Medicare Reform - 2 Steps Forward, 1 Step Back

Washington Report - May, 2002

Bill Finerfrock

Capitol Associates

Medicare Reform - 2 Steps Forward, 1 Step Back

Progress on Medicare reform continues at an exceedingly slow pace. In early May, House Republican Congressional leaders released the outline of a major Medicare reform proposal. At that time, the leaders stated their plans to have the legislation introduced, reported out of Committee and passed by the full House by the end of May.

Unfortunately for the House leadership, as the details of the proposed reform plan became more specific, support for the plan diminished. As a result, Ways and Means Chairman Bill Thomas (R-CA) and Energy and Commerce Committee Chairman Billy Tauzin (R-LA) were told to go back to the drawing board and come up with a plan that could win the support of a majority in the House.

As of the writing of this report, House leaders were once again expressing optimism over their ability to write and pass a major Medicare reform plan. The latest predictions are that the House could pass a bill by the end of June.

Senate leaders appear less optimistic about their prospects for passing a major reform bill. Although publicly committed to passing a reform bill that includes a prescription drug benefit, privately Senators have expressed skepticism. Partisan differences over the scope and cost of a Medicare prescription drug benefit remain wide. Unlike the House where a simple majority is all it would take to adopt a reform bill, the Senate rules will likely require a 60 votes to pass a reform bill. In order to achieve this type of majority, either party would have to convince Senators from the other party to join them in a reform initiative. This does not appear likely.

This does not mean that Congress can’t enact a Medicare bill this Session, only that it will not be as comprehensive as some had hoped.

The most likely victim of the expected stalemate will be a prescription drug benefit. Physician and provider payment reforms are, however, still high on the list of “must pass” legislation.

House GOP Reform Plan Outline Released

In early May, House Congressional leaders released an outline of their proposed Medicare reform proposal. The plan incorporates a new prescription drug benefit for Medicare and makes significant reforms in provider payments. In addition, the plan would incorporate previously reported regulatory reforms and contractor reforms; stabilize Medicare+Choice payments and authorize competitive bidding for health plans; provide relief to rural hospitals; repeal the previously adopted 15% reduction in home health payments; and, expand competitive bidding for certain durable medical equipment.

Prescription Drug Plan

A voluntary prescription drug benefit would be established for Medicare. The anticipated premium for this new benefit would be approximately $35 - $40 per month. There would be a $250 annual deductible. Low-income (below 135% of poverty) Medicare beneficiaries would be eligible for both premium and cost-sharing assistance. After satisfying this deductible, the benefit would cover the next $750 in drug expenses on an 80/20 split. The plan would pick up 80% of the cost and the beneficiary would be responsible for the remaining 20%. For the next $1,000 of drug costs, the co-pay would be 50%. There would be a catastrophic component that would kick in once the beneficiaries “true out of pocket” costs exceeded $5,000.

Beneficiaries would enroll in a Medicare-approved prescription drug plan which, would, according to the authors, obtain better pricing through competition and volume purchasing. Also according to the authors, this particular benefit structure would be valuable to a majority of seniors because, “today’s average drug spending is $2,400 per year.”

Home Health

The GOP proposal would eliminate the scheduled 15% reduction in home health payments. Scheduled inflationary increases for home health services delivered in 2003, 2004 and 2005 would be lowered. The GOP leadership proposal would also establish a “flat dollar” copayment for each home health episode beginning with services delivered after calendar year 2003. It was estimated that the copay would be approximately $50 per episode. The copay would be waived for low income Medicare beneficiaries.

The plan would also add a 10% rural adjustment (increase) for home services delivered in frontier areas.

Physician Payments

The Republican leadership proposes to change the RBRVS fee schedule update formula to reflect a 10-year moving average of the Gross Domestic Product. The plan would also mandate a 2% increase in the fee schedule update (rather than the 5.7 percent reduction currently estimated by CMS actuaries). Finally, Congress would mandate that the Sustainable Growth Rate base year be changed to 2002, rather than the 1998/99 base year in current law.

In addition to the physician payment reforms, the plans would establish a competitive bidding process for Durable Medical Equipment, Clinical Diagnostic Laboratory services, and “off-the-shelf” orthotics. The policy would be phased in over a three year period. Also, the inflationary increase for services provided in Clinical Diagnostic Laboratories would be eliminated until competitive bidding for these services takes effect.

Finally, the plan would reform the pricing policy for physician administered drugs. Current policy uses the “average wholesale price” method. No details on the alternative pricing were provided, however, it is expected that whatever method is chosen, it will result in lower payments for these drugs.

Hospital Payments

The plan would reduce the scheduled hospital payment updates for 2004 through 2007. Instead of receiving anticipated inflationary adjustments, increases would be set at:

2.65% - 2004

2.75% - 2005

2.85% - 2006

2.95% - 2007

The plan would also increase the Indirect Medical Education (IME) payment adjustment from 5.5% to 5.8% for FY 2003. Thereafter, IME increases would be set at 5.5%. The increase for 2002 was 6.5%.

Medicare + Choice Payments

The legislation proposes to create a fourth payment option for health plans participating in the Medicare+Choice program. The new option would pay M+C Health Plans 100% of fee-for service costs and include Indirect Medical Education Payments in the formula.

The GOP Plan would change the date for setting the Health Plans Adjusted Community Rate (ACR) used to determine plan payments to the 3rd Monday in September and delay, for one year, the implementation of the beneficiary lock-in requirement scheduled to take effect later this year.

Beginning in 2005, Health Plans participating in the M+C program would be required to submit bids for delivering the Medicare package of benefits. Payments would be based upon the bids submitted rather than the existing payment mechanisms. Plan is roughly modeled on the way the Federal Employee Health Benefits Programs establishes government contributions for federal employee health benefits.

Provider Community Reaction

Reaction to this plan was not surprising. For the most part, physician organizations reacted positively because Congress was taking steps to eliminate projected future reductions in the physician fee schedule and make structural reforms so that fee schedule reductions in the out years were less likely.

By contrast, hospitals generally reacted negatively because of reductions Congress would be mandating in their anticipated increases. In effect, hospitals are being asked to “pay” for the partial restoration of physician payments.

Durable Medical Equipment providers reacted negatively to the proposed expansion of competitive bidding. Home Health agencies applauded the proposed repeal of the scheduled 15% reduction in home health payments.

The only part of the plan that appeared to secure broad support was the section dealing with regulatory and contractor reforms. These reforms have enjoyed broad bi-partisan support and strong support from the provider community, including the Healthcare Billing and Management Association.

As mentioned in the previous article, Congressional leaders are going back to the drawing board in order to make the revisions necessary to garner the support of a majority in the House. As currently drafted, the bill does not have sufficient votes to pass. The strongest opposition in the House came from Representatives concerned about hospital payment reductions. In addition, many members complained that the reform proposal was too generous to the Health Plans participating in the Medicare+Choice program.

A revised reform proposal is expected in early June.

CMS Issues Proposed Hospital Regulatory Changes

On May 9th, the Center for Medicare and Medicaid Services (CMS) issued a proposed rule recommending various changes in the Hospital Prospective Payment System. In addition to a 2.75% increase in hospital payments, the proposed rule recommends a number of important reforms in the prospective payment system.

The size of the increase is larger than had originally been anticipated by the hospital community. Early projections had pegged the hospital inflation rate at 2.8% percent. The final number, however was 3.3%. Because of previous Congressional actions, hospitals do not receive a full inflationary adjustment. Instead, the law limits the update to inflation minus .55%. Therefore, the actual update is 2.75% (3.3 minus .55).

The proposed rule also clarifies a number of policy questions that have been raised regarding the Emergency Medical Treatment and Labor Act (EMTALA). EMTALA is a federal statute that governs Medicare participating hospitals’ treatment of individuals who are in need of emergency services. Most significantly, these standards apply to all patients, not just those covered by Medicare. EMTALA sets standards for the screening, stabilizing and transfer of patients who present at the hospital with emergency conditions.

Some of the EMTALA questions addressed in the rule are:

• Managed Care requirements for prior authorization
• What does “comes to the Emergency Department” mean
• Applicability of EMTALA requirements to “non-emergent” patients presenting at the emergency room
• Applicability of EMTALA requirements to “emergent” patients presenting at “non-emergent” hospital departments

In attempting to clarify these policies, CMS offers examples of clinical situations relevant to the questions being raised.

To view the proposed rule, go to:

and go to the Center for Medicare and Medicaid Services section. Once there, you will see the icons for the proposed rule for hospital inpatient services.

The entire document is over 200 pages; however, it is viewable and downloadable in 50 page segments. The document is available in either Text format or PDF.

CMS Frequently Asked Questions Site - A valuable resource

The Center for Medicare and Medicaid Services (CMS) maintains a section on their website entitled, “Frequently Asked Questions”. Answers to many of the questions you may have can be easily obtained by going to this site. A sample of some of the questions you can get answered here are:

• What is CMS?
• How does Medicare determine place of service for physician services?
• Does Medicare pay for services performed outside of the United States?
• Does Medicare pay for services performed in United States Territories?
• What is the difference between Medicare and Medicaid?
• What is the HIPAA Administrative Simplification Compliance Act (ASCA)?
• Updated What is the Regulatory Reform Initiative and where do I get more

information?

• Where does CMS have offices located?

The following is a recent question and response having to do with the applicable definitions for various questions related to supervision and office suite.

Question

How does CMS define “office suite” and “immediately available” for the “direct supervision” of diagnostic testing?

Answer

The Centers for Medicare and Medicaid Services (CMS) defines three levels of physician supervision for the provision of diagnostic tests:

“General” means the procedure is furnished under the physician’s overall direction and control, but the physician’s presence is not required during the performance of the procedure;

“Direct” means that in the office setting the physician must be present in the office suite and immediately available to furnish assistance and direction throughout the performance of the procedure; and

“Personal” means a physician must be in attendance in the room during the performance of the procedure.

These levels of supervision are defined in the regulations at 42 CFR 410.32(b) and are also discussed in section 2070 of the Medicare Carriers Manual. This manual can be accessed via our website at

For the purposes of “direct supervision” we state the physician must be present in the “office suite” and “immediately available” to furnish assistance and direction throughout the performance of the procedure. This does not mean that the physician must be present in the room when the procedure is performed. We believe that use of these terms establishes reasonable parameters while allowing some flexibility to recognize that there are variations unique to individual practices.

Questions concern a specific “direct supervision” scenario should be directed to your carrier. A list of carriers can be found at:

It is important to note that CMS worked closely with physician specialty societies and others who provide diagnostic services to establish the level of supervision applicable to specific diagnostic services.

Supervision levels for all diagnostic services are now reflected in CMS’ Public Use Files on our website at

(Once you reach this website go to the second bullet, “National Physician Fee Schedule Relative Value File.)

The FAQ section of the CMS website can be reached by going to:

Medicare Program Memos issued Since April 30

The following Program Memoranda have been issued by CMS since April 30th. These issuance's are official agency transmittals used for communicating reminder items, request for action or information of a one time only, non-recurring nature. To obtain a copy of these documents, you can go on-line to:

and click on the specific document you want.

AB02073 Installation of a New Medicare Customer Service Center (MCSC) Next Generation Desktop (NGD) Application See PM 2079

A02038Modification of Common Working File (CWF) A/B Crossover Edit 7111 and “Alert”. Effective: 10/1/2002

AB02072Medicare Payment for Drugs and Biologicals Furnished Incident to a Physician's Service. Effective: 8/1/2002

AB02071 HIPAA Model Compliance Plan and Instructions. Effective: 5/10/2002

AB02070New Waived Tests – April 12, 2002. Effective: 7/1/2002

AB02069July 2002 Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Fee Schedule Files. Effective: 7/1/2002

AB02068Notice of Interest Rate for Medicare Overpayments and Underpayments. Effective: 5/8/2002

AB02064Coverage and Billing for Home Prothrombin Time International Normalized Ratio (INR) Monitoring for Anticoagulation Management. Effective: 7/1/2002

AB02065Coverage and Related Claims Processing Requirements for Positron Emission Tomography (PET) Scans – for Breast Cancer and Revised Coverage Conditions for Myocardial Viability. Effective: 10/1/2002

B02034Implementation of the National Council for Prescription Drug Programs (NCPDP) Telecommunications Standard Version 5.1 and the equivalent Batch Standard Version 1.1 for Retail Pharmacy Drug Transactions. Effective: 10/16/2003

AB02066Noncoverage of Perception Sensory Threshold/Nerve Conduction Threshold

Test (SNCT). Effective: 10/1/2002

AB02067Remittance Advice Coding and Health Insurance Portability and Accountability Act (HIPAA) Transaction 835v4010 Completion Update. Effective: 10/1/2002

AB02059Additional Clarification for Medical Nutrition Therapy (MNT) Services. Effective: 10/1/2002

B02031Cessation of Certain DMERC Activities. Effective: 5/1/2002

AB02057Charging Fees to Providers for Medicare Education and Training Activities Program Management. Effective:5/1/2002

AB02060Coverage and Billing for Intravenous Immune Globulin (IVIG) for the Treatment of Autoimmune Mucocutaneous Blistering Diseases. Effective:10/1/2002

AB02061CWF Editing of Claims for Medicare Beneficiaries in State or Local Custody Under a Penal Authority. Effective: 10/1/2002

A02037Health Insurance Portability and Accountability Act (HIPAA) Institutional 837 Health Care Claim Home Health Implementation Direction. Effective: 10/1/2002

A02036Health Insurance Portability and Accountability Act (HIPAA) Institutional 837 Health Care Claim Outpatient Hospice Implementation Direction. Effective: 10/1/2002

B02033Implementation of the Health Insurance Portability and Accountability Act (HIPAA) Health Care Eligibility Benefit Inquiry/Response Transaction (270/271)

Standard. Effective: 10/1/2002

AB02063Instructions for Fiscal Intermediary Standard System (FISS) and MultiCarrier System (MCS) Testing of 835 Interface with the Healthcare Integrated General Ledger Accounting System (HIGLAS). Effective: 10/1/2002

B02032Medical Review (MR) Progressive Corrective Action (PCA) See PM 2131

A02035Revision to the 837 Interface Format for Sending Claims Accounting Information from Fiscal Intermediary Standard System (FISS) to the Healthcare Integrated General Ledger Accounting System (HIGLAS). Effective: 10/1/2002

AB02058Second Update to the 2002 Medicare Physician Fee Schedule Database. Effective: 7/1/2002

AB02058Second Update to the 2002 Medicare Physician Fee Schedule Database

Effective: 7/1/2002

A02034Submission of the Swing Bed Minimum Data Set (MDS) Data for Swing Bed Hospitals. Effective: 5/1/2002