Government Affairs - Issues

Medicare/Medicaid Archives

House Fails to Override SCHIP Veto

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House and Senate Hearings Focus on SGR Reform

March 13, 2007 - Several Congressional Committees held recent hearings focusing on Medicare Payment Advisory Commission (MedPAC) recommendations for reforming Medicare's Sustainable Growth Rate (SGR) for physician payment..  The Senate Finance Committee (March 1), the House Ways and Means Health Subcommittee (March 6), and House Energy and Commerce Health Subcommittee (March 6) heard testimony from, among others, MedPAC Chair Glenn Hackbarth, J.D., Government Accountability Office (GAO) Health Care Director Bruce Steinwald, and Congressional Budget Office (CBO) Director Peter Orszag, Ph.D.

Chairman Hackbarth testified that "Significant disagreement exists within [MedPAC] about the utility of expenditure targets."  He added that "the complexity of the issues makes it difficult to recommend any option with confidence."  However, the commission unanimously agrees that any payment reforms must "change the inherent incentives in the fee-for-service system to reward quality and efficient use of resources while improving payment equity."  He offered examples of such changes: performance-based payments; improved "payment accuracy"; improving payment equity among regions and specialties; incentives to coordinate care; using comparative-effectiveness information; and bundling payments.

In his testimony before the Finance Committee, Dr. Orszag identified "four dimensions" of physician payment reform: promoting efficiency; encouraging "fiscal discipline in policymaking"; assuring "equity among regions and providers"; and minimizing/offsetting the cost of altering the system.  Dr. Orszag's testimony also included cost estimates for short- and long-term SGR reform options. The costs ranged from $4.2 billion (over 10 years) for a 1-year freeze to $330.5 billion (over 10 years) to replace the SGR with an inflation-based update.  Dr. Orszag stated that "significant" cuts in physician payment rates could potentially reduce the number of participating providers, reduce quality, and/or trigger over-utilization of certain services.

Appearing before the Energy and Commerce Health Subcommittee, Mr. Steinwald testified that "physician profiling" (comparing a physician's performance to an "efficiency standard") could be an important part of SGR reform.  According to Steinwald, the Centers for Medicare and Medicaid Services (CMS) could use medical claims information to "identify physicians who are likely to practice medicine inefficiently."

During the Ways and Means Health Subcommittee hearing, Chairman Pete Stark (D-CA.) expressed support for the collection and analysis of comparative effectiveness data.  Chairman Stark proposed the development of a health information technology network to collect such data, as well as the development of medical school curricula that reflects newly identified best practices.  Also during the Ways and Means hearing, Reps. Mike Thompson (D-CA.) and Earl Pomeroy (D-ND) voiced concern that the Medicare payment system discouraged primary care physicians from practicing in rural areas.  They and others also argued for increased payments to primary care physicians (to encourage growth in the specialty), as well as bonus payments for physicians who manage patients with chronic illnesses.

 

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AAMC Signs Letter Outlining Physician Payment Reform Proposal

March 12, 2007 - On February 28th, the Association of American Medical Colleges (AAMC) along with seventy six specialty societies, sent a letter to the leadership of the Senate Committee on Finance, and the House Committees on Ways and Means, and Energy and Commerce concerning the sustainable growth rate (SGR),  The letter, which also was sent to the Chairs and Ranking Members of the respective health subcommittees, outlines "a proposal for modifying Medicare's physician payment formula."  The AAMC was part of a workgroup that developed the document.

The proposal recommends:

• repealing the SGR and gradually transitioning to a new payment system;
• developing initiatives to assure the "appropriateness" of physician services;
• re-evaluating and refining the 2007 voluntary Medicare Physicians Quality Reporting Initiative;
• and enacting additional reforms to "create incentives for judicious use of services" and "adequately fund the program."

The letter states that the recommendations "are the result of extensive work by organizations representing a wide variety of physician specialties."  They reflect a "central premise" that payment reforms "are best fostered through positive incentives that inspire physicians...not by top-down spending targets" that do not "distinguish between appropriate and inappropriate care."

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Congress Approves Physician Fix, Health and Education Provisions

December 22, 2006 - On December 8th, during the last hours of the 109th Congress, the Senate cleared, by a vote of 79-9, a House-passed comprehensive tax and trade bill (H.R. 6111) that includes provisions to establish a zero percent update for CY 2007 Medicare physician payments (without such legislation, physicians faced a negative 5% update to CY 2007 Medicare payments).  The planned decrease would have meant a roughly $3 million drop in revenue for Columbia’s faculty practice.  The estimated $3.1 billion cost of the one-year freeze appears to be covered by a reduction in the Medicare Advantage Stabilization Fund.  The bill does not address the long term problem of insufficient Medicare physician payment rates.  The bill states that the freeze in FY07 rates will not factor in the calculation of FY 08 rates, which will be based on the assumption that the cut had gone into effect.  This means that Medicare physician spending will likely miss its target spending level and that the formula will call for an even greater decrease next year.

Also included in H.R. 6111 of interest to academic medical centers:

·        Set aside $1.35 billion for a "Physician Assistance and Quality Initiative Fund," which the Secretary of Health and Human Services (HHS) could use for 2008 "physician payment and quality initiatives, which may include...update of the conversion factor."

·        Initiate a short-term physician quality reporting program based on the Physician Voluntary Reporting Program (PVRP). Under the new initiative, physicians may qualify for "bonus payments" for services provided from July 1 to Dec. 31, 2007. Additionally, the provision establishes a long-term quality reporting program in CY 2008.

·        Reduce the federal limit on the allowable Medicaid provider tax rate from 6 percent to 5.5 percent from Jan.1, 2008, to Sept. 30, 2011 (the Bush Administration's FY 2007 budget had proposed a 3 percent limit).

·        Implement no sooner than 2009 a voluntary quality reporting program for hospital outpatient departments and ambulatory surgery centers. Facilities that do not participate in the program will face a 2 percent reduction in their annual payment update.

·        Require an HHS Office of Inspector General study of Medicare payments for services related to "never events," as defined by the National Quality Forum.

·        Extend certain provisions established under the Medicare Modernization Act of 2003, including a one-year extension of the one percent floor for the work-related geographic practice costs indexes (GPCI) used to calculate physician payments, and a 6-month extension of certain hospital wage index reclassifications.

·        Extend through 2007 a 20 percent research and development tax credit that applies to corporate cash expenses, including grants or contributions, that pay for basic university research.

·        Extend through 2007 a tuition tax break that allows individuals who earn $65,000 or less a year ($130,000 for married couples filing joint returns) to deduct up to $4,000 in higher-education expenses from their taxable income. The maximum deduction is $2,000 for those who earn $65,000 to $80,000 ($130,000 to $160,000 for married couples).

President Bush signed the bill into law on December 20th.

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MedPAC Continues SGR Alternatives Discussion

The Medicare Payment Advisory Commission (MedPAC) continued its work on a mandated report to evaluate alternatives to the sustainable growth rate (SGR) for updating physician payments.  The MedPAC report will address volume control at the medical group level, physician outliers, and hospital medical staff.

Elliott Fisher, M.D., M.P.H., Dartmouth Center for Evaluative Clinical Services, presented a potential approach for evaluating hospital medical staff.  Using the term "extended hospital medical staff" (EHMS), Dr. Fisher suggested that physician measurement and volume controls could be applied to all physicians, even physicians that do not admit patients to a specific hospital.  Physicians with inpatient work would be assigned to the hospital where most of their inpatient work was performed.  Physicians that do not have inpatient work would be assigned to the hospital where the plurality of the patients they billed for were admitted.  Almost all Medicare physicians could be assigned to an acute care hospital using this methodology.

Medicare beneficiaries also would be assigned to their primary EHMS, and the EHMS could be held accountable for care delivered.  Dr. Fisher noted that based on his work at Dartmouth Atlas, he believes unnecessary variation is due to excess supply, and this proposal will inform decisions on increasing capacity.

The commissioners expressed interest in the EHMS model and discussed issues that could impact implementation, such as measuring care for beneficiaries who live in different hospital regions throughout the year; incorporating care from other organizations such as skilled nursing facilities; and measuring services and care provided by referral hospitals.

MedPAC staff also presented preliminary results of the episode treatment groupers that measure and compare care provided by multi-specialty groups and identify physician outliers.  The report is due to Congress March 1, 2007.

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MedPAC Continues Discussions on IME and DSH Adjustments as Well as Physician Payments

At its October 5th-6th meeting, the Medicare Payment Advisory Commission (MedPAC) continued the discussion that it began at the September meeting on the purpose of indirect medical education (IME) and disproportionate share (DSH) payments within the Medicare program.  They also discussed physician payment issues.

Commission staff provided information showing that the "empirically justified" IME adjustment based on 2004 hospital data and Medicare policies was 2.1%, which is significantly less than the 5.35% adjustment that is currently paid to teaching hospitals.  Staff noted that the adjustment would be 2.2% if Medicare adopted the commission's recommendations on DRG refinements.  The empirical level is based on regression analyses that attempt to explain the higher patient care costs of teaching hospitals compared to non-teaching hospitals.  Staff analyses also showed that the empirical level of the DSH adjustment was significantly lower than the current DSH payment levels.  As a result, Medicare inpatient margins for hospitals receiving these payments are higher than for other hospitals.

The Commission’s discussion centered around why the current DSH and IME adjustments are higher than their empirical levels.  It focused primarily on IME payments, with staff noting that when the inpatient prospective payment system (PPS) was implemented, Congress purposely set the adjustment at double the empirical level out of concern that teaching hospitals would fare poorly under the PPS.  However, actual experience showed that teaching hospitals did not suffer financially under the PPS as originally feared.

Some staff and commissioners noted that teaching hospitals provide other important societal benefits, such as providing uncompensated care, using cutting edge technologies, and maintaining stand-by capacity, which might justify the additional payments.  Also discussed was whether the best funding source for these functions is federal appropriations rather than the Medicare program.

At the end of the discussion, Chair Glenn Hackbarth reiterated his concern about the level of the IME adjustment, stating that if one of the purposes of the IME adjustment is to compensate teaching hospitals for handling more complex and sicker patients, that purpose can be dealt with more directly by refining the Medicare inpatient PPS diagnosis-related groups (DRGs), which MedPAC has recommended in the past.  According to Chairman Hackbarth, if this recommendation were adopted it would allow at least "at least some piece of IME" to be put in the base payment rates for all hospitals.

The discussion on the DSH adjustment continued to focus on the need to obtain reliable uncompensated care data from hospitals so that DSH payments could be better targeted to those hospitals that provided higher levels of uncompensated care.  Currently, the DSH formula distributes payments based on a hospital's level of Medicaid and poor Medicare patients.

On the physician front, in preparation for its March 2007 mandated report to Congress, MedPAC continued evaluating alternatives to the sustainable growth rate (SGR) system for controlling growth in physician services.  The commission presented several ideas they might recommend that were not explicitly mentioned in the statutory report request. These options include:

• implementing pay-for-performance;
• encouraging coordination of care;
• bundling physician services;
• ensuring accurate prices for physician services;
• promoting use of primary care;
• exploring the benefits of physician groups;
• revisiting Medicare benefit design;
• measuring physician resource use;
• using clinical and cost-effectiveness information;
• imposing quality standards as a condition of participation; and
• capitalizing on contractor reform.

Chairman Hackbarth reiterated that these options were "draft" and that items may be added to or deleted from the list of considerations.  Also related to the SGR report, commissioners heard a panel discussion on the structure and organization of physician groups, and how financial and quality incentives might be applied to physician medical groups.

In other areas, the commission discussed:

• alternatives to the current hospital wage index;
• trends in Medicare Part D (prescription drug) enrollment and payment;
• a Congressional mandated rural hospital report, and
• an initial examination into the profile of future Medicare beneficiaries.

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CMS Inpatient Final Rule Makes Changes to DRG Methodology and Didactic Activities Regulations

August 20, 2006 - The Centers for Medicare and Medicaid Services (CMS) will move from a charge-based to a cost-based methodology for determining per case payment weights according to the fiscal year (FY) 2007 Medicare hospital inpatient prospective payment system (IPPS) final rule.  However, the methodology contains significant changes from what was originally proposed and will be phased-in over three years.  In addition, CMS will not implement a new consolidated severity adjusted diagnosis-related group (DRGs) system, but will instead add twenty DRGs to the current system.  The changes will go into effect October 1st.

While CMS did not implement a one-year delay in the changes, as urged by the hospital community and others, CMS was responsive in making a number of significant technical corrections that had been identified by hospitals.  CMS also decided to retain the current method of "standardizing" costs across hospitals, rather than implementing a new hospital-specific relative value (HSRV) standardization process.  However, the agency said it will continue to analyze the HSRV option and may implement it in the future.

In terms of refining the DRG classification system to better reflect patient severity, CMS stated that while it decided not to implement the CS-DRGs this year, the Agency will conduct an evaluation "with public input" of alternative systems to make more comprehensive changes in FY 2008.

CMS also modified its position on "Didactic Activities."  The final rule made changes regarding when hospitals may count the time residents spent in didactic activities, such as conferences and educational lectures, for purposes of calculating direct graduate medical education (DGME) and indirect medical education (IME) payments.  In the proposed rule, CMS stated that didactic time must be excluded in all IME calculations, and for DGME calculations in non-hospital sites, because the activities are not "related to patient care."  Over 1,200 comments urged CMS to rescind this position and recognize the integral relationship between didactic activities and patient care delivery.

While CMS staunchly defends its position in the final rule that didactic time is not related to patient care, because of the documentation burdens associated with identifying all didactic activities, CMS has decided, effective October 1st, to institute a "one workday" threshold for documentation purposes.  CMS states, "as long as an entire workday is not scheduled for didactic activities, then for documentation purposes, that day may be recorded as spent in patient care activities."

In other areas, the final rule sets the outlier threshold at $24,475 in FY 2007, which is $875 more than the current year, but $1,055 less than what was proposed, and postpones publication of wage index values to collect occupational mix data (to comply with the court-ordered move to a 100% occupational mix adjustment in FY 2007).  CMS states in the final rule that these values will be published in a separate notice before October 1st.

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CMS Releases Physician Work and Practice Expense Updates

July 26, 2006 - The Centers for Medicare and Medicaid Services (CMS) published updates for two components of the physician fee schedule payment: physician work relative value units (WRVUs) and practice expense relative value units (PERVUs).  Physician WRVUs, which measure the relative time and intensity of physician work for each of more than 8,000 clinical service codes, account for approximately half of Medicare's payments to physicians.  Practice expense payments, excluding professional liability insurance, account for approximately 45% of fee schedule payments.  The remainder of payments is for professional liability insurance (PLIRVUs).

CMS is mandated to review physician work values no less than every five years and this is the third such comprehensive review.  Evaluation and management (E&M) services received large increases in work RVU.  The estimated impact of all new work RVUs is $4 billion.  By law, proposed payment changes over $20 million must be budget neutral.  To meet this requirement, CMS is proposing to implement a separate 10 percent budget neutrality adjustment to the work RVU component.

Additionally, CMS proposes to change the methodology to calculate and allocate practice expenses.  The practice expense methodology also is designed to be budget neutral.  CMS proposes to transition to new practice expense values over 4 years.  CMS plans to release its annual Part B proposed rule later this month to address any additional changes to physician policies, excluding the work and practice expense RVU changes.

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AAMC Submits Comments on Inpatient Proposed Rule

June 20, 2006 - On June 12th, the AAMC submitted comments on the fiscal year (FY) 2007 Medicare hospital inpatient proposed rule, published in the Federal Register April 25th.  Two primary issues were addressed: the diagnosis-related group (DRG) weighting and classification system proposed changes, as well as a purported "clarification" that would largely exclude the time residents spend in didactic activities from the resident counts used in the calculation of direct graduate medical education (DGME) and indirect medical education (IME) payments.

In the inpatient rule, the Centers for Medicare and Medicaid Services (CMS) propose to move from a "charge-based" DRG weighting methodology to a "cost-based" methodology in FY 2007.  In FY 2008 or earlier, CMS plans to increase the 526 current DRGs to 861 "consolidated severity adjusted DRGs" (CS-DRGs).  According to the accompanying press release, these proposals represent the "first significant revision of the Inpatient Prospective Payment System (IPPS) since its implementation in 1983."  Both of these changes are budget-neutral (i.e., there are no "savings" for the Medicare program), but they have major redistributional impacts across hospitals.

These proposed changes were not entirely unexpected.  In 2005, the Medicare Payment Advisory Commission (MedPAC) had recommended similar changes.  This past February, Senate Finance Committee Chair Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) urged CMS to move forward in FY 2007 with significant changes.

In its lengthy comment letter, the association espouses several overarching "principles." The AAMC:

• Supports a move from charge to cost-based DRG weights so long as they improve the payment system;
• Supports refining the current DRG system to better reflect patient severity and complexity;
• Urges postponement of the proposed cost-based weights for one year to allow for further work;
• Endorses simultaneous implementation of cost based weights and refined DRGs; and
• Urges a significant transition period to address the large swing in dollars that will result from these changes.

Both MedPAC and congressional committees have also written letters to CMS providing their views of the DRG proposals (see related article).

"Clarification" on the proposed rule states that resident training in non-hospital sites must be related to patient care if a hospital wishes to count that time for DGME and IME payment purposes.  Resident time spent in didactic activities that often occur in associated medical schools, such as educational conferences, journal clubs, and seminars, would be specifically excluded.

In its comment letter, the AAMC strongly opposes the purported clarification and urges the agency to maintain the policy set forth in a 1999 CMS letter that defined patient care activities broadly, allowing hospitals to count resident time in didactic activities.  CMS addressed this assertion, stating, "implying that didactic time spent in non-hospital settings could be counted for direct GME and IME...was inaccurate."  CMS notes that time spent in these activities could be counted for DGME purposes if they occur in a hospital; however, the counting prohibition applies for IME payments regardless of where the educational activity occurs.

The final inpatient rule is required by statute to be published by Aug. 1.

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House Budget Requires $4 Billion in Savings from Ways and Means; Urges Short-Term Physician Payment Fix

May 26, 2006 - The House-passed budget resolution (H.Con.Res. 376) includes reconciliation instructions for the House Ways and Means Committee, which oversees the Medicare program.  Specifically, the Committee must identify $4 billion in savings over five years. While the reconciliation instructions do not specify which programs should be cut, the report language accompanying H.Con.Res. 376 does state that the budget resolution assumes no reductions in Medicare or Medicaid.

The report language also states that the Sustainable Growth Rate (SGR) methodology used to calculate Medicare physician payments "does not accurately reflect physician services or beneficiary utilization rates; and as such, physicians are scheduled to receive a significant reduction in reimbursement…in FY 2007 and beyond."  The Budget Committee "recognizes the need to modernize and stabilize physician payment," and it urges Congress "to determine a fair short-term solution" for FY 2007, as well as "a long-term solution…so the Congress need not address the payment issue annually..."  The report language also "recommends that quality improvement initiatives be included in any physician payment update...”

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CMS Releases Medicare Inpatient Proposed Rule

(AAMC Washington Highlights) On April 12th the Centers for Medicare and Medicaid Services (CMS) released its proposed FY 2007 Medicare inpatient rule.  Major teaching hospitals would see their Medicare per case payments increase by significantly less than what Congress authorized if the rule is finalized.  The rule will be published in the Federal Register April 25th.  According to the CMS press release, this proposed rule begins a transition to the "first significant revision of the Inpatient Prospective Payment System (IPPS) since its implementation in 1983."

While current law specifies that the Medicare base per case payment increase by 3.4% in FY 2007, CMS estimates that teaching hospitals training 100 or more residents would see average per case payments in FY 2007 that would be only 2.1% than last year.  Other teaching hospitals and non-teaching hospitals would see increases of 2.6% and 4.8%, respectively; rural hospitals would see an average increase of 6.7%.

A portion of the lower increase is due to the legislatively mandated cut in indirect medical education (IME) payments, from 5.55% to 5.35%.  However, the reduction also is due to a proposed significant regulatory change to the diagnosis-related group (DRG) payment weight calculation from a charge-based method to a hospital-specific cost-based method.  According to the proposed rule, this change reduces payments from those cases that require more ancillary services, such as surgical cases, while medical cases would see payment increases.

The movement from a charge-based to cost-based weighting methodology is the first of CMS's envisioned two-part transformation to the IPPS.  In FY 2008, CMS proposes to move to a new DRG system that would better reflect severity.  In theory, such a change should help major teaching hospitals because they tend to treat the most severe Medicare patients.

CMS has indicated it will consider comments it receives in response to its proposal. In a press release, CMS Administrator Mark McClellan states that "This proposed rule will be shaped by the public comment process... We look forward to comprehensive feedback from hospitals, suppliers, and other stakeholders that will help to refine and improve the final version of the rule."

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CMS Describes Plans for Physician Payments

January 13, 2006 - On January 6th, 2006 Centers for Medicare and Medicaid Services (CMS) Director of the Center for Medicare Management Herb Kuhn sent a letter to House Ways and Means Committee Chair Bill Thomas (R-CA) describing CMS plans related to physician payments and claims processing. The delay in final Congressional action on the House and Senate-passed Deficit Reduction Act (S. 1932) resulted in a 4.4% cut to physician payments effective on Jan. 1, 2006. CMS has indicated that physicians and other Part B providers should not hold claims. The letter to Congressman Thomas states that upon enactment of the pending legislation, which will update payments to zero percent effective January 1st, CMS will immediately issue instructions to carriers and fiscal intermediaries instructing them to automatically reprocess claims that were already processed at the negative 4.4% update. Providers will not need to resubmit claims.

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MedPAC Approves Update Recommendations for Hospital and Physician Payments

January 13, 2006 - At its January 10th and 11th meeting, the Medicare Payment Advisory Commission (MedPAC) approved final recommendations on Medicare payment updates for 2007, to be published in its March 2006 Report to the Congress. Despite a projected negative overall Medicare margin of negative 2.2% in 2006, the commission recommended an update to the hospital inpatient and outpatient payment rates equal to the increase in the hospital market basket (an inflation measure) minus 0.45% points. For physician services, MedPAC recommended to update payments for physician services by the projected changes in input prices less the productivity expectation growth for 2007. MedPAC estimates price inflation of 3.7% and productivity growth of 0.9%, which would make the update 2.8%. MedPAC also will comment in its report that it does not support the physician fee cuts scheduled through 2011 and considers the current volume control formula, known as the sustainable growth rate or SGR, to be a "flawed, inequitable mechanism."

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Budget Reconciliation Almost Complete, Physician Rates Held at 2005 Levels

January 3, 2006 - Budget reconciliation, a process Congress undertakes to make changes in the tax code and to mandatory spending programs like Medicare and Medicaid, was to have been completed in September, but Congress was forced to turn all of its attention to Hurricane Katrina. By mid-November the House Republican leadership was finally able to engineer passage of budget reconciliation legislation. Just a week earlier, the Republican leadership had to cancel a vote on an earlier version of the bill because they did not have the votes needed for approval. After revising the bill by, among other things, dropping the provisions to allow drilling in the Alaska National Wildlife Refuge (ANWR) and softening of cuts to the Medicaid program, and holding the vote open for nearly double the normally allotted time, Republicans pulled out a 217-215 victory. The Senate had passed its version of a budget reconciliation bill a week earlier but it contained $15 billion less in spending cuts and did include the ANWR provision.

Unlike the House, the Senate did address the issue of physician payment. The Centers for Medicare and Medicaid Services has announced that on January 1st, 2006 it will reduce the payments it makes to physicians on behalf of Medicare beneficiaries by 4.3%. The Senate bill would have replaced that decrease with a one year, 1% increase in reimbursement rates.

Both houses did finally approve a conference version of the "Deficit Reduction Omnibus Reconciliation Act of 2005." The House approved the bill mostly along party lines by a vote of 212-206, and in the Senate, Vice President Dick Cheney had to break a tie to ensure the final 51-50 vote for passage. Due to procedural issues, however, final approval and presentment to the President had to be postponed until January. The budget deal would reduce mandatory spending by $40 billion over five years, including $8.3 billion in net Medicare savings and $4.8 billion in net Medicaid savings over five years. The bill freezes physician payment rates at the 2005 level for this year, no increase, but avoiding the 4.3% cut.

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House Approves Budget Reconciliation Bill

Rebounding from the embarrassment of loosing the vote on passage of the Labor, Health and Human Services, and Education Appropriations bill, the House Republican leadership was able to engineer the passage later the same day of budget reconciliation legislation ( H.R. 4241) by a 217-215 vote. Just a week earlier, the Republican leadership had to cancel a vote on an earlier version of the reconciliation bill because they did not have the votes needed for approval. After revising the bill a second time to appease House Republican moderates by, among other things, dropping the provisions to allow drilling in the Alaska National Wildlife Refuge and softening of cuts to the Medicaid program, and holding the vote open for nearly double the normally allotted time, Republicans pulled out the victory. The Senate had passed its version of a budget reconciliation bill a week earlier. The bill now goes to conference where the two sides will return to it after the Thanksgiving recess.

Specifically, the revisions alter the bill in the following ways:

• Allows seniors to shelter $750,000 in home equity their assets instead of $500,000, to be eligible for Medicaid coverage for nursing home care. The revision is reported to cost $350 million over five years.
  
• Maintains the current $3 co-payment required of Medicaid recipients for most medical services, rather than increasing it to $5. Such a change reduces the proposed savings by $100 million over five years.
  
• Allows a delay in planned cuts to Medicaid payments to pharmacies for prescription drugs if the Government Accountability Office finds that the average prices pharmacies pay for the drugs they sell to customers are above the new amounts set in the bill.
  
• Expands the uses of Medicaid Transformation Grants provided by the Secretary to encourage the use of generic drugs and reduce Medicaid drug spending.
  

The budget bill still includes a provision of concern to academic medical centers that would limit hospital payments for emergency services provided to "out-of-network" Medicaid managed care beneficiaries. Under the provision (Sec. 3147), a provider "must accept as payment in full the amounts (less any payments for indirect costs of medical education and direct costs of graduate medical education) that it could collect if the beneficiary received medical assistance under [fee-for-service Medicaid]." The AAMC is concerned that the provision could jeopardize direct graduate medical education and indirect graduate medical education payments that teaching hospitals have already negotiated with either Medicaid managed care plans or their states.

More importantly, unlike the Senate, the House did not address the issue of Physician Payment. The Centers for Medicare and Medicaid Services has announced that on January 1st, 2006 it will reduce the payments it makes to physicians on behalf of Medicare beneficiaries by 4.3%. The Senate bill would replace that decrease with a one year, 1% increase in reimbursement rates.

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Medicaid Commission Recommends Proposals to Reduce Spending

The Medicaid Commission completed the first requirement of its two-part charge by recommending a series of short-term proposals that would reduce Medicaid spending by $11 billion over the next five years. The group officially offered these recommendations in a Sept. 1 report to the Secretary of Health and Human Services and Congress. These recommendations will likely guide the Senate Finance and House Energy and Commerce Committees in identifying the savings required under the FY 2006 budget resolution.

Most of the commission's proposals would achieve programmatic savings through changes to the program's prescription drug reimbursement formula. Commission members also recommended several other revisions to the Medicaid program, including changes aimed at reducing the abuse of loopholes associated with the transfer of assets required for Medicaid eligibility.

The commission is chaired by former Tennessee Governor Don Sundquist, with former Maine Governor Angus King serving as Vice Chair. The commission is to issue a second set of long-term recommendations by Dec. 31, 2006.

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Senate, House Delay Budget Reconciliation Deadline

In the wake of Hurricane Katrina, both the Senate and House have formally postponed until the end of October the deadlines for their respective Budget Committees to report legislation to cut mandatory spending by nearly $35 billion over the next five years, including $10 billion in Medicaid and $1 billion in Medicare cuts. Under the terms of the FY 2006 budget resolution approved in April, the Budget Committees were to report reconciliation bills to reduce mandatory spending by September 16th.

Senate Majority Leader Bill Frist (R-TN) and Senate Budget Committee Chair Judd Gregg (R-NH) released a joint statement September 12th delaying until October 26th the deadline for the Senate Budget Committee to report its mandatory spending reconciliation bill. The House joined the next day when Budget Committee Chair Jim Nussle (R-IA) informed the authorizing committees that his committee would mark up its spending reconciliation bill the week of October 24th. The authorizing committees, which have jurisdiction over the programs slated for spending cuts, must report their recommendations to the Budget committees about a week ahead of the reporting deadline to permit budget committee staff time to assemble the proposals into a single bill

GOP leaders were concerned that postponing the deadline established in the budget resolution would strip the reconciliation bill of the special protections it enjoys from filibusters on the Senate floor. However, the Senate Parliamentarian has indicated the decision to delay "will not jeopardize the privileged status of any reported reconciliation bill." But delaying the budget deadline may not make the task of passing the spending cuts any easier as Democrats and moderate Republicans are lining up to oppose efforts to reduce programs such as Medicaid and other programs for the poor that are likely targets for spending cuts in the reconciliation bill. Republican leaders insist that reforming entitlement programs to make them more efficient is even more necessary now because of the anticipated costs of the Katrina relief and rebuilding efforts.

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Leavitt Names Medicaid Commission

Secretary of Health and Human Services Secretary Mike Leavitt announced thirteen voting members and fifteen non-voting members of an advisory commission charged with identifying reforms necessary to stabilize and strengthen Medicaid. Two additional voting positions are being reserved for current governors and will be filled after Sept. 1, 2005. Creation of the commission was prompted by a provision in the FY 2006 budget agreement.

Members of the commission include Republican and Democratic health policy leaders, state health department officials, public policy organizations, individuals with disabilities and others with special expertise. Hospital and physician interests are primarily represented by the non-voting members.

The commission is charged with outlining recommendations by Sept. 1 for Medicaid to achieve $10 billion in reductions in spending growth during the next five years as well as ways to begin meaningful long-term enhancements that can better serve beneficiaries. The first report also will consider potential performance goals for Medicaid as a basis of longer-term recommendations. A second report, due Dec. 31, 2006, will provide recommendations to help ensure the long-term sustainability of Medicaid.

Former Tennessee Governor Don Sundquist will chair the commission and former Maine Governor Angus King will serve as vice-chair. The commission members are:

• Nancy Atkins, commissioner for the Bureau for Medical Services, Department of Health and Human Resources, West Virginia;
  
• Melanie Bella, vice president for policy, Center for Health Care Strategies, Inc.;
  
• Gail Christopher, vice president for health, Women and Families at the Joint Center for Political and Economic Studies and director of the Joint Center Health Policy Institute;
  
• Gwen Gillenwater, director for advocacy and public policy, National Council on Independent Living;
  
• Robert Helms, resident scholar and director of health policy studies, American Enterprise Institute;
  
• Kay James, former director of the U.S. Office of Personnel Management;
  
• Troy Justesen, deputy assistant secretary for the office of special education and rehabilitative services, U.S. Department of Education;
  
• Tony McCann, secretary of health and mental hygiene, Maryland;
  
• Mike O'Grady, assistant secretary for planning and evaluation, U.S. Department of Health and Human Services;
  
• Bill Shiebler, former president, Deutsche Bank; and
  
• Grace-Marie Turner, president, Galen Institute.

In addition to the voting members, the commission will consist of the following non-voting members:

• James Anderson, president and CEO, Cincinnati Children's Hospital Medical Center, National Association of Children's Hospitals;
  
  
• Julianne Beckett, director of national policy, Family Voices;
  
• Carol Berkowitz, president, American Academy of Pediatrics;
  
• Maggie Brooks, county executive, Monroe County, New York;
  
• Valerie Davidson, executive VP, Yukon-Kuskokwim Health Corporation;
  
• Mark de Bruin, senior VP of pharmacy services, Rite Aid; chairman of the policy council, National Association of Chain Drug Stores;
  
• John Kemp, CEO, Disability Service Providers of America;
  
• Joseph Marshall, chairman and CEO, Temple University Health System, American Hospital Association;
  
• John Monahan, president of state sponsored programs for WellPoint; Blue Cross/Blue Shield Association and America's Health Insurance Plans;
  
• John Nelson, M.D., immediate past-president of the American Medical Association;
  
• Joseph J. Piccione, corporate director of mission integration, OSF Healthcare System;
  
• John Rugge, CEO, Hudson Headwaters Health Network, National Association of Community Health Centers;
  
• Douglas Struyk, president and CEO, Christian Health Care Center, American Health Care Association/National Center for Assisted Living and American Association of Homes and Services for the Aging;
  
• Howard Weitz, M.D., cardiologist, Thomas Jefferson University; and
  
• Joy Johnson Wilson, director of health policy and federal affairs counsel, National Conference of State Legislators.
  

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Ways and Means Leadership Urges CMS to Address Flaws in SGR Methodology

In a July 12 letter to Centers for Medicare and Medicaid Services (CMS) Administrator Mark McClellan, M.D., Ph.D., House Ways and Means Committee Chairman Bill Thomas (R-CA) and Health Subcommittee Chairwoman Nancy Johnson (R-CT) urged "consideration of administrative changes" to the Sustainable Growth Rate (SGR) methodology used to calculate Medicare physician payments.

The letter asks Dr. McClellan to "undertake new action" to remove prescription drugs and biologic expenditures from the SGR calculation. It also urges CMS to review how it determines the costs of national coverage decisions, which are reflected in the SGR target. Reps. Thomas and Johnson are concerned that a legislative SGR fix "would be prohibitively expensive, given current interpretations of the formula." However, they suggest that an SGR fix that combines both administrative and legislative actions "could proceed."

Also in the letter, Reps. Thomas and Johnson applaud recent CMS initiatives to develop and evaluate performance-based Medicare payments. Such initiatives, they believe, "will provide us with the experience we need to design appropriate rewards for delivering quality care." Reps. Thomas and Johnson state that they look forward to working with CMS "to develop incentives for physicians to provide high-quality care to Medicare beneficiaries."

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Physician Payment Bills Introduced in the House and Senate

Legislation to address the problematic Sustainable Growth Rate (SGR) methodology which is used to calculate Medicare physician payments has been introduced in both the House and Senate. In May, Representatives Clay Shaw (R-FL) and Ben Cardin (D-MD) introduced the Preserving Patient Access to Physician Act (H.R. 2356). In CY 2006, the legislation establishes an update of “at least” 2.7%. In CY 2007 and thereafter, the legislation replaces the SGR methodology with a new formula. Later that same month, Jon Kyl (R-AZ) and Debbie Stabenow (D-MI) introduced S 1081, also titled The Preserving Patient Access to Physician Act. The Senate bill establishes an update of “at least” 2.7% in CY 2006 and temporarily replaces the SGR methodology in CY 07 with a new formula that is similar to the one outlined in H.R. 2356. Both bills use MedPAC’s recommendations (the update should reflect the change in input prices, less a productivity adjustment) as a foundation for the new formula. Current estimates place the update at about 2.4%. According to CMS Without congressional or administrative action, the Medicare physician payment update is projected to be cut by 4.3% in CY 2006 and 25% over the next five years.

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Governors Won’t Participate in Medicaid Commission

The National Governors Association (NGA) stated that it will work independent of the Department of Health and Human Services' Medicaid Commission to develop short- and long-term options for program reform. According to a press release, the "NGA will provide its recommendations to Congress and the commission as opposed to being part of the commission."

The release also outlines an interim Medicaid Reform Policy, which includes a variety of proposals to "more efficiently manage the program and subsequently serve all those in need." The interim policy was developed by the bipartisan NGA Medicaid Working Group, which is led by Chairman Governor Mark Warner (D-VA) and Vice Chairman Governor Mike Huckabee (R-AR). The full NGA membership is expected to vote on the recommendations during their annual summer meeting. According to the press release, the NGA will share the details of their policy recommendations at a June 15 hearing before the Senate Finance Committee.

The NGA reforms address prescription drug reimbursement, asset transfers related to long-term care and cost-sharing. They also call for increased flexibility in structuring benefits packages, reforming the waiver process, and judicial reforms that assure states have the "fundamental right to make basic operating decisions about optional categories of the program." The NGA also proposes the creation of a "National Health Care Innovations Program" to control costs and improve quality through the use of health information technology, as well as various incentives for employer-based and private healthcare coverage.

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Medicare Physician Payment Legislation Introduced

Congressmen Clay Shaw (R-FL) and Ben Cardin (D-MD) have introduced the "Preserving Patient Access to Physicians Act of 2005" ( H.R. 2356), which would avert projected reductions in Medicare physician payments. Without congressional or administrative action, physicians are expected to face a 4.3% reduction in the conversion factor in CY 2006. The Medicare Board of Trustees has projected additional annual reductions through CY 2011.

The bill sets Medicare's CY 2006 physician payment update at "not less than 2.7%." It also replaces the Sustainable Growth Rate (SGR) methodology with a new formula for calculating physician payments in CY 2007 and beyond. The new formula, which appears to be based on recommendations made by the Medicare Payment Advisory Commission (MedPAC), would reflect changes in input prices, less a productivity adjustment. MedPAC had recommended the new formula in its March 2005 Report to Congress as a long-term solution to the problematic SGR methodology.

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Newly Released Document Outlines Cost of Changing Medicare Physician Payment Formula

Proposals to change the Medicare physician payment methodology would cost as much as $154.5 billion over ten years, according to a new table of estimates released by the Congressional Budget Office. The $154.5 billion estimate reflects the cost of replacing the sustainable growth rate (SGR) methodology with an update that accounts for increases in the cost of providing care. This option is similar to one supported by the Medicare Payment Advisory Commission. Freezing payment rates at 2005 levels would cost $48.6 billion over ten years.

A two-year extension of the physician payment provisions in the Medicare Modernization Act (MMA), which set the CY 2004 and CY 2005 updates at 1.5%, would require $20.8 billion in additional spending over five years. However, the temporary increase would not eliminate the SGR methodology, which produces negative updates to compensate for spending that exceeds annual targets. Subsequently, the table shows that the ten-year cost of the two-year extension would be $1.7 billion due to significant payment reductions in CYs 2011 - 2015.

Another proposal to retrospectively and prospectively remove physician-administered drugs from the SGR calculation is estimated to cost $114.2 billion over ten years.

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Republican House Members Oppose Medicaid Cuts

Congresswoman Heather Wilson (R-NM) was joined by forty-three of her House Republican colleagues in sending an April 13th letter to Budget Committee Chairman Jim Nussle (R-IA), opposing the inclusion of Medicaid cuts and reconciliation instructions in the final FY 2006 budget agreement. The House-passed Budget Resolution (H. Con. Res. 95) directs the Energy and Commerce Committee to identify $20 billion in savings over the next five years. While the bill does not specify how the Committee must find the savings, it requires that the savings come from within programs under their jurisdiction. Given that Medicaid is under Energy and Commerce jurisdiction, and given its high level of funding, it is likely savings would be achieved through program cuts.

The letter expresses concern that the proposed cuts would "negatively impact people who depend on the program and the providers who deliver health care to them." It advises Chairman Nussle that "policy should drive the budget and not the budget drive policy." The co-signers also support establishment of a Bipartisan Commission on Medicaid, as outlined in the Senate-passed budget resolution (S. Con. Res. 18). Such a commission, they write, "would serve as a credible forum for an honest, open discussion and the development of comprehensive recommendations on how we can reform the Medicaid program."

Signers of the letter include: Bob Beauprez (CO); Judy Biggert (IL); Sherwood Boehlert (NY); John Boozman (AR); Ginny Brown-Waite (FL); Shelly Moore Capito (WV); Mike Castle (DE); Jo Ann Davis (VA); Tom Davis (VA); Charlie Dent (PA); Vern Ehlers (MI); Jo Ann Emerson (MO); Phil English (PA); Mike Fitzpatrick (PA); Luis Fortuno (PR); Jim Gerlach (PA); Joel Hefley (CO); Tim Johnson (IL); Sue Kelly (NY); Peter King (NY); Randy Kuhl (NY); Steve LaTourette (OH); Jim Leach (IA); Frank LoBiondo (NJ); Donald Manzullo (IL); Kenny Marchant (TX); John McHugh (NY); John Peterson (PA); Jim Ramstad (MN); Rick Renzi (AZ); Ileana Ros-Lehtinen (FL); Jim Saxton (NJ); Joe Schwarz (MI); Chris Shays (CT); Don Sherwood (PA); Rob Simmons (CT); Chris Smith (NJ); Mike Sodrel (IN); John Sweeney (NY); Jim Walsh (NY); Curt Weldon (PA); Jerry Weller (IL); Heather Wilson (NM); and Frank Wolf (VA).

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Survey Finds Medicare Beneficiary Access to Care Will Be Compromised As a Result of Medicare Physician Payment Reductions

An American Medical Association (AMA) survey indicates that steep Medicare payment cuts to physicians, nurses and other health professionals will hurt access to care for America's seniors and disabled. Designed to examine how the projected Medicare physician payment cuts could affect physicians' practices, the survey topics include: potential changes to accepting/treating Medicare patients, potential changes to practice and likelihood of participation in Medicare Advantage.

According to the survey results, more than one third (38%) of physicians reported that they will decrease the number of new Medicare patients they will accept if Medicare payment rates are cut by 5% on January 1, 2006 as planned. Eighteen percent reported that they would decrease the number of established Medicare patients that they treat. Further, 61% of physicians reported that a 5% cut would lead them to defer purchase of new equipment; 57% said they will reduce time spent with Medicare patients; 54% will defer purchase of information technology; 52% will begin referring complex cases; 49% will stop providing certain services; and 24% will shift services from the office to the hospital.

Currently, 20% of survey participants reported that they accept some or no new Medicare patients who contact them. Of the 80% who do accept all new Medicare patients, 42% reported that they are contractually obligated to do so by a hospital, group practice or other entity. AMA's President-Elect, J. Edward Hill, M.D., stated, "[physicians] simply cannot afford to accept an unlimited number of new Medicare patients into their practices if Medicare payments do not keep up with the cost of providing care."

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Medicare Payments to Physicians Could be Dropping

On March 31st the Centers for Medicare and Medicaid Services (CMS) informed the Medicare Payment Advisory Commission (MedPAC) that the update to the 2006 physician fee schedule is currently projected to be -4.3%. The 4.3% drop is an overall figure and reimbursement rates will differ by procedure and specialty. In 2003 CMS had recommend reducing payments by almost 5%, but Congress stepped in and included a provision in the Medicare Modernization Act that set a minimum increase of 1.5% for 2004 and 2005. The provision expires at the end of this year and unless Congress acts again, CMS can lower rates for next year. For more information, visit www.aamc.org.

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Medicare Hospital Insurance Fund Solvent Until 2020

On March 23rd the Trustees of the Social Security and Medicare trust funds released their annual report on the current status and projected condition of the funds over the next seventy five years. The Medicare Part A Trust Fund will be financially insolvent in 2020, one year later than projected last year. The report states that Medicare Parts B and D will be "adequately financed, since premium and general revenue income are reset each year to match expected costs." However, it warns that the government will have to "rapidly" increase the premiums and general revenue transfers from the U.S. Treasury that fund Parts B and D in order to "match expected expenditure growth under current law." Part B expenditures on benefit payments are expected to rise from $149.3 billion in 2005 to $264.3 billion in 2014, and represent 4.8 percent of GDP by 2079.

According the summary of the report, "Medicare's financial difficulties come sooner - and are much more severe - than those confronting Social Security" due to increases in underlying health care costs per enrollee. The fund fails the trustees' short-range 10-year financial adequacy test as well as the long-range test of seventy five years by a wide margin.

The Medicare trustees did find that the program's financial outlook has improved slightly compared to last year's estimate. This improvement results from slightly higher income and slightly lower costs in 2004 than previously estimated. Projected costs for Medicare Part D, which funds Medicare's new drug benefit, are also lower than forecast in last year's Trustees Report, contributing to the improvement in Medicare's overall spending outlook.

The Trustees expect the Medicare Economic Index (MEI) used to calculate physician payments to remain fairly steady over the next ten years, at about 2% annually. However, they project negative physician updates of "5% annually for 6% years, beginning in 2006." According to the report, the negative update reflects recent "increases in physician expenditures, exacerbated by the physician updates legislated in the MMA." The MMA (Medicare Modernization Act) legislated 1.5% physician updates in CYs 2004 and 2005. States the report, "These projections demonstrate the need for timely and effective action to address Medicare's financial challenges. Consideration of such reforms should occur in the relatively near future. The sooner the solutions are enacted, the more flexible and gradual they can be."

Senate Finance Committee Chairman Charles Grassley (R-IA) responded to the release of the report stating, "Congress also needs to examine ways to make the Medicare program more effective by providing incentives that reward efficient, high quality care. Congress already took a major step forward with the new benefits outlined in the Medicare Modernization Act of 2003 (MMA)." Both Senator Grassley and House Ways and Means Committee Chairman Bill Thomas (R-CA.) said that as the MMA is implemented, Congress should evaluate the effectiveness of these provisions.

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Medicare Budget Focuses on Prescription Drug Benefit Implementation; Assumes Cuts to Hospitals and Physicians

The key focus of the President's FY 2006 Medicare budget is the implementation of the " Medicare Prescription Drug, Improvement, and Modernization Act of 2003" (MMA), and specifically the new Part D prescription drug benefit due to take effect next year. Additionally, the Medicare budget assumes that hospitals and physicians will be reimbursed at levels set forth by the MMA. For physicians, the 5% cut in CY 2006 would not be reversed. Additionally, the budget also proposes "administrative improvements" that will affect the Medicare hospital payment system.

With the Medicare budget totaling $345 billion in FY 2006, an increase of 15%, the bulk of the Medicare budget documents include descriptions of the provisions included in the Medicare reform law: providing a discount prescription drug card and voluntary prescription drug benefit; expanding private plan choices for Medicare beneficiaries; improving Medicare fee for service benefits; combating waste, fraud and abuse; and reforming regulatory procedures. While there are no specific legislative proposals to reduce provider payments, the budget does assume current law reductions to Medicare physician fees, approximately negative 5% in CY 2006. In a budget briefing, Centers for Medicare and Medicaid Services (CMS) Administrator Mark McClellan, M.D., Ph.D., indicated that he had been working with the physician community to determine whether there are any ways to make administrative changes to the formula.

Furthermore, the budget documents indicate that the Department of Health and Human Services (HHS) will make a number of administrative changes "to rationalize several components of Medicare's payment system." According to a Medicare budget fact sheet, this includes:

• "Orderly implementation of the final rule for inpatient rehabilitation facilities; expansion of post-acute transfer policies to all DRGs to discourage double payments; and
  
  
• Refin[ing] the inpatient hospital payment system and related regulatory provisions to assure that payments are appropriate for specialty and non-specialty hospitals."

The implementation of the inpatient rehabilitation final rule is estimated to save the Medicare program $70 million in FYs 2006 and 2007, $180 million in FY 2008, $230 million in FY 2009, and $260 million in FY 2010. The expansion of the post-acute transfer policies is estimated to save $740 million in FY 2006, $900 million in FY 2007, $960 million in FY 2008, $1 billion in FY 2008, and $1.1 billion in FY 2009.

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President's Medicaid Proposal Assumes Lower Than Expected Expenditure Growth, Budget Cuts, and Programmatic Reforms

Just days before the President released his FY 2006 budget proposal, Centers for Medicare and Medicaid Services (CMS) Administrator Mark McClellan, M.D., Ph.D., announced that the budget would reflect new projections indicating a lower than expected increase in FY 2004 Medicaid spending. According to the revised data, program spending grew by 9% in FY 2004, 2% less than earlier projections of 11$. According to Dr. McClellan, the ten year projected growth rate subsequently fell from 7.8% to 7.6% annually. The Congressional Budget Office (CBO) has not yet confirmed the revised CMS projections.

Despite the slow-down in spending growth, the President's budget proposal includes $60 billion in Medicaid reductions through FY 2015, including program savings generated by "payment reforms" that would further restrict states' use of upper payment limit (UPL) and intergovernmental transfer (IGT) funding mechanisms. According to the budget proposal, the UPL and IGT reforms represent a ten-year federal savings of $3.3 billion and $11.9 billion, respectively. The President's blueprint also proposes a "phase down" of allowable state provider taxes, with the maximum allowable amount falling from 6% to 3%. The provider tax provisions would also make managed care organizations subject to the 3% maximum. Combined, the provider tax reforms would offer an estimated savings of about $7.6 billion over ten years.

In conjunction with the IGT, UPL, and provider tax provisions, the Administration's budget proposes additional reforms, including greater state flexibility in determining eligibility and benefits among optional populations, except acute care services for the disabled. Under the proposal, enhanced flexibility would not require "burdensome waiver applications." According to a CMS press release, this could include "new options for the funding of uncompensated care" that would permit "more coordinated approaches" to serving the uninsured. The President would also devote about $4 billion in funding over five years to support outreach programs that would enroll eligible, uninsured children in Medicaid.

The President's budget proposal does not outline specific strategies for achieving savings via the payment reforms or provider tax phase-down, nor does it provide details regarding increased state flexibility. The President designates $6.2 billion in State Children's Health Insurance Program (SCHIP) funding for FY 2006, including $5.4 billion in allotments, $0.1 billion in outreach programs to increase enrollment, and $0.7 billion in unspent, redistributed allotments. The President also proposes reauthorization of SCHIP in FY 2006, one year earlier than scheduled. While the reauthorization would establish funding levels according to current law, the President's plan would extending the initial spending period for state allotments from two years to three years. It would also "better target SCHIP funds in a more timely manner," implying possible changes in the calculation and redistribution of state allotments.

The Bush blueprint seeks additional Medicaid savings by restructuring the pharmacy reimbursement to reflect average sale prices ($15 billion over ten years), eliminating loopholes regarding the transfer of assets to gain eligibility for long-term care benefits ($4.5 billion over ten years), and establishing an allotment for administrative claims ($6 billion over ten years). The President also proposes spending an additional $25 million to finance "efforts to root out erroneous and fraudulent uses of Medicaid and SCHIP funding."

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Providers, Congress, and Governors Urge President Bush Not to Cut Medicare or Medicaid in Upcoming Budget

The Association of American Medical Colleges and twenty five other hospital and physician groups recently sent President George W. Bush a letter urging him not to include any Medicare or Medicaid reductions in his FY 2006 budget. The letter stated, "With many states in crisis, Medicaid reductions at the federal level would drastically unravel an already frail safety net. Similarly, Medicare must be able to meet increasing needs of an aging population that is growing in numbers. "

The letter also acknowledges the strides the President made in enacting "landmark" Medicare legislation, but also notes that the President’s previous budgets did not include provider reductions. The provider communication was preceded by a December 14th letter to the President from forty eight Senate Democrats opposing "any Medicaid reform proposal" that would cap federal spending, alter eligibility standards, or reduce services. Coordinated by Senator Jeff Bingaman (D-NM), the letter advised the President to "take steps to stabilize and improve health coverage rather than undermine it."

Similarly, a December 22nd letter by the Chair and Vice Chair of the National Governors Association urged House and Senate Majority and Minority leaders to reform the Medicaid program, but warned against doing so as part of the FY "2006 fiscal year budget reduction and reconciliation process, especially if it does nothing more than shift additional costs to states."

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MedPAC Addresses Physician Pay for Performance

At the Medicare Payment Advisory Commission's (MedPAC) November 16th meeting, commission staff presented a feasibility study on implementing pay-for-performance measures for physician services. The purpose of the analysis is to determine if it is feasible to base some amount of physician payment under Medicare Part B on quality. It was suggested that criteria for developing quality measures include consideration of: use of well-accepted, evidence based measures when available; burden of data collection; availability of risk adjusters if necessary and opportunities for provider improvement.

Types of measures to consider can be divided into four categories: structural, process, outcomes, and patient experience. Structural measures may include physician certification or identifying presence of information technology infrastructure. Process and outcomes measures involve adherence to guidelines for select diseases (i.e., HbA1C testing for diabetes patients.) Patient experience measures would record patient satisfaction using survey tools. For each of these categories, the committee discussed whether established, accepted measures were available, what types of physicians would be measured, and what data needs to be collected or is currently available for reporting the measurement.

There was continuing discussion about the breadth of implementation of measures (e.g., will a measure be applied to all physicians or selected specialties and are measurements at the provider or the group level), however, there was general consensus among MedPAC members that pay-for-performance measures should be implemented.

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New GAO Report Analyzes Proposed Changes to Medicare Physician Payment Formula

On October 8th, the Government Accountability Office (GAO) issued a report that concludes that any of the recently proposed changes to the Sustainable Growth Rate (SGR) system used to calculate Medicare physician payments "could be implemented in a way that would likely generate positive fee updates." The report, entitled "Medicare Physician Payments: Concerns About Spending Target System Prompt Interest in Considering Reforms" (GAO-05-85), which was required under the Medicare Modernization Act (MMA) and delivered to the House and Senate Committees that oversee the Medicare program, also advises that any change to the SGR system "will be very expensive" and would increase Medicare spending on physician services from 4% to 23% during CY 2005 - CY 2012, depending on the type of change. Subsequently, the GAO warns that the implementation of any changes, "may hinge on whether primary importance should be given to stable fee increases of… fiscal discipline within the Medicare program."

Requested amid Congressional concerns that projected Medicare fee reductions for 2006 - 2012 will discourage physician participation and reduce beneficiary access to care, the GAO report analyzes the potential impact of specific changes to the SGR methodology. The report also details how the SGR methodology has helped "substantially" slow spending growth on physician services since its implementation in 1998.

Working in collaboration with the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary (OACT), GAO estimates that eliminating the use of the SGR spending target and basing physician updates on annual increases in the cost of care (as proposed by the Medicare Payment Advisory Commission) would, from CY 2005 through CY 2014, "result in cumulative expenditures that are 22% greater than projected under current law." According to GAO, this would increase Medicare spending on Part B services from $16.9 trillion under current law to $19.1 trillion over the next 75 years.

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Senators Circulate Dear Colleague to Extend GME Moratorium

Senators Susan Collins (R-ME) and Dick Durbin (D-IL) have circulated for signatures a "Dear Colleague" letter requesting that Senate Leadership and Senate Appropriators include in the FY 2005 appropriations bill language to extend and expand a current GME moratorium put into place by the Medicare Modernization Act (MMA) last year.

Specifically, for purposes of calculating teaching hospitals' Medicare DGME and IME payments, Section 713 of MMA allows, through the end of 2004, hospitals to continue counting residents in family practice programs who are training in non-hospital settings where physicians are volunteering their supervisory time. Section 713 also requires the Inspector General of the Department of Health and Human Services to conduct a study on the use of volunteer physicians in residency training in non-hospital sites and issue a report with any potential recommendations to Congress no later than one year after the law's enactment.

Because this study is not due until Dec. 8 and the moratorium is scheduled to expire on Dec. 31, 2004, the AAMC is working with other provider organizations to extend the moratorium by one year. This will give Congress sufficient time to review the study and act upon its recommendations. In addition, since the study will pertain to all medical specialties, the AAMC would like the moratorium to be expanded to include all medical (osteopathic and allopathic) specialties as well.

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Senator Hutchison Introduces American Hospital Preservation Act

On September 30th, Senator Kay Bailey Hutchison (R-TX), along with Senators Evan Bayh (D-IN.) and Edward Kennedy (D-MA.), introduced S. 2876, the "American Hospital Preservation Act," to restore reimbursement for indirect medical education (IME) payments to teaching hospitals. IME payments give teaching hospitals an additional Medicare reimbursement due to their higher costs of inpatient care. In her introductory statement in the Congressional Record, Senator Hutchison noted that "[T]he Medicare Modernization Act restored the reimbursement rate to 6 percent for fiscal year 2004. However this payment update expires today. Over the next 3 years, reimbursements to teaching hospitals will decrease, making it more difficult to care for our sick and to train our future health care providers. The American Hospital Preservation Act would fix the reimbursement rate at 6.0 and will ensure our hospitals are compensated for the invaluable care they provide to our patients."

Senator Hutchison continued, "[T]eaching hospitals have higher costs due to their critical role in educating tomorrow's physicians. They run more tests, utilize newer technology and require more staff because they are training our future health professionals. Preserving this reimbursement rate is vital to continuing this training. Although only 23 percent of all hospitals are teaching hospitals, they deliver over two-thirds of charity care." She concluded, "[L]ower reimbursement rates coupled with bioterrorism risks and a workforce shortage make our hospitals a time bomb waiting to go off. It is our responsibility to ensure they have adequate resources. "

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Inpatient Final Rule Addresses Resident Limits, Preliminary Year Issue

The final FY 2005 Inpatient Prospective Payment System (PPS) rule, including regulations regarding the Medicare resident limit redistribution program, was published Aug. 2 on the Centers for Medicare and Medicaid Services (CMS) Web site. The final rule, to be published in the Federal Register on Aug. 11, also clarifies CMS' policy for hospitals training residents in specialties that require a broad-based, general clinical training year (the so-called "preliminary year" issue).

The final rule provides extensive information on the implementation process for the resident limit redistribution program mandated by last year's Medicare Modernization Act (MMA). In brief, under this program, hospitals that are not fully "using" their Medicare resident caps will have those caps permanently reduced and the cap slots will be "redistributed" to those teaching hospitals that can demonstrate a need for them. The final rule addresses criteria to determine which hospitals will lose resident cap slots as well as sets forth the application process for hospitals seeking to increase their resident caps. With limited exception, applications to receive additional cap slots are due to CMS by Dec. 1, 2004.

The final rule also states that that the "initial residency period (IRP)" determinations for residents training in specialties requiring a first year broad-based training program, such as radiology, dermatology, and anesthesiology, will be determined by that specialty, rather than the specialty in which the resident meets the broad-based requirement, if the resident "simultaneously matches" to both programs. IRPs are used, in part, to determine Medicare direct GME payments. Under the final rule, residents who simultaneously match will receive longer IRPs since their residency durations are longer than the duration of internal medicine, which often is the residency program used to fulfill the broad-based requirement.

In other areas, the final rule:

***Increases the standardized amounts for hospitals that submit data on 10 designated quality measures by 3.3 percent (a full market basket (MB) update). All other hospitals will receive an increase of 2.9 percent (MB- 0.4 percentage points);

***Sets an outlier payment threshold of $25,800, down from the current threshold level of $31,000;

***Implements new metropolitan statistical area (MSA) definitions, which affect the wage index value hospitals are assigned, and provides a one-year transition for hospitals adversely affected by changes in MSA determinations; and

Incorporates an "occupational mix adjustment" into the wage index determinations; and

***Provides special payments for four new medical services and technologies.

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House Attempts to Block 75 Percent Rule

(excerpted from AAMC Washington Highlights)

On July 14th, the full House Appropriations Committee approved its version of the FY 2005 Labor, Health and Human Services, Education and Related Agencies Appropriations bill, including a 2.8% increase for the National Institutes of Health and an 8.4% cut to the Title VII health professions education programs. Appropriators also adopted by voice vote an amendment offered by Representatives Nita Lowey (D-N.Y.) and Zach Wamp (R-Tenn.) to delay implementation of the so-called "75 percent Rule" that would reduce Medicare payments for some rehabilitation hospitals. The 75 percent rule amendment would prohibit the Centers for Medicare and Medicaid Services (CMS) from implementing the rule until an Institute of Medicine (IOM) study is completed on the issue. The provision mandates a study conducted by the Institute of Medicine to make recommendations to the HHS and Congress by Oct. 1, 2005, and that no funds be expended to implement the rule until nine months following the date the report is sent out by IOM.

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House and Senate Urge CMS to Review Physician Payment Formula

In May, seventy-two Senators and 240 House members signed letters urging Centers for Medicare and Medicaid Services (CMS) Administrator Mark McClellan to make a variety of adjustments to the sustainable growth rate (SGR) methodology under the Medicare physician fee schedule. Last year, Congress enacted legislation that prevented CMS from decreasing physician payment rates, but that only covered 2004 and 2005. All agree that a more permanent solution is needed.

Spearheaded by Congressmen Phil Crane (R-IL) and Sherrod Brown (D-OH), and Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR), the letters recommend "policy adjustments the Administration could make that would lead to more accurate calculations of the targets used in physician reimbursement." Specifically, the letters suggest that the SGR does not adequately capture the full impact of changes in laws, regulations, and new screening benefits as required by the Medicare law, as well as CMS coverage decisions. In light of the upcoming cuts to the Medicare physician fee schedule beginning in 2006, the letters acknowledge "such fine-tuning will not eliminate all of the problems in the current SGR formula," but that "it will help facilitate Congress' efforts to develop a more reliable reimbursement system.

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House Energy and Commerce Subcommittee Initiates Review of Medicare Physician Payment Methodology
(Excerpted from AAMC Washington Highlights)

The Association of American of American Medical Colleges (AAMC) submitted testimony at a May 5th House of Representatives Energy and Commerce Health Subcommittee hearing on Medicare physician payments. The hearing was the first in a series to address problems with the current Sustainable Growth Rate (SGR) methodology used to calculate annual payment updates.

Medicare Payment Advisory Commission (MedPAC) Chairman Glenn Hackbarth, Congressional Budget Office (CBO) Director Douglas Holtz-Eakin, and General Accounting Office (GAO) Healthcare Director Bruce Steinwald testified regarding the development, flaws, and impact of the current payment methodology. According to a statement issued by full Committee Chairman Joe Barton (R-TX), the subcommittee will also meet with "physicians, seniors, and relevant government agencies" on the issue.

Opening remarks from Subcommittee members indicated bipartisan concern over the impact of reverting to the SGR methodology in 2006, when payment relief provisions expire. When Rep. Charles Norwood (R-GA.) called the payment issue a "black cloud on Medicare's horizon" that would significantly limit access to care, Rep. Gene Green (D-TX) concurred, having recently heard escalating concerns from physicians at Texas Medical Center in Houston.

Mr. Steinwald reported that service volume and intensity was growing by 3% per beneficiary annually. The increases, he added, were more expensive than the physician updates set for CYs 2003, 2004, and 2005. GAO is studying the phenomenon of service volume and intensity in its consideration of the SGR methodology, as directed by the recently passed Medicare prescription drug legislation.

CBO Director Holtz-Eakin reported that Medicare spending on physician services will increase despite the SGR mechanism. An increased range of benefits, rising costs for physicians, and increased purchasing power among beneficiaries will promote the spending growth. Subsequently, Congress should focus on these factors when developing a plan to control spending on physician services. Dr. Holtz-Eakin also provided an estimated cost of $95 billion over 10 years if Congress were to tie physician updates to the Medicare Economic Index (MEI), as proposed by some physician advocates. Commissioner Hackbarth reported that if the SGR were repealed, Congress should still restrain spending on physician services. He also criticized the current system for lacking physician incentives that would contain the volume of physician services. Despite their political sensitivity, Mr. Hackbarth suggested that Congress consider the success of private plans in limiting volume and intensity via physician incentives, standards of care, refuting claims, and prior authorization for services. The MedPAC Commissioners have requested an analysis of how high-volume, highly discretionary imaging services could be restructured to better control Medicare spending. Mr. Hackbarth expected a final report on the analysis next year. He added that Congress should consider "pay-for-performance" as a way to improve Medicare efficiencies. Mr. Hackbarth also agreed that the projected cuts in Medicare physician reimbursement would, in the long-term, trigger significant access-to-care issues.

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November Washington Update

In a flurry of activity just before Thanksgiving Congress attempted to deal with two major pieces of legislation and also made progress on its spending bills for the 2004 fiscal year.

Despite a strong push by the Bush Administration, the Senate was not able to overcome a filibuster on H.R. 6, The Energy Policy Act of 2003. The measure did pass the House but there were only fifty-eight votes in the Senate, two short of what is needed to pass a cloture motion. Senate Majority Leader Bill Frist (R-TN) said the Senate would try again to pass the bill early next year.

President Bush had more success with H.R. 1, The Medicare Prescription Drug and Modernization Act of 2003. Although it took much longer than House Speaker J. Dennis Hastert (R-IL) and Senator Frist would have hoped, and passage in the House took place under the most bizarre of circumstances, Congress was able to put together a prescription drug bill. A day after the Conference Committee completed its work on the over six hundred page bill the House took up consideration late in the evening of November 21st and the vote on final passage did not begin until 3:00 am on the morning of the 22nd. The supposedly fifteen minute electronic vote took nearly three hours as Republican leaders held the vote open until they could muster the support they needed. Throughout much of the morning the vote was 216 in favor, 218 opposed and one not voting, but in the end Speaker Hastert was able to convince a handful of Republicans to switch their votes in favor of the bill thus passing the bill by a 220-215 margin and handing President Bush a major victory, albeit by a razor thing margin. Supporters in the Senate were able to overcome a filibuster lead by Ted Kennedy (D-MA) and passed the bill 54-44. President plans to sign the bill on December 8th.

The bill will create a new Medicare prescription drug benefit for the nation’s seniors. Although supported by the AARP, the Republican leadership had to overcome significant opposition from those who were opposed to the bill’s premium support demonstration project, an idea for allowing private insurers to compete with Medicare. There was also strong opposition from conservative Republicans who felt the bill would create a new entitlement and cost too much.

While much of the focus was on the effort to provide drug coverage, the bill also contains several important provider provisions, including increased physician payments and funding for teaching hospitals. It is primarily for this reason that the American Hospital Association, the Association of American Medical Colleges, the Associated Medical School of New York and the Hospital Association of New York State endorsed the bill. Unfortunately, Senate language that would have prevented significant cuts to dental graduate medical education was not included in the final bill.

Although Congress once again failed to complete work on the annual spending bills for FY04, which began October 1st, and has been operating under a series of continuing resolutions, it did make significant progress before recessing for Thanksgiving. Congress makes its spending decisions in a series of thirteen annual appropriations bills, each covering one or more different parts of the government. Going into December, six had been passed and signed into law.

Rather than continue to try to pass the remaining seven bills individually, Congress chose to bundle them into one omnibus bill. This includes the Labor, Health and Human Services, Education, and Related Agencies bill which contains funding for many important health care programs. Last year Congress completed the five-year doubling of the National Institutes of Health budget. This year however, the funding picture does not look as bright with only a $1 billion (3.7%) increase. While the details of the Omnibus bill have been agreed upon by the Appropriations Conference Committee, final passage will not occur until December or January and the government will continue to run on a Continuing Resolution.

The omnibus bill does contain language that could make it more difficult to patent new medical breakthroughs. Congressman Dave Weldon (R-FL), a leading opponent of embryonic stem cell research, included the language in the House bill, and, despite objections from stem cell supporters, the Senate accepted the amendment. The amendment prevents the Patent and Trademark Office (PTO) from issuing “patents on claims directed to or encompassing a human organism.” While ostensibly intended to prevent the patenting of cloned human being, it can be read to prevent a patent on any therapy derived from stem cells. Since the language does not define “human organism” it also could preclude patenting of any biotechnology invention. The language is unnecessary as it is current PTO policy not to issue patents on humans. Although stem cell supporters were disappointed that the omnibus bill did include the Weldon Amendment, their concerns were partially eased because the language will only apply for one year, unless sit is renewed, and the report which accompanied the bill made it clear that the language was to be read narrowly.

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Conferees Move Forward on Provider Agreements; President Bush Urges Medicare Conferees To Complete Their Work
(From the AAMC Washington Highlights)

October 31, 2003 - In an Oct. 29 press conference, President George W. Bush urged the Medicare conferees to complete their business and send a bill to him to sign into law by the end of the year. Conferees had hoped to complete their negotiations before the press conference and have reached tentative agreements on a number of provider issues including the physician payment update, the inpatient hospital update, Medicare Indirect Medical Education (IME), and Medicaid Disproportionate Share Hospital (DSH) allotments. However, the conferees have yet to reach an accord on contentious issues such as premium support, cost containment and drug re-importation.

For physicians, it appears the conference agreement will include provisions to avert the negative 4.2 percent update (preliminary estimate) to the CY 2004 Medicare physician fee schedule. The House version of the bill required CMS to raise physician payment rates by a minimum of 1.5%. CMS is expected to release the final update in its CY 2004 Final Rule, which could alter the conference agreement.

The conferees reportedly are also moving forward on provider provisions and have tentatively agreed to the following hospital provisions:

• A full inpatient hospital update in FY 2004 and an update of market basket minus 0.4% in FYs 05, 06, and 07. Hospitals participating in the Centers of Medicare and Medicaid Services (CMS) Voluntary Quality Initiative would receive full updates.
  
  
• An IME adjustment of 6% beginning April 1, 2004; 5.8% in FY 05, 5.55% in FY 06, and 5.35% in FY 07. Beginning in FY 08 and beyond, the IME adjustment would be 5.5%.
  
  
• A substantial one-time increase to states' Medicaid DSH allotments in FY 04 (mitigating a portion of the Balance Budget Amendment's reductions) and freezing allotments at FY 04 levels in FY 05 for several years. Allotments for "Low-DSH states" would be temporarily increased from 1% to 3% of their overall Medicaid expenditures in FYs 04 and 05.

Hospitals will also receive one base rate, the "large urban" standardized amount, beginning April 1, 2004. For hospitals with wage indexes of less than one, labor shares will be adjusted to 62% beginning in FY 2005. Agreements on niche providers and unused residency slots had not yet been finalized.

Stated the President, "I urge the Congress to act quickly, to act this year, not to push this responsibility to the future. We have the opportunity; we have the obligation to give seniors more choices and better benefits. We have come far, and now is the time to finish the job."

In response to the President's remarks, Senate F