December 2003 Bulletin

Medicare bill becomes law

Changes coming for both beneficiaries and physicians

By Kathryn M. Pontzer, JD

On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act into law at a public ceremony attended by AAOS. This legislation marks the largest expansion of Medicare since the program was created in 1965 and includes a new prescription drug benefit.  This followed after three days of intense debate in the U.S. Senate where the measure passed by a vote of 54 to 44 on Nov. 25. Two senators, John Kerry (D-Mass.) and Joseph Lieberman (D-Conn.)---both Presidential candidates, participated in the vote but abstained from voting.

Although debate in the Senate was brutal, the bill’s passage in the House wasn’t much easier. In an early morning vote on Saturday, Nov. 22, what should have been a 15-minute process lasted easily three hours — an unprecedented action. Within the 15-minute time limit, it appeared the measure was going to be defeated by a vote of 216 ayes to 218 noes. Over the ensuing three hours, the Republican leadership twisted arms and, in the end, when the gavel came down and the vote was completed at 5:50 a.m., the bill passed by a vote of 220 ayes to 215 noes.

After witnessing the heavy-handedness of the Republican leadership in muscling the bill through the House, Sen. Edward Kennedy (D-Mass.) vowed to filibuster the legislation, beginning two days of tumultuous debate in the Senate. However, after Senators and lobbyists scrambled to maneuver around procedural obstacles to passage, the bill was finally approved.

These activities were the culmination of intense Republican leadership activities to win support for this legislation. The bill takes the unprecedented step of “means testing” beneficiaries for the first time, builds in more competition with private industry, and subjects the government-run Medicare program to cost-containment requirements. With a growing Medicare population, many believe these changes are necessary to keep Medicare solvent as the nation prepares for the baby boom generation’s entrance into the program. 

Basic provisions of bill
Beginning in 2006, Medicare beneficiaries will be entitled to receive a standard drug benefit, or a benefit that is considered equal in value, that is estimated to include a monthly premium of approximately $35, a $250 deductible, coinsurance of 25 percent up to an initial coverage limit of $2,250 and co-pay protection once an enrollee’s out-of-pocket spending reaches $3,600. In the so-called “doughnut hole” gap between $2,200 and $3,600, drug assistance will not be available for the majority of beneficiaries. Two categories of low-income beneficiaries — those below 135 percent of the federal poverty line ($12,123 for individuals; $16,362 for couples), and those between 135 and 150 percent ($13,470 for individuals; $18,180 for couples) — will receive more generous packages that include low or no deductibles, varying premium costs and no or less gap in coverage between $2,200 and $3,600.

Prior to 2006, Medicare will offer beneficiaries a discount drug program to assist them in defraying the high costs of drugs. The bill also provides incentives for greater use of generic drugs.

Unprecedented means testing will be imposed on the Part B component of Medicare, which encompasses the majority of outpatient services including physician services. Based on certain threshold income levels, beneficiaries with higher incomes will be expected to pay a higher portion of their premiums. Medicare’s share will gradually be reduced as income climbs: 75 percent for income up to $80,000, 65 percent to $100,000, 50 percent to $150,000, 35 percent to $200,000 and 20 percent for those beneficiaries with incomes of $200,000 or higher. A five-year phase-in of new premiums would begin in 2007.

A contentious provision in the bill, also designed to control costs, was considerably scaled back and will require the traditional Medicare program to begin to compete with private health plans in 2010. The slower pace for implementation, beginning with pilot testing in six metropolitan statistical areas, will help to defray the fear that patients will lose the array of benefits and access to care they are accustomed to under the traditional plan.

Another issue that created great resistance on Capitol Hill and heavy lobbying by the unions was the fear that employer coverage of prescription drugs would be dropped for retirees once Medicare had a plan. Strengthening assurances to the contrary by adding some last-minute tax incentives for the value of the employer’s subsidy was a major point of negotiation that helped to bring the American Association for Retired Persons on board as an avid supporter of the bill.

Under new cost-containment guidelines, Congress will be required to scrutinize Medicare spending more closely and take action if general revenue contributions exceed 45 percent of program spending. Currently, general revenues pay approximately 35 percent of the cost of providing Medicare services.

While these sweeping changes were the most contentious part of the Prescription Drug Bill, throughout the Medicare negotiations between the House and the Senate, the AAOS Washington office has worked with Medicare conferees and their staff seeking improvements on several other provisions that have significant impact on the delivery of care by orthopaedic surgeons. Several of these provisions are highlighted below.

Medicare physician payment update — Rather than the 4.5 percent cut in payments for 2004 set to take effect under the final regulations recently issued by the Centers for Medicare and Medicaid Services (CMS) (See AAOS Washington Legislative and Regulatory Update of Nov. 7, 2003, physicians will receive a 1.5 percent increase for 2004 and 2005. A 10-year rolling average of per capita growth in the gross domestic product will be incorporated into the existing formula calculation to assist in minimizing radical annual changes in payments. However, because the formula will not be changed significantly, reverting back to the existing flawed sustainable growth rate formula in 2006, significant reductions in the annual payment updates are anticipated through to 2010. 

Throughout this process, AAOS and the Alliance of Specialty Medicine lobbied key Republican leadership and their staff on our concerns with these steep cuts in the out years and have received their commitment to work on a permanent overhaul of the flawed formula in these next two years. 

Rural providers — Under a package of adjustments long sought by Senate Finance Committee Chairman Charles Grassley (R-Iowa), physicians in rural areas will receive a minimum 1.0 on the work geographic payment adjuster in 2004 through 2006, designed to bring up those payments in localities where the index would fall below 1.0. Physicians will also receive a scarcity bonus payment for 2005-2007 to encourage physicians to practice in underserved areas. This would involve the establishment of primary and specialty care ratios of physicians to patients. Adjustment for rural hospitals will include an increase of 12 percent for disproportionate share hospitals in rural areas as well as urban hospitals with fewer than 100 beds, and payment increases for low-volume hospitals, including those with fewer than 800 discharges annually who meet a 25-mile limitation.

Electronic prescribing – Establish- ment of a system requiring uniform standards for prescriptions to be written and transmitted electronically by physicians and other providers will be done on a voluntary basis and timelines for development, pilot testing and implementation will be incorporated to slow the process. AAOS and the Alliance advocated for a voluntary approach and stressed to lawmakers that the technology was not ready to support a swifter, mandatory approach. Monetary incentives to encourage pilot projects in certain designated areas, such as rural areas, are included in the bill.

Practice expense adjustment — Finding a solution to the need to control the high cost of chemotherapy and other drugs administered by physicians in their offices has been particularly challenging to Medicare conferees. Negotiations on these particular provisions were ongoing up to the final hours of bill drafting and final provisions are subject to late cost estimates from the Congressional Budget Office (CBO). 

It is likely that the outcome will result in a 15 percent reduction to the current average wholesale price (ASP) for 2004. Beginning in 2005, pricing will be based on the average sales price plus a certain percentage, and the Department of Health and Human Services (HHS) Office of the Inspector General will be required to audit manufacturer-submitted ASPs. Beginning in 2006, physicians will have a choice of reimbursement structures, opting for a competitive bidding structure. Increases to practice expense reimbursements for drug administration will be made to offset these drug reimbursement losses to oncologists and other physicians. Existing administration codes will be exempt from current Medicare budget neutrality requirements, and supplemental surveys will be accepted for extending budget neutrality to other codes. The Medicare Payment Advisory Commission (MedPAC) will review the impact of these payment changes by January 2005 for oncologists and by January 2006 for other affected specialties.

ICD-10 — The House-passed bill included a provision that would have allowed the Secretary of HHS to proceed with the process to adopt the International Classification of Disease 10th Edition coding system for diagnosis codes (ICD-10-CM) and procedure codes (ICD-10-PCS) for the reporting of “services” without first receiving a recommendation from the National Committee on Vital Health Statistics (NCVHS) if the Committee did not make a decision within one year. This provision was dropped from the final bill when NCVHS made its recommendation to go to ICD-10 for current uses only — limiting these changes to substituting for current ICD-9 codes and not interfering with physician CPT codes.

Ambulatory surgical centers — The House bill scaled back annual payments to ambulatory surgical centers (ASCs) to the Consumer Price Index (CPI) minus two for 2004. Unfortunately, the final conference agreement includes CPI minus three for 2004 and a freeze through 2009. In addition, a Government Accounting Office study by 2005 will review ASC payments.
Specialty hospitals — An 18-month moratorium — effective the date the bill is filed — will be imposed on the Stark II exception that currently allows physicians in rural areas with ownership in specialty hospitals to refer patients to those hospitals. This will apply to new hospitals, not existing hospitals or those under construction. Existing hospitals will be permitted to expand by the greater of 5 beds or 50 percent of the beds currently on campus. MedPAC will conduct a cost analysis of these hospitals and recommend whether the payment system should be refined and the Secretary of HHS is required to study referral patterns and quality of care issues.

Regulatory reform — The bill contains a broad spectrum of regulatory reforms long advocated by AAOS to improve the Medicare system. These include improvements to the process for issuing final regulations and other policy guidelines, as well as education, billing and coding procedures, and due process protections.

Emergency Medical Treatment and Active Labor Act (EMTALA) — Directed at the problems of a high level of illegal immigrants presenting to hospital emergency rooms, the bill provides $1 billion mandatory spending for hospitals, ambulances and physicians providing services under EMTALA-related admissions. The bill also clarifies the procedures for investigating EMTALA violations and creates an EMTALA Technical Advisory Group that will include representation from specialists such as orthopaedic surgeons.
Chiropractor demonstration — What is remaining in the bill is a demonstration project added by Sen. Grassley that will allow Medicare patients to have direct access to chiropractic care without approval by a physician.

Modifications to the final bill reduce the number of demonstration sites from six to four — two in rural areas and two in urban areas — and reduces the demonstrations from three years to two years. These projects will evaluate the feasibility and desirability of covering additional chiropractic services under the Medicare program. Findings will be reported to Congress within one year after demonstrations are completed and demonstrations can begin no earlier than October 2004.

Physical therapy direct access — The final bill did not include the creation of demonstrations in five states examining the cost and quality of care in allowing Medicare beneficiaries to have direct access to physical therapy services without physician supervision. This provision had been added to the Senate bill by Sen. Blanche Lincoln (D-Ark.). However, the final bill does require MedPAC to conduct a study on the advisability and feasibility of allowing Medicare fee-for-service beneficiaries to have direct access to outpatient physician therapy services and physical therapy services furnished as part of comprehensive rehabilitation facility services. MedPAC will be required to report its findings to Congress by Jan. 1, 2005.
Graduate medical education

(GME) — The final bill includes a House bill provision that extends the update limitation on high-cost direct GME programs to 2013.
Indirect medical education (IME) — Under the Medicare bill, IME payments will be adjusted to 6.0 percent for the last half of fiscal year (FY) 2004, 5.8 percent for FY 2005, 5.55 percent in FY 2006 and 5.35 in FY 2007. These payments for 2003 are currently at 5.5 percent and AAOS was advocating to have them increased to 6.5 percent.  

Medical residents — The bill establishes a plan for redistributing unused slots for medical residents and defines the priority distribution order as rural hospitals, small urban hospitals and specialties for which there are no other resident training programs in the state.   

Competitive bidding — Durable medical equipment rates will be frozen for three years beginning in 2004, and some adjustment to the top five services will be made to reflect prices currently used under the Federal Employees Health Benefit Plans. Competitive bidding will begin in 2007, with phase-in of 80 percent of all metropolitan statistical areas by 2009.

Health Savings Accounts (HSAs) — The bill creates tax-advantaged savings accounts that can be used to pay for medical expenses incurred by individuals, spouses and dependents. Unlike medical savings accounts that were restricted to employees of small businesses and the self-employed, HSAs are open to everyone with a high-deductible health insurance plan, and contributions can be the same as the individual’s health insurance plan deductible, up to $5,000 for self-coverage and up to $10,000 for family coverage. These plans are portable, contributions to the plan are tax deductible and interest and earnings generated by the account are not taxable.

For further information on the vote and provisions of the bill, please direct your questions to Kathryn Pontzer, JD, deputy director of the AAOS Washington Office, at

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