Budget bill makes sweeping changes in Medicare
Re-evaluate alliances immediately, experts say
Physician practices can expect dramatic changes in the way they do business with Medicare in the future, based on the results of Medicare-related provisions contained in the federal Balanced Budget Act of 1997.
"Life in the Medicare program as you know it is going to change significantly," predicts Fred Abbey, director of regulatory affairs for Ernst & Young’s Washington, DC, office. "As such, physicians need to take the time to step back and develop both tactical and strategic plans to deal with these changes."
"It’s critically important that all providers re-evaluate their alliances and operations if they are going to maintain a competitive position in their markets," agrees Michael Blaszyk, a Boston-based consultant with William M. Mercer.
The budget’s Medicare-related provisions were finalized by a Medicare-specific subcommittee of the larger joint Senate-House budget committee. Among physician reimbursement issues, the hardest-fought battles were over implementation of a resource-based relative value physician expense fee schedule, plus a campaign by primary care physicians to enact a so-called "down payment" in the new payment schedule shifting some $390 million a year in Medicare payments from surgeons and other hospital-based physicians to primary care specialties.
Providers and patients also face structural reforms that offer Medicare recipients a wider menu of care delivery options, ranging from traditional fee-for-service Medicare to seniors-only health maintenance organizations (HMOs) and preferred provider organizations.
Unique solvency standards will govern PSOs
Congress also gave provider-sponsored organizations (PSOs) a boost, after a hard fight with hospitals, HMOs, and state officials. "In an important victory, PSOs will be licensed based on new federal solvency standards specifically designed to take into account the unique nature of a provider-owned delivery system," observes Beth Morrow of Mercer’s Washington Resource Group. As such, many physicians are expected to take a hard look at these options, which in turn creates more competition for hospitals and HMOs.
One effect of offering more managed care options is it "tends to shift the risk of providing Medicare benefits from the federal government onto providers and health plans," observes Abbey. These changes will force providers to be more efficient and rethink the best way to market their Medicare practice.
For patients who are willing and able to pay more out of their own pockets, one answer to managed care will be expanded private fee-for-service options contained in the bill. These private plans will set their own fee schedules up to 15% higher than Medicare currently permits. Patients can see any doctor, or use any medical service, that accepts the plan’s fee schedule.
Private contracting becomes an option
For physicians and patients who don’t want to deal with Medicare at all, there’s also a private contracting option. If the patient chooses, he or she can contract directly with a physician for any fee they agree upon a first since the Medicare system was founded. Meanwhile, Medicare is cut out of the arrangement, which relies on private health insurance or patient out-of-pocket payments.
The following analysis of the provisions of the budget bill that affect physicians was prepared with the help of the Medical Group Management Association’s Washington, DC, office.
• Provider-sponsored organizations.
Governance of PSOs proved controversial early in the budgeting process, with legislators disagreeing over federal pre-emption of state solvency standards.
Ultimately, conferees agreed to refinements that included allowing PSOs to seek a waiver of state law by filing an application with the Department of Health and Human Services (HHS) by Nov. 1, 2002, notes MGMA lobbyist Pat Smith. This waiver would only be effective for three years, would not apply to any other state, and could not be renewed.
To qualify for a waiver, the state must have failed to complete action on a PSO’s substantially complete license application within 90 days of being filed. Or, the state must have denied the application for one of the following reasons:
State standards (except for solvency standards) for the PSO were different from those applied to others engaged in similar business activities.
The PSO did not offer a product other than Medicare.
The PSO was required to meet solvency standards different from federal requirements (once they are published).
Bottom line: Essentially, a stand-off occurred between physicians, hospitals, insurers, and state regulators. In the end, no group got everything they wanted. Provider groups did not get a blanket federal pre-emption, and insurance and state regulators did not succeed in knocking out the PSO provisions.
As a result, non-hospital-affiliated group practices will not see great differences in their ability to form PSOs as a result of this legislation. Nonetheless, the PSO provisions will benefit physicians who have hospital-affiliated group practices by allowing PSOs to have recourse at the federal level if a state unjustly denies a license to a PSO.
• Conversion factor and updates.
For the past several years, the Physician Payment Review Commission (PPRC) has pressured Congress to replace the current three conversion factors one each for primary care, surgical services, and all other services with a single conversion factor and update. The GOP congressional leadership and the Clinton administration reached agreement on this issue during the 1995 Medicare debate. This year, all three congressional health committees included identical provisions in their bills, making the single conversion factor a non-negotiable item in the budget discussions. They also agreed to the PPRC’s recommendation that the Medicare Volume Performance Standard should be replaced by a Sustainable Growth Rate (SGR).
Bottom line: Beginning Jan. 1, 1998, a single conversion factor based on the 1997 primary care conversion factor will be in effect. This will be updated by the HHS’ estimate of the weighted average of the three separate updates that would have occurred in the absence of legislation. A separate conversion factor will be implemented for anesthesia services at 46% of the single conversion factor established for other physician services. A transition period for surgery will not be included.
Surgeons and other specialists severely affected by HCFA’s practice expense proposal fear that the combination of a single conversion factor, limited updates, and practice expense adjustments will severely reduce surgical payments, notes Smith.
• Stark law/advisory opinions.
Self-referral advisory opinions were the brainchild of House Ways and Means Health Subcommittee Chairman Bill Thomas (R-CA). The provision requires that HHS issue written advisory opinions regarding certain self-referral provisions. The opinions would be binding only on HHS and the party requesting the opinion.
Bottom line: "Although this provision does not negate the harmful effects of the Stark law, which places limits on the extent to which physicians can refer patients to ancillary services they have partial ownership in, it may give group practices guidance in one of the most confusing areas for providers," says Smith.
• Kickback violations.
Under the legislation, the Office of the Inspector General (OIG) could bring civil monetary penalty suits against individuals or entities alleged to be in violation of the kickback law. Each violation would carry a $50,000 penalty, plus triple damages measured on the total amount of the remuneration offered or paid, even if some or most of the remuneration was paid for a lawful purpose.
Bottom line: "This is a strict new penalty for providers and is part of the widespread push against perceived fraud, waste, and abuse in Medicare," notes Smith. "The $50,000 penalty should cause group practices looking into the viability of partial integration agreements to examine the resulting potential to influence referral patterns very carefully for kickback violations."
• Graduate medical education.
There were two schools of thought on whether graduate medical education (GME) should be carved out from the average adjusted per capita cost (AAPCC) rates, thus redirecting Medicare funds from Medicare risk contractors to teaching hospitals.
Rep. Thomas advocated that GME should not be removed from the AAPCC until policy-makers were able to study its impact. Rep. Benjamin Cardin (D-MD) led the effort to carve out the payments, arguing that these payments were not being passed through from the contractor to the teaching hospitals.
Bottom line: "Academic medicine realized a great victory," says Smith. The subcommittee agreed to a GME carveout, without carving out disproportionate share hospital payments, phased in over a five-year period: 20% in 1998, 40% in 1999, 60% in 2000, 80% in 2001, and 100% in 2002.
• Consortia project.
Congress instructed HCFA to establish a demonstration project that would pay GME/ disproportionate share hospital (DSH) money directly to consortia. Consortia could be composed of teaching programs within teaching hospitals in combination with medical group practices, federally qualified health centers, managed care entities, entities furnishing outpatient services, or such other entities as the HHS determines appropriate.
Bottom line: For the first time, Congress has recognized that GME is increasingly shifting away from traditional teaching hospitals. With the passage of this legislation, GME payments will flow to consortia instead of only to teaching hospitals. While teaching hospitals will be the lead partners in consortia, group practices also will be able to participate in these consortia, and ultimately will have a voice in determining the flow of dollars.
• Payment to non-hospital providers.
Here again, Congress recognized the move of GME to non-hospital sites by requiring HHS to submit a report to Congress within 18 months after the Medicare bill’s enactment. The HHS report would assess the feasibility of paying medical education funds to "qualified non-hospital providers" to reimburse them for costs incurred in the operation of a Medicare-approved medical residency training program. The legislation defines "qualified non-hospital providers" as federally qualified health centers, rural health clinics, and other facilities deemed appropriate by the HHS Secretary. The budget act grants the HHS permission to implement the proposal for the residency year beginning no later than six months after the report is submitted.
Bottom line: More physician practices will be able to take part in graduate medical education programs.
"We consider this a step in the right direction," Smith says.
• Residency programs.
For some time, Congressional leaders and the PPRC have agreed on the need to limit the number of medical residents. Accomplishing this goal, however, has been a problem.
Bottom line: The number of total allowable medical residents will be capped based on resident totals as of Dec. 31, 1996. In addition, residency programs must set resident levels lower than the rolling average of the current year plus the two preceding years. HCFA can continue to offer prescribed incentives to residency programs that voluntarily offer to reduce their resident count if they file applications with HCFA by Nov. 1, 1999.
Within one year after enactment, HHS must conduct a study on variations among hospitals in hospital overhead and supervisory physician components of direct medical education costs, and the reasons for such variations. Once completed, HHS will use the report to make legislative recommendations to Congress.
• Indirect medical education.
Both the House and Senate agreed to reduce indirect medical education (IME) payments from 7.7% to 5.5%.
Bottom line: The reduction will be phased in by 2001. The budget act also includes provisions allowing hospitals to rotate residents through non-hospital settings without reduction in IME funds (including ambulatory care settings), and directing HHS to develop an inventory of the different types of ambulatory care sites and the average number of residents training at these sites. "Here again, lawmakers have begun to recognize the importance of non-hospital sites for academic training," notes MGMA’s Smith.
• Competitive bidding.
Rep. Joe Barton (R-TX) initiated the House effort by sponsoring a competitive bidding amendment in the Commerce Committee. As passed, the House language would have allowed the Secretary of HHS to set up an unlimited number of demonstration projects to accept bids for any items and services HHS felt appropriate. Sen. Bob Graham (D-FL) led similar efforts on the Senate Finance Committee.
Except for physician services, the Senate gave HCFA full authority (as opposed to demonstration project authority) to bid out whichever Part B items and services it deemed appropriate. Even though the Senate’s bill exempted Part B services, HCFA could have interpreted its authority not only to cover competitive bidding for durable medical equipment, but also for physician clinical lab services, X-ray and other imaging procedures, and physical therapy.
Bottom line: Congress gave HHS the authority to establish only five competitive bidding demonstration sites for Part B items and services, excepting physician services. The sites will cover up to three competitive urban areas for a three-year period. HHS must evaluate whether these demonstration projects decrease federal expenditures without reducing program access, diversity, product selection, or quality. Also, the General Accounting Office (GAO) must examine the program’s effectiveness.
"We’re concerned about the discretion given HHS on the selection of items and services. As such, we will continue to educate lawmakers on this issue and closely monitor the issue, " notes Smith.
• AAPCC geographic blend.
The House and Senate had different visions of how to adjust AAPCC rates over the short term. In general, the committees’ approach depended on the number of rural legislators on the committee who wanted to see their state’s or district’s AAPCC rates increased.
Bottom line: Conferees compromised on a 50/50 local/national geographic blend (with a phased-in national rate of 10% in 1998, 18% in 1999, 26% in 2000, 34% in 2001, 42% in 2002, and 50% thereafter), with a floor for 1998 of $367, and a ceiling of 150% of the 1997 AAPCC rate.
AAPCC rates will change, with funds moving gradually from urban centers to rural locations. This could affect new PSOs receiving AAPCC rates, and group practices contracting with Medicare risk contractors in urban areas.
• Laboratory fee schedules.
Medicare-related lab payments have been frozen between the years 1998-2002, while the cap on clinical lab fees will be lowered beginning in 1998. HHS is required to divide the country into five regions with only a single carrier for each region while adopting uniform policies for coverage, administration, and payment for lab tests by July 1, 1998. HHS also must ask the Institute of Medicine to conduct a study on lab payments.
Bottom line: Lower payment rates will make it harder for physician office labs to compete with the large reference labs.
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