Before adjourning for the year, Congress passed the "Medicare, Medicaid, and SCHIP (State Children's Health Insurance Program) Balanced Budget Refinement Act of 1999" as part of a package of last-minute spending bills. The bill restores $16 billion over five years in Medicare and Medicaid cuts that had been mandated by the Balanced Budget Act of 1997 (BBA). The Administration, through its regulatory discretion, restored another $1 billion for a total estimate of $17 billion. This advisory highlights provisions affecting hospitals and health systems.

The bill clarifies that Congress did not intend for hospitals' Medicare outpatient payments to be cut so that beneficiary coinsurance could be reduced. The Health Care Financing Administration (HCFA) had proposed an additional 5.7 percent across-the-board reduction to the outpatient PPS to help cover the costs of reducing beneficiary coinsurance. All hospitals will benefit by not being subjected to this additional 5.7 percent cut.

Restored to hospitals: $3.9 billion over five years.

Also, a three-and-a-half-year transition to outpatient PPS is established by the legislation, so that hospitals who were scheduled to see increases in the new system will continue to do so, while hospitals who were likely to face losses will have those losses limited. Rural hospitals with fewer than 100 beds and cancer hospitals are completely protected from any loss as a result of the switch to outpatient PPS. For other hospitals, the provision follows this formula:

Projected hospital payment changes under PPS Year 1 Year 2 Year 3
If payment is projected to increase Keep all of the increase Keep all of the increase Keep all of the increase
If payment is projected to drop by up to 10% 8% of loss is restored 7% of loss is restored 6% of loss is restored
If payment is projected to drop 10%-20% Loss limited to 8%-15% Loss limited to 7%-13% Loss limited to 6%
If payment is projected to drop 20%-30% or more Loss limited to 15%-21% Loss limited to 13% Loss limited to 6%

Restored to hospitals: $1.4 billion over five years.

The bill also establishes a budget-neutral adjustment to pay for high-cost outpatient services, medical devices, drugs and biologicals.

The Administration also announced a two-year delay in the implementation of a volume expenditure cap for outpatient services.
Restored to outpatient payments: $400 million.


Sole Community Hospitals (SCHs)
SCHs will receive the full market basket update for fiscal year (FY) 2001. SCHs paid at the hospital-specific rate may elect to rebase their payments. Starting in FY2001, hospitals electing the transition would receive a payment based on 25 percent of their 1996 costs and 75 percent of 1982 or 1987 costs. In FY2002, hospitals would receive a 50/50 blended payment. In FY2003, hospitals would receive a payment based on 75 percent of their 1996 costs and 25 percent of their 1982 or 1987 costs. In 2004 and beyond, hospitals would receive 100 percent of the rebased target amount.

Medicare Dependent Hospitals
The Medicare Dependent Hospital program is extended for five years until FY2006. The program was due to expire in FY 2001.

Critical Access Hospitals (CAHs)
The CAH program has been substantially refined to increase program flexibility. The changes include:

  • Replacing current 96-hour length-of-stay limitation with an average 96-hour length-of-stay limitation. The limitation is applied on an annual basis rather than on a per-case basis.
  • Permitting CAHs to bill at the all-inclusive rate or continue billing hospital and physician outpatient services separately. The all-inclusive rate would combine both cost-based hospital outpatient payments and fee schedule payments for professional services.
  • Granting CAH status to hospitals that have closed in the past 10 years or to those hospitals that have downsized to a health clinic or center.
  • Allowing CAHs to continue providing long-term care services (swing-bed program).
  • Eliminating beneficiary coinsurance for clinical laboratory services furnished on an outpatient basis.
  • Extending CAH eligibility to for-profit hospitals.

Rural reclassification
Isolated urban hospitals are permitted to reclassify as rural through an appeals process if they: 1) are located in a rural census tract of a metropolitan statistical area; 2) located in a rural area designated by state law; 3) would otherwise qualify as a Sole Community Hospital or Rural Referral Hospital; or 4) meet other criteria specified by the Secretary of Health and Human Services (HHS). The Secretary must approve applications within 60 days.

Graduate medical education
Allows rural hospitals to increase the number of primary care residents. Hospitals could add up to three full-time equivalent residents if the individuals were previously scheduled to begin training before the 1996 base year limit and were on maternity, disability or a similar approved leave of absence.

Rural health clinics
Imposes a two-year moratorium on the phase-down of Medicaid cost-based reimbursement for Federally Qualified Health Centers, Community Health Centers and Rural Health Clinics. Rates would be frozen at 95 percent of costs for FY2001 and 2002. The phase-out of cost-based reimbursement would resume at 90 percent in FY2003 and 85 percent in FY2004. In addition, the full repeal of cost-based reimbursement would be delayed one year from FY2004 to FY2005.

New grant funding
Provides grant funding to help offset training and computer software expenses associated with implementing new BBA payment methodology. The funding would be available to rural hospitals with fewer than 50 beds. The Secretary of HHS may award grants up to $50,000 per hospital.

Restored to rural hospitals (excluding outpatient PPS protection): $900 million over five years.


The indirect medical education (IME) adjustment is increased to 6.5 percent through FY2000 and moves to 6.25 percent in FY2001.
Restored to teaching hospitals: $600 million over five years.

Direct graduate medical education (DGME) payments incorporate national average per resident allotments. The formula is as follows:

% of your hospital's geographically adjusted national average* FY2001 payments FY 2003-FY2005 payments
Per resident amount exceeding 140% Payments frozen for FY 2001 and FY 2002 Consumer price index minus 2%
Per resident amount below 70% payments increased to 70% of the geographically adjusted national rate, establishing a new floor.
Per resident amount between 70% and 140% Payments continue on a hospital specific per-resident amount update for inflation.

*Uses the geographic adjustment factor (GAF) that applies to the physician payment schedule.


The Administration announced that it would not expand for two years the list of DRGs to which the BBA's transfer provision currently applies. Restored to hospitals: $400 million.


The legislation increases payments to disproportionate share hospitals by eliminating the additional 1 percent reduction mandated in the BBA. The reduction in the DSH formula will now be 3 percent for FY2001 and 4 percent for FY2002, rather than 4 percent in FY2001 and 5 percent in FY2002.
Restored to DHS hospitals: $100 million over five years.


For cost reporting periods on or after October 1, 1999, the labor-related portion of the 75 percent cap is adjusted within each class of PPS-exempt hospital, to reflect the difference between regional costs and the national average.
Restored to PPS-exempt facilities: $300 million over five years.

Also, the amount of continuous bonus payments to eligible long-term care and psychiatric providers is increased from 1 percent to 1.5 percent for cost reporting periods beginning on or after October 1, 2000, rising to 2 percent for cost reporting periods beginning on or after October 1, 2001. The bill also directs the Secretary of HHS to develop PPS systems for the following facilities:

PPS-exempt facility PPS design Effective date
Long-term care Discharge based October 1, 2002
Psychiatric Per-diem based October 1, 2002
Rehabilitation Functional-related groups October 1, 2001


Federal per-diem PPS payments for SNFs are increased by 20 percent for the 15 resource utilization groups (RUG) in the following table, between April 1 and October 1, 2000. For FY2001 and FY2002, all RUG categories will be increased by 4 percent. Also, beginning April 1, 2000, the legislation instructs the Secretary of HHS to pay separately for ambulance services for dialysis patients, prostheses, and chemotherapy drugs for SNF patients. Restored to SNFs: $1.4 billion to SNFs over five years (approximately $500 million is expected to benefit hospital-based SNFs).

RUG description Code Rural add-on Urban add-on
High rehabilitation
325 minutes minimum a week
RHC $56.94 $55.48
Medium rehabilitation
150 minutes a week minimum
RMC $55.56 $54.62
RMB $49.99 $48.81
Extensive services
Last 14 days - IV meds., suctioning, tracheostomy, ventilator/respirator, last 7 days IV feeding
SE3 $50.45 $51.71
SE2 $43.81 $44.77
SE1 $39.09 $39.85
Special care
MS, cerebral palsy, quadriplegia, ulcers 2+sites, radiation, wounds, tube feed and aphasia
SSC $38.24 $38.95
SSB $36.52 $37.16
SSA $35.66 $36.27
Clinically complex
Comatose, pneumonia, foot/wound/burns, septicemia, internal bleeding, dehydration, oxygen, transfusion, terminal illness, chemotherapy, dialysis, diabetes, tube feeding
CC2 $38.02 $38.73
CC1 $35.24 $35.82
CB2 $33.52 $34.03
CB1 $32.02 $34.46
CA2 $31.81 $32.24
CA1 $30.09 $30.45
The agreement also permits SNFs to elect, on or after December 15, 1999, to move immediately to the full federal per-diem rate.
Restored to SNFs: $700 million over five years.


The bill requires the General Accounting Office to continue its evaluation of the Department of Justice's and all U.S. Attorneys' compliance with the June 3, 1998 "Guidance on the Use of the False Claims Act in Health Care Matters." The GAO will issue a report to Congress on April 1 in years 2000, 2001, and 2002. In drafting the BBA relief legislation, Congress noted its concern over the application of the False Claims Act to Medicare billing errors and the complexity of the Medicare regulatory system.


The 15 percent additional reduction to the interim payment system (IPS) scheduled for FY2001 is delayed for one year. The Secretary of HHS will report on the appropriateness of implementing the 15 percent reduction six months after the PPS is in effect.
Restored to home health agencies: $1.3 billion (approximately $450 million is expected to benefit hospital-based home health agencies).

Home health agencies will receive $10 per beneficiary in FY2000 to complete the Outcome and Assessment Information Set (OASIS) questionnaire. One-half of the payment will be made in April 2000 and the remainder at cost report settlement. Also, per beneficiary limits are increased by 2 percent for cost reporting periods starting in FY2000. Furthermore, the agreement clarifies that surety bonds are limited to $50,000 or 10 percent of the home health agency's Medicare payments and must be in effect for four years or longer if ownership changes. Finally, the bill excludes durable medical equipment from consolidated billing for home health services.


The risk adjustment blend is modified by using 10 percent of the new health status method and 90 percent of the old demographic method for calendar years 2000 and 2001. The 90-10 mix continues through 2001 and goes to 80-20 in 2002. The Secretary is required to revise the regulations implementing the risk adjuster to ensure that the overall payment level to Medicare+Choice plans is not reduced. The blend would have been much faster under the BBA, with a 70-30 mix in 2001, 45-55 in 2002, 20-80 in 2003, and full risk adjustment by 2004.

Total funds restored: $1.3 billion. Because of increases in the traditional Medicare fee-for-service program under this bill, the total funds restored to the Medicare+Choice program goes up an additional $900 million, since the two payments systems are tied.

The bill also provides a series of adjustments to encourage Medicare+Choice in rural and underserved areas. The adjustment for the average adjusted per capita cap (AAPCC) is trimmed to minus 0.3 percent in 2002, which will increase the number of counties eligible for blended payments in that year. It also makes available a bonus for plans entering counties not previously served, by adding 5 percent to first year payments and 3 percent the second year.

To help stem some administrative burdens, the bill gives plans more time to submit adjusted community rates; provides greater flexibility in benefits; reduces user fees for beneficiary education; eases quality standards for preferred provider organizations; and sets up a process for the Secretary of HHS to deem private accrediting bodies (such as JCAHO) acceptable substitutes for Medicare accreditation. Finally, the bill delays the BBA's competitive pricing demonstration projects, at a cost of $300 million.


The $1,500 caps on physical, occupational and speech therapy services are lifted for calendar years 2000 and 2001. In the meantime, the Secretary is required to evaluate potential over-utilization of these services through focused medical reviews, particularly by skilled nursing facilities.
Restored to therapy payments: $600 million.


The composite rate for renal dialysis is updated by 1.2 percent for services provided in calendar year 2000 and an additional 1.2 percent for 2001.
Restored to renal dialysis payments: $300 million over five years.


The minimum payment for pap smears is increased to $14.60.
Restored to pap smear payments: $100 million over five years.


The current 36-month limit on coverage of immunosuppressive drugs is extended for approximately six months.
Additional money available for these drugs: $150 million.


Payments for durable medical equipment and oxygen are temporarily increased by .3 percent in FY2001 and .6 percent in FY2002.
Additional money available for durable medical equipment and oxygen: $100 million.


Certain disproportionate share allotments are increased for four states. The bill lifts limits on certain post-welfare reform transition costs. It also slows the phase-out of reasonable cost payments for Federally Qualified Health Center services and Rural Health Clinic services, and includes a series of Medicaid technical corrections.
Total increase in Medicaid payment: $700 million over five years.


Allotments for commonwealth and territories are increased. Additional funds are provided for improved data collection and evaluation.
Increases $200 million in SCHIP funds over five years.


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