United States: Deficit Reduction Act Of 2005 Enacts Sweeping Medicare and Medicaid Changes

Under current law, hospitals that submit certain quality of care data are entitled to receive annual increases to their payments for inpatient services in the full amount of the increase in the hospital market basket. If a hospital fails to submit this quality of care data, it receives a lesser increase in its Medicare payments equal to the market basket minus 0.4 percent.

The Act increases the penalty for hospitals that fail to submit the quality of care data. For federal fiscal year 2007 and thereafter, hospitals that do not report this data will receive increases equal to the market basket minus 2 percent. Since the vast majority of hospitals have been reporting quality of care data this penalty will likely affect few hospitals.

The Act also provides for the Secretary ("Secretary") of the Department of Health and Human Services ("HHS") to expand the quality of care data to be submitted by hospitals beginning in federal fiscal year 2007.

Under current law, hospitals are entitled to reimbursement for only 70 percent of their allowable bad debts related to Medicare deductible and coinsurance amounts. However, skilled nursing facilities have continued to receive reimbursement for 100 percent of their allowable bad debts related to Medicare deductible and coinsurance amounts. The Act extends the 30 percent reduction to skilled nursing facilities, effective with cost reporting periods beginning on or after October 1, 2005. However, bad debts for Medicare and Medicaid dual eligible patients will continue to be reimbursed at 100 percent.

Under Medicare regulations, inpatient rehabilitation facilities are subject to the "75 Percent Rule," pursuant to which they are required to demonstrate that at least 75 percent of their patients have one or more of 13 specified conditions. In 2004, the Centers for Medicare & Medicaid Services ("CMS") significantly revised the conditions that qualify for 75 Percent Rule compliance and has been phasing in its enforcement of these new requirements.

The Act provides some relief for inpatient rehabilitation facilities by extending the phase-in of the 75 Percent Rule by one additional year. The 60 percent threshold will remain in effect until June 30, 2007. It will increase to 65 percent on July 1, 2007, and to 75 percent on July 1, 2008.

The Act requires the Secretary to develop a "strategic and implementing plan" to address the following controversial issues arising from physician investments in specialty hospitals: (a) proportionality of investment return; (b) bona fide investment; (c) annual disclosure of investment information; (d) provision of care to Medicaid beneficiaries and charity care patients; and (e) enforcement. The Secretary is required to submit an interim report to Congress three months after the date of enactment of the Act, and a final report within six months. Along with the final report, the Secretary is to submit recommendations for legislative and administrative action as the Secretary considers appropriate.

This action follows an 18 month moratorium that Congress imposed on new physician-owned specialty hospitals which expired on June 8, 2004 (see Law Watch 03-28). Following that expiration, CMS imposed an administrative suspension on any new specialty hospitals enrolling in Medicare, pending an internal analysis of whether these facilities truly qualify as "hospitals" given the high level of outpatient activity compared to inpatient activity at such facilities. The Act continues the administrative suspension until the earlier of the date that the Secretary submits the final report, or six months after enactment of the Act (which can be extended to eight months, if the Secretary fails to meet the six-month timeframe). Physician owned specialty hospitals remain extremely controversial, and debate regarding their future will no doubt continue to rage before and after CMS issues its report.

The Act authorizes gainsharing demonstration projects ("gainsharing" refers to a program in which a hospital pays physicians a share of certain cost savings achieved by the hospital, as a result of the physicians’ efforts to reduce costs). The Secretary is authorized to permit gainsharing demonstration arrangements at up to six sites, beginning on January 1, 2007, based on proposals to be submitted to the Secretary.

Gainsharing arrangements can run afoul of existing statutes, including a longstanding prohibition on payments by hospitals to doctors that could reward them for discharging patients early or for other types of underutilization. The Act provides a statutory waiver of these prohibitions for the six demonstration projects. Previously, the Office of Inspector General of HHS ("OIG"), acting under its "advisory opinion" authority to permit practices that could otherwise violate certain statutes on a case by case basis, has authorized seven gainsharing programs (see Law Watch 05-10). The OIG’s approval of these seven programs was conditioned on the inclusion of a number of safeguards, including but not limited to quality safeguards and patient notification. The Act provides for similar safeguards for the gainsharing demonstration projects.

The Act makes several changes to the rules related to beneficiary ownership of durable medical equipment ("DME") and oxygen equipment. With respect to DME, Medicare beneficiaries will no longer have the option to continue to rent DME after the 13th month of rental. Instead, beneficiaries will be required to take ownership of such equipment. This change applies to items for which rental begins in 2006.

Under current law, Medicare pays for home oxygen on a monthly basis, paying a flat rate of approximately $7.50 per day for as long as the beneficiary needs oxygen. The monthly payment covers the cost of the oxygen equipment, refills of the portable oxygen system, home delivery, billing Medicare, oxygen supplies (cannulas, tubing, oxygen conservers, etc.), 24- hour emergency service, maintenance, repair and replacement if needed.

With respect to oxygen equipment, the Act provides for a 36 month "rent-to- purchase" arrangement. After a 36 month rental period, title and responsibility for maintenance and service for all home oxygen stationary and portable technologies would be transferred to the Medicare beneficiary. Thus, if a beneficiary needs home oxygen for more than 36 months, the equipment will be considered purchased and Medicare will no longer pay a monthly rental and service fee to oxygen suppliers. As a result, certain services, such as the 24 hour emergency service, oxygen supplies, and maintenance will no longer be covered by Medicare.

Under current law, Medicare generally pays for physician services, as well as most imaging services, on the basis of the Medicare Physician Fee Schedule ("Schedule"). The Schedule assigns a higher relative value for imaging services when they are furnished in a physician’s office than when furnished in a hospital setting. This higher payment is to compensate for the physician’s ownership of the equipment and the involvement of the staff in the service.

The Act provides that for certain imaging and computer-assisted imaging services furnished in physician offices on or after January 1, 2007, Medicare will pay for the technical component of such services (including the technical component of global fees) at the lesser of the hospital outpatient prospective payment system (OPPS) or the Schedule. As a consequence, the higher technical component payment under the Schedule will be eliminated. This new payment method applies to X-ray, ultrasound (including echocardiography), nuclear medicine (including positron emission tomography), magnetic resonance imaging, computed tomography, and fluoroscopy, but excludes diagnostic and screening mammography.

The Act reduces payments for certain ambulatory surgical center ("ASC") procedures. Under the Act, ASC services that are currently paid more when performed in an ASC than when performed in a hospital outpatient department will be reduced to the hospital outpatient department rate, effective January 1, 2007. Currently, there are 280 procedures paid more in the ASC setting than in hospital outpatient departments. However, because hospital outpatient department payments will change in 2007, some of these procedures may not be affected by this budget-cutting provision. There is no change in payment for 2,267 procedures which are paid more in the hospital outpatient setting than in an ASC.

The Act averted another payment reduction to physicians under the Medicare Physician Fee Schedule by eliminating the 4.4 percent payment cut that was implemented on January 1, 2006. This means physicians will be paid at the 2005 payment levels in 2006.

CMS has announced that its contractors will reprocess any claims for services provided on or after January 1, 2006 that were subjected to the 4.4 percent payment reduction.

In 1997, Congress enacted caps on the annual payments that may be made for outpatient therapy services provided by non-hospital providers. There was a limit of $1500 for physical and speech therapy, and $1500 for occupational therapy. Congress subsequently delayed implementation of this provision.

The Act provides for certain therapy caps to go into effect on January 1, 2006. The adjusted caps will be $1740 for physical and speech therapy, and $1740 for occupational therapy. However, the Act establishes an exceptions process whereby a beneficiary can request and be granted an exception from these payment limits and receive an unlimited amount of therapy if the services are determined by the Secretary to be medically necessary.

The Act freezes reimbursement for home health agencies. In 2006, home health agencies were scheduled to receive a 2.8 percent market basket update. However, as a cost saving measure, the Act freezes this payment increase so that home health agencies will continue to be reimbursed at 2005 rates.

This provision relates to Medicare Advantage plans under Part C. Following a recommendation by the Medicare Payment Advisory Commission ("MedPAC"), the Act implements a phase out of the "hold harmless" policy that offsets the impact of lower payments to Medicare Advantage plans ("plans") from risk adjustment. Under risk adjustment, plans are paid based on the health of their enrollees, with lower payments for those plans with healthier enrollees. Under the budget neutrality provisions, the savings from risk adjustment are funneled back into the Medicare Advantage program and redistributed among the plans, with the result that overall payments to the plans are not reduced. The Act phases out the budget neutrality provision over four years. The Congressional Budget Office has estimated that this will save $6.5 billion between 2006 and 2010.

Notably, the Act did not eliminate the Medicare Advantage stabilization fund, an area of some controversy during the conference process. The conference eliminated a provision in the Senate passed bill which would have terminated a $10 billion regional preferred provider organization stabilization fund for the plans. The Medicare Modernization Act of 2003, which created the Medicare Advantage program, provides for an initial $10 billion regional plan stabilization fund, to be used between 2007 and 2013, to help encourage plan entry and retention in areas where there is a lack of plans, by increasing payments to the plans.

However, because plan participation has been stronger than predicted, many have argued that the stabilization fund is no longer necessary. Indeed, Med- PAC’s June 2005 report recommended that Congress eliminate the fund because there should be a "level playing field" between fee-for-service Medicare and the Medicare Advantage program. Despite this opposition, the stabilization fund survived the conference process.

The are several Medicaid provisions in the Act that make changes to the Medicaid Drug Rebate, which are estimated to yield $3.85 billion in savings over five years. One significant change would establish the average manufacturer price ("AMP") as the benchmark for prescription drug reimbursement in the Medicaid program. This eliminates the average wholesale price ("AWP") standard, which had previously been used to calculate Medicaid payments. In addition, starting in 2007, the federal upper payment limit for multiple source drugs will be set at 250 percent of the AMP for the least costly of the products within a given multiple source designation, that must meet specified regulatory criteria. The existing formula sets the upper payment limit at 150 percent of the lowest average wholesale price. Effective July 1, 2006, the Act also requires the Secretary, for the first time, to provide AMP information to the states on a monthly basis and on a public website on a quarterly basis. Previously AMP data were subject to statutory confidentiality protections.

The Act contains a number of provisions that will affect the current rules regarding the transfer of assets and eligibility for Medicaid. States are required to impose penalties on individuals who transfer assets, including income and resources of the individual and of the individual's spouse, for less than fair market value on or after a "look-back date."

The previous "look-back date" was 36 months prior to an individual’s application for Medicaid for income and most assets, and 60 months for certain trusts. The Act lengthens the lookback date to 60 months for all income and assets disposed of by an individual after the Act's date of enactment. For income and assets disposed of prior to the enactment date, the look back periods of 36 months for income and assets and 60 months for certain trusts will continue to apply.

The Act includes a number of provisions intended to combat Medicaid fraud. These provisions were originally included in the Senate version of the budget reconciliation bill (see Law Watch 05-25). Among them is a provision that would strengthen the role of state false claims act laws by giving states direct financial incentives to adopt and enforce false claims statutes modeled on the federal False Claims Act, including providing similar financial rewards for whistleblowers.

In addition, there is a provision that implicitly mandates the establishment of compliance programs. Every entity that receives at least $5 million in Medicaid payments per year is required to establish a fraud and abuse training program by January 1, 2007 for all its employees, agents and contractors. The training program must include "detailed information" concerning the federal False Claims Act, federal administrative remedies for false claims and statements, state laws pertaining to civil or criminal penalties for false claims and statements, and whistleblower protections under these laws.

The written training materials must also include the entity’s policies and procedures for detecting and preventing fraud, waste and abuse, and any employee handbook provided by the entity must contain a discussion of these laws and the rights and protections afforded to employees as whistleblowers. Although the federal government has been recommending for years that providers have compliance programs, this is the first time that the government has, in effect, required providers to adopt them.

The Act also provides for increased spending for controlling Medicaid fraud and abuse. This includes an additional $25 million each year beginning in fiscal years 2006 through 2010 for Medicaid activities of the OIG. The bill also establishes a Medicaid Integrity Program, much like the Medicare Integrity Program, allowing HHS to hire companies to: (1) review the actions of individuals and entities furnishing items or services reimbursed by Medicaid; (2) audit claims for payment for items or services furnished, or administrative services rendered, under Medicaid; (3) identify and recover overpayments from individuals and entities receiving federal Medicaid funds; and (4) educate providers, managed care entities, and other individuals with respect to payment integrity and benefit quality assurance issues. Appropriations of $5 million for fiscal year 2006, $50 million for 2007 and 2008, and $75 million for every year thereafter would fund the Medicaid Integrity Program.