United States: President Signs 2-Year Funding Bill With Medicare SGR Patch, Sequestration Extension For Medicare Providers

Last Updated: December 31 2013
Article by Debra A. McCurdy and Paul Pitts

On December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes the Pathway for SGR Reform Act of 2013 ("the Act"). In addition to establishing federal budget targets for fiscal years (FYs) 2014 and 2015, the Act includes a number of provisions impacting the Medicare and Medicaid programs. Most notably, the Act provides a short-term reprieve from a looming Medicare physician fee schedule cut while lawmakers work to finalize a longer-term solution. It also extends Medicare provider payment cuts under existing sequestration authority for two years and makes a variety of other policy changes. The Act's major Medicare and Medicaid provisions are summarized below.

Short-Term Medicare Physician Fee Schedule Patch.  The final Medicare physician fee schedule rule, which was published on December 10, 2013, called for a 20.1% reduction in the fee schedule update for 2014, largely as a result of the statutory sustainable growth rate (SGR) formula.  The Act blocks the 20.1% cut and replaces it with a 0.5% increase for services provided through March 31, 2014, resulting in a 2014 conversion factor after all adjustments of $35.8228 (note that Medicare sequestration cuts applicable to the MPFS and other Medicare payment systems continue, as described below.). This temporary payment boost is intended to provide Congress with additional time to finalize pending legislation that would permanently repeal the SGR policy and replace it with a period of stable payment followed by reimbursement linked to quality of care. Bipartisan SGR reform bills have been overwhelmingly approved by the Senate Finance Committee, the House Ways and Means Committee, and the House Energy and Commerce Committee, but differences in the measures must still be resolved and spending offsets need to be identified.

2-Year Extension of Medicare Sequestration Cuts.  While the Act provides limited relief from sequestration cuts for certain defense and non-defense spending for FYs 2014 and 2015, the Act does not extend relief to sequestration reductions impacting mandatory programs such as Medicare; the 2% reduction to Medicare provider and plan payments therefore will continue in 2014 unless additional Congressional action is taken. In fact, the Act achieves new savings by extending sequestration for mandatory programs – including Medicare – for another two years, through 2023.  The Act also "realigns" the Medicare sequestration amounts for FY 2023 to capture more of the sequestration savings during the first half of FY 2023, which falls in the legislation's 10-year budget window. Specifically, the 2% cap on Medicare provider payment cuts will be raised to 2.9% for the first 6 months of FY 2023, and then drop to 1.11% for the second half of FY 2023. This change "scores" as $2.1 billion in savings, although the provision is billed as not increasing the overall effect of the sequester on Medicare providers. Obviously, there is a hope that Congress will adopt an alternative deficit reduction framework well before the sequestration extension would be triggered.

Extension of Therapy Cap Exceptions. The Act maintains the status quo for outpatient therapy services by extending the exceptions process for outpatient therapy caps through March 31, 2014.  The Medicare program has annual limitations (or caps) on the amount of expenses a patient can accrue for outpatient therapy services in a given year. When an exception to the cap is requested for medically-necessary services furnished through March 31, 2014, therapy providers must continue to include the KX modifier on the claim form.  All claims exceeding the cap continue to be subject to manual medical review. In addition, the Act extends the application of the therapy cap and exceptions to therapy services furnished in a hospital outpatient department through March 31, 2014 (which was otherwise set to expire on December 31, 2013).

Extension of Other Expiring Provisions.  The Act extends for three months certain Medicare policies set to expire December 31, 2013, including: the floor used in the Medicare physician work geographic adjustment; certain ambulance add-on payments;the Qualified Individual program that reimburses states for certain Part B premiums; and the Transitional Medical Assistance program.

The Act also extends for six months (through March 31, 2014) the Medicare low-volume hospital payment and the Medicare-dependent Hospital program. In addition, the Act extends for one year the authority for Medicare Advantage Special Needs Plans (through 2016) and certain Medicare reasonable cost contracts (through 2014).  Funding for the National Quality Forum (NQF) for certain health care performance measurement activities is extended until currently-available funds expire.

Medicare Long Term Care Hospital (LTCH) Payments.  The Act includes a number of provisions impacting the provision of and payment for LTCH services provided to Medicare beneficiaries. Among other things, the Act establishes new criteria for LTCHs to be paid under the LTCH PPS rather than the acute inpatient prospective payment system (IPPS) rate. In particular, the Act establishes new "site neutral" Medicare payment criteria for LTCH services provided on or after October 1, 2015. Subject to certain exceptions, LTCHs will be reimbursed at the rate otherwise paid under the IPPS unless the patient had a preceding hospital stay including at least three days in an Intensive Care Unit (ICU) or received qualifying ventilator services. The Act provides for a two-year transition to the site neutral payment rate, during which time a blended rate will be paid. 

For cost reporting periods beginning in FY 2020, payment for all discharges from an LTCH may be subject to the new site neutral payment limitation unless the number of discharges for which payment is not made at the site neutral payment rate is greater than 50% of the total number of discharges for the LTCH. In other words, if the LTCH's site neutral payment rate is 50% or greater, then all discharges (beginning in the next cost reporting period) will be reimbursed at the IPPS rate. The Act requires CMS to establish a process for an LTCH subject to the IPPS payment rate to re-qualify for payment under LTCH PPS.

Moreover, the Act delays full implementation of the so-called "25% rule" for three years, through FY 2017 (when this policy is implemented, if an LTCH admits more than the specified percentage of its patients from a single acute care hospital during a fiscal year, it will be paid at a rate comparable to the IPPS rate for patients above the specified percentage threshold). In addition, the Act extends the current moratorium on establishing or increasing LTCH beds (with certain exceptions) through September 30, 2017.

For cost reporting periods beginning on or after October 1, 2015, LTCH discharges paid at the site neutral payment rate or by a Medicare Advantage plan will be excluded from calculation of the LTCH's average length of stay.

Medicaid DSH Payments.   The Act restructures planned reductions in Medicaid disproportionate share hospital (DSH) payments by delaying FY 2014 cuts until FY 2016 but increasing the overall level of reductions and extending cuts through FY 2023, for a total savings of $3.9 billion during the FY 2014-2023 budget window.

Strengthening Medicaid Third-Party Liability.  The Act includes provisions intended to strengthen Medicaid third-party liability. Among other things, the Act reinforces Medicaid's standing as the payer of last resort by letting states delay paying certain prenatal and preventive pediatric care claims, to the extent that doing so is cost-effective and will not adversely affect access to care. It also allows Medicaid to recover costs from beneficiary liability settlements. These provisions take effect on October 1, 2014.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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