United States: Bipartisan Budget Law Extends Medicare Sequestration, Includes Medicaid Drug Rebate, Off-Campus Hospital Outpatient Department, CMP Inflation Policies

Last Updated: November 12 2015
Article by Debra A. McCurdy

On November 2, 2015, President Obama signed into law H.R. 1314, the "Bipartisan Budget Act of 2015" (BBA).  The two-year, $80 billion budget/debt-ceiling deal is funded in part by several significant Medicare and Medicaid policies, including an extension of Medicare sequestration, changes to Medicare payment for services provided in "new" off-campus hospital outpatient departments (OPDs), and extention of inflation-based Medicaid drug rebates to generic drugs.

While the BBA provides $80 billion in discretionary spending sequestration relief over two years, the agreement extends Medicare sequestration – which generally cuts Medicare provider and plan payments by 2% across-the-board — for an additional year, through fiscal year 2025.  The law also provides a uniform 2% reduction for 2024 instead of applying different rates during the first and second halves of the fiscal year, but the FY 2025 sequestration will be "front loaded" (that is, a 4% reduction will apply during the first 6 months of the fiscal year and no reduction will be imposed during the second half of the fiscal year).  While Congress could end or otherwise revise the Medicare sequestration rules at any time, extending Medicare sequestration appears to be an irresistible source of funding for lawmakers, so there is no assurance that these sequestration reductions will actually end a decade from now.  For background on Medicare sequestration policy, see our

In addition, the BBA includes a significant change in how hospitals are reimbursed for services provided in "new" off-campus hospital OPDs — those located more than 250 yards from the main hospital campus that enter into a Medicare provider agreement after November 2, 2015.  Effective for services provided on or after January 1, 2017 (other than services furnished by a dedicated emergency department), such OPDs will be paid under the ambulatory surgical center prospective payment system or the Medicare physician fee schedule, rather than the (generally higher-paying) hospital outpatient prospective payment system (OPPS).  OPDs that were billing under the OPPS with respect to covered OPD services furnished prior to November 2, 2015 are grandfathered and will continue to be paid under the OPPS.

The BBA also extends to generic drugs the inflation-based Medicaid drug rebates that currently are paid on brand drugs.  Specifically, for generic drugs first marketed before April 1, 2013, the manufacturer will have to pay a rebate equal to the difference between (i) the product's current quarter average manufacturer price (AMP) and (ii) the "base period" AMP from the third quarter of 2014 adjusted for inflation.  For generic drugs first marketed after April 1, 2013, the calculation is the same except that the "base period" will be deemed to be the fifth full calendar quarter beginning after the date the product is first marketed.  These rebates will take effect with the first quarterly rebate period that begins one year after enactment.  For more analysis of this provision, see our Life Sciences Legal Update blog post.

Furthermore, the BBA increases civil monetary penalties (CMPs) under the Social Security Act (SSA) and the Occupational Safety and Health Act to account for inflation since their last update prior to 1996 (with certain exceptions).  The amount of the "catch up" adjustment is capped at a 150% increase, and it must take effect not later than August 1, 2016, with inflation adjustments applied annually thereafter. This provision can be expected to result in a significant increase in the maximum CMPs that could be imposed for violation of a variety of Medicare and Medicaid program requirements, and will also affect False Claims Act penalties, as discussed in a separate post.  The catch-up adjustment may be decreased by the otherwise required amount if an agency head determines (after notice and comment rulemaking) that increasing the CMP by the otherwise-required amount will have a negative economic impact, or if the "social costs" of increasing the CMP by the full amount outweighs the benefits, and the Office of Management and Budget concurs with the agency's assessment.

Other BBA provisions include, among others, repeal an Affordable Care Act (ACA) provision that requires employers with more than 200 employees to automatically enroll new full-time equivalents into a qualifying health plan if offered by that employer, and to automatically continue enrollment of current employees.  The BBA also shields certain Medicare beneficiaries from a substantial increase in Medicare Part B premiums for 2016.

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

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