Court Passes Medicare Give-Back Bill

NUMBER 131 FROM THE LATHAM & WATKINS HEALTH CARE PRACTICE GROUP BULLETIN NO. 131 JANUARY 11, 2001 Court Passes Medicare Give-Back Bill BIPA contains numerous provisions designed to increase Medicare and Medicaid reimbursements to hospitals, home health agencies, skilled nursing facilities, managed care plans, and other healthcare providers. On December 15, 2000, the U.S. Congress voted to pass the Medicare Give-Back Bill, a package of changes designed to restore approximately $35 billion in funding to health care entities financially stressed by the Balanced Budget Act of 1997 (BBA). The official title of the legislation is the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). 1 It follows the Balanced Budget Refinement Act of 1999 (BBRA), which apparently did not go far enough in restoring funds to health care entities lost after the passage of the BBA. President Clinton signed the legislation into law on December 21, 2000, putting an end to months of partisan discussions in the Congress. Essential components of the law are discussed below. Reimbursement BIPA contains numerous provisions designed to increase Medicare and Medicaid reimbursements to hospitals, home health agencies, skilled nursing facilities, managed care plans, and other healthcare providers. The attached grid highlights some of the more significant changes with respect to the Medicare program. Fraud and Abuse With respect to fraud and abuse, BIPA: Grants permanent authority to the Office of Inspector General of the U.S. Department of Health and Human Services to issue advisory opinions. Seeks to guard against Medicare over-reimbursement for covered pharmaceutical drugs. Medical Technology BIPA improves access to innovative medical tests and treatments and includes key provisions of the Medicare Patient Access to Technology Act (H.R. 4395/S. 3082) and the Medicare Appeals Act (H.R. 2356) as well as a provision to improve the outpatient transitional payment program for new technology. BIPA improves access by reducing Medicare delays in coverage and reimbursement for certain innovative medical technologies, and by requiring HCFA to establish procedures for coding and payment determinations for new clinical diagnostic laboratory tests and new durable medical equipment. Medicare+Choice For Medicare+Choice plans, BIPA makes both positive and negative changes. Reimbursement Effective March 1, the minimum payment update is increased to 3 percent from 2 percent. 2 BIPA also provides for a more gradual phase-in of the risk adjustment payment methodology. The current methodology (under which 10 percent of payment is based on risk-adjusted inpatient data) remains in effect through 2003, at which point a phasein of 30 percent for 2004, 50 percent for

CLIENT ALERT 2005, 75 percent for 2006 and 100 percent for 2007 and subsequent years occurs. This phased-in risk adjustment is based on data from inpatient and ambulatory settings. BIPA permits Medicare+Choice organizations to adjust to the revised payment rates, either by electing to re-enter the program if they had previously given notice of termination or by submitting revised Adjusted Community Rates within specified time frames. Medicare+Choice organizations that elect to re-enter the program appear to have more flexibility than those who renewed contracts prior to enactment of BIPA, as the re-entering plans are not subject to limits on the use of additional funds discussed below. Limits on Use of Funds BIPA limits the uses of additional funds Medicare+Choice organizations receive under the changes in the law it imposes. The funds from higher capitation payments received by plans may only be used to reduce premiums, 3 reduce cost-sharing, enhance benefits, utilize stabilization funds or stabilize or enhance beneficiary access to providers. Pre-emption BIPA provides that in addition to pre-empting benefit requirements, state requirements related to cost-sharing and marketing and benefit materials are also pre-empted. Thus, Medicare+Choice organizations need to obtain fewer approvals from state regulators under the pre-emption provisions of BIPA. Timing Changes BIPA changes certain timing requirements: If HCFA makes a national coverage determination or a change in benefits that results in a significant increase in costs to a Medicare+Choice organization, HCFA must adjust contract rates during the contract year. HCFA may only implement or impose significant new regulatory requirements on a Medicare+Choice organization at the beginning of a calendar year. The period for approval of marketing material that precisely follows HCFA language is reduced from 45 to 10 days. Beginning June 1, 2001, the effective date of enrollee elections and changes in election is the first day of the month following the month the change was made (i.e., beneficiaries enrolling after the 10 th of the month no longer must wait an additional month for coverage). The 5 percent new entry bonus also applies to areas where Medicare+Choice organizations were exiting in 2001 (in addition to 2000). Other Provisions BIPA also provides for: revisions to ESRD payment rates to reflect rates used in the Social HMO ESRD capitation demonstration project and for flexibility for ESRD patients changing plans when their original plan is terminated or non-renewed. an any willing provider type provision applicable to coverage of post-hospitalization skilled nursing care through home SNFs. flexibility for HCFA in facilitating offering of Medicare+Choice plans under contracts between the plans and employers, labor organizations or trustees. a $100,000 maximum civil money penalty for Medicare+Choice organizations that prematurely terminate their contracts. effective for portions of cost reporting periods occurring on or after January 1, 2001, payments for nursing and allied health services for Medicare+Choice enrollees will be based on hospital s per day cost of nursing and allied health programs and the number of days attributed to Medicare enrollees compared to other hospitals. BULLETIN NO. 131 2 JANUARY 11, 2001

CLIENT ALERT Medicaid, SCHIP and PACE BIPA also contains various provisions related to the Medicaid, SCHIP and PACE programs, which are not discussed in detail here. Medicaid changes include modifications to DSH payments, description of methods for identifying Medicaid managed care patients, development of prospective payment systems for federally qualified health centers and rural health clinics, streamlined approval of Section 1115 waivers, and imposition of a deadline for release of final regulations relating to Medicaid upper payment limits, among others. Studies and Demonstration Projects BIPA also provides for various studies, analyses, data collections and reports by government agencies, including the Health Care Financing Administration, the Medicare Payment Advisory Commission and the General Accounting Office, as well as demonstration projects on specific aspects of health care delivery and payment. These include studies of: rigid timelines for the government s rendering of administrative decisions on appeals. A number of substantive changes have also been made, particularly the filing of an administrative complaint by aggrieved parties to challenge national and local coverage determinations. 1 BIPA was approved as part of a larger year-end spending bill that funded various federal departments and agencies, among other things. 2 For 2001, the minimum payment amount is raised to $525 for Medicare+Choice organizations in metropolitan statistical areas with a population of more than 250,000 and $475 for organizations in other areas. The payment rates for 2001 cannot exceed 120 percent of the amount the organizations received in the area for 2000. 3 Reduction in Part B premiums for enrollees may not exceed 125 percent of the otherwise applicable premium and must apply uniformly to each enrollee of the Medicare+Choice plan to which the reduction applies. reductions in Medigap premium levels resulting from reductions in coinsurance; the appropriateness of furnishing certain specialist physician services in physician offices rather than hospital outpatient departments; preventive interventions in primary care for older Americans; and the effect of limitations on state payments for Medicare cost-sharing, and demonstration projects for: cancer prevention and treatment for ethnic and racial minorities; disease management for severely chronically ill Medicare beneficiaries; physician group practice incentives; and lifestyle modification programs. Other Provisions BIPA also includes revisions to Medicare s appeals and coverage processes. These revisions incorporate more BULLETIN NO. 131 3 JANUARY 11, 2001

CLIENT ALERT Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed to the right or the attorney whom you normally consult. Copyright 2001 by Latham & Watkins BOSTON CHICAGO LOS ANGELES NEW JERSEY NEW YORK NORTHERN VIRGINIA ORANGE COUNTY SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON, D.C. HONG KONG LONDON MOSCOW SINGAPORE TOKYO If you have any questions about this Client Alert, please contact any of the attorneys listed at the right. CHICAGO James A. Cherney (312) 876-7700 LOS ANGELES Daniel K. Settlemayer Bruce J. Shih L. Susan McGinnis (213) 485-1234 SAN FRANCISCO/ SILICON VALLEY Paul R. DeMuro Jerry Peters (415) 391-0600 WASHINGTON, D.C. Stuart S. Kurlander (202) 637-2200 BULLETIN NO. 131 4 JANUARY 11, 2001

Client Alert 131 ANALYSIS OF MEDICARE "GIVE-BACK" BILL Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA") 1. Hospital Inpatient Payment Updates Sole community hospitals receive full market basket percentage increase for FY 1 2001; market basket minus 1.1% for FY 2002. All other hospitals receive market basket minus 1.1% increase for FY 2001 and 2002. 2. Hospital Outpatient Services Update outpatient payments using same market basket percentage used for inpatient updates, with update for CY 2 2000-2002 limited to market basket minus 1%. 3. DSH Payment Adjustments DSH hospitals receive supplemental payments when the total number of Medicare/Supplemental Security Income and Medicaid eligible patient discharges exceeds: 15% for urban hospitals with more than 100 beds 30% for rural hospitals with more than 100 beds 40% for urban hospitals with fewer than 100 beds 45% for rural hospitals with fewer than 100 beds Full market basket percentage, or 3.4%, increase for all hospitals for FY 2001, but, because FY 2001 is underway, all hospitals other than sole community hospitals will received market basket minus 1.1% increase for discharges between 10/1/00 and 3/30/01 and market basket plus 1.1% for discharges between 4/1/01 and 9/30/01. All hospitals receive market basket minus 0.55% increase for FY 2002 and 2003. For 4/1/01-12/31/01, update outpatient payments by the amount established by HCFA effective 1/1/01 plus 0.32%. Effective 4/1/01, the eligibility thresholds for supplemental payments for DSH hospitals applies when the total number of Medicare/Supplemental Security Income and Medicaid eligible patient discharges exceeds 15% for all hospitals. Establishes new, generally lower, payment adjustment formulae for rural hospitals and urban hospitals with fewer than 100 beds. Reduces cuts for DSH payment adjustments (resulting from BBA and BBRA) to 2% in FY 2001 and 3% in 2002. 1 "FY" means Federal Fiscal Year, defined as October 1 - September 30. "CY" means Calendar Year, defined as 2 See footnote 1. January 1 - December 31. 1

4. Provider-Based Status Requirements Extensive guidance and proposed rules sets forth various requirements to qualify for providerbased status. 5. Wage Index Improvements Decisions by the Medicare Geographic Reclassification Review Board to reclassify hospitals for purposes of wage indexes effective for one year. Entities treated as provider-based as of 10/1/00 retain such status for two years. Under two year moratorium (ending 9/30/02) new regulation would not be applied, including criteria used to determine provider-based status, prohibition against conferring provider-based status on joint ventures, and requirements applicable to management contracts. Entities requesting provider-based status during the two-year period are treated as provider-based until official determination is made. Hospitals may meet the geographic location test for provider-based status if the entities or departments are located within 35 miles from the main campus of a hospital or CAH, or is owned by a hospital that is a unit of state/local government, is formally granted governmental powers by a unit of state/local government, or is a private hospital with a state/local contract to operate off-campus clinics, and has a DSH percentage of 11.75% or greater. Decisions by the Medicare Geographic Reclassification Review Board to reclassify hospitals for purposes of wage indexes effective for three years, effective for hospitals qualifying for FY 2001. Permits states to adopt a statewide wage index. 6. Indirect Medical Education ("IME") and Graduate Medical Education (" GME") IME adjustments for FY 2001 reduced to 6.25% for each 10% increase in a hospital's ratio of interns and residents to beds (per the BBA/BBRA). Methodology for paying hospitals for direct GME costs based on national average per resident amounts modified by geographic adjustment factors (per BBRA). 7. Sole Community Hospitals Sole community hospitals may use inpatient cost data from the 12-month cost reporting period beginning during FY 1996 for purposes of determining the hospital's most advantageous target amount if the facility were paid on the basis of the target amount for cost reporting periods beginning during FY 1999 (per BBRA). 8. Medicare Dependent Hospitals A hospital may qualify as a "Medicare Dependent Small Rural Hospital" and receive special inpatient service payments if it meets defined criteria including that no less than 60% of inpatient days or discharges during the cost reporting period beginning during 1987 were attributable to inpatients entitled to benefits under Medicare Part A. Maintains IME adjustment at 6.25% for discharges between 10/1/00 and 3/30/01, increases IME adjustment to 6.75% for discharges between 4/1/01 and 9/30/01, reduces IME adjustment to 6.5% in FY 2002 and 5.5% in FY 2003 and subsequent years. Establishes a floor for direct GME payments whereby a hospital's approved per resident amount for cost reporting periods beginning during FY 2002 would not be less than 85% of the locality adjusted national average per resident amount. Sole community hospitals may use FY 1996 cost year data if such data would improve Medicare reimbursement to the hospital. This provision is retroactively effective, as if included in the enactment of the BBRA. Effective for cost reporting periods on or after 4/1/01, a hospital may qualify as a "Medicare Dependent Small Rural Hospital" if it meets all defined criteria and at least 60% of its inpatients days or discharges were attributable to inpatients entitled to Part A benefits during two of the three most recently audited cost reporting periods. 2

9. Bad Debt Amount of bad debt attributable to deductibles and coinsurance that may be treated as allowable cost for cost reporting purposes is limited to 55%. 10. Inpatient Rehabilitation Services 11. PPS Exempt Hospitals and Units (Psychiatric; Long- Term Care) 12. Critical Access Hospitals (CAHs) Under the Prospective Payment System (PPS), HCFA sets payment rates at levels such that overall payments during FY 2001 and 2002 will be 98% of the overall payments had PPS not been implemented. Reimbursement made on the basis of reasonable cost subject to target limits and certain incentive payments. The Medicare Rural Hospital Flexibility Program (established under the BBA) allows states to designate hospitals meeting certain criteria as CAHs, among other things. CAHs are reimbursed on a reasonable cost basis. 13. Device Pass-Throughs During the first three years of hospital outpatient PPS, Medicare makes supplements payments on a limited cost pass-through for certain innovative medical devices, drugs and biologicals. Amount of bad debt attributable to deductibles and coinsurance that may be treated as allowable cost for cost reporting purposes increased to 70%. The 98% cap on overall payments still applies in FY 2001, but for FY 2002 HCFA must set payment rates at levels that approximately equal payments under the existing cost-based system. Hospitals may also make a one-time election to be paid completely on a PPS system rather than a PPS/cost-based blend during the PPS transition period. Increases supplemental incentive payments available to psychiatric hospitals in the years before PPS is implemented from 2% of the target amount to 3%. Provides supplemental payments to long-term care hospitals and units by increasing the national cap by 2% and the target amount by 25%. Requires HCFA to conduct a feasibility analysis of basing the new PPS for long-term care hospital services on the PPS for acute care hospital services. Modifies the CAH program, including: 1) institutes changes regarding reimbursement and eliminates beneficiary cost-sharing obligations for clinical diagnostic laboratory services, 2) changes the amount of reimbursement for professional services furnished in CAHs, including the cost of on-call emergency room physicians, 3) provides an exemption from the skilled nursing facility PPS for swing beds in CAHs, and 4) provides special payment rules for ambulance services furnished by CAHs. Requires HCFA to modify its procedures and standards for purposes of identifying and reimbursing devices eligible for the pass-through, including 1) devices that are currently not eligible for pass-through payments because they were payable under Medicare prior to 1997 may be eligible, 2) reimbursement amounts for eligible devices will be established on a category level and based on the average cost of the devices classified in the category rather than on a devicespecific level. Pass-through payments will be available only for a limited time and will ultimately be included in the underlying PPS payment. Also adds temperature monitored cryoablation to transitional pass-through under OPD PPS. 3

14. DME, Prosthetics, Orthotics and Supplies (DMEPOS) 15. Contrast Enhanced Diagnostic Procedures 16. Skilled Nursing Facilities (SNFs) 17. Home Health Agencies (HHAs) Limited fee schedule CPI updates. Limited Ambulatory Payment Groups. SNF PPS consists of nursing care services, therapy services and non-case-mix services that are summed to determine overall payment. HCFA updates payments for SNF services annually using a market basket percentage adjustment similar to that used to update payments for inpatient hospital services, specifically, the market basket percentage minus 1% for FYs 2001 and 2002. HCFA establishes a PPS for home health services and implements an interim payment system during the transition (per BBA). A 15% payment reduction effective 10/1/00 was delayed until one year following implementation of the PPS (per BBRA). Phased-in increase of updates for payments under the DMEPOS fee schedule (except for oxygen and oxygen equipment) for CY 2001 -- previous updates apply for items furnished between 1/1/01 and 6/30/01, supplemental updates apply for items furnished between 7/1/01 and 12/31/01. For orthotics and prosthetics, 1% increase for CY 2002. Custom fabricated orthotics and prosthetics must be furnished by a qualified practitioner and fabricated by a qualified practitioner or supplier. Negotiated rulemaking to be used for promulgation of regulations to implement new provisions. Requires payment for replacement of certain prosthetic devices and parts if ordered by physician based on necessity. For items and services furnished on or after July 1, 2001, requires HCFA to create additional ambulatory payment groups of covered hospital outpatient department services that classify separately those procedures that utilize contrast agents from those that do not. HCFA must increase the current reimbursement amount for the nursing care component of each Resource Utilization Group (RUG) by 16.6% for SNF services furnished between 4/1/01 and 9/30/02. Consolidated billing requirement repealed for all Part B services furnished to nursing home residents and for non-therapy items and services furnished to beneficiaries who are not under a Part A stay (consolidated billing still applies to Part A services and to therapy services regardless of whether the beneficiary's stay is covered by Part A). Increases update payments to full market basket percentage for FY 2001 and to the market basket percentage minus 0.5% for FY 2002, but because FY 2001 is underway, the actual update will be market basket percentage minus 1% for services provided between 10/1/00 and 3/30/01 and market basket plus 1% for services provided between 4/1/01 and 9/30/01. Permits HCFA to establish a process for geographic reclassification of SNFs similar to the hospital reclassification process. Further delays the 15% payment reduction until 10/1/02. Increases the annual PPS update to 2.2% for services rendered between 4/1/01 and 9/30/01. Clarifies definitions of "parent office" and "branch office" for payment purposes and broadens definition of "homebound" to include persons who are absent from the home for purposes of medical care or adult daycare. 4

18. Ambulatory Surgical Centers (ASCs) HCFA proposed new facility payment rates for services furnished in Medicare-certified ASCs, based on 1994 cost data. 19. Therapy Caps $1,500 cap on the amount of outpatient physical, occupational and speech therapy services reimbursable in a calendar year (per the BBA). Cap suspended for CYs 2000 and 2001 (per BBRA). 20. Renal Dialysis Rate 1.2% increase for composite rate for renal dialysis services during CY 2001. 21. Hospice Care Temporary increases in payment rates (per BBRA). 22. Ambulance Services Update of inflation minus 1% for payments made under the ambulance service fee schedule for CY 2001. 23. Rural Health Clinics (RHCs) Statutory cap applies to payments to RHCs for services, with exemption for RHCs owned by rural hospitals with fewer than 50 beds. Prohibits HCFA from implementing new payment rates for ASCs before 1/1/02, requires the phase-in of new payment rates over four years if rates are based on facility cost data collected before 1999 and requires new payment rates based on facility costs data collected after 1999 to be implemented by 1/1/03. Extends suspension of cap through CY 2002. Enlarges increase to 2.4% for composite rate for renal dialysis services during CY 2001. Extends deadline for submitting a request to be exempt from payment based on the composite rate. HCFA will also develop an ESRD market basket and a system to include additional services in the composite rate. Effective 4/1/01, base Medicare per diem payment rate for hospice services furnished between 4/1/01 and 9/30/01 increases by 5%. This provision has no effect on temporary increases under the BBRA. Adds a clarification regarding physician certification: "The certification regarding terminal illness of an individual shall be based on the physician's or medical directors clinical judgment regarding the normal course of the individual's illness." Phased-in full inflation update for payment made under the ambulance service fee schedule for CY 2001 -- inflation minus 1% update for services furnished between 1/1/01 and 6/30/01, and 4.7% update for services furnished between 7/1/01 and 12/31/01. Transitional assistance (between 7/1/01 and 1/1/04) for providers of ground ambulance services for trips between 17 and 50 miles originating in rural areas (rate increases by not less than one-half of the additional payment per mile established for the first 17 miles of such a trip originating in a rural area). Extends cap exemption to RHCs owned by hospitals with fewer than 50 beds, regardless of location. 5

24. Telehealth Services Limited reimbursement for telehealth services. Medicare reimburses for certain telehealth services to physicians and facilities in rural areas. No physician/practitioner need be present at the originating site unless it is medically necessary. Physician/practitioner payments equal the amount that would have been paid if the services had been furnished to the beneficiary in person and without the use of telecommunications system. Facility payment of $20 (with increases by the Medical Economic Index beginning in 2003) must be paid to the physician or practitioner office, CAH, RHC, federally qualified health center or hospital where the telehealth service is rendered. Changes are effective 10/1/01. 25. Physician Pathology Services Hospital to bill for technical services provided by independent laboratory for hospital patients. 26. Screening Pap Smears Medicare covers screening pap smears for women once every three years, and annual screenings for women deemed at high risk for cervical or vaginal cancer. Home health agencies may provide telehealth services provided that the physician order does not require "in person" service and the service is not considered a home health visit for purposes of eligibility or payment. Provides that when an independent clinical laboratory furnishes the technical component of a physician pathology service to a fee-for-service Medicare beneficiary who is an inpatient or outpatient of a covered hospital, the service is reimbursed as a laboratory service, not an inpatient or outpatient hospital service. Effective 7/1/01, Medicare covers screening pap smears once every two years for women who are not at high risk. 27. Glaucoma Screenings Not covered. Effective 1/1/02, Medicare covers annual glaucoma screenings for persons determined to be at high risk for glaucoma, individuals with a family history of glaucoma and individuals with diabetes. 28. Colonoscopy Screenings Medicare covers certain kinds of periodic colorectal cancer screenings (per the BBA), and covers screening colonoscopies only for beneficiaries at high risk for colorectal cancer. Effective 7/1/01, Medicare expands coverage to permit beneficiaries who qualify for fecal-occult blood tests or screening flexible sigmoidoscopy to elect to receive a screening colonoscopy, but only covers screening colonoscopies for beneficiaries who are not at high risk for colorectal cancer after 119 months following the previous screening colonoscopy or after 47 months following the previous screening flexible sigmoidoscopy. 29. Mammography Screenings Statutorily prescribed payment rate. Effective 1/1/02, eliminates the statutorily prescribed payment rate for screening mammographies. Services will be paid under the physician fee schedule at rates established by HCFA. Authorizes specific supplemental payments for mammographies furnished between 4/1/01 and 12/31/02 using new technologies. 6

30. Nutrition Therapy for Beneficiaries with Diabetes or Renal Disease 31. Amyotrophic Lateral Sclerosis ("ALS") Limited coverage. 24 month waiting period for beneficiaries with ALS to qualify for Medicare coverage. 32. Beneficiary Copayments Pursuant to hospital outpatient PPS, beneficiary coinsurance amounts are reduced to 20% of the total hospital allowed charge, but transitioned. 33. Drugs and Biologicals Drugs and biologicals are covered if incident to physician services and they cannot be selfadministered. 34. Immunosuppressive Drugs Medicare covers immunosuppressive drugs for organ transplant recipients for a limited number of months following organ transplant operations. Effective 1/1/02, Medicare covers medical nutrition diagnostic, therapeutic and counseling services for beneficiaries with diabetes or renal disease provided by a registered dietician or qualified nutrition professional pursuant to a referral by a physician. Payments will be based on a physician fee schedule. Effective 7/1/01, the waiting period is waived for beneficiaries with ALS. Effective 4/1/01, limits beneficiary cost-sharing to accelerate transition to 80/20 cost sharing split. Effective immediately, drugs and biologicals are covered if they are "not usually" selfadministered. Effective 1/1/01, rates of reimbursement for drugs and biologicals may not be decreased until HCFA has reviewed a study to be conducted regarding the current Medicare payment methodology. Effective 1/1/01, persons/entities receiving payment from Medicare for a covered drug or biological must do so on an assignment-related basis only (i.e., must accept Medicare payment and copayment as payment in full). Effective immediately, coverage of immunosuppressive drugs for organ transplant recipients extends indefinitely. 7