Order Code RL33131
CRS Report for Congress
Received through the CRS Web
Budget Reconciliation FY2006:
Medicaid, Medicare, and State Children’s
Health Insurance Program (SCHIP) Provisions
October 31, 2005
Evelyne Baumrucker, Hinda Chaikind, April Grady, Jim Hahn, Jean
Hearne, Elicia Herz, Paulette Morgan, Jennifer O’Sullivan, Rich
Rimkunas, Julie Stone, Sibyl Tilson and Karen Tritz
Domestic Social Policy Division
Congressional Research Service { The Library of Congress

Budget Reconciliation FY2006:
Medicaid, Medicare, and SCHIP Provisions
Summary
The House and Senate approved the conference report (H.Rept. 109-62) on
H.Con.Res. 95, the Concurrent Resolution on the FY2006 Budget, on April 28 and
April 29, 2005, respectively. The Senate Committee on Finance was instructed to
meet a budget reconciliation target of $10 billion in direct spending savings over a
five-year period, FY2006-FY2010. On October 25, 2005, the Senate Finance
Committee reported its reconciliation proposal to the Senate Budget Committee,
which subsequently incorporated the proposal into S. 1932, The Deficit Reduction
Omnibus Reconciliation Act of 2005. In the House, the Committee on Energy and
Commerce had budget reconciliation instructions that specified a mandatory savings
target of $14.734 billion between FY2006 and FY2010. The Committee mark-up
took place on October 27, 2005.
Like a number of Senate committees, the Senate Committee on Finance
achieves its reconciliation instruction budget mark through recommended program
changes that result in direct spending increases as well as decreases. The Committee
proposal focused on changes to the Medicaid, the State Children’s Health Insurance
program (SCHIP), and Medicare. Based on Congressional Budget Office (CBO)
estimates, the largest Medicaid savings amounts are the result of changes in the
reimbursement of outpatient prescription drugs. The Senate proposal would change
some asset transfer rules for Medicaid-eligible individuals applying for long-term
care services also resulting in estimated program savings. Additional Medicaid
savings are estimated to occur as a result of changes to the program designed to
combat fraud, waste, and abuse. Increases in Medicaid spending would result from
temporary federal medical assistance percentage (FMAP) increases targeted to help
Medicaid recipients in selected Louisiana parishes and counties in Alabama and
Mississippi devastated by Hurricane Katrina, and also from the limiting of any
FY2006-FY2007 FMAP decrease to Alaska. The proposal includes a number of
Medicaid demonstration projects and some benefit and eligibility expansions. The
SCHIP proposal would alter the method for redistribution of funds to the states.
Medicare savings would result from changes in Medicare’s Part C (Medicare
Advantage) and the establishment of variations in provider payments that reflect
quality differences (value-based purchasing or “pay for performance”). The proposal
would also provide for a 1% Medicare payment update for physicians in 2006. In
addition, there are other Medicare and Medicaid provisions.
The House Energy and Commerce Committee limited its proposal to changes
in the Medicaid program. The House Committee proposed reforms in the payment
for prescription drugs, and asset transfer rules for long-term care Medicaid-eligible
individuals. Other provisions in the House would alter Medicaid’s cost-sharing
requirements, allow for the use of actuarial-equivalent benchmark insurance
packages, and would allow for Health Opportunity Account demonstration projects.
The House recommendation also provides Katrina relief. This report will be updated
to provide a summary of all the major provisions in the Committee’s
recommendations.

Contents
FY2006 Budget Reconciliation Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Senate Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Medicaid Outpatient Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Upper Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Authorized Generics and Physician-Administered Drugs . . . . . . . . . . . 3
Long-Term Care Under Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Calculating the Length of the Penalty Period . . . . . . . . . . . . . . . . . . . . 4
Changing Non-Countable Assets to Countable Assets . . . . . . . . . . . . . 4
Undue Hardship Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medicaid Estate Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Long-Term Care Insurance Partnership Program . . . . . . . . . . . . . . . . . 5
Fraud, Waste, and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Third-party Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Medicaid Integrity Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
State Financing and Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Temporary FMAP Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Managed Care Organization Provider Tax Reform . . . . . . . . . . . . . . . . 7
Disproportionate Share Hospital Allotment for the
District of Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Changes to Medicaid Targeted Case Management Benefit . . . . . . . . . . 7
Inclusion of Podiatrists as Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Demonstration Project Providing Medicaid Coverage for Institutions
for Mental Disease to Stabilize Emergency Medical Conditions . 8
Improving the Medicaid and State Children’s Health Insurance Programs . . 8
Family Opportunity Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Demonstration Projects Regarding Home- and Community-Based
Alternative to Psychiatric Residential Treatment Facilities
for Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Development and Support of Family-to-Family Health Information . . 9
Restoration of Medicaid Eligibility for Certain SSI Beneficiaries . . . . 9
Grants to Promote Innovative Outreach and Enrollment
Under Medicaid and SCHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Money Follows the Person Rebalancing Demonstration . . . . . . . . . . . . 9
State Children’s Health Insurance Program (SCHIP) . . . . . . . . . . . . . . . . . 10
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Medicare Value-Based Purchasing Programs . . . . . . . . . . . . . . . . . . . . . . . 11
Medicare Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Phase-Out of Risk Adjustment Budget Neutrality . . . . . . . . . . . . . . . . 12
Elimination of Stabilization Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Other Medicare Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicare Dependent Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Skilled Nursing Facility Bad Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Inpatient Rehabilitation Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Physician Self Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Hold Harmless Provision for Small Rural and Sole
Community Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Composite Rate for Dialysis Services . . . . . . . . . . . . . . . . . . . . . . . . . 13
Therapy Caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Durable Medical Equipment Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Rural Program of All-Inclusive Care for the Elderly (PACE)
Provider Grant Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Waiver of Part B Late Enrollment Penalty . . . . . . . . . . . . . . . . . . . . . 14
Federally Qualified Health Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Delay of Medicare Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Budget Reconciliation FY2006: Medicaid,
Medicare, and State Children’s Health
Insurance Program (SCHIP) Provisions
FY2006 Budget Reconciliation Targets
The House and Senate approved the conference report (H.Rept. 109-62) on
H.Con.Res. 95, the Concurrent Resolution on the FY2006 Budget, on April 28 and
April 29, 2005, respectively. The annual concurrent resolution on the budget sets
forth the congressional budget. When the federal deficit is expected to be large,
budget resolutions often require reductions in mandatory spending. In such
instances, the budget resolution includes reconciliation instructions that require
authorizing committees to report changes to legislation to reduce spending on
mandatory programs under their jurisdictions. The FY2006 budget resolution
includes reconciliation instructions that direct authorizing committees to report
legislation to reduce mandatory spending for the FY2006-FY2010 period.
Subsequently, these proposals are to be combined in a single reconciliation bill by
the budget committees.
The Senate Committee on Finance was instructed to meet a budget
reconciliation target of $10 billion in mandatory spending savings over the five-year
period. On October 25, 2005, the Senate Finance Committee reported its
reconciliation proposal to the Senate Budget Committee, which subsequently
incorporated the proposal into S. 1932, The Deficit Reduction Omnibus
Reconciliation Act of 2005. The Committee met its reconciliation instruction by
making changes in Medicaid, Medicare, and the State Children’s Health Insurance
program (SCHIP). In the House, the Committee on Energy and Commerce had
budget reconciliation instructions specifying a mandatory savings target of $14.734
billion between FY2006 and FY2010. The Committee mark-up took place on
October 27, 2005. The Committee’s legislation focused on changes to the Medicaid
program. When details of the House Committee mark-up become available, this
report will be updated.
Senate Bill
Like a number of Senate committees, the Senate Committee on Finance
achieves its reconciliation instruction budget mark through recommended program
changes that result in both direct spending increases and decreases. The Committee’s
Medicaid saving proposals include (a) changes in the payment methods for
prescription drugs; (b) changes in eligibility and benefit rules for long-term care
services; (c) changes in the program’s approach to limit fraud; and, (d) changes in

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some components of state Medicaid financing. The Committee also recommended
a number of changes that would result in Medicaid spending increases. These
proposals include (a) temporary financial relief for Medicaid costs of individuals who
resided prior to Hurricane Katrina in selected parishes in Louisiana and counties in
Alabama and Mississippi, and a provision not to allow Alaska’s federal medical
assistance percentage to fall below its FY2005 level; (b) an increase in the
disproportionate share hospital payment allotment in the District of Columbia; and
(c) a number of demonstrations and program expansions.
The legislation also contains several provisions that affect the State Children’s
Health Insurance Program (SCHIP), including (1) provisions to redistribute unspent
FY2003-through-FY2005 original allotments to states that fully spent their original
allotments, and (2) to prohibit additional states from using SCHIP funds to cover
childless adults. The Medicare provisions include both direct spending savings and
increases. The three major areas of Committee recommendations: (a) changes to the
Medicare Advantage component of Medicare; (b) the development of value-based
reimbursement for Medicare providers; and (c) a 1% update for physician
reimbursement rates in 2006. The Finance Committee provisions include a number
of other Medicare-related provisions.
Based on Congressional Budget Office (CBO) estimates, changes in the
Medicare program would amount to $5.7 billion in savings from FY2006 to FY2010;
changes in the Medicaid and the SCHIP program would amount to $4.3 billion in
savings over the period.1 The change in Medicare’s payment for physician services
would result in a $10.8 billion increase over the five-year period. But this would be
offset by $12 billion in Medicare Advantage plan savings, and an additional $4.5
billion in savings from value-based purchasing. A temporary increase in federal
medical assistance percentage (FMAP) payment rates for individuals in selected
Louisiana parishes and counties in Alabama and Mississippi affected by Hurricane
Katrina would increase Medicaid spending by $1.8 billion. The largest Medicaid
savings proposal is the result of changes in the reimbursement for outpatient
prescription drugs. The Finance Committee proposals result in a $6.3 billion
reduction over the five-year period.
Medicaid
Medicaid Outpatient Prescription Drugs
The major Medicaid outpatient prescription drug provisions alter the upper
limits that apply to federal reimbursement of state spending on prescription drugs,
alter the formulas for calculating the rebates that prescription drug manufacturers are
required to pay to states, and establish special reporting requirements for the prices
of certain “authorized” generic drugs and certain outpatient drugs administered in
physicians’ offices.
1 Congressional Budget Office Cost Estimate, Reconciliation, Recommendations of the
Senate Committee on Finance,
as approved by the Senate Committee on Finance on Oct. 25,
2005.

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Federal Upper Limits. Under current law, state Medicaid programs set the
prices paid to pharmacies for Medicaid outpatient drugs. Federal reimbursements for
those drugs, however, are limited to a federal upper limit (FUL). The FUL that
applies to drugs available from multiple sources (generic drugs, for the most part) is
calculated by the Centers for Medicare and Medicaid Services (CMS) to be equal to
150% of the lowest published average wholesale price (AWP) for the least costly
therapeutic equivalent. The upper limit that applies to brand-name and other drugs
is equal to the acquisition cost as estimated by the states. The Senate bill would
replace the current FUL requirement so that state payments for single-source drugs
would qualify for federal reimbursement of up to 105% of the average manufacturer
price (AMP) as reported to CMS by the manufacturers. FULs for multiple-source
drugs would be equal to 115% of the weighted AMP for those drugs. In addition, the
bill includes interim upper payment limits that would apply during calendar year
2006, before the new FULs become effective.
This section of the bill would modify the definitions of the prices that
manufacturers are currently required to provide to CMS. The definition of AMP, an
important price point for calculating Medicaid drug rebates and for the proposed
FULs, would become more specified than under current law. For example, one of
the new specifications would direct manufacturers to include cash and volume
discounts in the computation of AMP. In addition, the bill would add a definition of
weighted AMP for the purpose of calculating FULs for multiple-source drugs.
Rebates. Under current law, prescription drug manufacturers that participate
in the Medicaid program are required to pay rebates to states. The rebates are
calculated based on a formula in statute. For single-source and “innovator” multiple-
source drugs (those drugs that had formerly been sold under a patent, but are now off
patent), basic rebates are equal to the greater of 15.1% of the AMP or the difference
between the reported AMP and the best price for each drug. The rebate for all other
multiple-source drugs is equal to 11% of the AMP. The Senate bill would increase
basic rebates for all drugs. The basic rebate for single-source and innovator multiple-
source drugs would be raised to the greater of 17% of the AMP or the difference
between the reported AMP and the best price for each drug. The rebate for all other
multiple-source drugs would be raised to 17% of the AMP.
Authorized Generics and Physician-Administered Drugs. Authorized
generic drugs are generics that are produced by the same manufacturer that produces
the brand-name version of the drug; or by a different manufacturer with the
authorization of the manufacturer that holds the patent on the brand-name version.
The Senate bill would establish a requirement that a manufacturer reporting the AMP
and best price for a brand-name product must also include the prices at which
authorized generic versions are sold. This provision is estimated to increase rebates
that result in savings to the Medicaid program, since authorized generic drugs are
generally less expensive than brand-name versions of the same drug. In addition, the
bill would require states to provide utilization and coding information to CMS for
physician-administered outpatient drugs. This would improve the ability of CMS to
ensure manufacturers pay rebates for those drugs.

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Long-Term Care Under Medicaid
Medicaid is a means-tested program. Current law regarding eligibility, asset
transfers, and estate recovery are designed to restrict access to Medicaid’s long-term
care services to people who are poor or have very high medical or long-term care
expenses, and who apply their income and assets toward the cost of their care. Under
current law, states must impose penalties on individuals applying for Medicaid who
transfer assets (all income and resources of the individual and of the individual’s
spouse) for less than fair-market value (an estimate of the value of an asset if sold at
the prevailing price at the time it was actually transferred). Specifically, states must
delay Medicaid eligibility for individuals receiving care in a nursing home, and, at
state option, certain people receiving care in community-based settings who have
transferred assets for less than fair-market value on or after a “look-back date.” The
“look-back date” is 36 months prior to application for Medicaid for income and most
assets disposed of by the individual, and 60 months in the case of certain trusts.
Calculating the Length of the Penalty Period. The length of the delay
in Medicaid eligibility is determined by dividing the total cumulative uncompensated
value of all assets transferred by the individual (or individual’s spouse) on or after
the look-back date by the average monthly cost to a private patient of a nursing
facility in the state (or, at the option of the state, in the community in which the
individual is institutionalized) at the time of application. States use different
methods for counting transfers and determining the length of a penalty period when
more than one transfer is made during a limited time period. The Senate bill would
impose certain requirements on how these calculations would be made in an attempt
to ensure that such calculations result in longer, rather than shorter, penalty periods.
Specifically, the provisions would (1) require states to count cumulative transfers
(transfers made during different months) as one transfer, and (2) prohibit states from
rounding down to shorten the penalty period.
Changing Non-Countable Assets to Countable Assets. Not all assets
that an applicant may have are counted for the purposes of determining an applicant’s
eligibility for Medicaid long-term care services, or for determining if a transfer for
less than fair-market value has been made — states generally follow rules established
by the Supplemental Security Income (SSI) program for counting income and assets
of applicants. Provisions in the Senate bill would change the status of certain types
of assets from non-countable (or exempt) assets to countable assets to decrease the
ways in which individuals might protect assets to meet Medicaid’s means-testing
requirements sooner than they otherwise would. Under this proposal, certain types
of assets that are currently exempt, including certain types of annuities, promissory
notes, loans, mortgages, and life estates, would be counted for the purposes of
Medicaid eligibility determinations. The bill would also require that states treat the
purchase of an annuity as the disposal of an asset for less than fair-market value
unless the state is named as the remainder beneficiary in the first position (or in the
second position after the community spouse) for at least the total amount of Medicaid
expenditures paid on behalf of the annuitant.
Undue Hardship Waivers. To protect beneficiaries from unintended
consequences of asset transfer penalties, current law requires states to establish
procedures for waiving penalties for persons who, according to criteria established

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by the Secretary, show that a penalty would impose an undue hardship. The ways in
which states implement this requirement vary significantly by state. Whereas a few
states have formal application processes and specified eligibility criteria to apply to
each application, most states have informal methods for evaluating each application
and no formal method for notifying applicants of the availability of undue hardship
waivers. The Senate bill would impose requirements on state practices to formalize
and standardize the waiver application process. The bill would specify criteria that
states would use to determine eligibility for a waiver and require states to provide
notice to applicants about the availability of undue hardship waivers.
Medicaid Estate Recovery. Current law requires states to recover the
private assets (e.g., countable and non-countable assets) of the estates of deceased
beneficiaries who have received certain long-term care services. Recovery of
Medicaid payments may be made only after the death of the individual’s surviving
spouse, and only when there is no surviving child under age 21 and no surviving
child who is blind or has a disability. Estate recovery is limited to the amounts paid
by Medicaid for services received by the individual and is limited only to certain
assets that remain in the estate of the beneficiary upon his or her death. As a result,
estate recovery is generally applied to a beneficiary’s home, if available, and certain
other assets within a beneficiary’s estate. The Senate provision would make any
remaining balance of an annuity subject to recovery by the state after a beneficiary’s
death.
Long-Term Care Insurance Partnership Program. Under Medicaid’s
long-term care (LTC) insurance partnership program, certain persons who have
exhausted (or used at least some of) the benefits of a private long-term care insurance
policy may access Medicaid without meeting the same means-testing requirements
as other groups of Medicaid-eligible individuals. For these individuals, means-
testing requirements are relaxed at (1) the time of application to Medicaid; and (2)
the time of the beneficiary’s death when Medicaid estate recovery is generally
applied. Under current law, these provisions are limited to selected states.2
The Senate Committee’s provision would allow additional states to implement
long-term care partnership programs as long as the state long-term care insurance
programs would provide for the disregard of assets in an amount equal to the amount
of payments made to, or on behalf of, the LTC insurance policyholder. Long-term
care partnership programs would be required to meet certain requirements. The
Senate’s bill would also require LTC insurance partnership programs already in
existence to meet most of the specified requirements on or after two years after
enactment.
2 Section 1917 of the Social Security Act (amended by the Omnibus Budget Reconciliation
Act of 1993, P.L. 103-66) allows states with an approved state plan amendment as of May
14, 1993 to exempt individuals from Medicaid estate recovery who apply to Medicaid after
exhausting their private long-term care insurance benefits. By that date, five states
(California, Connecticut, Indiana, Iowa, and New York) had received CMS approval for
such exemptions. All of these states, except Iowa, have implemented partnership programs.

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LTC insurance policies sold under the LTC insurance partnership plan would
be required to meet certain requirements specified in the National Association of
Insurance Commissioners’ (NAIC) Long-Term Care Insurance Model Regulations
and Long-Term Care Insurance Model Act. In addition, the Secretary, in consultation
with specified entities, would be required to develop uniform standards for
reciprocity, minimum reporting requirements, suitability, incontestability,
nonforfeiture, independent certification for benefits assessment, rating requirements,
and dispute resolution.
Fraud, Waste, and Abuse
Third-party Liability. With certain exceptions, Medicaid is a payer of last
resort, meaning that states must ascertain the legal liability of third parties to pay for
Medicaid care and services. They must also seek reimbursement for Medicaid costs
from third parties when necessary. Examples of potentially liable third parties
specified in current Medicaid law include health insurers, group health plans, service
benefit plans, and health maintenance organizations. With respect to third-party
liability, the Senate bill would clarify the right of states to obtain reimbursement from
specific third parties — self-insured plans and pharmacy benefit managers — that are
legally responsible for payment of claims for health care items or services provided
to Medicaid beneficiaries. The bill would also require each state to have laws that
in effect require third parties to provide eligibility and claims payment data for
Medicaid-eligible individuals and to cooperate with payment and recovery efforts by
Medicaid.
Medicaid Integrity Program. Under current law, states and the federal
government — acting primarily through CMS and the Office of Inspector General
within the Department of Health and Human Services (HHS) — share in the
responsibility for safeguarding Medicaid program integrity. The Senate bill would
establish a Medicaid Integrity program, under which entities that meet certain
contracting requirements (modeled after the Medicare Integrity program) would
review the actions of Medicaid providers, audit claims for payment, identify and
recover overpayments, and provide education on payment integrity and benefit
quality assurance issues. Appropriations for the Medicaid Integrity program would
be $50 million in FY2006-FY2008 and $75 million in each fiscal year thereafter. A
Medicaid Chief Financial Officer and Medicaid Integrity Program Oversight Board
would also be established, and an additional $25 million would be appropriated in
each of FY2006-FY2010 for Medicaid activities of the Office of Inspector General
in HHS.
Other Provisions. Other fraud, waste, and abuse provisions in the Senate bill
would require states to adhere to compensation standards for Medicaid consultants
and other contractors issued by the Inspector General of HHS; encourage states to
enact laws modeled after the federal False Claims Act by decreasing the percentage
of Medicaid amounts recovered under such laws that must be repaid to the federal
government; require that any entity receiving annual Medicaid payments of $1
million or more educate its employees about state and federal false-claims laws,
whistleblower protections, and policies and procedures for detecting fraud, waste,
and abuse; and prohibit states from billing Medicaid twice for the same drugs.

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State Financing and Medicaid
Temporary FMAP Increases. Two provisions in the Senate bill would
affect federal Medicaid reimbursement for states. First, for items and services
furnished between August 28, 2005 and May 15, 2006, states would receive 100%
reimbursement for Medicaid assistance provided to individuals who resided prior to
Hurricane Katrina in one of the parishes in Louisiana or counties in Mississippi and
Alabama specified in the bill. Costs directly attributable to related administrative
activities would also be reimbursed at 100%. Second, the bill would provide that if
Alaska’s calculated federal medical assistance percentage (FMAP, which is based on
a formula that provides higher reimbursement to states with lower per capita incomes
relative to the national average and vice versa) for FY2006 or FY2007 is less than its
FY2005 FMAP, the FY2005 FMAP shall apply.
Managed Care Organization Provider Tax Reform. States sometimes
raise their share of Medicaid program costs by establishing provider taxes that federal
law requires to be broad based. The statute defines broad based taxes as those that
apply to all providers within a class of providers. Two examples of classes of
providers are hospitals and physicians. One of the classes of providers that current
law allows a state provider tax to apply to is Medicaid managed care organizations.
The Senate bill would modify this class of providers (both Medicaid and non-
Medicaid) to encompass all managed care organizations, so that, in the future, these
taxes would be required to be more broad than are allowed under current law. States
with existing provider specific taxes levied against Medicaid managed care
organizations would be allowed to keep those taxes.
Disproportionate Share Hospital Allotment for the District of
Columbia. Medicaid requires states to make payments to hospitals that treat
disproportionate numbers of Medicaid beneficiaries and those who cannot pay for
their care. The Senate bill would increase allotments for the District of Columbia for
making such disproportionate share hospital (DSH) payments. The increased
allotments would become available on October 1, 2005.
Changes to Medicaid Targeted Case Management Benefit. Targeted
case management (TCM) is an optional benefit under the Medicaid state plan that is
designed to help Medicaid beneficiaries access needed medical, social, educational,
and other services. States that cover the TCM service do not have to offer the benefit
statewide and can limit the service to specific groups of Medicaid beneficiaries (e.g.,
those with chronic mental illness). Several states extend the TCM services to
individuals who may also be receiving certain case management services as part of
another state and/or federal program (e.g., foster care, juvenile justice).
This proposal would clarify the activities that can be considered a TCM service,
and those activities (primarily foster care-related activities) that may not be
reimbursed as TCM services. The proposal also states that Medicaid funding would
only be available for TCM services if there are no other third parties liable to pay for
such services, including as reimbursement under a medical, social, educational, or
other program. The proposal would take effect January 1, 2006.

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Inclusion of Podiatrists as Physicians. Currently, states may provide
Medicaid coverage for podiatrist services under an optional benefit category of “other
practitioners.” In contrast, physician services are a mandatory Medicaid benefit. The
proposal would treat podiatrists as physicians, as is the case under Medicare, thereby
making it mandatory for states to provide Medicaid coverage for the medical services
of podiatrists.
Demonstration Project Providing Medicaid Coverage for
Institutions for Mental Disease to Stabilize Emergency Medical
Conditions.
Current law prohibits Medicaid payments for residents of an
Institution for Mental Disease (IMD) between the ages of 22 and 64. This proposal
would require the Secretary of HHS to establish a three-year demonstration project
in eligible states to provide Medicaid coverage for IMD services (not publicly-owned
or operated) for Medicaid eligible individuals who are between the ages of 21 and 64,
and who require IMD services to stabilize an emergency medical condition. Eligible
states include Arizona, Arkansas, Louisiana, Maine, North Dakota, Wyoming, and
four additional states to be selected by the Secretary. The proposal appropriates $30
million for FY2006 for the demonstration which would be available through
December 31, 2008. The proposal also requires the Secretary to submit annual and
final reports to Congress regarding the progress of the demonstration project.
Improving the Medicaid and
State Children’s Health Insurance Programs

Family Opportunity Act. This provision would create a new optional
Medicaid eligibility group for children with disabilities up to age 18 who meet the
severity of disability required under the Supplemental Security Income (SSI)
program, but whose family income is above the financial standards for SSI but below
300% of the federal poverty level (FPL). Under current law, children with
disabilities have generally had to qualify for Medicaid using an income standard that
is lower than 300% of FPL. Medicaid coverage for this optional group would be
initially effective January 1, 2008 and would be fully phased in starting in FY2010.
Within certain limits, states would be permitted to charge monthly premiums (based
on income) and other cost-sharing fees under this new group. Finally, under this
option states must require the parents of Medicaid beneficiaries to enroll in any
available employer-sponsored private insurance meeting certain criteria.
Demonstration Projects Regarding Home- and Community-Based
Alternative to Psychiatric Residential Treatment Facilities for Children.
This proposal would establish a five-year demonstration project in which up to 10
states could provide a broad range of home- and community-based services to
children who would otherwise require services in a psychiatric residential treatment
facility. Though these types of home- and community-based services are often
allowed for other types of disability groups (e.g., children with developmental
disabilities) under Section 1915(c) waivers of the Social Security Act, the waiver
requirements prohibit states from developing home- and community-based services
as an alternative to a psychiatric residential treatment facility. The demonstration
would test the effectiveness of improving or maintaining the child’s functional level,
and the cost-effectiveness of providing these types of services as an alternative to

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psychiatric residential treatment services. These projects must also follow the
existing requirements of the Section 1915(c) waiver. The demonstration project must
be budget neutral and there must be an assurance that an interim and final evaluations
will be conducted by an independent third party. The Secretary will also be required
to complete evaluations of the project and report the findings to Congress. This
proposal would authorize a total of $218 million for FY2007-FY2011 to carry out the
demonstration.
Development and Support of Family-to-Family Health Information.
This proposal would increase funding under the Special Projects of Regional and
National Significance program (SPRANS) of the Maternal and Child Services Block
Grant (Title V of the Social Security Act) for the development and support of new
family-to-family health information centers. These family-to-family health
information centers would assist families of children with disabilities to make
informed decisions about health care options and available resources. The proposal
would appropriate a total of $12 million for FY2007-FY2009, and would authorize
an additional $5 million, each year, for FY2010 and FY2011. The Secretary would
be required to develop family-to-family health information centers in at least 25
states in FY2007, 40 states in FY2008, and all states in FY2009.
Restoration of Medicaid Eligibility for Certain SSI Beneficiaries. The
provision would extend Medicaid eligibility to persons who are under age 21 and
who are eligible for SSI, effective on the later of: (1) the date the application was
filed, or (2) the date SSI eligibility was granted. Currently, SSI and Medicaid
eligibility is effective on the first day of the month following the dates specified
above. This provision would be effective one year after the date of enactment.
Grants to Promote Innovative Outreach and Enrollment Under
Medicaid and SCHIP. The provision would establish a new grant program under
SCHIP to finance outreach and enrollment efforts to increase the participation of
eligible children in both SCHIP and Medicaid. Currently, SCHIP administrative
activities, which include outreach, cannot exceed 10% of total SCHIP expenditures.
Various entities would be eligible to receive these grants, such as: state or local
governments, Indian tribes, schools, non-profit organizations, and certain faith-based
organizations. The proposal specifies several criteria the Secretary must use to
prioritize grant awards, for example, entities that target geographic areas where there
are a large number of eligible but not enrolled children. The provision would
appropriate $25 million for FY2007 for these grants; 10% of the appropriation would
be for grants to certain organizations that specifically provide health care services to
Indian children.
Money Follows the Person Rebalancing Demonstration. The proposal
would authorize the Secretary to award demonstration projects to states that provide
90% federal Medicaid reimbursement for home- and community-based long-term
care services for 12 months for certain individuals relocating from an institution into
the community. To participate in the demonstration, a person must be a Medicaid
beneficiary who is residing in a hospital, nursing facility, intermediate care facility
for a person with mental retardation, or an institution for mental disease (IMD) (to
the extent that IMD services are covered in the state), and must have resided there for
six months (up to a maximum of two years, as specified by the state).

CRS-10
State demonstrations must operate for at least two years in a five-year period
starting in FY2007, and services for individuals must continue following the
demonstration, so long as the person remains eligible for these services. States must
also take steps to eliminate barriers to using Medicaid funding to provide long-term
care services in the setting of a person’s choosing, and meet maintenance of effort
requirements. The Secretary would be required to provide technical assistance and
oversight to state grantees and conduct and report the findings of a national
evaluation. This proposal would appropriate $1.75 billion from January 1, 2009
through FY2013 (September 30, 2013) to carry out the demonstration.
State Children’s Health Insurance Program (SCHIP)
Under current law, each state’s federal SCHIP annual allotment is available for
three years. At the end of the three-year period of availability, the unspent funds
from the original allotment are reallocated based on methodologies that vary
depending on the fiscal year. Unspent original allotments from FY2003 forward are
to be redistributed according to the original Balanced Budget Act of 1997 (BBA97)
methodology. That is, redistributed funds will go only to those states that spend all
of their original allotments by the applicable three-year deadline, with the
redistributed amounts determined by the Secretary of HHS and made available for
one year only.
The provision would reduce the period of availability of the FY2004 and
FY2005 original allotments from three years to two years, and would specify rules
for the reallocation of unspent FY2003, FY2004, and FY2005 SCHIP original
allotments. The reallocated FY2003 and FY2004 funds would be available in
FY2006; the reallocated FY2005 funds would be available in FY2007. The proposal
is projected to eliminate state shortfalls in FY2006. The proposal is projected to
nearly eliminate state shortfalls in FY2007. Each of the 15 states expected to face
a shortfall in FY2007 under the proposal would still be able to cover at least 97% of
their federal SCHIP demand.
In addition, the provision would limit the types of payments that could be
matched at the SCHIP enhanced matching rate for SCHIP expenditures drawn against
the FY2003, FY2004, and FY2005 redistributed funds available to shortfall states.
Specifically, the enhanced FMAP would be available for “targeted low-income
children” but all other SCHIP expenses, such as, benefit expenditures for adults
(other than pregnant women) would be matched at the regular FMAP. The provision
would also limit the Secretary of HHS’s Section 1115 waiver authority by prohibiting
the approval of demonstration projects that allow federal SCHIP funds to be used to
provide child health assistance or other health benefits coverage to nonpregnant
childless adults. Finally, the proposal would permit the 11 qualifying states to use
FY2004 and FY2005 funds under the 20% allowance, and would permit all states to
use up to 10% of their FY2006 and FY2007 original allotments for expenditures on
outreach activities incurred during FY2006 and FY2007 respectively.

CRS-11
Medicare
Physicians
Physicians are paid under the fee schedule which assigns relative values to
services based on physician work, practice expense costs and malpractice costs. The
relative values are then adjusted for geographic variations in costs. These adjusted
relative values are converted into dollar payment amounts by a conversion factor.
The conversion factor is updated annually according to a complex formula specified
in the law. The scheduled update for 2006 is estimated at a negative 4.3%. The bill
would override the formula by setting a minimum update for 2006 at a positive 1%.
Medicare Value-Based Purchasing Programs
The Medicare statute would be amended to establish value-based purchasing
systems for each of the different Medicare providers. There would be separate value-
based purchasing programs for hospitals, physicians and other practitioners,
Medicare managed health care plans and prescription drug plans, ESRD providers
and facilities, home health agencies, and skilled nursing facilities. Medicare
payments to providers currently are not based on any measures of quality. The value-
based purchasing programs, sometimes referred to as “pay-for-performance”
programs, would introduce variations in provider payments reflecting differences in
measured quality. Although the specifics of each program differ in the details, they
all share some general principles:
! The value-based purchasing programs would begin collecting data
on quality measures in the initial year of establishment, with
incentive payments disbursed in subsequent years. Data from the
initial year would be used to inform providers what their payments
would have been for the year had the value-based purchasing
program already been in place.
! Each value-based purchasing program would create an incentive
pool funded by withholding up to 2% of total payments to that
category of provider. The percentage of funds that goes towards the
incentive pool would not decrease over time, and all funds collected
for the year must be paid to providers as incentive payments under
the program for that year.
! Participation in the value-based purchasing program would be
voluntary, but providers would be required to report quality data in
order to be eligible for incentive payments.
! Incentive payments would be paid to providers who meet certain
thresholds for quality measurement. These thresholds would be
based on either relative or absolute standards.
! The quality measures would be specific to each category of
providers and would be revised over time, but the measures would

CRS-12
be required to be evidence-based, easy to collect and report, address
process, structure, outcomes, beneficiary experience, efficiency,
over- and underuse of health care. In the initial year, the measures
would include at least one measure of health information technology
infrastructure.
Because all the funds collected under the value-based purchasing programs
would be paid out as incentive payments, the total payments over time would not
change as a result of these provisions, but the timing of the incentive payments would
be delayed a year compared to payments made in the absence of the value-based
purchasing programs.
Medicare Advantage
Under Medicare Advantage (MA), Part C of the Medicare program, private
health plans agree to provide Medicare covered benefits to beneficiaries who enroll
in their plans. MA plans are paid a per capita monthly fee for providing all required
Part A and Part B services to each plan enrollee, regardless of the amount of services
used. An MA plan’s per capita payment is adjusted to reflect the higher health care
use of sicker enrollees. Though payments to plans are risk adjusted based on the
demographics and health history of each enrollee, the risk adjustment method is
imperfect and cannot account for all of the variation in health care use.
Phase-Out of Risk Adjustment Budget Neutrality. Medicare payments
to private plans under the Medicare Advantage program are risk adjusted to control
for the variation in the cost of providing health care among beneficiaries. Congress
urged the Secretary of HHS to implement risk adjustment without reducing overall
payments to plans. The Secretary applied a budget neutrality adjustment to the risk
adjusted rates to keep them from being reduced overall.
This provision directs the Secretary to (1) change the way the MA benchmarks
are calculated to, in part, exclude budget neutrality, and (2) phase-out the budget-
neutral implementation of risk adjustment. Overall, these changes will lower
payments to plans. Budget neutrality is to be completely phased-out by 2011.
Elimination of Stabilization Fund. The Secretary is to establish an MA
Regional Plan Stabilization Fund to provide incentives for plan entry in each region
and plan retention in certain MA regions with below average MA penetration.
Initially, $10 billion is to be available for expenditures from the fund beginning on
January 1, 2007 and ending on December 31, 2013. Additional funds are to be
available in an amount equal to 12.5% of average per capita monthly savings from
regional plans that bid below the benchmark. The section which created this fund
under the Medicare Modernization Act is repealed.
Other Medicare Provisions
The Senate provisions would make several other changes to the Medicare
program, as described below.

CRS-13
Medicare Dependent Hospitals. Under current law, special reimbursement
for facilities with Medicare dependent hospital (MDH) status will lapse in 2006.
Certain rural hospitals with 100 beds or less that have at least 60% of their discharges
or inpatient days attributable to Medicare patients in two of the last three years are
classified as MDH hospitals. This provision would extend their status through
discharges occurring before October 1, 2011. Also, MDHs could elect payment
based on their adjusted FY2002 hospital-specific costs, beginning in FY2005, if that
would result in higher Medicare payments.
Skilled Nursing Facility Bad Debt. Beginning October 1, 2005, the amount
of bad debts otherwise treated as allowed costs, which are attributable to deductible
and coinsurance amounts, would be reduced by 30% for services furnished in skilled
nursing facilities (SNFs).
Inpatient Rehabilitation Facilities. CMS requires that a facility treat a
certain proportion of patients with specified medical conditions in order to qualify
as an inpatient rehabilitation facility (IRF) and receive higher Medicare payments.
The “75% rule” established in regulation requires IRFs to meet a compliance
threshold of 60% from July 1, 2005 and before July 1, 2006, 65% from July 1, 2006
and before July 1, 2007 and 75% thereafter. This legislation would reduce the
current required proportion, or threshold to 50% from July 1, 2005 through June 30,
2007.
Physician Self Referrals. The prohibition on Medicare and Medicaid
referrals to physician-owned limited service hospitals or specialty hospitals would
be effective on or after December 8, 2003. Certain exceptions would be made to the
definition of such hospitals, to include those hospitals where: (1) the percent
investment by physician investors is no greater than the percent on June 8, 2005, (2)
the percent investment by any physician investor is no greater than the percent on
June 8, 2005, (3) the number of operating rooms is no greater than the number on
June 8, 2005 and (4) the number of beds is no greater than the number on June 8,
2005.
Hold Harmless Provision for Small Rural and Sole Community
Hospitals. Under current law, most services provided by hospital outpatient
departments are paid under a prospective payment system, which began August 2000.
Rural hospitals with no more than 100 beds and sole community hospitals located in
rural areas, are to be held harmless through January 2006, that is they are to be paid
no less under the prospective system than they would have been paid under prior law.
This legislation would extend the hold harmless provisions through January 1, 2007.
Composite Rate for Dialysis Services. Medicare payments for dialysis
services furnished either at a facility or in a patient’s home are based on a basic case-
mix adjusted prospective payment system. The system has two components: (1) the
composite rate, which does not have to be updated annually; and (2) a drug add-on
adjustment, which the Secretary of HHS is required to update annually beginning in
2006. The legislation would increase the composite rate by 1.6% for services
beginning January 1, 2006.

CRS-14
Therapy Caps. The Balanced Budget Act of 1997 established annual per
beneficiary payment limits on all outpatient therapy services provided by
non-hospital providers beginning in 1999. Subsequent legislation suspended
application of the limits beginning in 2000. A moratorium has been in place since
then, except for a brief period in 2003. Under current law, the caps are again slated
to go into effect in 2006. The bill would extend the moratorium for an additional
year, through 2006.
Durable Medical Equipment Rentals. This provision would eliminate the
semi-annual maintenance payment currently allowed for capped rental equipment and
pay only for repairs when needed. The Secretary would determine the amount of
payments for maintenance and service, which would only made if deemed reasonable
and necessary. For durable medical equipment in the capped rental category, after
a 13-month rental period, the supplier would transfer the title to the Medicare
beneficiary. The option for beneficiaries to purchase power wheelchairs when
initially furnished would be moved to be the same time as other rental cap items.
Rural Program of All-Inclusive Care for the Elderly (PACE) Provider
Grant Program. The Program for All-Inclusive Care for the Elderly (PACE)
makes available all services covered under Medicare and Medicaid without amount,
duration or scope limitations, and without application of any deductibles, copayments
or other cost sharing. Under the program, certain low-income individuals age 55 and
older, who would otherwise require nursing home care, receive all health, medical,
and social services they need. An interdisciplinary team of physicians, nurses,
physical therapists, social workers, and other professionals develop and monitor care
plans for enrollees. Monthly capitated payments are made to providers from both the
Medicare and Medicaid programs. As specified in Medicare and Medicaid statutes,
the amount of these payments from both programs must be less than what would
have otherwise been paid for a comparable frail population not enrolled in PACE
program. Payments are also adjusted to account for the comparative frailty of PACE
enrollees. PACE providers assume the risk for expenditures that exceed the revenue
from the capitation payments. The Balanced Budget Act of 1997 made PACE a
permanent benefit category under Medicare and a state plan optional benefit under
Medicaid.
The provision would create site development grants and provide technical
assistance to establish PACE providers in rural areas. It would also create a fund for
rural PACE providers to provide partial reimbursement for incurred expenditures
above a ceratin level. The proposal would require the Secretary of HHS to establish
a process and criteria for awarding up to $7.5 million in site development grants in
up to 12 qualified PACE providers that have been approved to serve a geographic
service area that is in whole or in part in a rural area, with each grant award not to
exceed $750,000.
Waiver of Part B Late Enrollment Penalty. Generally, individuals who
delay enrollment in Medicare Part B past their initial period of eligibility are subject
to a penalty equal to 10% of the premium amount for each 12 months of delay. This
provision would allow certain individuals to delay enrollment without a penalty,
specifically those individuals who volunteered outside of the United States through
a 12-month or longer program sponsored by a tax-exempt organization (defined by

CRS-15
the Internal Revenue Code). Upon return to the United States, they would have a
special enrollment period.
Federally Qualified Health Centers. This provision would allow federally
qualified health centers (FQHCs) to provide diabetes outpatient self management
training services and medical nutrition therapy services provided by a registered
dietician or nutritional professional. It would modify the definition of FQHC
services so that only the primary preventative required services would be retained.
Services would include those furnished to an outpatient of an FQHC that are
provided by a health care professional under contract with the center, and payments
would be made directly to the FQHC.
Delay of Medicare Payments. Medicare Parts A and B payments for
services made by fiscal intermediaries and carriers would be delayed for six business
days at the end of FY2006. These payments would be made at the beginning of
FY2007, thereby shifting payments from one fiscal year to the next.