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
Updated December 1, 2005
Evelyne P. Baumrucker, Hinda Chaikind, April Grady, Jim Hahn,
Jean Hearne, Elicia J. Herz, Bob Lyke, Paulette C. Morgan,
Jennifer O’Sullivan, Richard Rimkunas, Julie Stone,
Sibyl Tilson, and Karen Tritz
Analysts and Specialists in Health Insurance and Financing
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Budget Reconciliation FY2006:
Medicaid, Medicare, and State Children's
Health Insurance Program (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, 2005.
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’s recommendations
were incorporated into the House Budget Committee’s bill, The Deficit Reduction
Act of 2005. The House passed its version of the bill on November 18, 2005.
The Senate bill proposes changes to 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. Other areas of Medicaid savings
include changes to some asset transfer rules for Medicaid-eligible individuals
applying for long-term care services and changes to the Medicaid program designed
to combat fraud, waste, and abuse. Increases in Medicaid spending would largely
result from temporary federal medical assistance percentage (FMAP) increases
targeted to help Medicaid recipients from 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 and the re-computation
of FMAPs for FY2006. The bill includes a number of Medicaid demonstration
projects and some benefit and eligibility expansions. The proposal would alter the
method for redistribution of SCHIP 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.
The House bill’s health program provisions are largely limited to changes in the
Medicaid program. The House bill achieves its largest savings with cost-sharing and
benefit changes. The bill also foresees savings from changes in prescription drug
reimbursement and asset transfer rules. Increased spending provisions are focused
on long-term care service benefits, the establishment of health opportunity account
demonstrations, and Hurricane Katrina health program relief.
This report will be updated to reflect legislative activity.

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Contents
FY2006 Budget Reconciliation Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Senate Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicaid Outpatient Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Federal Upper Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Authorized Generics and Physician-Administered Drugs . . . . . . . . . . . 4
Long-Term Care Under Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Calculating the Length of the Penalty Period . . . . . . . . . . . . . . . . . . . . 5
Changing Non-Countable Assets to Countable Assets . . . . . . . . . . . . . 5
Undue Hardship Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Medicaid Estate Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Long-Term Care Insurance Partnership Program . . . . . . . . . . . . . . . . . 6
Fraud, Waste, and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Third Party Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Medicaid Integrity Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
State Financing and Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Temporary FMAP Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Managed Care Organization Provider Tax Reform . . . . . . . . . . . . . . . . 8
Disproportionate Share Hospital Allotment
for the District of Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Changes to Medicaid Targeted Case Management Benefit . . . . . . . . . . 8
Inclusion of Podiatrists as Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Demonstration Project Providing Medicaid Coverage
for Institutions for Mental Disease to Stabilize
Emergency Medical Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Limitation on FMAP Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Authority to Continue Providing Certain Adult Day
Health Care Services or Medical Adult Day Care Services . . . . . . 9
Demonstration Project Regarding Medicaid Coverage
of Low-Income HIV-Infected Individuals . . . . . . . . . . . . . . . . . . 10
Improving the Medicaid and State Children’s
Health Insurance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Family Opportunity Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Demonstration Projects Regarding Home- and
Community-Based Alternative to Psychiatric Residential
Treatment Facilities for Children . . . . . . . . . . . . . . . . . . . . . . . . . 11
Development and Support of Family-to-Family Health Information . 11
Restoration of Medicaid Eligibility for Certain SSI Beneficiaries . . . 12
Grants to Promote Innovative Outreach and Enrollment
Under Medicaid and SCHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Money Follows the Person Rebalancing Demonstration . . . . . . . . . . . 12
State Children’s Health Insurance Program (SCHIP) . . . . . . . . . . . . . . . . . 13

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Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Medicare Value-Based Purchasing Programs . . . . . . . . . . . . . . . . . . . . . . . 14
Medicare Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Phase-Out of Risk Adjustment Budget Neutrality . . . . . . . . . . . . . . . . 15
Elimination of Stabilization Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Medicare Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Medicare Dependent Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Skilled Nursing Facility Bad Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Inpatient Rehabilitation Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Physician Self Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Hold Harmless Provision for Small Rural and
Sole Community Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Composite Rate for Dialysis Services . . . . . . . . . . . . . . . . . . . . . . . . . 16
Therapy Caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Durable Medical Equipment Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Rural Program of All-Inclusive Care for
the Elderly (PACE) Provider Grant Program . . . . . . . . . . . . . . . . 17
Waiver of Part B Late Enrollment Penalty . . . . . . . . . . . . . . . . . . . . . 17
Federally Qualified Health Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Delay of Medicare Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Coverage of Ultrasound Screening for
Abdominal Aortic Aneurysms . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Improving Patient Access to and Utilization
of Colorectal Cancer Screening Services . . . . . . . . . . . . . . . . . . . 18
Coverage of Marriage and Family Therapist Services and
Mental Health Counselor Services Under Medicare Part B . . . . 18
House Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Medicaid Outpatient Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Federal Upper Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Authorized Generics and Physician-Administered Drugs . . . . . . . . . . 20
Children’s Hospitals and Access to Discounted Drug Products . . . . . 20
Prior Authorization for Mental Health Drugs . . . . . . . . . . . . . . . . . . . 21
Reform of Asset Transfer Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Lengthening Look-back Period for all Disposals to five years . . . . . . 21
Availability and Provisions Concerning Hardship Waivers . . . . . . . . 21
Disclosure and Treatment of Annuities and of Large Transactions . . . 21
Application of “Income-First” Rule in Applying
Community Spouse’s Income Before Assets
in Providing Support of Community Spouse . . . . . . . . . . . . . . . . 22
Disqualification for Long-term Care Assistance for
Individuals with Substantial Home Equity . . . . . . . . . . . . . . . . . 22
Enforceability of Continuing Care Retirement Communities
and Life Care Community Admission Contracts . . . . . . . . . . . . . 23
Flexibility in Cost Sharing and Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
State Option for Alternative Medicaid Premiums and Cost-Sharing . . 23
Special Rules for Cost-Sharing for Prescribed Drugs . . . . . . . . . . . . . 24
Emergency Room Copayments for Non-Emergency Care . . . . . . . . . 24
Use of Benchmark Benefit Packages . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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State Option to Establish Non-Emergency
Medical Transportation Program . . . . . . . . . . . . . . . . . . . . . . . . . 27
Exempting Women Covered under Breast or
Cervical Cancer Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Benefit Expansions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Expanded Access to Home and Community-based
Services for the Elderly and Disabled . . . . . . . . . . . . . . . . . . . . . 28
Optional Choice of Self-Directed Personal Assistance
Services (Cash and Counseling) . . . . . . . . . . . . . . . . . . . . . . . . . 28
Expansion of State Long-term Care Partnership Program . . . . . . . . . . 28
Health Opportunity Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Other Medicaid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Managed Care Organization Provider Tax Reform . . . . . . . . . . . . . . . 30
Third Party Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Reforms of Targeted Case Management Benefit . . . . . . . . . . . . . . . . . 30
Increase in Payments to Insular Areas . . . . . . . . . . . . . . . . . . . . . . . . . 30
Medicaid Transformation Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Citizenship Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Emergency Services Furnished by Non-Contract Providers
for Medicaid Managed Care Enrollees . . . . . . . . . . . . . . . . . . . . 31
FMAP Computation for Employer Pension Contributions . . . . . . . . . 32
Katrina Health Care Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Targeted Medicaid Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FMAP Hold Harmless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

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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, 2005.
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 each of the House and Senate 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 Finance 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 Energy and Commerce
Committee mark-up took place on October 27, 2005. In the health care area, its
recommendations resulted in changes in Medicaid. The Committee’s
recommendations were incorporated into the House Budget Committee bill, H.R.
4241, the Deficit Reduction Act of 2005, and reported on November 7, 2005.
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 Finance 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 include (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.
The health provisions in the Senate Finance Committee proposal were modified
by several floor amendments. The amendments included changes that (1) would
require that FY2006 FMAPs would be recalculated, and it would limit any reductions
in a State’s FY2006 FMAP rate. The estimated increased cost of this provision
would be offset by extending outpatient prescription drug rebates to most managed
care organizations. Other amendments would 1) authorize the continued provision
of certain adult day health care services or medical adult day care services under a
State Medicaid plan; (2) exclude discounts provided to mail order and nursing facility
pharmacies from the determination of average manufacturer price and to extend the
discounts offered under fee-for-service Medicaid for prescription drugs to managed
care organizations; (3) amend Medicare to make a technical correction regarding
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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purchase agreements for powerdriven wheelchairs, provide for coverage of
ultrasound screening for abdominal aortic aneurysms under part B, improve patient
access to, and utilization of, the colorectal cancer screening benefit, and provide for
the coverage of marriage and family therapist services and mental health counselor
services under part B of such title; (4) modify the quality measurement system
defined in the Medicare value-based purchasing section of the proposal; (5) provide
for a Medicaid demonstration project for low-income HIV-infected individuals; and
(6) modify the Federal Upper Payment limit for independent pharmacies located in
rural and frontier areas. Information on these amendments are incorporated in the
Senate bill provision descriptions.
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.
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 provided in pharmacies that are not critical access
pharmacies would qualify for federal reimbursement up to 105% of the average
manufacturer price (AMP) as reported to CMS by the manufacturers. FULs for
multiple source drugs provided in pharmacies that are not critical access pharmacies
would be equal to 115% of the weighted AMP for those drugs. State payments for
single source drugs provided in critical access retail pharmacies would qualify for
federal reimbursement up to the lesser of 108% of the AMP or the wholesale
acquisition cost for the drug. FULs for multiple source drugs provided in critical
access pharmacies would qualify for federal reimbursement up to the lesser of 140%
of the AMP or the wholesale acquisition cost for the drug. Critical access retail
pharmacies are defined as those retail pharmacies that are not within 20 miles of any
other retail pharmacy. In addition, the bill includes interim upper payment limits that
would apply during calendar year 2006, before the new FULs become effective..
In addition, 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,

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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. The bill would also define weighted AMP for
the purpose of calculating FULs for multiple source drugs, and would establish that
dispensing fees for multiple source drugs may be higher than those for single source
drugs.
Rebates. Under current law, prescription drug manufacturers that participate
in the Medicaid program are required to pay rebates to states for drugs provided to
Medicaid beneficiaries for which fee for service payments are required. 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
makes two major changes to Medicaid rebate policy. The bill would require
manufacturers to begin paying rebates for drugs provided to Medicaid beneficiaries
who are enrolled in most managed care organizations and would raise the rebate
percentages for all drugs. The basic rebate for single source and innovator multiple
source drugs would be raised to the greater of 18.1% 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 would be raised to 17% of the AMP. States would have the
option of collecting rebates from pharmaceutical manufacturers for those drugs
provided to enrollees of MCOs, or alternatively, allowing the MCOs to collect the
rebates in exchange for reduced MCO payment rates.
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.
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

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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
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.

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CRS-6
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.
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.
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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CRS-7
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
total $50 million in FY2006, $49 million in each of FY2007 and FY2008, $74
million in each of FY2009 and FY2010, and $75 million in FY2011 and beyond. 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,
whistle-blower protections, and policies and procedures for detecting fraud, waste,
and abuse; and prohibit states from billing Medicaid twice for the same drugs.
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

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CRS-8
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.
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.

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CRS-9
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.
Limitation on FMAP Reduction. The federal medical assistance percentage
(FMAP), which has a statutory minimum of 50% and maximum of 83%, is the rate
at which states are reimbursed for most Medicaid service expenditures. An enhanced
FMAP is available for both services and administration under SCHIP, subject to the
availability of funds from a state’s SCHIP allotment. When state FMAPs are
calculated by HHS for an upcoming fiscal year (usually in the preceding November),
the state and U.S. per capita personal income amounts used in the formula are equal
to the average of the three most recent calendar years of data on per capita personal
income available from the Department of Commerce’s Bureau of Economic Analysis
(BEA). When BEA undertakes a comprehensive revision of its income data
(reflecting methodological and other changes) every few years, there may be upward
and downward revisions to each of the component parts of personal income (e.g.,
wages and salaries, supplements to wages and salaries such as employer contributions
for employee pension and insurance funds, etc.). To calculate FMAPs for FY2006,
HHS used per capita personal income data for 2001, 2002, and 2003 that reflected
BEA’s latest comprehensive revision. Under the Senate bill, FY2006 FMAPs would
be re-computed so that no FY2006 FMAP would be less than the greater of (1) a
state’s FY2005 FMAP minus 0.5 percentage points (0.1 in the case of Delaware and
Michigan, 0.3 in the case of Kentucky) or (2) the FY2006 FMAP that would have
been determined for a state if per capita incomes for 2001 and 2002 that were used
to calculate the state’s FY2005 FMAP (i.e., pre-revision BEA data, which are not
available for 2003) were used.
Authority to Continue Providing Certain Adult Day Health Care
Services or Medical Adult Day Care Services. Adult day care services are
generally community-based daytime programs for adults with disabilities or chronic
conditions that provide health, social, and related support services in a setting outside
the person’s home. Most states currently offer these services to Medicaid
beneficiaries through the rehabilitation or clinic benefits of the Medicaid state plan
(in approximately 10 states) or, more commonly, through a home and community-
based (HCBS) waiver under Section 1915(c) of the Social Security Act (in
approximately 44 states through 102 HCBS separate waiver programs).3 Because
3 CRS analysis of Medicaid state chart as published by CCH: Internet Research Network and
(continued...)

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CRS-10
states define the state plan service criteria and tailor the HCBS waivers to specific
groups of beneficiaries, states offer adult day care services under both the state plan
and HCBS waiver(s) or under multiple HCBS waivers.
The way in which a state covers a Medicaid benefit makes a difference in terms
of who can receive the benefit and what administrative steps may be necessary. The
Medicaid state plan must be available statewide, and individuals who need the
service are entitled to receive it. The HCBS waiver program, on the other hand, can
be limited by the state, both in the number of people covered and its statewide
availability. In addition, the HCBS waiver program is designed as an alternative to
institutions (i.e., nursing home, hospital or intermediate care facility for those with
mental retardation) and must meet a cost-neutrality provision (on average, the per-
person cost of the HCBS waiver can not exceed the per-person cost of a comparable
institution). This provision would prohibit the Secretary of HHS from denying
federal Medicaid funding or withdrawing federal approval for adult day health care
services or medical adult day care services under the Medicaid state plan, as defined
by the state and approved by the Secretary on or before 1982.
Demonstration Project Regarding Medicaid Coverage of Low-
Income HIV-Infected Individuals. Section 1115 of the Social Security Act gives
the Secretary of HHS broad authority to modify virtually all aspects of the Medicaid
program. Among other projects, the Secretary has used the Section 1115 waiver
authority to approve benefit-specific demonstrations that provide targeted services
to certain individuals so as to divert them from full Medicaid eligibility. For
example, under existing HIV/AIDS demonstration waivers, the Secretary approved
programs that provide a limited set of Medicaid benefits (e.g., case management, and
pharmacy services) to individuals with HIV/AIDS who would not otherwise be
eligible for Medicaid. Approved Section 1115 waivers are deemed to be part of a
state’s Medicaid (or SCHIP) state plan for purposes of federal reimbursement.
Project costs associated with waiver programs are subject to that state’s FMAP.
Unlike regular Medicaid, CMS waiver guidance specifies that costs associated with
waiver programs must be budget neutral to the federal government over the life of
the waiver program. The federal and state government negotiate a budget neutrality
spending cap beyond which the federal government has no fiscal responsibility.
This section of the bill would require the Secretary to allow states to seek
approval for five-year Section 1115 demonstration projects that provide full
Medicaid medical assistance coverage to specified HIV-infected individuals. For
fiscal years 2006 through 2010 only, $450,000,000 in federal funds would be
appropriated for such demonstrations. From these federal funds, the Secretary would
allocate money to states and territories (without regard to existing federal Medicaid
spending caps) with approved HIV Section 1115 demonstrations based on the
availability of such funds. Allotment of funds among states and territories with
approved demonstrations would be equal to the state’s enhanced federal medical
assistance percentage (Enhanced-FMAP) for quarterly expenditures associated with
3 (...continued)
the Home- and Community-based waiver database from the Centers for Medicare and
Medicaid Services, July 2003.

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CRS-11
medical assistance provided to individuals under the waiver up to the specified cap.
Not later than December 31, 2010, the Secretary would be required to submit a
report to Congress evaluating the cost-effectiveness and the impacts of the
demonstrations on the Medicare, Medicaid, and Supplemental Security Income
programs. This provision would be effective on January 1, 2006.
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
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

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CRS-12
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).
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.

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CRS-13
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.
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. CMS has announced that the update for 2006 will be a negative 4.4%.
The bill would override the formula by setting a minimum update for 2006 at a
positive 1%.

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CRS-14
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, 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 incentive pool must be paid to providers as incentive
payments.
! 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
be required to be evidence-based, easy to collect and report, address
process, structure, outcomes, beneficiary experience, efficiency,
over- and underuse of health care and to address disparities in health
care provided and health outcomes between majority and minority
groups. 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.

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CRS-15
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.
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

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CRS-16
and coinsurance amounts, would be reduced by 30% for services furnished in skilled
nursing facilities (SNF).
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.
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 be made if deemed

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CRS-17
reasonable and necessary. With the exception of power-driven wheelchairs, the title
to durable medical equipment in the capped rental category would be transferred by
the supplier to the Medicare beneficiary after a 13-month rental period. The current
option for beneficiaries to purchase power wheelchairs when initially furnished
would be retained and the amount of any necessary maintenance and servicing
payments would be established by the Secretary.
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
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 (FQHC) 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

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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 seven
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.
Coverage of Ultrasound Screening for Abdominal Aortic
Aneurysms. The provision would authorize Medicare coverage of ultrasound
screening for abdominal aortic aneurysms for individuals who (1) received referrals
for such screenings as a result of an initial preventive physical exam performed for
new Medicare enrollees; (2) had not previously had such a test covered by Medicare;
and (3) had a family history of abdominal aortic aneurysm or manifested risk factors
included in a beneficiary category (not related to age) identified by the United States
Preventive Services Task Force. The Part B deductible would not apply to these
services.
Improving Patient Access to and Utilization of Colorectal Cancer
Screening Services. The provision would establish national minimum payment
amounts for specified facility and non-facility service codes that reflect a 5% increase
above current amounts. The provision would also authorize Medicare coverage for
an office visit or consultation prior to a screening colonoscopy or in connection with
a beneficiary’s decision to obtain such a screening. The Part B deductible would not
apply for colorectal cancer screening tests.
Coverage of Marriage and Family Therapist Services and Mental
Health Counselor Services Under Medicare Part B. The provision would
authorize coverage of marriage and family therapist services and mental health
counselor services for the diagnosis and treatment of mental illness that the therapist
or counselor is legally authorized to perform in the state.

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House Bill
Under the budget resolution instructions, the House Energy and Commerce
Committee was required to obtain $2 million in savings in FY2006 and $14.734
billion over the five-year budget period, FY2006-FY2010. The total House Energy
and Commerce proposal, which includes changes in areas outside of health, is
estimated to reduce federal outlays by $17.1 billion over the five-year budget
window.4 Proposed changes to the Medicaid program would result in an $11.9
billion reduction in spending over the five-year period. Katrina health care and
energy relief would increase spending by $3.6 billion. Additional savings would
result from Digital Television transition. This report summarizes provisions dealing
only with Medicaid and SCHIP.5 These provisions were incorporated into the larger
bill reported by the House Budget Committee on November 3, 2005, the Deficit
Reduction Act of 2005. Under a House rule, an amended Committee bill was
introduced. The bill passed the House on November 18, 2005.
Subtitle A of Title III in the House bill reduces federal Medicaid spending by
$11.9 billion over the FY2006-FY2010 five year budget period. Changes in
outpatient prescription drug payments would result in $2.1 billion in savings over the
period. Changes in Medicaid cost-sharing and benefits would result in $6.5 billion
in savings over the period. Changes in asset transfer rules would reduce Medicaid
spending by an additional $2.5 billion over the five year period. Changes in other
provisions (e.g., changes in the treatment of state taxes on health care providers, and
changes aimed at reducing Medicaid overpayment when a Medicaid recipient also
has private insurance) would reduce Medicaid spending by an additional $1.8 billion
over the five year period. Benefit expansions would add $1 billion in Medicaid
spending. These expansions would include changes in benefits for individuals with
long-term care needs in the community, and the establishment of health opportunity
account demonstration programs (Medicaid-funded savings accounts that
beneficiaries would use to pay for certain health care services). Under subtitle B,
federal government spending for Medicaid and SCHIP would be temporarily
increased for Medicaid-eligible individuals who lived or currently live in parts of
Alabama, Louisiana, and Mississippi affected by Hurricane Katrina. The overall
effect of this subtitle’s changes would result in an increase in spending over the
FY2006- FY2010 period of $2.5 billion. In total, the two health subtitles in the
House Energy and Commerce proposal is estimated by CBO to result in net Medicaid
and SCHIP savings of $9.3 billion over the five year budget period.
4 Congressional Budget Office. Cost Estimate. Reconciliation Recommendations of the
House Committee on Energy and Commerce, as approved by the House Committee on
Energy and Commerce on October 28, 2005.
5 Specifically, this report does not discuss provisions that alter the Public Health Services
Act (PHSA). These provisions are in sections 3202, 3203, and 3204. In addition, the report
does not discuss subtitle C, Katrina and Rita Energy Relief, and subtitle D, Digital
Television Transition of Title III.

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Medicaid
Medicaid Outpatient Prescription Drugs
The Medicaid outpatient prescription drug provisions in the House bill would
alter the federal upper limits that apply to Medicaid outpatient prescription drugs,
provide for a minimum dispensing fee for multiple source drugs, and establish
special reporting requirements for the prices of certain “authorized” generic drugs
and certain outpatient drugs administered in physicians’ offices. In addition, the bill
would allow certain children’s hospitals access to discounted drug prices and places
an additional requirement on state prior authorization programs that seeks to limit
access to atypical antipsychotic or antidepressant single source drugs.
Federal Upper Limits. The House bill would also replace the current FUL
requirement so that state payments for single source drugs would qualify for federal
reimbursement up to 106% of the RAMP, defined as the average price paid to a
manufacturer by wholesalers as reported to CMS by the manufacturers. FULs for
multiple source drugs would be equal to 120% of the volume weighted average
RAMP for all drug products in the same multiple source drug billing and payment
code. The provision would provide the Secretary with the authority to enter into
contracts and engage the services of vendors to determine RAMP, and would allow
the Secretary to implement an alternative FUL methodology based on survey prices.
The implementation of the changes to the FUL would be delayed, however, if GAO
were to find that the average prices paid by pharmacies are above the new
reimbursable amounts.
In addition, this section of the bill would allow state Medicaid programs to have
access to manufacturers’ reported prices and would establish minimum dispensing
fees of $8 for pharmacies dispensing multiple-source drugs.
Authorized Generics and Physician-Administered Drugs. The House
bill would establish that when a manufacturer reports AMP and best price for their
brand name product, they would include the prices of all drugs sold under the new
drug application (which would include authorized generic versions). This provision
is estimated to increase rebates resulting 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 provision would require states to provide utilization
and coding information to CMS for all single source physician-administered
outpatient drugs and for the 20 most frequently provided physician administered
multiple source drugs. This would improve the ability of CMS to ensure
manufacturers pay rebates for those drugs.
Children’s Hospitals and Access to Discounted Drug Products. The
House bill includes a provision allowing Children’s Hospitals access to the
discounted outpatient prescription drugs prices negotiated under Section 340(B) of
the Public Health Service Act. Section 340(B) allows certain health care providers,
including many community health centers and disproportionate share hospitals,
access to prescription drug prices that are similar to the prices paid by Medicaid
agencies after being reduced by manufacturer rebates.

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Prior Authorization for Mental Health Drugs. The bill would limit the
ability of states to place atypical antipsychotic or antidepressant single source drugs
on prior authorization lists imposing other restrictions unless a drug use review board
has determined that doing so is not likely to harm patients or increase overall medical
costs. It also would require states to pay for a 30 day supply of such drugs in cases
where a request for authorization is not responded to within 24 hours after the
prescription is transmitted.
Reform of Asset Transfer Rules
Lengthening Look-back Period for all Disposals to five years.
Current law requires states to impose penalties on individuals 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, the rules require states to delay
Medicaid eligibility for certain Medicaid long-term care services for individuals
applying for care in a nursing home, and, at state option, for 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. The penalty, or period of ineligibility,
begins with the first month during which the assets were transferred. The House bill
would lengthen the look-back date to five years, or 60 months, for all income and
assets disposed of by the individual. It would also change the start date of the
ineligibility period for all transfers to the first day of a month during or before which
assets have been transferred for less than fair market value, or the date on which the
individual is eligible for medical assistance under the state plan and would be
receiving certain long-term care services if it where not for the penalty, whichever
is later.
Availability and Provisions Concerning Hardship Waivers.To protect
beneficiaries from unintended consequences of the asset transfer penalties, current
law requires states to establish procedures for not imposing penalties on persons who,
according to criteria established by the Secretary of DHHS, can show that a penalty
would impose an undue hardship. The House bill would add to existing law criteria
for approving or disapproving applications for undue hardship waivers. It would also
require states to provide applicants with notice about the availability of undue
hardship waivers; to review applications under a timely process; and to establish an
appeal process for beneficiaries who receive an adverse determination. The bill
would also permit facilities to apply for waivers on behalf of, and with the consent
of, institutionalized individuals. In addition, if the application for undue hardship of
nursing facility residents meets criteria specified by the Secretary, the state would
have the option of providing payments for nursing facility services to hold the bed
for these individuals at a facility while an application is pending. Such payments
could not be made for longer than 30 days.
Disclosure and Treatment of Annuities and of Large Transactions.
Current law provides that the term “trust,” for purposes of asset transfers and the
look-back period, includes annuities only to the extent that the Secretary of DHHS
defines them as such. CMS guidance (Transmittal Letter 64) asks states to determine

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the ultimate purpose of an annuity in order to distinguish those that are validly
purchased as part of a retirement plan from those that abusively shelter assets. To be
deemed valid in this respect, the life of the annuity must coincide with the average
number of years of life expectancy for the individual (according to tables in the
transmittal). If the individual is not reasonably expected to live longer than the
guarantee period of the annuity, the individual will not receive fair market value for
the annuity based on the projected return; in this case, the annuity is not “actuarially
sound” and a transfer of assets for less than fair market value has taken place. The
House bill would require applicants and their community spouses to report their
ownership interest in annuities (or similar financial instruments). It would also
require disclosure of all transfers greater than $100,000. Further it would also require
that all transactions $5,000 or more within a single year would be treated as a single
transaction.
Subject to certain requirements, the bill would also require the state to be made
the remainder beneficiary under such annuities or similar financial instruments. The
bill would also give the Secretary authority to provide guidance to states on
categories of arms length transactions (such as the purchase of a commercial annuity)
that could be generally treated as an asset transfer for fair market value.
Application of “Income-First” Rule in Applying Community
Spouse’s Income Before Assets in Providing Support of Community
Spouse. Current law includes provisions intended to prevent impoverishment of a
spouse whose husband or wife seeks Medicaid coverage for long-term care services,
allowing the community spouse to retain higher amounts of income and assets (on
top of non-countable assets such as a house, car, etc.) than allowed under general
Medicaid rules. The law allows community spouses with more limited income to
retain at least a state specified amount set within federal guidelines. If the
community spouse’s monthly income amount is less than this amount, the
institutionalized spouse may choose to transfer an amount of his or her income or
assets to make up for the shortfall (i.e. the difference between the community
spouse’s monthly income and the state- specified minimum monthly maintenance
needs allowance). The House bill would require that any transfer or allocation made
from an institutionalized spouse to meet the need of a community spouse for a
community spouse’s monthly income allowance be first made from income of the
institutionalized spouse. Only when sufficient income is not available, could
resources of the institutionalized spouse be transferred or allocated.
Disqualification for Long-term Care Assistance for Individuals with
Substantial Home Equity. Under current law, states set asset standards, within
federal parameters, that applicants must meet to qualify for coverage. These
standards specify a limit on the amount of countable assets a person may have to
qualify, as well as define which assets are not counted. In general, countable assets
cannot exceed $2,000 for an individual. States generally follow SSI rules for
computing both countable and non-countable assets. Current Medicaid and SSI asset
counting practices exclude the entire value of an applicant’s home. The House bill
would exclude from Medicaid eligibility for nursing facility or other long-term care
services, those individuals with an equity interest in their home of greater than
$750,000. (The Secretary of DHHS would establish a process to waive application
of this provision for demonstrated cases of hardship.) This amount would be

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increased, beginning in 2011, from year to year based on the percentage increase in
the consumer price index for all urban consumers, rounded to the nearest $1,000.
Individuals whose spouse, child under age 21, or child who is blind or disabled
resides in the individual’s home would not be excluded from eligibility.
Enforceability of Continuing Care Retirement Communities and Life
Care Community Admission Contracts. The House bill would allow state-
licensed, registered, certified, or equivalent continuing care retirement communities
(CCRC) or a life care community to require in their admissions contracts that
residents spend their resources (subject to Medicaid’s rules concerning the resources
and income allowances for community spouses), declared for the purposes of
admission, on their care before they apply for Medicaid. It would also allow certain
entrance fees for CCRCs or life care communities to be considered by states to be
countable resources for purposes of the Medicaid eligibility determination.
Flexibility in Cost Sharing and Benefits
Many of the provisions in this chapter allow for changes to existing cost-sharing
and benefit requirements through Medicaid state plan amendments, rather than the
special waiver process that is required under current law.
State Option for Alternative Medicaid Premiums and Cost-Sharing.
Under current law, premiums are generally prohibited under Medicaid except under
specific circumstances. For example, for pregnant women and infants with family
income that exceeds 150% of the federal poverty level (FPL), states are allowed to
implement nominal premiums or enrollment fees (between $1 and $19 per month
depending on family income) as defined in regulations. Other restrictions apply to
service-related cost-sharing. For example, all service-related cost-sharing is
prohibited for children under 18. Service-related cost-sharing is also prohibited for
pregnant women for any pregnancy-related services or for services to treat other
medical conditions that complicate pregnancy. Other groups and services are also
exempt from service-related cost-sharing (e.g., emergency care, family planning
services, services delivered to persons receiving Medicaid hospice care). For most
other beneficiaries and services, nominal service-related cost-sharing (between $0.50
and $3 depending on the cost of the service provided) may be imposed.
The House bill would allow states to impose premiums and cost-sharing for any
group of individuals for any type of service subject to several specific restrictions.
Certain groups would be exempted from paying premiums (e.g., children under 18
in mandatory coverage groups, inpatients in certain medical institutions who must
spend nearly all their income on medical care before Medicaid pays for services).
Also, cost-sharing would be prohibited for specified services (e.g., preventive care
for all children under 18, services provided to hospice patients, emergency care). The
total amount of annual cost-sharing for all individuals in a family would be capped
at 5% of family income for all families regardless of income. States would be
allowed to impose higher cost-sharing amounts than is allowed under current law for
individuals with family income over 100% of the FPL. States may exempt additional
classes of individuals or services from premiums and service-related cost-sharing.
Beginning in 2006, for individuals in families with incomes below 100% FPL, the
Secretary of HHS would be required to increase nominal cost-sharing amounts over

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time based on the annual percentage increase in the medical care component of the
consumer price index for all urban consumers.
The House bill would also allow states to condition the provision of medical
assistance on the payment of premiums, and to terminate eligibility for Medicaid
when the failure to pay a premium continues for at least 60 days. States may apply
this provision to some or all groups, and may waive premium payments when they
would be an undue hardship. In addition, states could permit Medicaid providers to
require a Medicaid beneficiary to pay authorized cost-sharing as a condition of
receiving services. Providers would also be allowed to reduce or waive cost-sharing
amounts.
GAO would be required to conduct a study of the impact of premiums and cost-
sharing under Medicaid on access to and utilization of services, with a report of
findings due to Congress no later than January 1, 2008. All provisions would be
effective for cost-sharing imposed on items and services furnished on or after January
1, 2006.
Special Rules for Cost-Sharing for Prescribed Drugs. Under current
law, cost-sharing for outpatient prescription drugs follows the rules described above
for all cost-sharing amounts. Many states require cost-sharing amounts that are
slightly lower for generic drugs or for drugs listed on a preferred drug list.
The House bill would allow states to impose cost-sharing amounts that exceed
the proposed state option limits described above for certain state-identified non-
preferred drugs if specific conditions are met. Under this option, states may impose
higher cost-sharing for non-preferred drugs within a class; waive or reduce cost-
sharing otherwise applicable for preferred drugs within such class; and must not
apply such cost-sharing for preferred drugs to persons exempt from service-related
cost-sharing. Cost-sharing for non-preferred drugs would be based on multiples of
the nominal amounts based on family income. For persons generally exempt from
cost-sharing, the cost-sharing for non-preferred drugs may be applied. Such cost-
sharing may not exceed nominal amounts, and aggregate caps on cost-sharing would
still apply.
When a prescribing physician determines that the preferred drug would not be
effective or would have adverse health effects or both, the state may impose the cost-
sharing amount for preferred drugs on the prescribed non-preferred product.
States may exclude specified drugs or classes of drugs from these special cost-
sharing rules. Finally, states would be prohibited from implementing these special
cost-sharing rules for outpatient prescription drugs unless the state has instituted a
system for prior authorization and related appeals processes. All provisions would
be effective for cost-sharing imposed on items and services furnished on or after
October 1, 2006.
Emergency Room Copayments for Non-Emergency Care. Under
current law, waivers may be used to allow states to impose up to twice the otherwise
applicable nominal cost-sharing amounts for non-emergency services provided in a
hospital emergency room (ER). States may only impose these higher amounts if they

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have established that Medicaid beneficiaries have available and accessible alternative
sources of non-emergency, outpatient services.
The House bill would allow states, through state plan amendments rather than
waivers, to impose increased cost-sharing on state-specified groups for non-
emergency services provided in an ER, when certain conditions are met. First,
alternative non-emergency providers must be available and accessible to the person
seeking care. Second, after initial screening but before the non-emergency care is
provided at the ER, the beneficiary must be told: (1) the hospital can require a higher
co-payments, (2) the name and location of an alternative non-emergency provider and
that this provider uses a lower co-payments, and (3) the hospital can provide a
referral. When these conditions are met, states could apply or waive cost-sharing for
services delivered by the alternate provider.
For persons with income below 100% FPL, cost-sharing for non-emergency
services in an ER could not exceed twice the nominal amounts. Individuals exempt
from premiums or service-related cost-sharing may be subject to nominal copayments
for non-emergency services in an ER, only when no cost-sharing is imposed for care
in hospital outpatient departments or by other alternative providers in the area served
by the hospital ER. Aggregate caps on cost-sharing would still apply.
Finally, the House bill would require the Secretary to provide for payments to
states for the establishment of alternate non-emergency providers, or networks of
such providers. It also authorizes and appropriates $100 million for paying such
providers for the four-year period beginning with 2006. The Secretary would be
required to give a preference to states that establish or provide for alternate non-
emergency services providers (or networks) that serve rural or underserved areas
where beneficiaries may have limited access to primary care providers, or in
partnership with local community hospitals.
Use of Benchmark Benefit Packages. Medicaid benefits may differ for
what are called categorically needy (CN) versus medically needy (MN) groups. In
general, CN groups include families with children, the elderly, certain persons with
disabilities, and certain other pregnant women and children who meet applicable
financial standards. These financial criteria are tied to rules under two federal cash
assistance programs — the former AFDC program for poor families with children or
the SSI program for the poor elderly and persons with disabilities. Some groups of
the elderly, pregnant women, and children must meet financial standards tied to
specified percentages of the FPL instead. MN groups include the same types of
individuals, but different, typically higher financial standards apply. Medical
expenses (if any) may be subtracted from income in determining financial eligibility
for the MN. For nearly all CN groups, medical expenses are not considered in
determining Medicaid eligibility.
Examples of benefits that are mandatory for CN groups include inpatient and
outpatient hospital services, services provided by federally qualified health centers
(FQHC), physician services, and nursing facility care for persons age 21 and over.
Examples of optional benefits for CN groups that are offered by many states include
physician-directed clinic services, routine dental care, other licensed practitioner
services (e.g., optometrists, podiatrists, psychologists), physical therapy, inpatient

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psychiatric care for the elderly and persons under age 21, and prescribed drugs (all
states). In general, states may offer a more restrictive benefit package to the MN, but
at a minimum, must offer (1) prenatal and delivery services, (2) ambulatory services
for persons under 18 and those entitled to institutional services, and (3) home health
services for those entitled to nursing facility care. Within a state, services available
to all CN groups must be equal in amount, duration and scope. Likewise, services
available to all MN groups must be equal in amount, duration and scope.
The House bill would give states the option to provide Medicaid to state-
specified groups of beneficiaries through enrollment in benchmark and benchmark-
equivalent coverage (described below). States could implement this option through
a Medicaid state plan amendment rather than a waiver as would be required under
current law. States could require “full-benefit eligible individuals” to enroll in such
coverage. A full-benefit eligible would be a person eligible for all services covered
for the CN, or under any other category of eligibility for full services as defined by
the Secretary. Some individuals would be excluded from the definition of a full-
benefit eligible (e.g., the MN, persons who spend-down their income for medical care
to meet the financial requirements for Medicaid coverage). Several other specific
groups would also be exempted from this option (e.g., mandatory pregnant women
and children, dual eligibles, hospice patients, persons with special medical needs,
individuals who qualify for Medicaid long-term care services). States could only
apply this option to eligibility categories established before the date of enactment of
this provision.
The benchmark and benchmark equivalent packages would be nearly identical
to those offered under the State Children’s Health Insurance Program (SCHIP), with
some additions beyond the basic elements of SCHIP. Under this option, benchmark
coverage would include (1) the standard Blue Cross/Blue Shield preferred provider
option plan under the Federal Employees Health Benefits Program (FEHBP), (2) the
health coverage offered and generally available to state employees, or (3) the health
coverage offered by a health maintenance organization (HMO) with the largest
commercial (non-Medicaid) enrollment. Benchmark-equivalent coverage would be
defined as a package of benefits that has the same actuarial value as one of the
benchmark benefit packages. Such coverage would include each of the benefits in
the “basic benefits category,” including (1) inpatient and outpatient hospital services,
(2) physician’s surgical and medical services, (3) lab and x-ray services, (4) well-
baby and well-child care, including age-appropriate immunizations, and (5) other
appropriate preventive services (designated by the Secretary). Such coverage must
also include at least 75% of the actuarial value of coverage under the benchmark plan
for each of the benefits in the “additional service category,” including (1) prescription
drugs, (2) mental health services, (3) vision services, and (4) hearing services.
Both benchmark and benchmark equivalent coverage would also include
qualifying child benchmark dental coverage. A qualifying child would be a person
under 18 with family income below 133% of the FPL. Benchmark dental coverage
would be equivalent to or better than the dental plan that covers the greatest number
of individuals in the state who are not eligible for Medicaid.
Finally, states could only enroll eligible beneficiaries in benchmark and
benchmark-equivalent coverage if such persons have access to services provided by

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rural health clinics (RHC) and FQHCs, and the Medicaid prospective payment
system for both types of providers remains in effect.

State Option to Establish Non-Emergency Medical Transportation
Program. Federal regulations require states to ensure necessary transportation for
recipients to and from providers and to describe the methods that they will use to
meet this requirement in their Medicaid state plan. States may choose whether to
provide transportation as an optional Medicaid service or claim it as an
administrative expense.
If a state chooses to provide transportation as an optional Medicaid service,
costs are reimbursed by the federal government using the federal medical assistance
percentage (FMAP), which varies by state and has a statutory floor of 50% and
ceiling of 83%. Under this option, states must meet a number of federal requirements
that apply to all Medicaid services (e.g., enrollees must have freedom to choose
among qualified providers) unless they have an approved waiver. Costs are only
allowable for FMAP reimbursement if the transportation is furnished by a provider
to whom a direct payment can be made. Other arrangements (e.g., payment to a
broker who manages and pays transportation providers) must be claimed as an
administrative expense. If a state chooses to claim transportation as an
administrative expense, costs are reimbursed by the federal government at a rate of
50%, which is lower than the FMAP in many states, but there are fewer federal
requirements that must be met.
Under the House bill, a state would have the option to establish a non-
emergency medical transportation brokerage program in order to more cost-
effectively provide transportation for Medicaid enrollees who need access to medical
care or services and have no other means of transportation. Under the program, the
state would not be required to provide comparable services for all Medicaid enrollees
or freedom to choose among providers. The program could include wheelchair van,
taxi, stretcher car, bus passes and tickets, and other transportation methods deemed
appropriate by the Secretary, and could be conducted under contract with a broker
who: (1) is selected through a competitive bidding process, (2) meets oversight
requirements, (3) is subject to regular auditing by the state, and (4) complies with
requirements related to prohibitions on referrals and conflict of interest established
by the Secretary. Also, the HHS Inspector General would be required to submit a
report to Congress examining this new program no later than January 1, 2007.
Exempting Women Covered under Breast or Cervical Cancer
Program. Under current law, states may offer Medicaid to certain uninsured
women who are under age 65, and are in need of treatment for breast or cervical
cancer based on screening services provided under an early detection program run by
the CDC. This group has access to the same Medicaid services offered to the CN in
a given state, and are subject to Medicaid’s nominal cost sharing rules.
Under the House bill, none of the proposed cost-sharing or benefit provisions
described above would apply to women who qualify for Medicaid under the breast
and cervical cancer eligibility group.

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Benefit Expansions
Expanded Access to Home and Community-based Services for the
Elderly and Disabled. Under current law, states may provide a broad range of
home and community-based services under a Medicaid waiver authorized by Section
1915(c) of the Social Security Act. These services, which may include, for example,
respite, adult day care, and personal care, may be provided to Medicaid beneficiaries
who would otherwise need the level of care provided in a nursing facility,
intermediate care facility for persons with mental retardation (ICF-MR), or hospital.
Approval of a Medicaid waiver is contingent on a state documenting the waiver’s
cost-neutrality (the average per person cost under the waiver cannot exceed the
average per person cost of services in an institution.)
This proposal would allow states to cover these types of home and community-
based services under the Medicaid state plan without requiring the state to seek a
waiver or document the waiver’s cost-neutrality. To cover this option, a state’s
existing waiver must have expired. Similar to rules governing the current waiver
program, states would be able to: 1) define which services will be covered (room and
board may not be paid for); 2) offer the waiver on a less-than-statewide basis; 3) limit
the number of individuals who are eligible for services; and 4) establish a waiting list
for services. This section would be effective for home and community-based
services furnished on or after October 1, 2006.
Optional Choice of Self-Directed Personal Assistance Services
(Cash and Counseling). Traditionally, Medicaid personal care and other related
benefits have been provided to beneficiaries through a local public or private agency.
However, in the last decade, Medicaid programs have been increasing the discretion
that Medicaid beneficiaries have over key elements of the service (e.g., what time a
service provider comes to the home, who provides the service). This proposal would
allow a state to establish and operate a program in which the Medicaid beneficiary
could hire, supervise and manage the individuals providing his or her services
(including personal care and related services or other home and community-based
services). The beneficiary would have significant discretion within an approved
service plan and budget. As part of this option, a state may limit the population
eligible to receive these types of services and may limit the number of persons
served.
Expansion of State Long-term Care Partnership Program. U n d e r
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 eligibles. For these individuals, means-
testing requirements are relaxed at (1) the time of application to Medicaid (allowed
with Secretary’s approval, without changes to current law); and (2) the time of the
beneficiary’s death when Medicaid estate recovery is generally applied. Current law
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,

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Connecticut, Indiana, Iowa, and New York) had received CMS approval. Except for
Iowa, all of these states have implemented partnership programs.
This provision would allow additional groups of individuals in states with state
plan amendments approved after May 14, 1993 to be exempt from estate recovery
requirements if the amendment provides for a qualified state long-term care insurance
partnership program. New partnership programs would disregard any assets or
resources of a Medicaid applicant and beneficiary in the amount equal to the amount
of insurance benefit paid to or on behalf of an individual who is a beneficiary under
a long-term care policy. Policies sold under new LTC partnership programs would
be tax-qualified, cover an insured who was a resident of such state when coverage
first became effective under the policy, require that policyholders be offered a policy
with some level of inflation protection, and impose certain requirements on states
concerning seller training. It would also require insurers to report information, as
specified by the Secretary, concerning benefit payments, policy terminations, among
others. Existing Partnership programs (programs in California, Connecticut, Indiana,
Iowa, and New York) would not be subject to these requirements. The Secretary
would also be subject to certain requirements concerning data reporting and the
development of recommendations for certain uniform standards. Under the House
bill, the Secretary would be permitted to develop portability standards for reciprocal
recognition of partnership policies among certain states.
Health Opportunity Accounts. The bill would require the Secretary to
establish demonstration programs within Medicaid for health opportunity accounts
(HOA), effective January 1, 2006. No more than ten state programs could be
established the first five years, though afterwards other programs would be allowed
if the earlier ones were not unsuccessful. Among other things, state programs would
have to make patients aware of the high cost of medical care, provide incentives for
them to seek preventive care, and reduce inappropriate uses of health care. Eligibility
for HOAs would be determined by the state, though individuals who are disabled,
pregnant, or receiving terminal care or long-term care, would be among those who
could not participate.
Participants would have both an HOA and coverage for medical items and
services that, after an annual deductible is met, were available under the existing
Medicaid state plan and waiver authorities. The deductible would have to be at least
100%, but no more than 110%, of the annual state contributions to the HOA. Both
the deductible and the maximum for out-of-pocket cost-sharing could vary among
families. The deductible need not apply to preventive care.
HOAs would be used to pay health care expenses specified by the state;
payments could be restricted to licensed or otherwise authorized providers as well as
to items and services that are medically appropriate or necessary. Withdrawals
would be made by electronic transfer. Once account holders were no longer eligible
for Medicaid they could continue to make withdrawals under these conditions,
though accounts could then also be used to pay for health insurance or, at state
option, for job training or education. Participants generally would be able to obtain
services from Medicaid providers or managed care organizations at the same
payment rates that would be applicable if the coverage deductible did not apply, or
from any provider for payment rates not exceeding 125% of those rates.

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HOA contributions could be made by the state or by other persons or entities,
including charitable organizations. Including federal shares, state contributions
generally could not exceed $2,500 for each adult and $1,000 for each child.
However, states could contribute more to some accounts as long as its aggregate
contributions did not increase.
Other Medicaid Provisions
Managed Care Organization Provider Tax Reform. The House bill
would, like the Senate bill, modify the class of providers that states can tax under the
provider tax rules. The current law class of Medicaid managed care providers would
be changed 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 in 2008, and would have to
reduce the tax by half in 2009. After that, all states would be subject to the new rule.
Third Party Liability. With certain exceptions, Medicaid is a payer of last
resort, meaning that states must ascertain the legally 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 House proposal 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 proposal would also require each state to
have laws in effect requiring third parties to provide eligibility and claims payment
data for Medicaid-eligible individuals and to cooperate with payment and recovery
efforts by Medicaid.
Reforms of 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.
Increase in Payments to Insular Areas. In the 50 states and the District
of Columbia, Medicaid is an individual entitlement. There are no limits on the
federal payments for Medicaid as long as the state is able to contribute its share of

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the matching funds. In contrast, Medicaid programs in the territories are subject to
spending caps. These spending caps were set in FY1998 and adjusted for inflation
in subsequent years. For each of fiscal years 2006 and 2007, the provision would
increase the total annual cap on federal funding for the Medicaid programs in each
of Puerto Rico, the Virgin Islands, Guam, the Northern Marianas, and American
Samoa. For Puerto Rico the total annual Medicaid cap would be increased by $12
million; for the Virgin Islands and Guam, the FY2006 total annual Medicaid caps
would be increased by $2.5 million and the FY2007 caps would be increased by $5.0
million. For the Northern Marianas, the FY2006 total annual Medicaid cap would
be increased by $1.0 million and the FY2007 cap would be increased by $2.0 million.
For American Samoa, the FY2006 total annual Medicaid cap would be increased by
$2.0 million and the FY2007 cap would be increased by $4.0 million. For FY2008
and subsequent fiscal years, the total annual cap on federal funding for the Medicaid
programs in each of Puerto Rico, the Virgin Islands, Guam, the Northern Marianas,
and American Samoa would be calculated by increasing the FY2007 ceiling for
inflation.
Medicaid Transformation Grants. Under the House proposal, in addition
to the normal federal Medicaid reimbursement received by states, Secretary of DHHS
would provide for payments to states for the adoption of innovative methods to
improve the effectiveness and efficiency of Medicaid. Examples of innovative
methods for which such funds may be used include (1) methods for reducing patient
error rates through the implementation and use of electronic health records, electronic
clinical decision support tools, or e-prescribing programs, (2) methods for improving
rates of collection from estates owed to Medicaid, (3) methods for reducing waste,
fraud, and abuse under Medicaid, (4) implementation of a medication risk
management program as part of a drug use review program, and (5) methods for
reducing expenditures for covered outpatient drugs by increasing generic utilization.
Total payments under this provision would equal and not exceed $50 million in each
of FY2007 and FY2008.
Citizenship Documentation. As a condition of an individual’s eligibility
for Medicaid benefits, Section 1137(d) of the Social Security Act requires a state to
obtain a written declaration, under penalty of perjury, stating whether the individual
is a citizen or national of the United States. Under current law, if an individual
declares that he or she is not a citizen or national, the individual must declare that he
or she is a qualified alien and must present additional documentary evidence. If an
individual declares that he or she is a U.S. citizen or national, the state is not required
to obtain additional evidence but may choose to do so. Under the House proposal,
states would be required to obtain documentary evidence from individuals who
declare that they are U.S. citizens or nationals.
Emergency Services Furnished by Non-Contract Providers for
Medicaid Managed Care Enrollees. Medicaid law provides certain protections
for beneficiaries enrolled in managed care, including assuring coverage of emergency
services under each managed care contract awarded by the state.
Under the House bill, a Medicaid provider that does not have a contract with a
Medicaid managed care entity (MCE) that furnishes emergency care to a beneficiary
enrolled with that MCE must accept as payment in full the amount otherwise

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applicable outside of managed care (e.g., in the fee-for-service setting) — minus any
payments for indirect costs of medical education and direct costs of graduate medical
education. This provision would be effective on January 1, 2007.
FMAP Computation for Employer Pension Contributions. When state
FMAPs are calculated by HHS for an upcoming fiscal year (usually in the preceding
November), the state and U.S. per capita personal income amounts used in the
formula are equal to the average of the three most recent calendar years of data on per
capita personal income available from the Department of Commerce’s Bureau of
Economic Analysis (BEA). The definition of personal income used by BEA is
comprised of many parts, including supplements to wages and salaries such as
employer contributions for employee pension and insurance funds. When BEA
undertakes a comprehensive revision of its income data every few years, there may
be upward and downward revisions to each of these parts, the sum of which has a net
effect on overall personal income. For example, in describing its most recent
comprehensive revision, BEA reported that upward revisions to employer
contributions for pensions beginning with 1989 were the result of methodological
improvements and more complete source data. However, BEA reported upward and
downward revisions to other parts of personal income as well (e.g., wages and
salaries). Under the House proposal, for purposes of computing states FMAPs
beginning with FY2006, employer contributions toward pensions that exceed a
specified threshold would be excluded from the per capita income of a state.
Katrina Health Care Relief
Targeted Medicaid Relief. The federal medical assistance percentage
(FMAP), which has a statutory minimum of 50% and maximum of 83%, is the rate
at which states are reimbursed for most Medicaid service expenditures. Medicaid
administrative costs are generally reimbursed at a flat rate of 50%. An enhanced
FMAP is available for both services and administration under SCHIP, subject to the
availability of funds from a state’s SCHIP allotment. Under the House proposal, for
items and services furnished during the period August 28, 2005 through May 15,
2006, states would receive 100% FMAP reimbursement for Medicaid and SCHIP
assistance provided to: (1) any individual residing in a parish of Louisiana, a county
of Mississippi, or a major disaster county of Alabama and (2) individuals who
resided during the week preceding Hurricane Katrina in a parish or county for which
a major disaster has been declared as a result of the hurricane and for which the
President has determined, as of September 14, 2005, warrants individual assistance
under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Costs
directly attributable to related administrative activities would also be reimbursed at
100%.
FMAP Hold Harmless. When state FMAPs are calculated by HHS for an
upcoming fiscal year (usually in the preceding November), the state and U.S. per
capita personal income amounts used in the formula are equal to the average of the
three most recent calendar years of data on per capita personal income available from
the Department of Commerce’s Bureau of Economic Analysis (BEA). For example,
to calculate FY2006 FMAPs, HHS used per capita personal income data for 2001,

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2002, and 2003 that became available from BEA in October 2004. Under the House
bill, in computing Medicaid and SCHIP FMAPs for any year after 2006 for a state
that the Secretary of HHS determines has a significant number of individuals who
were evacuated to and live in the state as a result of Hurricane Katrina as of October
1, 2005, the Secretary would disregard such evacuees and their income.

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