRUGS
Coverage
Medicare beneficiaries who are inpatients of hospitals or
skilled nursing facilities may receive drugs as part of their treatment.
Medicare payments made to the facilities cover these costs. Medicare
also makes payments to physicians for drugs or biologicals which cannot
be self-administered. This means that coverage is generally limited to
drugs or biologicals administered by injection. However, if the
injection is generally self-administered (e.g., insulin), it is not
covered.
In general, Medicare does not cover outpatient prescription
drugs.
However, despite the general limitation, the law specifically
authorizes coverage for the following:
- Immunosuppressive Drugs-Drugs used in immunosuppressive therapy
(such as cyclosporin) for individuals who have received a Medicare
covered organ transplant.
? Erythropoietin (EPO). EPO for the treatment of anemia for
persons with
chronic renal failure who are on dialysis.
- Oral Anti-Cancer Drugs. Drugs taken orally during cancer chemotherapy
providing they have the same active ingredients and are used for the same
indications as chemotherapy drugs which would be covered if they were
not self-administered and were administered as incident to a physician's
professional service. Also included are oral anti-nausea drugs used as part
of an anti-cancer chemotherapeutic regimen.
- Hemophilia clotting factors. Hemophilia clotting factors for
hemophilia patients competent to use such factors to control bleeding
without medical supervision, and items related to the administration of
such factors.
- Drugs that are necessary for the effective use of covered
durable medical equipment, including those which must be put directly
into the equipment (e.g., tumor chemotherapy agents used with an
infusion pump).
- Injectable osteoporosis drug approved for treatment of post-
menopausal osteoporosis provided by a home health agency to a homebound
individual whose attending physician has certified suffers from a bone
fracture related to post-menopausal osteoporosis and the individual is
unable to self-administer the drug.
The program also covers the following immunizations:
- Pneumococcal pneumonia vaccine. The vaccine and its
administration to a beneficiary if ordered by a physician.
- Hepatitis B vaccine. The vaccine and its administration to a
beneficiary who is at high or intermediate risk of contracting
hepatitis B.
- Influenza virus vaccine. The vaccine and its administration
when furnished in compliance with any applicable State law. The
beneficiary may receive the vaccine upon request without a physician's
order and without physician supervision.
Payments
Payments for these drugs and immunizations are made under
Medicare Part B. The payment for a drug equals 95 percent of the
average wholesale price (AWP). On December 3, 2002, CMS sent a notice
to contractors announcing the establishment of a single national price
for each Medicare covered drug whose payment allowance is based on 95
percent of the AWP. Effective January 1, 2003, individual fiscal
intermediaries and carriers no longer make the AWP determinations.
Rather, they rely on the single drug pricer (SDP) files sent to them by
CMS and process claims on the basis of the price shown on the applicable
file. The new policy does not apply to drugs billed to DMERCs (durable
medical equipment regional carriers) because DMERC-paid drug allowances
are already consistent nationally. The policy also does not apply to
hospital outpatient drugs (except blood clotting factors) because the
payment allowance for such drugs is determined by a different procedure.
Medicare pays 80 percent of the recognized payment amount after
the beneficiary has met the $100 Part B deductible. The beneficiary is
liable for the remaining 20 percent coinsurance charges. These Part B
cost-sharing charges do not apply for pneumococcal pneumonia or influenza
vaccines.
OTHER PART B SERVICES
Preventive services
Screening mammograms--Medicare covers an annual screening
mammography for all women over age 40. Payment for the mammogram is
made under the physicians' fee schedule.
Screening Pap smears; pelvic exams--Medicare authorizes coverage
for a screening Pap smear and a screening pelvic exam once every 2 years;
annual coverage is authorized for women at high risk. Payment is based on
the clinical diagnostic laboratory fee schedule (see above). A national
minimum payment for Pap smears is established. In 2003, this is $14.76.
Prostate cancer screening tests--Medicare covers an annual
prostate cancer screening test for men over age 50. The test can consist
of any (or all) of the following procedures: (1) a digital rectal exam;
(2) a prostate-specific antigen blood test; and (3) such other
procedures as the Secretary finds appropriate for the purpose of early
detection of prostate cancer.
Colorectal cancer screening--The law authorizes coverage of and
establishes frequency limits for colorectal cancer screening tests. A
covered test is any of the following procedures furnished for the
purpose of early detection of colorectal cancer: (1) screening fecal-
occult blood test (for persons over 50, no more than annually); (2)
screening flexible sigmoidoscopy (for persons over 50, no more than one
every 4 years after a previous sigmoidoscopy or more than one every 10
years following a screening colonoscopy); (3) screening colonoscopy (no
more than one every 2 years for high-risk individuals and no more
than one every 10 years (or no more than 4 years after a screening
flexible sigmoidoscopy) for other persons; and (4) such other procedures
as the Secretary finds appropriate for the purpose of early detection
of colorectal cancer. Barium enema tests, as an alternative to either a
screening flexible sigmoidoscopy or a screening colonoscopy, are
covered in accordance with the same screening parameters specified for
those tests. Services are paid under the physician fee schedule (except
that fecal occult blood tests are paid under the laboratory fee
schedule). A facility payment may also apply if services are performed
in an ambulatory surgical center or hospital outpatient department.
Diabetes Outpatient Self-Management Training--Medicare's covered
benefits include diabetes outpatient self-management training services.
These services are defined as including educational and training
services furnished to an individual with diabetes by a certified
provider in an outpatient setting. They are covered only if the
physician or qualified non-physician practitioner who is managing the
individual's diabetic condition certifies that the services are needed.
Services must be provided under a comprehensive plan of care to ensure
therapy compliance or to provide the individual with necessary skills
and knowledge (including skills related to the self-administration of
injectable drugs) to participate in the management of their own
condition. Certified providers for these purposes are defined as
physicians or other individuals or entities that, in addition to
providing diabetes outpatient self-management training services,
provide other items or services reimbursed by Medicare. Providers must
meet quality standards established by the Secretary. CMS currently
accepts recognition of the American Diabetes Association (ADA) as
meeting the National Standards for diabetes self-management training
programs.
Medical Nutrition Therapy Services--Medicare authorizes
coverage of medical nutrition therapy services (MNT) for certain
beneficiaries who have diabetes or a renal disease. Services include
nutritional, diagnostic, therapy and counseling services furnished by a
registered dietician or nutrition professional, pursuant to a referral by
a physician. Effective October 1, 2002, basic coverage of MNT for the
first year a beneficiary receives MNT with either a diagnosis of renal
disease or diabetes is 3 hours. Basic coverage in subsequent years for
renal disease or diabetes is 2 hours. The dietitian/nutritionist may
choose how many units are performed per day as long as all of the other
requirements are met. If the treating physician determines that
receipt of both MNT and diabetes self-management training is medically
necessary in the same episode of care, Medicare will cover both in
the initial and subsequent years without decreasing either benefit as
long as they are not provided on the same date of service. The
dietitian/nutritionist may choose how many units are performed per day.
In all cases, additional hours are considered to be medically necessary
and covered if the treating physician determines that there is a change
in medical condition, diagnosis, or treatment regimen that requires a
change in MNT and orders additional hours during that episode of care.
Payment equals 85 percent of the amount established under the physician
fee schedule for the service if it had been furnished by a physician.
Bone mass measurements--Bone mass measurement is covered for
the following high risk persons: an estrogen-deficient woman at clinical
risk for osteoporosis; an individual with vertebral abnormalities; an
individual receiving long-term glucocorticoid steroid therapy; an
individual with primary hyperparathyroidism; or an individual being
monitored to assess osteoporosis drug therapy. Payments are made under
the physician fee schedule. In general, the services are covered if
they are provided no more frequently than once every 2 years.
Glaucoma Screening--The program provides for annual coverage
for glaucoma screening for beneficiaries in the following high risk
categories: (1) individuals with diabetes mellitus, (2) individuals
with a family history of glaucoma, or (3) African-Americans age 50
and over. Medicare will pay for glaucoma screening examinations
when they are furnished by or under the direct supervision in the
office setting of an ophthalmologist or optometrist, who is legally
authorized to perform the services under State law. Payments are made
under the physician fee schedule.
Telehealth
Medicare pays for services which are furnished via a
telecommunications system by a physician or practitioner,
notwithstanding the fact that the individual providing the service is
not at the same location as the beneficiary. Payment to the physician
or practitioner furnishing the service is equal to the amount that
would be paid if the service had been furnished without the use of a
telecommunications system. A facility fee is paid to the originating
site (i.e. the site where the beneficiary is when the service is
provided.) The fee equals the amount established for the preceding
year, increased by the percentage increase in the Medicare economic
index (MEI). The 2003 amount is $20.60.
Rural Health Clinics and Federally-Qualified Health Centers
Medicare covers services furnished by a qualified rural health
clinic (RHC) located in an area which has a shortage of health
personnel. The covered services RHCs may offer are divided into two
basic groups-- rural health clinic services and other medical and
other health services covered under Part B. Items and services which
meet the definition of rural health clinic services are physicians'
services; services and supplies incident to a physician's services;
nurse practitioner and physician assistant services (including the
services of specialized nurse practitioners and nurse midwives) that
would be covered if furnished by a physician, provided the nurse
practitioner or physician assistant is legally permitted to perform
the services by the State in which they are performed; services and
supplies incident to the services of nurse practitioners and physician
assistants that would be covered if furnished incident to a physician's
services; and visiting nurse services to the homebound. The program
also covers services in Federally-qualified health centers (FQHCs).
Covered services include those covered in RHCs as well as preventive
primary services.
Payments for RHC and FQHC services are based on an all
inclusive rate for each beneficiary visit for covered services. An
interim payment is made to the entity based on estimates of allowable
costs and number of visits; a reconciliation is made at the end of the
year based on actual costs and visits. Per visit payment limits are
established for all RHCs (other than those in hospitals with fewer than
50 beds) and FHQCs. Payment limits are updated on January 1 of each
year by the Medicare economic index (MEI) which measures inflation for
certain medical services. Because of the delay in implementing the MEI,
there was one update on January 1, 2003 and a second one on March 1,
2003. For services provided January 1, 2003 - February 28, 2003, the
RHC upper payment limit was $66.46, the urban FQHC limit was $103.18
and the rural FQHC limit was $88.71. For services provided March 1,
2003- December 31, 2003, the RHC upper payment limit is $66.72, the
urban FQHC limit is $103.58, and the rural FHQC limit is $89.06.
Assignment is mandatory; no deductible applies for FQHC services.
Comprehensive Outpatient Rehabilitation Facilities (CORFs)
A comprehensive outpatient rehabilitation facility (CORF) is a
public or private institution that is engaged primarily in providing
(by or under the supervision of physicians) diagnostic, therapeutic, and
restorative services on an outpatient basis for the rehabilitation of
injured, disabled or sick persons. The facility must provide at least
the services of physicians (who are available to the facility on a full
or part-time basis), physical therapy, and social or psychological
services. Covered services also include occupational therapy, speech
language pathology services, respiratory therapy, prosthetic and
orthotic devices, nursing care, drugs which cannot be self-administered,
supplies, and durable medical equipment. Payments for services are
made under the physician fee schedule. Therapy services are subject to
the therapy payment limitations (described above, for physical and
occupational therapy providers). Mental health services are subject to
the payment limitation for mental health services (described above).
Partial Hospitalization Services
Medicare covers partial hospitalization in connection with the
treatment of mental illness. The services are covered only if the
individual would otherwise require inpatient psychiatric care. The
course of treatment must be prescribed, supervised, and reviewed by a
physician. Services must be provided under a program which is hospital-
based or hospital affiliated and must be a distinct and organized
intensive ambulatory treatment service offering less than 24-hour daily
care. The program may also be covered when provided by a community
mental health center.
Payment for professional services is made under the physician
fee schedule. Other services are paid under the hospital outpatient
prospective payment system.
END-STAGE RENAL DISEASE SERVICES
COVERAGE
Medicare's End-Stage Renal Disease (ESRD) Program was
established in the Social Security Amendments of 1972, and covers
beneficiaries regardless of age. Eligible individuals have severe
impairment of kidney function as a result of diabetes, hypertension, or
other diseases that lead to ESRD. Prior to passage of the 1972
Amendments, treatment for ESRD was limited to a few individuals because
of its high cost and the limited number of dialysis machines. ESRD is
invariably fatal without treatment. Treatment takes two forms:
transplantation and dialysis.
Beneficiaries must be: (1) fully insured for Old-Age and
Survivors Insurance benefits; (2) entitled to monthly Social Security
benefits; or (3) spouses or dependents of individuals described in (1)
or (2). Such individuals must be medically determined to be suffering
from ESRD and must file an application for
benefits.
Benefits include all Part A and Part B medical items and
services. ESRD beneficiaries are automatically enrolled in the Part
B portion of Medicare and are required to pay the monthly Part B
premium. Medicare coverage begins on the first day of the third month
after the beneficiary begins a course of renal dialysis. In the case
of a transplant candidate, coverage can begin as early as the month in
which the patient is hospitalized for transplantation. No new waiting
period is required when a beneficiary's entitlement has ended and the
beneficiary needs to begin another course of dialysis or receive
another kidney transplant. Medicare+Choice (M+C) plans may provide
ESRD benefits to the Medicare beneficiary who is already enrolled in a
M+C organization and subsequently develops ESRD. However, beneficiaries
who have been recently diagnosed with ESRD cannot join a M+C plan.
Table 2-41 shows expenditures, number of beneficiaries, and the
average expenditure per person for all persons with ESRD (including the
aged and disabled) from 1974 through 2005. Total projected program
expenditures for the Medicare ESRD Program for fiscal year 2003 are
$15.0 billion; for fiscal year 2005, they are estimated to increase
to $17.4 billion. In fiscal year 2003, there are an estimated 397,270
beneficiaries, including successful transplant patients and persons
entitled to Medicare on the basis of age or disability who also have
ESRD.
When the ESRD Program was created, it was assumed that program
enrollment would level out at about 90,000 enrollees by 1995. That mark
was passed several years ago, and no indication exists that enrollment
will stabilize soon. Table 2-42 shows that new enrollment for all
Medicare beneficiaries receiving ESRD services grew at an average annual
rate of 6.8 percent from 1991 to 2000. Most of the growth in program
participation is attributable to growth in the numbers of elderly people
receiving services and growth in the numbers of more seriously ill people
entering treatment. Table 2-42 shows the greatest rate of growth in
program participation is in people over age 75, at 10.1 percent,
followed by people of ages 65-74 with a growth rate of 4.4 percent. The
largest rate of growth in primary causes of people entering ESRD
treatment was diabetes. People with diabetes frequently have multiple
health problems, making treatment for renal failure more difficult.
TABLE 2-41--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM
EXPENDITURES, SELECTED FISCAL YEARS 1974-2005
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The rates of growth in older and sicker patients entering
treatment for ESRD indicate a shift in physician practice patterns. In the
past, most of these people would not have entered dialysis treatment
because their age and severity of illness made successful treatment for
renal failure less likely. Although the reasons that physicians have begun
treating older and sicker patients are not precisely known, it is clear
that these practice patterns have resulted, and will continue to result,
in steady growth in the number of older patients receiving Medicare's
ESRD services.
Outpatient Immunosuppressive Drug Coverage
Although the capability to perform transplants had existed since
the 1950s, problems with rejection of transplanted organs limited its
treatment for renal failure. The 1983 introduction of a powerful and
effective immunosuppressive drug, cyclosporin, resulted in a dramatic
increase in the number of transplants being performed and the success rate
of transplantation. Medicare currently pays 80 percent of the cost for
immunosuppressive drugs required after a covered Medicare
transplantation.
TABLE 2-42--INCIDENT COUNTS OF REPORTED ESRD: ALL PATIENTS, BY
DEMOGRAPHIC CHARACTERISTICS AND PRIMARY DIAGNOSIS, SELECTED YEARS
1991-2000
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-42--INCIDENT COUNTS OF REPORTED ESRD: ALL PATIENTS, BY
DEMOGRAPHIC CHARACTERISTICS AND PRIMARY DIAGNOSIS, SELECTED YEARS
1991-2000
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Immunosuppressive drug coverage under Medicare began with The
Omnibus Budget Reconciliation Act of 1986 (OBRA >86), which provided
coverage up to 1 year from the date of discharge from a Medicare-covered
transplant. Subsequent legislation extended the coverage. The
Beneficiary Improvement and Protection Act (BIPA) (P.L. 106-554),
provided lifetime coverage for immunosuppressive drugs to Medicare aged
and disabled beneficiaries following a transplant covered by Medicare,
effective December 21, 2000. However, persons who are under age 65 and
entitled to Medicare based solely on their diagnosis of ESRD will lose
their ESRD Medicare entitlement 3 years after transplantation, and,
effectively, lose coverage for the necessary immunosuppressive drugs.
They will be eligible again when they reach age 65.
TREATMENT
Table 2-43 indicates that a total of 14,628 kidney transplants
were performed in Medicare-certified U.S. hospitals in 2001. Kidneys are
the most frequently transplanted organ and Medicare covers nearly 90
percent of all kidney transplant beneficiaries in the U.S. Medicare
appears to be the primary payer in approximately 50 percent of all
kidney transplants in the U.S. and is at least the secondary payer in
nearly 60 percent of all kidney transplants. Despite the significant
increases in the number and success of kidney transplants,
transplantation is not the treatment of choice for all ESRD patients.
A chronic, severe shortage of kidneys available for transplantation
limits the number of patients who can receive transplants. Even absent
a shortage of organs, some patients are not suitable candidates for
transplants because of their age, severity of illness, or other
complicating conditions. Finally, some ESRD patients do not
want an organ transplant.
For all of these reasons, dialysis is likely to remain the
primary treatment for ESRD. Medicare pays for 75-80 percent of all
dialysis care. Dialysis is an artificial method of performing the
kidney's function of filtering blood to remove waste products and toxins.
There are two types of dialysis: hemodialysis and peritoneal dialysis.
The method chosen by the majority of Medicare beneficiaries is
hemodialysis, which requires blood to be removed from the body, filtered
and cleansed through a dialyzerBsometimes called an artificial kidney
machine--before being returned to the body. Hemodialysis is usually
performed three times a week in a clinic or hospital, and takes three
to four hours, depending on the patient.
TABLE 2-43--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE-CERTIFIED
U.S. HOSPITALS, 1999-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Peritoneal dialysis filtering takes place inside the
body by inserting dialysate fluid through a permanent surgical opening in
the peritoneum (abdominal cavity). Toxins filter into the dialysate
fluid and are then drained from the body through the surgical opening.
There are three types of peritoneal dialysis: intermittent peritoneal
dialysis (IPD), continuous cycling peritoneal dialysis (CCPD)-- both of
which require the use of a machine and the assistance of a partner--and
continuous ambulatory peritoneal dialysis (CAPD)-- which does not
require a machine.
IPD can be done at home but is usually done in a hospital--
treatments are performed several times a week, for a total of 36 to
42 hours per week. The CAPD and CCPD require daily exchanges of
dialysate fluid and both can be performed at home. CAPD can be done at
any time and is the most popular form of peritoneal dialysis. The
process involves draining the dialysate and replacing fresh solution
which takes 30 to 40 minutes and the solution is usually changed four
times a day. CCPD is usually done at night while the individual is
asleep, requiring 10 to 12 hours per night.
REIMBURSEMENT
Medicare reimbursement for dialysis services provided by
hospital-based and independent facilities are paid at prospectively
determined rates-the necessary dialysis-related services, equipment,
and supplies are furnished for a predetermined fixed fee per dialysis
treatment. The rate, referred to as a composite rate, is derived from
a base rate and adjusted by local area wage differences and audited
cost data adjusted for the national proportion of patients dialyzing
at home versus in a facility. Adjustments are made to the composite
rate for hospital-based dialysis facilities to reflect higher overhead
costs. Some examples of services included under the composite rate are:
cardiac monitoring, catheter changes, dressing changes, suture removal,
all oxygen and its administration, and declotting of shunt. If a
facility fails to furnish any part of the items and services covered
under the rate, then the facility cannot be paid any amount for the
part of the items and services that it did furnish.
Beneficiaries electing home dialysis may choose either to
receive dialysis equipment, supplies, and support services directly
from the facility with which the beneficiary is associated (method I)
or to make independent arrangements for equipment, supplies, and
support services (method II). Under method I, the equipment, supplies,
and support services are included in the facility's composite
rate. Under method II, payments are made on the basis of reasonable
charges and limited to 100 percent of the median hospital composite
rate, except for patients on CCPD, in which case the limit is 130
percent of the median hospital composite rate. Neither the composite
rate nor the reasonable charge payment for method II is routinely
updated.
The composite rate for renal dialysis was updated in the BBRA.
The act increased the composite rate for 2000 by 1.2 percent above
the revised composite rate that was in effect in 1999. An additional
1.2 percent was authorized for 2001. BIPA modified the BBRA provision
to provide for a 2.4 percent increase to the composite rate beginning
in 2001. The maximum composite rate cap (maximum allowed payment per
treatment) as of January 2002 is $144.59 per treatment for urban
centers and $144.05 for rural areas.
Kidney transplantation services are inpatient hospital services
and they are subject to the Medicare prospective payment system (PPS).
The costs of care for actual and potential kidney donors are fully
covered by Medicare and include all reasonable preparatory, operation,
and post-operation recovery expenses associated with donation, without
regard to deductibles, coinsurance, and premium payments. Post-
operation recovery expenses are limited to the actual period of
recovery, however. There is also no specific update policy for
reasonable costs of kidney acquisition, and 100 percent of reasonable
costs is reimbursed.
MEDICARE+CHOICE
Medicare has a long-standing history of offering its
beneficiaries an alternative to the traditional fee-for-service program.
Health Maintenance Organizations and other types of managed care plans
have been allowed to participate in the Medicare program, beginning
with private health plan's contracts in the 1970s and the Medicare
risk contract program in the 1980s. Then, in 1997, Congress passed the
Balanced Budget Act of 1997 (BBA, P.L. 105-33), replacing the risk
contract program with the Medicare+Choice (M+C) program. The M+C
program established new rules for beneficiary and plan participation,
along with a new payment methodology. In addition to controlling
costs, the M+C program was also designed to expand private health
plans to markets where access to managed care plans was limited or
nonexistent and to offer new types of private health plans. The 106th
Congress enacted legislation to address some issues arising from
the BBA changes. The Balanced Budget Refinement Act of 1999 (BBRA,
P.L. 106-113) changed the M+C program in an effort make it easier for
Medicare beneficiaries and plans to participate in the program.
Further refinements to the M+C program were included in the Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA, P.L. 106-554). The 107th Congress passed The Public Health
Security and Bioterrorism Preparedness and Response Act (P.L. 107-188)
which included a few temporary changes to deadlines
in the Medicare+Choice program.
In 2003, Medicare+Choice plans were available to about 59
percent of the over 40 million Medicare beneficiaries, and in March
2003 about 12 percent of them chose to enroll in one of the 146
(including two private-fee-for service plans) available Medicare+Choice
plans. The rapid growth rate of Medicare managed care enrollment in
the 1990s leveled off with the implementation of the M+C program, and
in fact, there has been a continuous decline in enrollment since 1999
when 17 percent of beneficiaries were enrolled in M+C plans.
In order to increase enrollment in Medicare managed care and
to allow beneficiaries to better meet their health care needs, the
M+C program offers a diverse assortment of managed care plans.
However, achieving the goals of the M+C program has been difficult,
in part because the goal to control Medicare spending which led to a
slowdown in the rate of increase in payments to plans, may have
dampened interest by managed care entities in developing new markets,
adding plan options, and maintaining their current markets (see
Appendix E for further information about the M+C program).
SELECTED ISSUES
SECONDARY PAYER
Generally, Medicare is the ``primary payer,'' that is, it pays
health claims first, with an individual's private or other public health
insurance filling in some or all of Medicare's coverage gaps. However,
in certain cases, the individual's other coverage pays first, while
Medicare is the secondary payer. This phenomenon is referred to as the
Medicare Secondary Payer Program.
An employer (with 20 or more employees) is required to offer
workers age 65 and older (and workers' spouses age 65 and older) the
same group health insurance coverage as is made available to other
employees. Workers have the option of accepting or rejecting the
employer's coverage. If the worker accepts the coverage, the employer's
plan is primary for the worker and/or spouse who is over age 65;
Medicare becomes the secondary payer. Employers may not offer a plan
that circumvents this provision.
Similarly, a group health plan, offered by a large employer
with 100 or more employees, is the primary payer for employees or their
dependents who are on the Medicare disability program. The provision
applies only to persons covered under the group health plan because
the employee (generally the spouse of the disabled person) is in
"current employment status" (i.e., is an employee or is treated as
an employee by the employer). Secondary payer provisions also apply
to ESRD individuals with employer group health plans (regardless of
employer size). The group health plan is the primary payer for 30
months for persons who become eligible for Medicare ESRD benefits.
Medicare is also the secondary payer when payment has been
made, or can reasonably be expected to be made, under workers'
compensation, automobile medical liability, all forms of no-fault
insurance, and all forms of liability insurance.
The law authorizes a data match program which is intended to
identify potential secondary payer situations. Medicare beneficiaries
are matched against data contained in Social Security Administration
and Internal Revenue Service files to identify cases in which a
working beneficiary (or working spouse) may have employer-based
health insurance coverage. Cases of previous incorrect Medicare
payments are identified and recoveries are attempted. Recoveries can be
initiated up to 3 years after the date the service was furnished.
Further, recoveries may be made from third-party administrators
except where such administrators cannot recover amounts from the
employer or group health plan.
Table 2-44 shows savings attributable to these Medicare
secondary payer provisions. In fiscal year 2002, combined Medicare
Part A and B savings are estimated at $4.3 billion.
TABLE 2-44--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY PAYER
PROVISIONS, FISCAL YEARS 1996-2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
SUPPLEMENTING MEDICARE COVERAGE
Most beneficiaries depend on some form of private or public
coverage to supplement their Medicare coverage. In 2000, only about
13 percent of beneficiaries relied solely on the traditional fee-for-
service Medicare program for protection against the costs of care; an
additional 13 percent were enrolled in managed care organizations.
See Appendix B for a discussion of supplementary coverage and
Appendix E for a discussion of Medicare+Choice.
LEGISLATIVE HISTORY, 1997-2003
This section summarizes major Medicare legislation enacted
into law, beginning in 1997. Previous editions of the Green Book
review legislation enacted prior to that date. The summary highlights
major provisions; it is not a comprehensive list of all Medicare
amendments. Included are provisions which had a significant budget
impact, changed program benefits, modified beneficiary cost sharing,
or involved major program reforms. Provisions involving policy changes
are mentioned the first time they are incorporated in legislation, but
not necessarily every time a modification is made. The descriptions
include either the initial effective date of the provision or, in the
case of budget savings provisions, the fiscal years for which cuts
were specified.
BALANCED BUDGET ACT (BBA) OF 1997 (P.L. 105-33)
Hospitals
Froze PPS hospital and PPS-exempt hospitals and units and
limited updates for fiscal years 1999-2002. Established a PPS for
inpatient rehabilitation hospitals, effective beginning in fiscal
year 2001. Rebased capital payment rates and provided for additional
reductions over the fiscal year 1997-2002 period. Reduced the indirect
medical education payment from 7.7 percent to 5.5 percent by fiscal
year 2001 and reformed direct graduate medical education payments
(generally effective on enactment or October 1, 1997).
Skilled nursing facilities
Provided for a phase in of a PPS that will pay a Federal
per-diem rate for covered SNF services (generally effective July 1,
1998).
Home health
Provided for the establishment of a PPS for home health
services. Provided for a reduction in per-visit cost limits prior to
the implementation of the PPS, clarified the definitions of part-time
and intermittent care, and provided for a study of the definition of
homebound. Provided for the transfer of some home health costs from
Part A to Part B (prospective payment effective October 1, 1999,
reduction in cost limits effective on enactment, definition
clarification effective October 1, 1997, and transfer of costs
effective January 1, 1998).
Hospice
Reduced the hospice payment update for each of fiscal years
1998-2002, and clarified the definition of hospice care (generally
effective on enactment).
Physicians
Provided for use of a single conversion factor; replaced
the volume performance standard with the sustainable growth rate;
provided for phased-in implementation of resource-based practice
expenses; and permitted use of private contracts under specified
conditions (generally effective January 1, 1998).
Hospital outpatient departments
Extended reductions in payments for outpatient hospital
services paid on the basis of costs through December 1999 and
established a PPS for hospital outpatient departments (OPDs) for
covered services beginning in 1999 (generally effective on enactment).
Other providers
Froze payments for laboratory services for fiscal years
1998-2002; provided for establishment of a fee schedule in 2000
for payment for ambulance services (generally effective on enactment).
Beneficiary payments
Permanently set the Part B premium at 25 percent of program
costs and expanded the premium assistance beginning in 1998 available
under the Specified Low-Income Medicare Beneficiary (SLMB) Program
(effective on enactment).
Prevention initiatives
Authorized coverage for annual mammograms for all women over
40. Added coverage for screening pelvic exams, prostate cancer screening
tests, colorectal cancer screening tests, diabetes self-management
training services, and bone mass measurements for certain high-risk
persons (generally effective in 1998, except prostate cancer screening
effective 2000).
Supplementary coverage
Provided for guaranteed issuance of specified Medigap policies
without a preexisting condition exclusion for certain continuously
enrolled aged individuals (effective July 1, 1998).
Competitive bidding
Provided for competitive bidding demonstrations for furnishing
Part B services (not including physicians services) (effective on
enactment).
Commissions
Established a 17-member National Advisory Commission on the
Future of Medicare (with appointments to be made by December 1, 1997).
Established the Medicare Payment Advisory Commission replacing the
Prospective Payment Assessment Commission and the Physician Payment
Review Commission (with appointments to be made by September 30, 1997).
Medicare+Choice
Established a new part C of Medicare called Medicare+Choice (M+C).
Built on the existing Medicare Risk Contract Program which enabled
beneficiaries to enroll, where available, in health maintenance
organizations (HMOs) that contracted with the Medicare Program.
Expanded, beginning in 1999, the private plan options that could
contract with Medicare to other types of managed care organizations
(for example, preferred provider organizations and provider-sponsored
organizations), private fee-for-service plans, and, on a limited
demonstration basis, high deductible plans (called medical savings
account plans) offered in conjunction with medical savings accounts
(effective on enactment).
BALANCED BUDGET REFINEMENT ACT (BBRA) OF 1999 (INCORPORATED IN
CONSOLIDATED APPROPRIATIONS ACT OF 1999, P.L.106-113)
Prospective payment system hospitals
Froze the indirect medical education adjustment at 6.5 percent
through fiscal year 2000, reduced the adjustment to 6.25 percent in
fiscal year 2001 and to 5.5 percent in fiscal year 2002 and subsequent
years. Froze the reduction in the DSH adjustment to 3 percent in fiscal
year 2001; changed the reduction to 4 percent in fiscal year 2002.
Changed the methodology for Medicare's direct graduate medical
education payments to teaching hospitals to incorporate a national
average amount calculated using fiscal year 1997 hospital- specific
per-resident amounts. Increased the number of years that would count as
an initial period for child neurology residency training programs.
Provided for the reclassification of certain counties and areas for
the purposes of Medicare reimbursement.
PPS-exempt hospitals
Adjusted the labor-related portion of the 75-percent cap to
reflect the wage differences in the hospitals' area relative to the
national average. Increased the amount of continuous bonus payments to
eligible long-term care and psychiatric providers from 1 percent to
1.5 percent for cost reporting periods beginning on or after October
1, 2000 and before September 30, 2001 and to 2 percent for cost
reporting periods beginning on or after October 1, 2001 and before
September 30, 2002. Required the Secretary to report on a discharge-
based PPS for long-term care hospitals which would be implemented in
a budget neutral fashion for cost reporting periods beginning on or
after October 1, 2002. Required the Secretary to report on a per-diem-
based PPS for psychiatric hospitals which would be implemented in a
budget neutral fashion for cost reporting periods beginning on or
after October 1, 2002. Required the Secretary to base the PPS for
inpatient rehabilitation hospitals on discharges and incorporate
functional related groups as the basis for payment adjustments.
Rural providers
Permitted reclassification of certain urban hospitals as rural
hospitals. Updated existing criteria used to designate outlying rural
counties as part of metropolitan statistical areas for the purposes of
Medicare's hospital IPPS. Changed certain requirements pertaining to
Medicare's Critical Access Hospital Program. Extended the Medicare
dependent hospital classification through fiscal year 2006. Permitted
certain sole community hospitals to receive Medicare payments based on
their hospital specific fiscal year 1996 costs. Increased the target
amount for SCHs by the full market basket amount for discharges occurring
in fiscal year 2001.
Skilled nursing facilities
Increased per-diem payments by 20 percent for 15 resource
utilization groups (RUGs) under the PPS from April 1, 2000, until such
time as the Secretary of HHS implements refinements to the RUGs. SNFs
were permitted to elect to be paid under the full Federal PPS rate for
SNFs (rather than go through the transitions period). Provided a
temporary 4 percent increase in the Federal per-diem rate for SNF
services for FY 2001 and FY 2002. The increase could not be considered
in the base amount used to compute subsequent updates to the Federal
per-diem rate. Expanded the list of services excluded from SNF PPS to
include certain chemotherapy items and administration services, certain
radioisotope services, certain prosthetic devices, and ambulance services
furnished in conjunction with renal dialysis treatments, beginning in
FY 2001. Any increase in total payments resulting from these exclusions
are required to be budget neutral. Allowed SNFs with a 60 percent
immunocompromised patient population to be paid temporarily a 50/50
blend of their facility-specific and Federal rates beginning with the
first cost reporting period beginning after enactment of BBRA and ending
on September 30, 2001. Required reports on the resource use of AIDS
patients (by the Secretary), on SNF costs in Alaska and Hawaii (by
MedPAC), and on respiratory therapy State licensure, certification
standards, and competency examinations (by the Secretary).
Home health agencies
Delayed the 15-percent reduction in home health payments until
12 months after implementation of the PPS and, within 6 months of
implementation, required the Secretary to assess the need for any
reductions. Increased per-beneficiary limits by 2 percent for agencies
whose per-beneficiary limit was below the national median; excluded DME
from consolidated billing, and provided agencies an additional $10 per
beneficiary to offset costs for collecting outcome and
assessment information set (OASIS) data.
Hospice
Increased payment rates otherwise in effect under the hospice
PPS for fiscal year 2001 by 0.5 percent and for fiscal year 2002 by
0.75 percent, provided that these increases are not to be included in
the base on which subsequent increases will be computed.
Physicians
Made technical changes to limit oscillations in the annual
update to the conversion factor beginning in 2001 and provided that the
sustainable growth rate is calculated on a calendar year basis.
Required the Secretary, in determining practice expense relative
values, to establish by regulation a process under which the
Secretary would accept for use and would use, to the maximum extent
practicable and consistent with sound data practices, data collected by
outside organizations and entities.
Hospital outpatient departments
Made seven major changes to Medicare payments under the HOPD
OPPS: (1) required the Secretary of the U.S. Department of Health and
Human Services (DHHS) to provide payments (within specified limits,
and on a budget neutral basis) over and above PPS payments for certain
high cost ("outlier") patients; (2) as a transition to the PPS, for 2-3
years, on a budget neutral basis, required the Secretary of DHHS to
provide ``passthrough payments'' to hospital OPDs above and beyond PPS
payments for costs of certain ``current innovative'' and ``new, high
cost'' devices, drugs, and biologicals; (3) limited the cost range of
items or services that are included in any one PPS category and required
the Secretary to review the PPS groups and amounts annually and to update
them as necessary; (4) as a transition to the PPS, through 2003, limited
the reduction in Medicare payments individual hospitals experience due
to the PPS; (5) provided special payments until 2004 for small, rural
hospitals to ensure that they receive no less under the outpatient PPS
than they would have received under the prior system and provided
the same protection permanently for cancer hospitals; (6) limited
beneficiary copayments for outpatient care to no more than the amount
of the beneficiary deductible for inpatient care; and (7) required that
the pre-PPS payment base used as the budget neutrality benchmark for
the PPS include beneficiary coinsurance amounts as paid under the
pre-PPS system (i.e., 20 percent of hospital charges).
Therapy services
Suspended for 2 years (2001 and 2002) application of the caps
on physical therapy and occupational therapy services.
Pap smears
Set the minimum payment for the test component of a Pap smear
at $14.60.
Immunosuppressive drugs
Extended the 36-month limit on coverage of immunosuppressive
drugs for persons exhausting their coverage in 2000-2004. Set the
increase for persons exhausting benefits in 2000 at 8 months, and
limited total expenditures to $150 million over the 5 years.
Studies
Required a number of studies including a Medicare Payment
Advisory Commission comprehensive study of the regulatory burdens placed
on all classes of providers under fee-for- service Medicare and the
associated costs. Required GAO to conduct a study of Medigap policies.
Medicare+Choice
Contained several provisions designed to facilitate the
implementation of M+C. Changed the phase in of the new risk adjustment
payment methodology based on health status to a blend of 10 percent
new health status method/90 percent old demographic method in 2000 and
2001, and not more than 20 percent health status in 2002. Provided for
payment of a new entry bonus of 5 percent of the monthly M+C payment
rate in the first 12 months and 3 percent in the subsequent 12 months
to organizations that offer a plan in a payment area without an M+C plan
since 1997, or in an area where all organizations announced withdrawal as
of January 1, 2000. Reduced the exclusion period from 5 years to 2 years
for organizations seeking to reenter the M+C Program after withdrawing.
Allowed organizations to vary premiums, benefits, and cost sharing
across individuals enrolled in the plan so long as these are uniform
within segments comprising one or more M+C payment areas. Provided for
submission of adjusted community rates by July 1 instead of May 1.
Provided that the aggregate amount of user fees collected would be
based on the number of M+C beneficiaries in plans compared to the total
number of beneficiaries. Delayed implementation of the Medicare+Choice
Competitive Bidding Demonstration Project.
MEDICARE, MEDICAID, AND SCHIP BENEFITS IMPROVEMENT AND PROTECTION ACT
(BIPA) OF 2000 (INCORPORATED IN THE CONSOLIDATED APPROPRIATIONS ACT
OF 2001 PUBLIC LAW 106-554)
IPPS hospitals
Provided the full market basket update to all hospitals for
FY2001. Established that all hospitals are eligible to receive DSH
payments when their DSH percentage (threshold amount) exceeds 15
percent. Decreased the scheduled reduction in IPPS hospitals' DSH
payments. Established that the cost of new medical technologies
should be recognized with a budget neutral payment adjustment in
IPPS by October 1, 2001. Established that starting for FY2001
Medicare Geographic Classification Review Board (MGCRB) decisions,
the reclassification of an IPPS hospital for use of a different area's
wage index is effective for 3 fiscal years. Modified teaching
hospitals' indirect medical education (IME) percentage adjustment.
Established that a teaching hospital's approved per resident amount
for cost reporting periods beginning during FY2002 is not less than
85 percent of the locality adjusted national average per resident
amount. Changed a hospital's payment of the direct costs of approved
nursing and allied health payments to incorporate Medicare managed
care enrollees. Permitted certain independent laboratories to continue
to bill Medicare directly for the technical component of pathology
services provided to hospital inpatients and hospital outpatients under
a grandfather arrangement for a 2-year period (2001-2002).
IPPS exempt hospitals
Established that total payments for inpatient rehabilitation
facility (IRF) services in FY2002 would equal the amounts of payments
that would have been made if the IRF prospective payment system (PPS)
had not been enacted. Permitted an IRF to make a one-time election
during the transition period to be paid based on a fully phased-in
IRF-PPS rate. Increased the incentive payments for psychiatric
hospitals and distinct part units to 3 percent for cost reporting
periods beginning on or after October 1, 2000. Increased the
national cap for long-term care hospitals by 2 percent and the target
amount by 25 percent for cost reporting periods beginning during FY2001.
Required the Secretary to examine the feasibility and impact of basing
payment on the existing (or refined) acute hospital DRGs and using the
most recently available hospital discharge data when developing the PPS
for long-term care hospitals.
Rural providers
Modified the critical access hospital (CAH) program: (1)
eliminated liability of Medicare beneficiaries for coinsurance,
deductible, copayment, or other cost sharing amount with respect to
clinical diagnostic laboratory services furnished as an outpatient
CAH service; (2) permitted CAHs to elect outpatient payments based on
reasonable costs plus an amount based on 115 percent of Medicare's fee
schedule for professional services; (3) exempted swing beds in CAHs from
the SNF prospective payment system; (4) provided for payment to CAHs for
the compensation and related costs for on-call emergency room physicians
who are not present on the premises, are not otherwise furnishing
services, and are not on-call at any other provider or facility; and
(5) specified that ambulance services provided by a CAH (or provided by
an entity that is owned or operated by a CAH) are paid on a reasonable
cost basis if the CAH or entity is the only provider or supplier of
ambulance services that is located within a 35-mile drive of the CAH.
Modified the Medicare dependent hospital (MDH) classification so
that an otherwise qualifying small rural hospital may be classified as an
MDH if at least 60 percent of its days or discharges were attributable
to Medicare Part A beneficiaries in at least two of the three most
recent audited cost reporting periods. Permitted sole community hospitals
to elect payment based on hospital specific, updated FY1996 costs if
this target amount resulted in higher Medicare payments. Increased
payments to providers of ground ambulance services for trips originating
in rural areas that are greater than 17 miles and up to 50 miles.
Provided permanent authority to physician assistants who owned rural
health clinics which lost their designation as such to bill Medicare
directly. Revised Medicare reimbursement for telehealth services.
Exempted rural health clinics operated by hospitals with less than
50 beds from the per-visit payment method.
Skilled Nursing Facilities
Provided higher payments to SNFs by increasing the update to
the full market basket for FY 2001 and the market basket minus 0.5
percentage point for FY 2002 and FY 2003. The nursing component of
the Federal rate was temporarily increased by 16.66 percent beginning
April 1, 2000 through October 1, 2002. BIPA also corrected a payment
anomaly created by BBRA by temporarily increasing all the rehabilitation
RUGs by 6.7 percent (rather than the 20 percent for 3 specific
rehabilitation RUGs). This adjustment also remains in effect
until the Secretary implements case mix refinements. BIPA also limited
application of the consolidated billing requirement to Part A-covered
stays and to therapy services furnished during Part A and Part
B-covered stays. Permited the Secretary to establish a procedure for
geographic reclassification for SNFs under PPS. The provision required
the Secretary to collect the data necessary to establish a wage index
for SNFs prior to establishing a geographic reclassification process.
Required reports on different systems for categorizing patients in SNFs
in a manner that accounts for the relative resource utilization of
different patient types (by the Secretary); on the adequacy of
Medicare payments to SNFs (by the GAO); and on nurse staffing ratios
and the impact of the 16.66 percent increase in the nursing component
payment rate (by the GAO).
Home Health Agencies
Delayed the effective date of the 15 percent reduction on payment
limits for home health services an additional year after the
implementation of PPS. Also provided the Secretary can adjust for case
mix changes that are not the result of real case mix changes. Provided
home health agencies with the full market basket update for FY 2001.
Provided a temporary 10 percent increase in payment for home health
services furnished in a rural area from April 1, 2001 until March 31,
2003. Provided a two-month periodic interim payment after PPS began
and subject to repayment with the settlement of the last cost report
filed before PPS.
Clarified that home health agencies are not prevented from using
telehealth services if the services do not substitute for in-person
home health services ordered under a plan of care and are not considered
a home health visit for eligibility or payment purposes. Prohibited the
Secretary from using solely time or distance in determining branch
office status and permitted the Secretary to include forms of
technology in determining what constitutes supervision for purposes of
determining branch office status. Clarified the definition of homebound
to permit beneficiaries who require home health services to attend
adult day care for therapeutic, psychosocial, or medical treatment and
remain eligible for the home health benefit.
Also clarifies that any absence for the purpose of attending a
religious services is considered infrequent or of short duration.
Hospices
Increased the hospice update by 5.0 percentage points in FY 2001
and required the Secretary to use 1.0043 as the Wichita, Kansas hospice
wage index for FY 2000. Clarified that certification of an
individual's terminal illness must be based on the physician's or the
medical director's clinical judgment regarding the normal course of the
individual's illness. Also required the Secretary to study and report
on the appropriateness of the certification process regarding terminal
illness and any recommendations for legislation by two years after
enactment.
Hospital outpatient departments
Limited the amount of a beneficiary's copayment for a
procedure in a hospital outpatient department (HOPD) to the hospital
inpatient deductible applicable in that year, effective April 1, 2001.
Reduced the effective copayment rate for outpatient services to a
maximum rate of 57 percent and then gradually reduced the effective
coinsurance rate in 5 percentage point intervals from 2002 through 2006
until the maximum rate is 40 percent in 2006, starting in April 2001.
Increased the 2001 update to the full rate of increase in the market
basket index. Increased the 2001 outpatient PPS rates. Authorized
the Secretary to adjust the conversion factor in later years to
eliminate the effect of coding or classification changes. Modified
the procedures and standards by which certain medical devices are
categorized and determined eligible for pass-through payments under the
PPS. Permitted all qualifying hospitals to be eligible for transitional
payments under OPPS. Established that existing provider-based status
designations continue for 2 years beginning October 1, 2000.
Established that children's hospitals would not receive lower Medicare
payments under the outpatient PPS system than they would have received
under the prior payment system.
Ambulatory surgical centers
Delayed implementation of proposed regulatory changes to the
ambulatory payment classification system, which are based on 1994 cost
data, until January 1, 2002. Established that the these changes would
be phased in over 4 years. Required that the revised payment system,
based on 1999 (or later) cost data, be implemented January 1, 2003.
Established that the phase-in of the revised system and 1994 data ends
when the system with 1999 or later data is implemented.
Preventive Benefits
Made the following changes to coverage of preventive services:
1) modified existing law to provide Medicare coverage for biennial
screening Pap smears and pelvic exams; 2) added Medicare coverage
for annual glaucoma screenings for persons determined to be at high
risk for glaucoma, individuals with a family history of glaucoma, and
individuals with diabetes; 3) authorized coverage for screening
colonoscopies for all individuals, not just those at high risk; 4)
specified that screening mammographies are paid under the physician
fee schedule; and 5) authorized coverage for medical nutrition therapy
services for beneficiaries who have diabetes or renal disease.
Immunosuppressive Drugs
Eliminated the time limitations of the coverage of
immunosuppressive drugs for beneficiaries who have received a transplant
paid for by Medicare.
Persons with Amyotrophic Lateral Sclerosis
Waived the 24-month waiting period for Medicare coverage
(otherwise applicable for disabled persons) for persons with amyotrophic
lateral sclerosis (ALS).
Ambulances
Provided for the full inflation update in 2001. Increased
payments (from July 1, 2001 - December 31, 2003) for ground ambulance
trips originating in rural areas that are greater than 17 miles and
up to 50 miles.
Therapy Services
Extended the moratorium on physical therapy and occupational
therapy caps for an additional year through 2002.
Renal Dialysis
Increased the composite rate payment for renal dialysis by
2.4 percent for 2001. The Secretary was required to collect data and
develop an end-stage renal disease (ESRD) market basket whereby the
Secretary could estimate, before the beginning of each year, the
percentage increase in costs for the mix of labor and non-labor goods
and services included in the composite rate. The Secretary was required
to report to Congress on the index together with recommendations on the
appropriateness of an annual or periodic update.
Durable Medical Equipment and Prosthetics and Orthotics
Provided full CPI-U update for DME and PO for 2001, but
maintained for 2002 the 0 percent update for DME and 1 percent update
for PO. Provided coverage for certain prosthetics and custom-
fabricated orthotics. Provided coverage for replacement of certain
artificial limbs and replacement parts for such limbs.
Revisions to Medicare Coverage Process
Clarified when and under what circumstances Medicare coverage
policy could be challenged. An aggrieved party could file a complaint
concerning a national coverage decision which would be reviewed by
the Department Appeals Board (DAB) of HHS. An aggrieved party could
also file a complaint concerning a local coverage determination. In
this case, the determination would first be reviewed by an
administrative law judge. If unsatisfied, complainants could
subsequently seek review of such local policy by the DAB. In both
cases, a DAB decision would constitute final HHS action and be subject
to judicial review. An affected party would be permitted to submit a
request to the Secretary to issue a national coverage or noncoverage
determination.
Medicare+Choice
Established multiple floor rates, based on population and
location. Applied a 3 percent minimum update in 2001 and returned to
the current law minimum update of 2 percent thereafter. Increased the
M+C payment rates for enrollees with ESRD to reflect the demonstration
rate of social health maintenance organizations' ESRD capitation
demonstrations. Extended the current risk adjustment methodology
until 2003 and beginning in 2004, begin to phase in a new risk
adjustment methodology based on data from inpatient hospitals and
ambulatory settings. Permitted M+C plans to offer reduced Medicare
Part B premiums to their enrollees as part of providing any required
additional benefits or reduced cost-sharing. Extended the application
of the new entry bonus for M+C plans to include areas for which
notification had been provided, as of October 3, 2000, that no plans
are available January 1, 2001. Required payment adjustments to
M+C plans if a legislative change resulted in significant increased
costs. Precluded the Secretary from implementing, other than at the
beginning of a calendar year, regulations that impose new, significant
regulatory requirements on M+C organizations. Required the Secretary
to make decisions, within 10 days, approving or modifying marketing
material used by M+C organizations, provided that the organization
used model language specified by the Secretary. Allowed an M+C
organization offering a plan in an area with more than one local
coverage policy to use the local coverage policy for the part of the
area that was most beneficial to M+C enrollees (as identified by the
Secretary) for all M+C enrollees enrolled in the plan. Expanded the
M+C quality assurance programs for M+C plans to include a separate
focus on racial and ethnic minorities. Allowed the Secretary to
waive or modify requirements that hinder the design of, offering of,
or enrollment in certain M+C plans, such as M+C plans under contract
between M+C organizations and employers, labor organizations, or
trustees of a fund established by employers and/or labor organizations.
Extended the period for Medigap enrollment for certain M+C enrollees
affected by termination of coverage. Allowed individuals who enroll in
an M+C plan after the 10th day of the month to receive coverage
beginning on the first day of the next calendar month. Permitted
ESRD beneficiaries to enroll in another M+C plan if they lost coverage
when their plan terminated its contract or reduced its service area.
Required an M+C plan to cover post-hospitalization skilled nursing care
through an enrollee's "home skilled nursing facility" in certain
situations. Mandated review of ACR submissions by the HCFA Chief
Actuary.
PUBLIC HEALTH SECURITY AND BIOTERRORISM PREPAREDNESS AND RESPONSE ACT
(P.L. 107-188)
Medicare+Choice
Moved CMS' annual announcement of M+C payment rates from no
later than March 1 to no later than the 2nd Monday in May, effective
only in 2003 and 2004. Temporarily moved the deadline for plans to
submit information about ACRs, M+C premiums, cost sharing, and
additional benefits (if any) from no later than July 1 to no later
than the 2nd Monday in September in 2002, 2003, and 2004. Changed
the annual coordinated election period from the month of November to
November 15th through December 31 in 2002, 2003, and 2004. Allowed
Medicare beneficiaries to make and change elections to an M+C plan
on an ongoing basis through 2004. Then beginning in 2005,
individuals will only be able to make changes on the more limited
basis, originally scheduled to be phased in beginning in 2002.
CONSOLIDATED APPROPRIATIONS RESOLUTION, 2003 (CAR) (P.L.108-7)
Hospitals
Temporarily increased the base rate used to pay rural and
small urban hospitals to that used to pay hospitals in large urban
areas for discharges from April 1, 2003 to September 30, 2003.
Physicians
Permitted CMS to make adjustments to sustainable growth rate
figures for previous years, thereby permitting a fee schedule update
of 1.6 percent for 2003.
Part B Premium
Extended through 2003 a program that pays the Medicare Part
B premium for Medicare beneficiaries with incomes between 120
percent and 135 percent of poverty.
TO EXTEND THE TEMPORARY ASSISTANCE FOR NEEDY FAMILIES BLOCK GRANT
PROGRAM, AND CERTAIN TAX AND TRADE PROGRAMS, AND FOR OTHER
PURPOSES (P.L. 108-89)
Hospitals
Extended Medicare's payment equalization between large
urban hospitals and other hospitals for discharges through March
31, 2004. The law which became effective October 1, 2003 requires
the Secretary to equalize the base amounts by November 1, 2003 and
compensate hospitals for missed payments.
CBO SAVINGS AND REVENUE ESTIMATES FOR BUDGET RECONCILIATION AND
RELATED ACTS, 1981-2003
Table 2-45 shows estimates of savings and revenue increases
for budget reconciliation legislation enacted from 1981 to 1997
and spending increases enacted in 1999, 2000 and 2003. These
estimates were made at the time of enactment by the Congressional
Budget Office (CBO). It should be noted that the estimates are
compared with the CBO budget baseline in effect at the time. The
savings from the various reconciliation bills cannot be added together.
TABLE 2-45--MEDICARE SAVINGS ESTIMATES, 1981-2003
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
MEDICARE HISTORICAL DATA
Tables 2-46 through 2-52 present detailed historical data on the
Medicare Program. Tables 2-46 and 2-47 present detailed enrollment data.
Table 2-48 describes the percentage of enrollees participating in a
State buy-in agreement. Tables 2-49, 2-50 and 2-51 show the number of
persons served and program payments. Table 2-52 shows the utilization
of short stay hospital services.
TABLE 2-46--GROWTH IN NUMBER OF AGED MEDICARE ENROLLEES BY SEX AND AGE,
SELECTED YEARS 1968-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-47--GROWTH IN NUMBER OF DISABLED MEDICARE ENROLLEES WITH
HOSPITAL INSURANCE COVERAGE BY TYPE OF ENTITLEMENT AND AGE,
SELECTED YEARS 1975-2001
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-48--NUMBER AND PERCENTAGE OF INDIVIDUALS ENROLLED IN
SUPPLEMENTARY MEDICAL INSURANCE (SMI) UNDER STATE BUY-IN AGREEMENTS
BY TYPE OF BENEFICIARY AND BY YEAR OR 2001 AREA OF RESIDENCE
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-49--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY
TYPE OF COVERAGE, TYPE OF SERVICE, AND TYPE OF ENROLLEE,
CALENDAR YEAR 2002
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-50--PERSONS ENROLLED AND PERSONS SERVED UNDER
MEDICARE, AND PROGRAM PAYMENTS, BY TYPE OF COVERAGE AND
SERVICE, SELECTED CALENDAR YEARS 1967-2000
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-51--PERSONS SERVED AND PROGRAM PAYMENTS FOR MEDICARE
BENEFICIARIES, BY DEMOGRAPHIC CHARACTERISTICS, CALENDAR YEAR 2000
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
TABLE 2-52--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE
ENROLLEES BY CALENDAR YEAR OR 2001 DEMOGRAPHIC CHARACTERISTICS
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
REFERENCES
Board of Trustees, Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds, 2003 Annual Report of the Boards of
Trustees of the Federal Hospital Insurance and Federal Supplementary
Insurance Trust Funds, March 2003.
Committee on Ways and Means. (2000) 2000 Green Book: Background
Material and Data on Programs Within the Jurisdiction of the Committee
on Ways and Means (WCMP 106-14). Washington D.C.: U.S. Government
Printing Office.
Federal Register (2003) Medicare Program; Physician Fee Schedule
Update for Calendar Year 2003; Final Rule 68 (40);9567-9580.
Federal Register (2002) Medicare Program; Revisions to Payment
Policies Under the Physician Fee Schedule for Calendar Year 2003.
Final Rule, 67 (251),79966-80184.
National Institutes of Health, National Institute of Diabetes and
Digestive and Kidney Diseases, U.S. Renal Data System. The Latest
Dialysis Findings of the United States Renal Data System. United
States Renal Data System, Bethesda, MD, 2003. Web page:
http://www.usrds.org/presentations.htm
Office of the President (2003 and various years). Budget of the
U.S. Government: Fiscal Year 2003 (Historical Tables Volume)
Washington D.C.: U.S. Government Printing Office.