Teaching Hospital and Physician
Payment Provisions in H.R. 3426, the "Medicare, Medicaid,
and SCHIP Balanced Budget Refinement Act of 1999"
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Related Resources
AAMC Documents
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AAMC Summary and Analysis
On November 29, 1999 President Clinton signed into law a
comprehensive legislative package that includes H.R. 3426,
the "Medicare, Medicaid and SCHIP Balanced Budget Refinement
Act of 1999." Specifically, H.R. 3426 provides a total
of $16 billion over 5 years in relief from the Balanced Budget
Act of 1997 (BBA) to hospitals, physicians, skilled nursing
facilities, home health agencies, and Medicare+ Choice plans.
Hospitals receive $7.3 billion of the total BBA relief spending.
For teaching hospitals, H.R. 3426 includes some provision
for the AAMC's top 1999 BBA relief priorities: freezing the
BBA's reductions in the Medicare Indirect Medical Education
(IME) and Disproportionate Share Hospital (DSH) payments,
and making reforms to the outpatient Prospective Payment System
(PPS). Other important changes include modification of the
Direct Graduate Medical Education (DGME) payment methodology
and physician payments. Regulations implementing most of these
changes will likely be published in Spring, 2000.
In addition, the Clinton Administration has agreed to make
several administrative adjustments to hospital and physician
payments not included in the $16 billion legislative package.
Also included in the larger comprehensive legislative package
is $40 million for Graduate Medical Education (GME) payments
for independent children's hospitals.
Payments Related to Teaching Hospitals
I. Graduate Medical Education Payments
A. Indirect Medical Education Payments
Current Law. IME payments to teaching hospitals were
reduced from 7.7 percent for every 10 percent increment in
a hospital's resident-to-bed ratio to 7.0 percent beginning
in October 1, 1997 (FY 1998); to 6.5 percent in FY 1999; to
6.0 percent in FY 2000; and to 5.5 percent in FY 2001 and
subsequent years.
H.R. 3426. IME payments are frozen at 6.5 percent
in FY 2000 and reduced slightly to 6.25 percent in FY 2001,
before being reduced to 5.5 percent in FY 2002 and thereafter.
A special adjustment to achieve the 6.5 percent payment for
the first six months of FY 2000 will be made after April 1,
2000. The Congressional Budget Office (CBO) estimates that
this provision will provide $600 million to teaching hospitals.
B. Use of National Average Payment Methodology in Computing
Direct Graduate Medical Education Payments
Current Law. Medicare pays hospitals for its share
of DGME costs in approved training programs using a hospital
specific per resident amount, updated for inflation and multiplied
by a hospital's number of full time equivalent (FTE) residents,
not to exceed the count during the hospital's cost reporting
period ending on or before December 31, 1996.
H.R. 3426. The bill creates a floor and a ceiling
for hospital per resident amounts. Beginning in FY 2001, a
hospital's primary care and non-primary care per resident
amounts will be combined and compared to and adjusted according
to a "corridor" surrounding a weighted standardized
national average per resident amount, modified by the geographic
adjustment factor used to adjust physician payments (the average
of the three geographic practice cost indices).
A national average per resident payment amount will be calculated
based on hospitals' combined primary care and non-primary
care per resident amounts for cost report periods ending in
FY 1997, standardized by the 1999 physician geographic adjustment
factor, and weighted by the number of FTE residents. This
amount will be updated to FY 2001 by the increase in the consumer
price index (CPI). A locality adjusted national average will
then be calculated by applying the physician adjustment factor
for each area to the CPI-adjusted national average.
Beginning in FY 2001, a floor would be calculated for each
hospital at 70 percent of the locality-adjusted national average
per resident amount. A ceiling of 140 percent of the locality-adjusted
national average per resident amount also would be calculated.
Each hospital's combined primary care and non-primary care
per resident amounts would be compared to the floor and ceiling
amounts. If a hospital's per resident amount is below the
70 percent floor, its per resident amount would be increased
to the 70 percent level in FY 2001 and updated annually by
the CPI increase. If a hospital's per resident amount is above
the 140 percent ceiling the per resident amount would be frozen
at FY 2001 levels for FYs 2001 and 2002. In FYs 2003-2005,
the per resident amount would be updated by the CPI increase
minus two percentage points. If a hospital's per resident
amount is between 70 percent and 140 percent of the locality-adjusted
national average, the per resident amount would continue at
current levels, updated annually by the CPI increase.
According to an AAMC analysis, this provision will result
in increased DGME payments for approximately 265 hospitals
and a payment freeze for approximately 119 hospitals.
C. Resident Limits
Current Law. In general, the number of residents that
a hospital may count for DGME and IME payments is limited
to the number of FTE residents recognized in the hospital's
most recent cost reporting period ending on or before December
31, 1996.
H.R. 3426. For discharges or cost reporting periods
beginning on or after November 29 1999, for purposes of determining
a hospital's resident count used in DGME and IME payment calculations,
hospitals would be allowed to increase the number of primary
care residents that it counts in its base year limit to include
those individuals who were on maternity, disability, or a
similar approved leave of absence, not to exceed 3 FTE residents.
In addition, rural hospitals would be able to expand their
base year limits by 30 percent effective with discharges or
cost reporting periods beginning on or after April 1, 2000.
Also effective April 1, 2000, for non-rural facilities that
establish separately accredited rural training programs or
have an accredited training program with an integrated rural
track, the Secretary of HHS will adjust their base year limits
"in an appropriate manner" to encourage training
of physicians in rural areas.
The provision also allows teaching hospitals a resident limit
exception for the transfer of residents that occurred between
January 1, 1997 and July 31, 1998 from a Department of Veterans
Affairs (VA) facility if its program would otherwise lose
accreditation.
D. Medicare+Choice Nursing and Allied Health Education
DGME Payments
Current Law. Medicare Fee-For-Service (FFS) pays teaching
hospitals on a cost basis for nursing and allied health training
programs. Included in Medicare's payments to Medicare+Choice
plans are the costs associated with nursing and allied health
training programs. Plans are not required to pass on such
payments to the hospitals that bear the costs of such programs.
H.R. 3426. Effective with cost report period beginning
in FY 2000, teaching hospitals that currently receive nursing
and allied health payments under Medicare FFS would be eligible
to receive nursing and allied health payments associated with
Medicare+Choice enrollees. Total nursing and allied health
payments associated with Medicare+Choice enrollees would be
determined by the ratio of managed care DGME payments to total
DGME payments applied to total nursing and allied health FFS
payments, but will total no more than $60 million. A hospital
would receive a percentage of nursing and allied health payments
associated with Medicare+Choice enrollees based on its current
share of total FFS nursing and allied health payments. Such
payments would be offset by reductions in DGME payments associated
with Medicare+Choice.
E. Initial Residency Period for Child Neurology Residency
Training Programs
Current Law. During initial residency periods (the
minimum number of years in which a resident must train to
be eligible for certification in a medical specialty), each
full-time intern and resident is counted as 1.0 FTE resident
for purposes of DGME payments. After the initial residency
period or five years (whichever comes first), a full-time
resident can be counted only as a .5 FTE. With a combined
primary care specialty program, such as internal medicine-pediatrics,
the initial residency period is defined as the minimum number
of years for the longer of the two programs, plus one additional
year. However, with a combined program where one of the programs
is not primary care, the initial residency period is based
on the minimum years to qualify for the longer of the composite
programs.
H.R. 3426. For cost report periods beginning on or
after July 1, 2000, residents enrolled in a child neurology
residency training program will be counted as follows: the
initial residency period is considered to be the period of
board eligibility for pediatrics plus 2 years. In addition,
the Medicare Payment Advisory Commission (MedPAC) is required
in its March 2001 report to Congress to include recommendations
on the appropriateness of Medicare initial residency period
policy for other residency training programs in a specialty
that requires preliminary years of study in another specialty.
F. MedPAC Study on Medicare Payments for Non-Physician
Health Professional Clinical Training
Current law. None
H.R. 3426. MedPAC shall conduct a study of Medicare
payment policy for the professional clinical training of "different
classes" of non-physician health care professionals (nurses,
nurse practitioners, allied health professionals, physician
assistants, and psychologists) and report on the basis "for
any differences in treatment among such classes." The
study must be submitted to Congress by May 29, 2001.
II. Disproportionate Share Hospital Payments
Current Law. DSH payments were reduced by 1 percent
in FY 1998; by 2 percent in FY 1999; by 3 percent in FY 2000;
by 4 percent in FY 2001; by 5 percent in FY 2002 and 0 percent
in FY 2003 and in each subsequent year.
H.R. 3426. DSH payments are frozen at 3 percent reduction
in FY 2001 and reduced by 4 percent in FY 2002. In FY 2003
and thereafter, the DSH payments return to pre-BBA levels.
This provision will provide an additional $100 million in
DSH payments.
For cost reports beginning on or after October 1, 2001, hospitals
will be required to submit to the Secretary of HHS "data
on costs incurred by the hospital for providing inpatient
and outpatient hospital services for which the hospital is
not compensated, including non-Medicare bad debt, charity
care, and charges for Medicaid and indigent care."
President's Administrative Changes. Certain qualifying hospitals
had received additional DSH payments because guidance on how
to claim these funds was insufficiently clear. The administration
will hold harmless hospitals that have received additional
payments and will clarify guidance to hospitals and contractors
on how to claim DSH payments.
III. Hospital-Based Outpatient Department
Payments
A. Implementation of the Outpatient Prospective Payment
System (PPS)
Current Law. The Secretary of HHS is required to replace
the current payment system for outpatient services with a
PPS beginning in 1999. An ambulatory payment classification
(APC) system for covered services is to be developed so that
services within each group are comparable clinically and with
respect to the use of resources.
Regulatory delays have postponed the implementation date
to at least July 2000.
H.R. 3426. Additional payments are provided to hospitals
in the first 3 years of the PPS if payments under the new
system are less than what a hospital received prior to implementation
of the PPS. The additional payments vary depending on the
level of a hospital's losses. For example, a hospital that
loses up to 10 percent would receive additional payments equal
to 80 percent of that amount in the first year; 70 percent
of that amount in the second year, and 60 percent in the third
year. A hospital that loses more than 30 percent would receive
21 percent of their pre-PPS amounts in the first year, 13
percent in the second year, and 6 percent in the third year.
A hospital that loses between 10 and 30 percent would receive
additional payments in between the upper and lower payment
amounts.
Rural hospitals with less than 100 beds will be "held
harmless" until January 1, 2004, if payments received
under PPS are less than payments received prior to implementation
of PPS (i.e., payments under PPS would be increased to 100
percent of payments received pre-PPS).
PPS-exempt cancer hospitals will be "held harmless"
on a permanent basis if payments received under PPS are less
than payments received prior to its implementation.
MedPAC is required to prepare a report to the Secretary of
HHS and to the Congress by November 29, 2001 regarding the
feasibility and advisability of including PPS-exempt cancer
hospitals and rural hospitals in the outpatient PPS.
For certain high cost or "outlier" services, the
Secretary of HHS will determine and provide additional payments
to hospitals for each covered service for which a hospital's
costs exceed a fixed multiple of the PPS amount, including
any "transitional-pass-through" payments and other
adjustments. These payments will be funded through corresponding
reductions to the PPS base payment rates and may not exceed
2.5 percent of total PPS payments in years before 2004 and
3 percent in 2004 and thereafter.
For a limited period of time (not less than two but no more
than three years) outpatient payments for innovative medical
devices, drugs, and biologicals, including orphan drugs, cancer
therapy drugs and biologicals, radiopharmaceuticals, and certain
"new" medical devices, drugs, and biologicals will
be paid on a "pass through" basis. Like outlier
payments, this provision is funded through reductions to base
payment rates and may not exceed 2.5 percent of total PPS
payments for years before 2004 and 2 percent in 2004 and thereafter.
The Secretary of HHS is given discretion to base the system's
relative payment weights on the mean or the median of hospital
costs. Furthermore, the most costly service or item included
in a single APC may not have a mean or median cost that is
more than twice that for the least costly item or service
in that group. Low volume items or services may be exempt
from the limitation requirement.
The Secretary of HHS is required to review the APC groups
annually and to update them as necessary. In addition, the
Secretary must consult with an outside advisory panel to review
the clinical integraty of the groups and weights.
President's Administrative Changes. A proposed volume
control system under the new PPS will not be included during
the first two years of the PPS implementation.
B. 5.7% Beneficiary Coinsurance Recalculation
Current Law. Beneficiary coinsurance payments under
the PPS are limited to 20 percent of the national median of
the charges for the service provided. The 20 percent payment
cap produced a shortfall in Medicare payments to hospitals
of 5.7 percent because it was based on median, rather than
mean, charges.
H.R. 3426. Provides Medicare payments to make up the
difference between the new co-payment amounts and the pre-BBA
co-payment amount.
IV. Transfer Policy
Current Law. As of October 1, 1998, payments to PPS
hospitals that discharge patients to a skilled nursing facility,
PPS-exempt facility or home health agency are reduced for
a specified group of ten diagnosis-related groups (DRGs) because
these discharges are considered "transfers." Under
Medicare's transfer payment methodology, transferring hospitals
receive only a portion of the full DRG payment amounts. By
2001, the Secretary is required to publish a proposed rule
that includes a list of additional DRGs for which this policy
would apply.
President's Administrative Changes. This hospital
transfer policy will be capped at 10 DRGs for two years, through
2002.
Payments Related to Physicians
I. Sustainable Growth Rate
Current Law. In 1999, a cumulative sustainable growth
rate (SGR) based on real gross domestic (GDP) growth was developed
to replace the Medicare volume performance standard (MVPS)
used to update physician fees. A ceiling of 3 percentage points
above inflation was placed on allowable fee increases and
a floor was set at inflation minus 7 percentage points.
H.R. 3426. In order to limiting oscillations in updated
physician payments, the law makes technical changes to the
annual update of physician fees beginning in 2001. The technical
changes includes a requirement that future SGR factors be
calculated using data measured on a calendar year basis. Since
the SGR is a cumulative measurement, the Secretary of HHS,
in calculating a new SGR must review and update the two previous
SGR rates using the best data available as of September 1,
2000.
An estimate of the SGR must be made available to MedPAC and
the public by March 1 of each year; the legislation requires
MedPAC to include a review of the SGR in its annual June report
to Congress. The Agency for Health Care Policy and Research
(AHCPR) is also directed to study the economic impact of the
SGR on Medicare spending for physician services within 3 years.
II. Resource-Based Practice Expense Relative Values
Current Law. The implementation of a resource-based
practice expense payment methodology for physician services
was delayed for one year, until 1999. A four-year phase-in
(in 25 percent increments) was established using 1998 as a
baseline for the calculations. In 2002, the practice expense
component of the Medicare physician fee schedule will be 100
percent resource-based. The BBA also reduced certain practice
expense relative value units in 1998.
H.R. 3426. The Secretary of HHS is required to establish
by regulation a process (using data collection standards)
under which the Secretary would accept for use, to the maximum
extent practicable and consistent with sound data practices,
data collected by organizations and entities other than HHS.
The Secretary is required to include in the annual publication
of the Medicare fee schedule for 2001 and 2002 a report on
the extent to which such data has been used.
Graduate Medical Education Payments to Independent Children's
Hospitals
In addition to BBA relief provisions, the larger comprehensive
legislative vehicle includes $40 million to be appropriated
for GME payments to independent children's hospitals. The
$40 million will be from the discretionary portion of the
federal budget and be administered by the Health Resources
Services Administration (HRSA). Additional legislation, the
"Healthcare Research and Quality Act of 1999," S.
580, determines how the payments would be distributed. At
this time, the legislation has been cleared by congress and
awaits the President's signature.
Under S. 580, DGME payments will be based on a standardized
national average per resident payment adjusted for the hospital's
area wage index multiplied by the number of residents in each
children's hospital. The IME payment methodology will be determined
by the Secretary of HHS. In developing this methodology the
Secretary is to take into account the indirect expenses associated
with the treatment of more severely ill and the additional
cost related to the teaching of residents. Unlike other teaching
hospitals, DGME and IME payments will not be dependent upon
the treatment of Medicare beneficiaries.
The bill authorizes $90 million in FY 2000 and $95 million
in FY 2001 in DGME payments and $190 million in FY 2000 and
$190 million in FY 2001 in IME payments. However, as only
$40 million will be appropriated for FY 2000, payments to
children's hospitals will be significantly less than the authorized
amount. At this point, the timing for HRSA's payment distribution
is uncertain.
Contacts
Lynne Davis Boyle, Assistant Vice President
AAMC Government Relations
ldavisboyle@aamc.org
(202) 828-0526
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