12/8/2003

Medicare Reform & Prescription Drug Summary

The final Medicare reform and prescription drug legislation cleared the House (November 22 by a vote of 220-215) and the Senate (November 25 by a vote of 54-44), and the President signed the bill into law on December 8. The 680-page reform bill will add a long-sought prescription drug benefit, place a greater reliance on private, managed care health plans to provide Medicare benefits, make many changes to provider payments and regulatory processes under fee-for-service (FFS) Medicare, and allow all Americans, not just Medicare beneficiaries, to contribute to tax-free “Health Savings Accounts.” These reforms, taken as a whole, constitute the largest reform of the Medicare program since its inception in 1965 and will markedly change how seniors and people with disabilities receive Medicare benefits.



The following is a summary of all the major provisions of the final bill:



Treatment of professional orthotic and prosthetic care in the Medicare bill can generally be considered a “mixed bag,” but there are clearly some important victories in the bill including the exclusion of most orthotics and all prosthetics from a nationwide competitive bidding system. Another key victory appears to be a favorable resolution to the Negotiated Rulemaking process.

Medicare Prescription Drug Benefit and Discount Card

• Beginning in 2006, Medicare beneficiaries would have the option to purchase private, managed-care "standalone" drug coverage at the following benefit levels:








• Approximately $35 monthly premium.



• $250 deductible.



• 75 percent coverage from $251 to $2,250 in combined total drug costs.



• $3,600 out-of-pocket catastrophic coverage.



• "Gap" in coverage-$750 in out-of-pocket costs up to $2,250 benefit limit, must spend an additional $2,850 on drugs before reaching out-of-pocket limit.



• 5 percent coinsurance on all drug costs after $3,600 limit reached.








• The bill mandates a minimum of one Prescription Drug Plan (PDP) and one integrated managed-care plan (Medicare Advantage) plan in each region that provides all Medicare benefits in addition to drug benefit. Two PDPs are required if no integrated plan is available. Plans would "bid" for coverage.



• If no managed-care plans bid for coverage in a region, a federally administered "fall-back" plan would provide coverage in that area. Fall-back plans must offer the standard benefit, accept performance risk, and their premiums are set by Medicare.



• "Dual Eligibles" (Medicare- and Medicaid-eligible) will have access to the Medicare drug benefit. (Existing state drug plans for dual eligibles phased out by 2006).








• Federal rules apply throughout benefit.



• Ten-year year phase-down to 75 percent state contribution, 75 percent applies thereafter, indexed to CPI.



• Full drug coverage with $1 copayment for generics and $3 for brand name.








• Low-income assistance under drug benefit will provide cost-sharing and premium assistance for those up to 150 percent of poverty with smaller, or no "gap" in coverage.






• Below 135 percent of the FPL-$2 copayments for generic drugs and $5 for brand name. No coinsurance above catastrophic limit. Asset test $6,000/$9,000 (single/couple) indexed to CPI.



• Below 150 percent of the FPL--$50 deductible and a sliding scale premium. 15 percent coinsurance up to the catastrophic limit during "gap," $2/$5 thereafter. Asset test $10,000/$20,000 (single/couple) indexed to CPI.



• Medicaid can provide coverage for classes of drugs not covered by Medicare (e.g. prescribed over-the-counter, benzodiazepines etc.), but states will have limited flexibility to offer "wraparound" coverage for non-formulary covered drugs.








• Existing retiree plans that offer "actuarially equivalent coverage" receive a 28-percent payment for the drug costs between $250 and $5,000.








• Qualified retiree plans have flexibility on plan design, formularies, and networks.



• Employers can also provide premium subsidies and cost-sharing assistance for retirees.






• Medicare would administer a drug discount card program that will be available no later than six months after enactment (July 2004). It would end when the prescription drug benefit becomes available in 2006.






• Beneficiaries would have a choice of at least two Medicare-endorsed cards for $30 enrollment fee.



• Negotiated prices and discounts-approximately 20 percent.



• Medicaid beneficiaries not eligible (covered under state plans until Medicare plans in 2006).



• Up to $600 per year transitional subsidy for beneficiaries under 135 percent of poverty with no asset test, but coinsurance of 5-10 percent, depending on income.






• All drug plans must have programs to provide medication therapy management targeted to beneficiaries who (1) have multiple chronic conditions, (2) use multiple prescriptions, and (3) are likely to incur high drug expenses.



• Plans may operate electronic prescription programs that meet federal standards, which would be in place by September 2005 to start in demonstration form in January 2006. Final standards by April 2008.

Medicare Advantage/Enhanced Fee-for-Service (EFFS) Program

• Medicare would replace Medicare+Choice with new privately administered, managed-care combined Parts A, B, D (drug benefit) benefits.






• Benefits similar to Medicare+Choice (i.e. enhanced benefits within managed-care model, restrictive network of providers, capitation arrangements, formularies, etc.)






• Plans also would have the option to provide "enhanced fee-for-service" Medicare plans that provide traditional Medicare coverage, but enhanced benefits through PPO-style networks of providers.



• All plans must provide standard Medicare benefits



• Payments would be 100 percent of traditional fee-for-service, increasing by growth in FFS Medicare thereafter. Local and regional plans bid starting in 2006.



• The government sets a "benchmark" bid based on the healthcare market as baseline for Medicare payment to health plan.



• Seventy-five percent of the savings from plans bidding below the "benchmark" would go to the plan/beneficiaries and 25 percent to the government. Plans could use savings to improve benefits, lower premium, increase profits.

Premium Support Demonstration

• In 2010 in six Metropolitan Statistical Areas (MSAs), private health plans would compete directly with FFS Medicare for beneficiaries.



• Beneficiaries could remain in traditional FFS Medicare with a protection that premiums could not go up or down by more than 5 percent in any year as a result of the demonstration. (Beneficiaries below 150 percent of FPL would be exempted from premium increases.)



• Demonstration sites chosen from MSAs with two local private plans with at least 25-percent total local private plan penetration.



• All plans, including the Medicare FFS plan, would be paid based on the demographic and health risks of enrollees.

Provider Payment Reform

• Average Wholesale Price (AWP) Reform.








• AWP minus 15 percent in 2004 and the Secretary of the Health & Human Services (HHS) Department would have authority to increase or decrease reimbursement based on market surveys.



• Average sales price (ASP) plus 6 percent beginning in 2005.



• Secretary has the authority to adjust reimbursement for a drug, where the ASP is found to not reflect widely available market prices.



• Increased practice expense reimbursements for drug administration.






• Durable medical equipment (DME) payments frozen and subject to new competitive pricing.






• Payment for DME, supplies, and all orthotics and prosthetics will be frozen for three years from 2004-06.



• The rates for the top five codes will be adjusted to reflect prices paid under the FEHBP plans, affecting a small proportion of the items and services.



• Competitive bidding for the largest MSAs begins in 2007 phasing up to 80 MSAs in 2009. "Off-the-shelf" orthotics included. Custom orthotics and all prosthetics not subject to competitive bidding.



• Competitive bidding prices applied nationwide for selected services (Inherent Reasonableness)






• Medicare payments in rural areas increased






• Medicare DSH for rural and small urban hospitals would be increased to 12-percent cap in 2004.



• Redistribution of unused graduate medical education payments to rural hospitals and small city
  
  hospitals.



• Improvements to Critical Access Hospital (CAH) program



• The hold-harmless for hospital outpatient services performed at small rural hospitals would be extended for two years.



• A safe harbor is created for donations and other remuneration used to improve services at Federally Qualified Health Centers.






• Hospital payment adjustments






• Full market basket (MB) update would be a full inpatient update for Fiscal Year (FY) 2004. (3.4 percent) For FY05-07, hospitals that submit data for a set of ten quality indicators would get full MB update. Hospitals not submitting would receive updates of Market Basket -0.4 percent.



• Beginning April 1, 2004, all hospitals will receive large urban "standardized amount" rate in perpetuity. Hospitals currently receive the rate due to an extension through March 31, 2004.



• Indirect Medical Education Payments temporarily increased from current law: 6.0 percent for last half of FY2004, 5.8 percent in FY 2005, 5.55 percent in FY2006, 5.35 percent in FY2007.



• The bill eliminates the Medicaid DSH "cliff" in FY04 by increasing state allotments up to 16 percent with allotments frozen until approximately 2010.



• "Low-DSH" allotments increase by 16 percent per year 2004-2008, adjusted by CPI thereafter.



• As of April 1, 2004, the bill increases the Medicare DSH cap from 5.25 percent to 12 percent for rural hospitals and urban hospitals with fewer than 100 beds.



• Drugs provided in 340B-eligible inpatient hospital settings are exempted from Medicaid "best price."



• 18-month moratorium of the self-referral whole hospital exemption for new specialty hospitals.








• Physician payments would not be subject to the 4.5-percent cut in 2004 or an additional cut in 2005.






• 1.5-percent update in 2004 and 2005.



• Permanent reform of flawed "sustainable growth rate" physician payment formula.



• 1.0 percent update work geographic payment adjuster (GPCI) in 2004 through 2006.



• Physician scarcity 5-percent bonus payments 2005-2007.






• Mammography services provided in hospital outpatient departments would be paid under the higher rates in the physician fee schedule.



• Drugs paid for in hospital outpatient settings will be as follows:






• Sole source at least 88 percent of AWP in 2004 and at least 83 percent of AWP in 2005, but no more than 95 percent of AWP.



• Multiple source drugs would be paid no more than 68 percent and generic drugs would be paid no more than 46 percent.



• The General Accounting Office (GAO) will collect data on hospital acquisition costs for drugs.



• The provision recognizes variation in the costs for brachytherapy seeds.






• Podiatrists, dentists, and optometrists included under private contracting authority.



• Fee schedule amount established for custom shoes for diabetic patients.



• Two-year moratorium on per-patient physical and occupational/speech therapy caps.



• Five-year freeze in payments for laboratory services. (2005-09).



• Renal dialysis payments






• 1.6 percent composite rate update in 2005.



• ESRD drugs exempted from AWP adjustments in 2004.



• New composite rate reformulation in 2005.








• Ambulatory surgical centers payment reductions.






• 1-percent reduction in payments beginning April 2004.



• Five-year freeze in payment rates from 2005-09.



• Secretary to develop new payment system after review of GAO study.








• Home health care payment adjustments








• No copayment.



• Market basket -0.8 percent for 2004-06.



• 5-percent rural bonus payment for one year.



• Demonstration to test a less restrictive homebound definition used for eligibility for home health services.








• Demonstration for home health services delivered at medical adult daycare centers.



• Ambulance payments will be based on a regional floor and the adjustment for low-population rural areas plus a 1 percent across the board for urban areas and 2 percent across the board for rural areas for two and a half years.

New Medicare Benefits (excluding drug benefit)

• Medicare will provide initial voluntary physical when becoming eligible for Medicare.



• New preventive screening benefits for those at risk for cardiovascular disease or diabetes.



• Part B deductible at $110 in 2005 and indexed to growth in Part B expenditures.



• New chronic care/disease management program to manage and promote health for those with chronic illnesses.

Long-Term Medicare Cost Containment

• "Means Testing" of Part B premium starting in 2007.






• All beneficiaries under $80,000 (single) $160,000 couple continue to get 75-percent subsidy.



• 65-percent premium subsidy for beneficiaries between $80,000 and $100,000.



• 50-percent premium subsidy for beneficiaries between $100,000 and $150,000.



• 35-percent premium subsidy for beneficiaries between $150,000 and $200,000.



• 20-percent premium subsidy for beneficiaries over $200,000.



• Five-year phase-in of new premiums beginning in 2007.



• Income levels doubled for married couples.






• Mechanism to require Congressional response of the Medicare program if general revenue contributions exceed 45 percent of program spending.

Regulatory and Contracting Reform

Regulatory Reform

• Prohibition on the introduction of new material in final rules without an opportunity for public comment.



• Prohibits retroactive application of new regulations and policies.



•  Prohibits sanctions if a provider follows written, erroneous guidance from the government and its agents.

Contracting Reform

• Competitive bidding for contracting for Medicare administrative functions such as processing and paying of claims.



• Expands the potential pool of expertise by allowing companies besides insurance companies to compete for contracts.

Appeals

• Transfers Medicare Administrative Law Judges from the Social Security Administration to the Department of Health & Human Services to ensure their independence.



• Expedites access to judicial review for legal issues that cannot be resolved administratively, and requires expedited review of certain provider agreement determinations.



• Allows providers up to three years to repay overpayments in cases of hardship (five years if extreme hardship).



• Prohibition on recovery of overpayments until after evaluation by independent party.



• No extrapolation of overpayments from small sample of claims; education intervention required.



• Billing mistakes can be corrected by supporting documentation prior to settlement or appeal of overpayment dispute.



• Notification to provider when possibly overusing particular code.

Drug Access Provisions (Hatch-Waxman/Reimportation)

Hatch-Waxman Reforms

• Ends existing loopholes in the Hatch-Waxman law by making changes to the 30-month stay and 180-day provisions. Under the conference agreement, new drug applicants will receive only one 30-month stay per product for patents submitted prior to the filing of a generic drug application.



• Modification of rules relating to generic company's 180-day exclusivity. Specifically, it enables multiple companies to qualify for the 180-day exclusivity if they all file their application on their first day of eligibility.

Reimportation

• Canada-only importation with safety certifications. (Effectively prevents importation.)



• Study by the Secretary on the major safety and trade issues regarding reimportation.

Health Savings Accounts Tax Provisions

• Bill creates tax-free Health Savings Accounts (HSAs) for lifetime healthcare needs








• Contributions to the account are tax free.



• Build up in the account is tax free.



• Distributions from the account are tax free.








• Contributions can be made by individuals, their employers, and family members-all on a tax-free basis.



• Up to 100 percent of the health plan deductible may be saved annually, up to a maximum of $2,600 for self-only policies and $5,150 for family policies.



• Individuals age 55-65 (peak savings years) can make additional tax-free "catch-up" contributions of up to $1,000.



• Distributions used to pay un-reimbursed medical expenses are completely tax free. Distributions can be used to pay for retiree health insurance, Medicare expenses, prescription drugs, and other expenses.

Conclusion

"This summary encompasses the major points of the entire bill in order to provide a broad overview of its scope and major impact on Medicare," NAAOP representatives said, adding, "We are undergoing a thorough [review] of all provisions contained in the bill and will update you shortly with more specific information."







Prepared by Peter W. Thomas, Principal, and Dustin W.C. May, Legislative Director, Powers, Pyles, Sutter and Verville, PC

Respond to NAAOP