As part of his Midsession Review budget, the President has proposed to dedicate $21 billion over 5 years ($40 billion over 10 years) to a provider payment restoration initiative designed to ensure adequate reimbursement to hospitals, rural providers, teaching facilities, nursing homes, home health care agencies, managed care plans, and other providers. The proposal, designed to continue access to high-quality care, clearly illustrates that adequate financing for provider payments need not conflict with needed funding for a long-overdue and voluntary Medicare prescription drug benefit. It includes $9 billion ($19 billion over 10 years) in specific policies that are primarily designed for immediate payment increases that would start to benefit providers in fiscal year 2001 delay further Balanced Budget Act (BBA) payment reductions, many of which are scheduled to occur on October 1. It also includes $11 billion ($21 billion over 10 years) in unspecified funding for use in developing additional policies that target and/or permanent corrections to flawed BBA policies. The President remains committed to a comprehensive plan to make Medicare more competitive and efficient, add a long-overdue, voluntary prescription drug benefit, and transfer part of the on-budget surplus to the Hospital Insurance trust fund to help pay for the retirement of the baby boom generation. The improved status of the Medicare Trust Fund makes it possible to pay for provider payment restorations and help offset the cost of a prescription drug benefit while still achieving the President's Medicare reform goal of extending the Trust Fund's life to past 2030.

NOTE: Numbers may not add due to rounding. Other specified policies are being considered. In addition to these policies, the President will no longer include in his Medicare plan traditional provider payment reductions for ‘03-07, repeal of the BBRA managed care risk adjustment policy, and the bad debt and the preferred provider organization proposals. This reduces net Medicare savings by over $30 billion over 10 years.

The Balanced Budget Act of 1997 (BBA) helped to eliminate the deficit, created the State Children's Health Insurance Program, and reduced and restructured Medicare and Medicaid payments to health care providers. Many of the provider payment changes were justified and have contributed to improved efficiency and the unprecedented fiscal health of the Medicare trust fund. However, information gathered over the last three years suggests that some of the policies may have the potential to affect the quality of and access to health care services. To address this, the President worked with Congress to increase home health care payments in 1998 and many other provider payment policies in 1999. In addition, the Administration has taken a number of administrative actions to smooth the transition to new policies and ease the burden on health care providers.

It appears, however, that problems persist. Studies by the Medicare Payment Advisory Commission (MedPAC), the General Accounting Office (GAO) and others suggest that health care providers that serve Medicare and Medicaid beneficiaries are experiencing financial distress -- in part related to BBA changes. We are concerned about reports of reduced access to health care services by beneficiaries.

As such, the President has proposed to modify his Medicare reform plan to increase Medicare and Medicaid reimbursement for health care providers. His plan would set aside $21 billion over 5 years ($40 billion over 10 years) to delay BBA provider payment cuts and fund additional targeted and/or permanent corrections. Approximately half of this funding ($9 billion over 5 years, $19 billion over 10 years) would be dedicated for specific policies designed to address immediate payment reductions many of which are scheduled to go into effect on October 1, 2000. The remaining $11 billion over 5 years ($21 billion over 10 years) would be set aside for development, in cooperation with the Congress, of a broader set of policies that make more permanent and/or targeted policy changes.

The President remains committed to his overall plan to add a voluntary prescription drug benefit to Medicare, improve its and competitiveness and efficiency, and transfer part of the on-budget surplus to the program to help finance the retirement of the baby boom generation. Because of the improved status of the trust fund, fewer surplus dollars are needed extend the life of the Trust Fund past 2030, thus freeing up surplus for these payment improvements as well as prescription drugs. This proposal illustrates that increased funding for provider payments need not conflict with needed funds for a prescription drug benefit.

The following is a description of the specific policies included in the President's plan; additional policies could be developed with the reserve fund.

HOSPITALS
General hospitals. Most experts agree that hospitals' financial status has deteriorated recently. In large part, this results from private payment reductions to hospitals. Rural hospitals' inpatient margins dropped by nearly twice as much as urban hospitals' margins did between 1997 and 1998. Academic health centers also experienced a significant decline in total hospital margins. While data show that Medicare hospital inpatient margins remain relatively healthy, more hospitals had negative margins in 1998 than 1996. Thus, MedPAC recommends an increase in the hospital inpatient update over current law in 2001.

Rural. Rural hospitals face special challenges -- they tend to be smaller, more dependent on Medicare patients, and often cannot attract or keep health care professionals. As noted above, rural hospitals are, in general, disproportionately affected by Medicare payment reductions. The BBRA invested about $1 billion over 5 years to address many of these problem. However, other payment increases appear to be warranted to help the long-term viability of rural hospitals.

Disproportionate share payments. Hospitals are often the last resort for people without health insurance. Some uninsured use hospital emergency rooms for primary care while others delay care until their problems become more severe and costly. While the number of uninsured has been rising, Federal payments to disproportionate share hospitals (DSH) were reduced in the BBA. This coincides with reductions in payments from private payers which traditionally has helped fund uncompensated care.

Puerto Rico hospitals. The BBA improved payments to Puerto Rico hospitals by increasing the proportion of the payment that is based on national rates from 25 to 50 percent. Despite this improvement, a MedPAC memo (6/15/00) found that there has been a decline in Medicare inpatient margins as well as "precipitous declines in hospital total margins."

To mitigate these payment problems confronting hospitals and allow for more time to assess the full impact of the BBA and BBRA, the President's plan would:

• Replace the BBA's inpatient hospital update of market basket (MB) minus 1.1 percentage points with a full MB update for FY 2001;

• Eliminate the BBRA's indirect medical education (IME) payment reduction for FY 2001, maintaining the additional payments for IME at 6.5 percent;

• Eliminate BBRA's Medicare disproportionate share hospital (DSH) reduction for FY 2001 of 3 percent;

• Replace the BBA's Medicaid DSH reductions for 2001 with a one-year freeze, so that the Federal share DSH limits for FY 2000 would also apply in 2001.

• Reserves about $1 billion over 10 years for rural health care provider policies. This will include policies to improve the sustainability of rural hospitals, similar to those in the bipartisan "Health Care Access and Rural Equality Act of 2000 (H-CARE)", introduced by Senators Conrad, Daschle and Representatives Foley, Berry, McIntrye, Pomeroy, Stenholm, and Tanner among others. In addition, improving the equity for rural hospitals in the Medicare DSH formula will be considered.

• Increase the Puerto Rico PPS operating payment formula blend from BBA's 50/50 national / local to 75/25 in ‘01.

The Midsession Review plan also modifies the President's Budget savings policies by dropping the FY2003-2007 policies to reduce hospital market basket update and capital payment reductions and the budget proposal to reduce hospital bad debt. These hospital policies saved over $25 billion over 10 years (before interactions).

HOME HEALTH
There has been a significant decline in actual home health spending since the enactment of the BBA. While some of this reduction reflects elimination of overpayments, waste and fraud, it may be causing access problems in some situations. GAO, MedPAC and the Office of the Inspector General agree that there does not appear to be system-wide access problems, but some patients who have long-term conditions, like diabetes, have had increased difficulty in accessing home health services. It is not clear how access to care will be affected by the implementation of the new prospective payment system (PPS) this fall.

The President's plan would:

• Replace the current law home health update of market basket (MB) minus 1.1 percentage points with a full MB update for FY 2001;

• Delay the BBA's 15 percent reduction in home health payments for one additional year until FY2002.

SKILLED NURSING FACILITIES
The BBA created a new prospective payment system for skilled nursing facilities (SNFs) that went into effect in 1998. This new system contributed to changes in the SNF market. Recent GAO and Office of the Inspector General (OIG) studies have found that SNFs were more cautious about admitting high-cost cases. An OIG study found that 58 percent of hospital discharge planners reported that Medicare patients requiring extensive services such as intravenous medications have become more difficult to place in nursing homes. Additionally, several large private SNF chains have experienced financial problems which were compounded by Medicare payment changes.

The BBA limited yearly payments for physical / speech therapy and occupational therapy to $1,500 each per beneficiary. This limit meant that a large number of therapy users had service use that exceeded the payment limits and thus paid for services out-of-pocket. The BBRA put a two-year moratorium on the caps while a study is being conducted to determine appropriate payment methodologies. However, the moratorium may not be long enough to complete this work.

The President's plan would:

• Replace the BBA's SNF update of market basket (MB) minus 1 percentage point with a full MB update for FY 2001.
• Delay for an additional year (until FY 2002) the application of the therapy caps providing additional time for development of policies.

It would also drop the nursing home bad debt reduction that was in the budget.

MANAGED CARE
One of the challenges facing Medicare managed care plans is adjusting to the BBA changes while maintaining the extra services that they offered before the BBA – in particular, prescription drugs. In the last several years, plans have significantly reduced the generosity of their prescription drug coverage. For example, in the last two years, the proportion of plans that limit drug coverage to $500 or less has increased by 50 percent. In 2000, about 75 percent of plans limit drug coverage to $1,000 or less. Part of the reduction in drug coverage results from reductions in managed care rates of growth mandated by the BBA. It also reflects the general tightening of the managed care market.

The President's plan includes a competitive defined benefit proposal that restructures managed care plans' payments, promoting competition on prices, not extra benefits. In addition, it would explicitly pay managed care plans for prescription drugs for the first time. Direct payment for prescription drugs would infuse over $20 billion over 5 years (over $50 billion over 10 years) with the changes in the prescription drug proposal in the Midsession review.

Additionally, the plan drops the proposed repeal of the BBRA risk adjustment policy. HCFA announced on June 19 that it will work with MedPAC, health plans, beneficiary groups and others to develop a slower phase-in of the current schedule for risk adjustment, administratively addressing the concerns about the current schedule. HCFA will maintain its commitment to using comprehensive, outpatient data beginning in 2004, but will phase in the percent of payments based on it over time.

In addition, the specific payment increases to fee-for-service hospitals, home health agencies, and skilled nursing facilities will increase payments to managed care plans by approximately $1 billion over 5 years, $3 billion over 10 years.

END-STAGE RENAL DISEASE
Medicare covers about 300,000 people with end-stage renal disease (ESRD) – people who have diabetes, hypertension or other diseases that result in severe impairment of kidney function. Medicare's composite rate (payment rate for outpatient dialysis services) has not kept pace with the increasing acuity of patients and cost of services. For the past several years, MedPAC has recommended updating the payment rate to reflect these factors. The BBRA went part way to the MedPAC recommendation by updating it by 1.2 percent in 2000 and plans another 1.2 percent increase in 2001 – the first increases since 1991.

The President's plan would fully comply the with MedPAC recommendation:

• Increase of 1.2 percent for CY 2001 on top of BBRA increase of 1.2 percent.

Note: The plan also drops the PPO proposal and payment reductions for labs, ambulances, durable medical equipment, parenteral and enteral nutrients, and prosthetic and orthotics for ‘03-07 and bad debt reductions for non-hospital providers. These proposals saved about $9 billion over 10 years.

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