Medicare: FY2007 Budget Issues

Medicare: FY2007 Budget Issues

Order Code RL33306
CRS Report for Congress
Received through the CRS Web
Medicare: FY2007 Budget Issues
Updated March 31, 2006
Hinda Chaikind, Coordinator,
Paulette C. Morgan, Carol O’Shaughnessy,
Jennifer O’Sullivan, Julie Stone, and Sibyl Tilson
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare: FY2007 Budget Issues
Summary
Each February, the President submits a detailed budget request to Congress for
the following federal fiscal year, along with projections for the five-year budget
window. The budget informs Congress of the President’s overall federal fiscal
policy, based on proposed spending levels, revenues, and deficit (or surplus) levels.
The budget request lays out the President’s relative priorities for federal programs,
such as how much should be spent on defense, education, health, and other federal
programs. The President’s budget may also include legislative proposals for
spending and tax policy changes. While the President is not required to propose
legislative changes for those parts of the budget that are governed by permanent law,
such as Medicare benefits, these changes are generally included in the budget.
The President’s 2007 budget includes Medicare legislative proposals for Part A
(Hospital Insurance) and Part B (Supplementary Medical Insurance) spending with
estimated savings of $2.5 billion in 2007 and $35.9 billion over the five-year budget
window. Proposals include savings in many of the Medicare payment updates.
There are no projected legislative changes to either Medicare Part C (Medicare
Advantage) or to Medicare Part D (Prescription Drugs). The President’s budget also
includes an automatic reduction to all Medicare payments if general revenue
financing is projected to exceed 45% of total Medicare financing, under specific
conditions. There are no savings from this proposal in the five-year budget window.
Finally, the budget includes legislative proposals for the Program Management
Budget account. The President’s budget reflects the passage of the Deficit Reduction
Act of 2005 (P.L. 109-171, DRA). Therefore, the savings proposals included in the
budget are based on changes to law after passage of the DRA. The current law
descriptions provided in this report also reflect changes made by DRA.
Each year, the Congressional Budget Office (CBO) conducts an independent
analysis of the President’s budget. This report includes their estimates of savings for
the President’s proposed Medicare legislation.
The Senate Budget Committee passed its FY2007 Budget Resolution
(S.Con.Res. 83) on March 9. The Chairman’s Mark assumes the repeal of the
Stabilization Fund included in the Medicare Modernization Act, saving $7 billion
over five years. The Mark assumes the enactment of legislation to extend the
moratorium on therapy caps (costing $710 million over five years). The Mark
includes a point of order if general revenue financing is projected to exceed 45% of
total Medicare financing, and if a Medicare funding warning has been submitted to
the Senate for two consecutive calendar years. The resolution was passed by the
Senate, with amendments, on March 19, 2006.
The House Budget Committee reported its budget resolution on March 29.
Action by the full House is expected during the week of April 3. Based on currently
available documents, it is unclear whether the resolution includes any of the
President’s Medicare proposals or other adjustments to funding for these programs.
It includes reconciliation instructions for the House Ways and Means Committee,
which has jurisdiction over Medicare as well as many other programs.

Contents
Medicare Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Hospital Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Skilled Nursing Facility Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Inpatient Rehabilitation Facility Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Hospice Payment Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Adjust Payment for Hip and Knee Replacement . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicare Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outpatient Hospital Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Ambulance Fee Schedule Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expand Competitive Bidding to Laboratory Services . . . . . . . . . . . . . . . . . . 4
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Eliminate Indexing of Threshold
for Income-Related Part B Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Pay for Short-Term Power Wheelchairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Limit Oxygen Rental Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Medicare Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Home Health Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Establish Federal Data Sharing Clearinghouse
for Medicare Secondary Payer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Extend Medicare Secondary Payer Status
for End Stage Renal Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Phase-Out Medicare Bad Debt Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Premium Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Forty-five Percent Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CBO Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Congressional Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Senate Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
House Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. President’s Budget Medicare Legislative Proposals . . . . . . . . . . . . . . . 11
Table 2. Staff Medicare Contacts for this Report . . . . . . . . . . . . . . . . . . . . . . . . 12

Medicare: FY2007 Budget Issues
Each February, the President submits a detailed budget request to Congress for
the following federal fiscal year, along with projections for the five-year budget
window. The budget informs Congress of the President’s overall federal fiscal
policy, based on proposed spending levels, revenues and deficit (or surplus) levels.
The budget request lays out the President’s relative priorities for federal programs,
such as how much should be spent on defense, education, health, and other federal
programs. The President’s budget may also include legislative proposals for
spending and tax policy changes. While the President is not required to propose
legislative changes for those parts of the budget that are governed by permanent law,
such as Medicare benefits, these changes are generally included in the budget.
The President’s 2007 budget includes Medicare legislative proposals for Part A
(Hospital Insurance) and Part B (Supplementary Medical Insurance) spending with
estimated savings of $2.5 billion in 2007 and $35.9 billion over the five-year budget
window. Proposals include savings in many of the Medicare payment updates.
There are no proposed legislative changes to either Medicare Part C (Medicare
Advantage) or to Medicare Part D (Prescription Drugs).
The Program Management Budget account request for 2007 is $3.1 billion,
which is a decrease of $40 million below the FY2006 level, even with the additional
$74 million in funding required by the Deficit Reduction Act of 2005 (P.L. 109-171,
DRA). Program management funds are used primarily for operating the Medicare
(and Medicaid) program, including (1) paying contractors to pay claims, answer
beneficiary questions and conduct appeals; (2) compensation for individuals
employed at the Center for Medicare and Medicaid Services (CMS); (3) the cost of
surveys of facilities; and (4) conducting research. There is a legislative proposal in
the Program Management Budget to collect $35 million in user fees for any return
visits to a facility that are required when a deficiency is found based on an initial
survey, a recertification, or a beneficiary complaint. Additionally, there is another
$133 million in savings, which does not require legislative action, from eliminating
paper claims for Medicare contractor transactions.
The President’s budget also includes an automatic reduction to all Medicare
payments if general revenue financing is projected to exceed 45% of total Medicare
financing, and only when that threshold is met and Congress fails to act on
recommendations to reduce that level. In such a case, a four-tenths of 1% reduction
would be made across the board to all Medicare payments. This reduction would
grow by four-tenths of 1% for every year that the 45% threshold was exceeded.
There are no threshold savings included in the five-year budget window.
Following is a brief discussion of current and proposed law for each of the 2007
Medicare mandatory program legislative proposals, along with Table 1, detailing

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both the Administration’s and CBO’s estimates of the savings for each proposal. The
President’s budget reflects the passage of the DRA for the savings proposals. This
report’s descriptions of current law also reflect passage. Table 2 provides a list of
CRS staff contacts for this report.
Medicare Part A
Hospital Update
Current Law. Inpatient services provided by acute care hospitals are
reimbursed based on the inpatient prospective payment system (IPPS). Medicare’s
payments are increased annually by an update factor that is determined, in part, by
the projected increase in the hospital market basket (MB) index. This is a fixed price
index that measures the change in the price of goods and services purchased by
hospitals to create one unit of output. Typically, hospitals have received less than the
MB index for an update. For FY2005 and beyond, however, hospitals that submit
required quality data will receive the full MB update. Those that do not submit the
data will receive a reduction, so that the update will be MB-0.4 percentage points (in
FY2005 and FY2006) and MB-2 percentage points in FY2007 and beyond. The
reduction for not submitting quality data would apply for the applicable year and
would not be taken into account in subsequent years.
President’s Proposal. Regardless of whether or not a hospital submits
quality data, payments for hospital inpatient services would be updated by MB- 0.45
percentage points in 2007 and by MB-0.4 percentage points in 2008 and 2009.
Hospitals that do not submit quality data will receive the additional two-percentage-
point reduction.
Skilled Nursing Facility Update
Current Law. Skilled Nursing Facility (SNF) care is reimbursed based on a
prospective payment system (PPS). The PPS payments are based on a daily
(“per-diem”) urban or rural base payment amount that is adjusted for case mix and
area wages using the hospital wage index. The urban and rural federal per diem
payment rates are increased annually by an update factor that is determined by the
projected increase in the SNF market basket index. This index measures changes in
the costs of goods and services purchased by SNFs. For FY2004 and beyond, the
increase in SNF payments are set at the market basket.
President’s Proposal. The SNF payments would be frozen in 2007 and
would increase by SNF MB-0.4 percentage points in 2008 and 2009.
Inpatient Rehabilitation Facility Update
Current Law. Inpatient Rehabilitation Facilities (IRFs) are paid based upon
the IRF-PPS, and paid a fixed amount per discharge. The annual update to the
payment is based on MB for rehabilitation, psychiatric, and long-term care. The

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update for FY2006 is 3.6%. In FY2006, the IRF-IPPS includes a one-time reduction
of 1.9% to account for coding changes.
President’s Proposal. IRF payments would be frozen for 2007 and would
increase by MB-0.4 percentage points in 2008 and 2009.
Hospice Payment Update
Current Law. Payment for hospice care is based on one of four prospectively
determined rates, which correspond to four different levels of care, for each day a
beneficiary is under the care of the hospice. The four rate categories are: routine
home care, continuous home care, inpatient respite care, and general inpatient care.
The prospective payment rates are updated annually by the increase in the hospital
market basket. National hospice payment rates for care furnished during FY2006 are
as follows: (1) routine home care at $126.49 per day; (2) continuous home care at
$738.26 for 24 hours of care, or $30.76 per hour; (3) inpatient respite care at $130.85
per day; and (4) general inpatient care at $562.69 per day.
President’s Proposal. The hospice payment update, i.e., the increase in
hospital market basket, would be reduced by 0.4 percentage points in 2007 through
2009.
Adjust Payment for Hip and Knee Replacement
Current Law. Patients receiving hip and knee replacements can receive
rehabilitative care in a variety of post-acute care settings, including a SNF and an
inpatient rehabilitation facility. Generally, care provided in an IRF is paid at a higher
rate than care provided in a SNF.
President’s Proposal. Eventually, the goal would be to have site-neutral
reimbursement rates for hip and knee replacement. The proposal would focus on
inpatient rehabilitation facilities. They would be paid the average SNF rate plus one-
third of the difference between the average IRF rate and SNF rate.
Medicare Part B
Outpatient Hospital Update
Current Law. Hospital Outpatient Department (HOPD) services are paid
based on a prospective payment system. The unit of payment is the individual
service or procedure as assigned to one of about 570 ambulatory payment
classifications (APCs). Medicare’s payment for HOPD services is calculated by
multiplying the relative weight associated with an APC by a conversion factor. The
conversion factor is updated on a calendar year schedule. These annual updates are
based on the hospital MB. For CY2006, the Inpatient Hospital MB was 3.7%.
President’s Proposal. Payments for HOPD services would be MB-0.45
percentage points in 2007 and MB -.4 percentage points in 2008 and 2009.

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Ambulance Fee Schedule Update
Current Law. Medicare pays for ambulance services on the basis of a national
fee schedule which is being phased in over a transition period. Prior to July 2004,
a gradually increasing portion of the payment was based on the fee schedule and a
decreasing portion on the former payment methodology (costs or charges). The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA)
established a new methodology for ground ambulance services beginning July 2004
with payments through 2009 equal to the greater of the national fee schedule or a
blend of the national and regional fee schedule amounts. For July through December
2004, the blend was 20% of the national fee schedule rates and 80% of the regional
rates. The portion of the blend based on national rates increases each year; in 2006
the blend is 60% national and 40% regional. In CY2010 and subsequently, the
payments in all areas will be based on the national fee schedule amount. The fee
schedule amounts are updated each year by the CPI-U. The update is 2.5% in 2006.
MMA provided an additional 2% payment increase for rural ambulance services and
1% payment increase for urban ambulance services for July 1, 2004, through
December 31, 2006.
President’s Proposal. The Ambulance Fee Schedule update would be
reduced by 0.4 percentage points in 2007, 2008 and 2009.
Expand Competitive Bidding to Laboratory Services
Current Law. The Centers for Medicare and Medicaid Services (CMS) tested
a competitive bidding process for durable medical equipment (DME) services.
Under the DME demonstration, Medicare’s payments for medical equipment and
supplies were based on the supplier’s bids, as compared with current law DME
payments which are based on a fee schedule. CMS plans to expand the process
nationwide. This does not apply to laboratory services.
President’s Proposal. This proposal would extend competitive bidding to
Medicare laboratory services.
Eliminate Indexing of Threshold
for Income-Related Part B Premiums
Current Law. Currently beneficiaries enrolled in Part B pay premiums
covering about 25% of Part B program costs. Beginning in 2007, individuals whose
modified adjusted gross income (AGI) exceeds $80,000 and couples whose modified
AGI exceeds $160,000 will be subject to higher premium amounts. The increase will
be phased-in over three years. The income levels for determining who pays higher
premium amounts would be indexed to the CPI-U.
President’s Proposal. The annual income levels of $80,000 for individuals
and $160,000 for couples would no longer be indexed each year, so that these levels
would remain fixed.

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Pay for Short-Term Power Wheelchairs
Current Law. In general, Medicare pays for certain durable medical
equipment (DME) items, such as hospital beds, nebulizers and power-driven
wheelchairs under the capped rental category. Suppliers are required to transfer the
title of DME equipment in the capped rental category to the beneficiary after a 13-
month rental period. Beneficiaries have the option to purchase power-driven
wheelchairs when they are initially furnished.
President’s Proposal. The proposal would reimburse short-term power
wheelchair usage based on actual time used versus paying up front at the full
purchase price.
Limit Oxygen Rental Period
Current Law. Rental payments for oxygen equipment, including portable
oxygen equipment, are converted to ownership at 36 months. The supplier is
required to transfer the title of the equipment to the beneficiary at that time.
Medicare will continue to make payments for oxygen contents (in the case of gaseous
and liquid oxygen), for the period of medical need.
President’s Proposal. The proposal would move oxygen and oxygen
equipment from a 36-month rental period to a 13-month period, the same as the
capped rental category. Medicare would continue to pay for refills of gaseous and
liquid oxygen, as medically necessary.
Medicare Parts A and B
Home Health Update
Current Law. Home health agencies (HHAs) are paid under a prospective
payment system. Payment is based on 60-day episodes of care for beneficiaries,
subject to several adjustments, with unlimited episodes of care in a year. The
payment covers skilled nursing, therapy, medical social services, aide visits and
medical supplies. The base payment amount, or national standardized 60-day
episode rate, is increased annually by an update factor that is determined, in part, by
the projected increase in the home health market basket index. This index measures
changes in the costs of goods and services purchased by HHAs. The 2006 update for
HHAs is frozen. Beginning in 2007, HHAs must submit quality data to the
Secretary. Those HHAs that submit the data will receive a full MB update, while
those HHAs that do not submit the required data will receive an update of MB-2
percentage points.
President’s Proposal. Payments for HHAs would be frozen in 2007 and
would increase by HHA MB-0.4 percentage points in 2008 and 2009. HHAs that do
not submit quality data will receive the additional two percentage point reduction.

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Establish Federal Data Sharing Clearinghouse
for Medicare Secondary Payer
Current Law. The law authorizes a data match program intended to identify
cases where an insurer other than Medicare is the primary payer. This information
is used to both facilitate recoveries when incorrect Medicare payments have been
made and identify secondary payer situations before Medicare payments are made.
Medicare recipients are matched against data contained in Social Security
Administration and Internal Revenue Service files to identify cases in which a
working beneficiary (or working spouse) may have employer-based health insurance
coverage. The Centers for Medicare and Medicaid Services (CMS) sends
questionnaires to certain identified employers to determine which of them offers
health insurance, and to determine the insurance status of specific beneficiaries.
Currently Medicare has a voluntary arrangement with about 40% of employers.
President’s Proposal. The proposal would establish a federal data sharing
clearinghouse to clarify and expand Medicare secondary payer instances. This
proposal would extend the arrangement to all employers who would be required to
provide CMS with coverage information. This information would be used to ensure
that proper payments were made by the responsible insurer and to recover improperly
made payments. The data would be shared with Medicare, Medicaid, Tricare, the
Veterans’ Administration, the Federal Employees Health Benefits Program, Indian
Health Service, and others.
Extend Medicare Secondary Payer Status
for End Stage Renal Disease
Current Law. The Medicare Secondary Payer (MSP) program prohibits
Medicare payments for any item or service when payment has been made or can
reasonably be expected to be made by a third party payer. Medicare is the secondary
payer to insurance plans and programs under certain conditions for beneficiaries
covered through a group health plan based on either their own or their spouse’s
current employment. For individuals with Medicare entitlement based on End Stage
Renal Disease (ESRD), Medicare is the secondary payer for the first 30 months of
ESRD benefit eligibility. After 30 months, Medicare becomes the primary insurer.
Medicare entitlement based on ESRD usually begins with the third month after the
month in which the beneficiary starts a regular course of dialysis.
President’s Proposal. Medicare secondary payment status for ESRD
enrollees would be extended from 30 to 60 months.
Phase-Out Medicare Bad Debt Payments
Current Law. Medicare pays the costs of certain items on a reasonable cost
basis (outside the applicable prospective payment system) including the unpaid debt
for beneficiaries’ coinsurance and deductible amounts. While some providers receive
100% reimbursement for allowable bad debt, since 2001 acute care hospitals receive
70% of the reasonable costs. Beginning in 2006, SNFs also receive 70% for only
those beneficiaries who are not dually eligible for Medicare and Medicaid. For the

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dual eligibles, the bad debt reimbursement will remain at 100%. Other providers
currently receiving reimbursement for bad debt include critical access hospitals, rural
health clinics, ESRD facilities, federally qualified health clinics, community mental
health clinics, and certain health maintenance organizations, among others.
President’s Proposal. This proposal would phase out bad debt
reimbursement to providers between 2007 and 2011. There would be no special
exemptions for dual eligibles in SNFs or in other providers.
Premium Interactions
Because Medicare Part B premiums are based on a percentage of total Part B
costs, any changes to the Medicare Part B program or to the calculation of Medicare
Part B premiums will also have a secondary budgetary effect. When the higher
income beneficiaries begin paying a larger share of premiums, Medicare Part B
revenues will increase. Further some Medicare beneficiaries may decide not to enroll
in Part B, while other current enrollees may dis-enroll, because of their larger
premiums. The interaction with the indexing proposal is included as a “savings”
because the increased revenues are estimated to translate into less spending to
provide services for these higher income beneficiaries.
There is a cost associated with Part B benefit savings that occurs because any
savings to the program are shared between the Medicare program and beneficiaries,
as beneficiaries pay a share (generally 25% of program costs, or beginning in 2007
for certain higher income beneficiaries a larger share) of program costs. For
example, for those beneficiaries paying 25% of premiums, for every dollar saved, the
Medicare outlays will be reduced by about $0.75 and beneficiaries will save about
$0.25. The savings for the individual proposals listed in Table 1 are the “gross”
savings and the offset for savings to beneficiaries is shown in the interaction line of
the table.
Forty-Five Percent Rule
Current Law. The hospital insurance (HI) and supplementary medical
insurance (SMI) trust funds are overseen by a board of trustees who make annual
reports to Congress. The MMA (Section 801) requires the trustees report to include
an expanded analysis of Medicare expenditures and revenues. Specifically, a
determination must be made as to whether general revenue financing will exceed
45% of total Medicare outlays within the next seven years. General revenues
financing is defined as total Medicare outlays minus dedicated financing sources (i.e.,
HI payroll taxes; income from taxation of Social Security benefits; state transfers for
prescription drug benefits; premiums paid under Parts A, B, and D; and any gifts
received by the trust funds). The 2005 trustees report projected that the 45% trigger
would first be exceeded in 2012 which was beyond the required seven-year test
period (i.e., 2005-2011). The 2005 report, therefore, did not include a determination
of excess general revenue funding. However, the 2012 estimated date for exceeding
the trigger suggests that such a determination could be included in the 2006 report.

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MMA (Sections 802-804) further requires that if an excess general revenue
funding determination is made for two successive years, the President is required to
submit a legislative proposal to respond to the warning. The Congress is required to
consider the proposal on an expedited basis. However, passage of legislation within
a specific time frame is not required.
President’s Proposal. The President’s budget includes an automatic
reduction to all Medicare payments if general revenue financing is projected to
exceed 45% of total Medicare financing, and only when that threshold is met and
Congress fails to act on recommendations to reduce that level. In such a case, a four-
tenths of 1% reduction would be made across the board to all Medicare payments.
This reduction would grow by four-tenths of 1% for every year that the 45%
threshold was exceeded. There are no threshold savings included in the five-year
budget window. The CBO estimate of the President’s budget assumes that the trigger
will be reached in FY2011.
CBO Estimate
As shown in Table 1, CBO has slightly different estimates of the Medicare
savings proposals included in the President’s budget. However, the CBO estimates
have a separate savings estimate for the Medicare Advantage program as a result of
the savings in fee-for-service spending. According to HHS, they have incorporated
the MA savings into the individual proposals, making a direct comparison of
individual savings, such as hospital update, difficult to compare. Therefore, it is
more appropriate to compare total savings. For the five-year budget window, CBO
estimates slightly higher savings of $37 billion, compared with the Administration’s
estimate of $35.9 billion.
Congressional Activity
Senate Activity
The Senate Budget Committee passed its FY2007 Budget Resolution
(S.Con.Res. 83) on March 9, which will now be considered by the Senate. The
Chairman’s Mark assumes that the authorizing committees, which for Medicare is
the Senate Finance Committee, will continue to examine and reform programs to
achieve savings and demonstrate continued progress toward deficit reduction.
However, the Mark does not provide the Senate Finance Committee with
reconciliation instructions.
The Chairman’s Mark provides $382 billion for Medicare in 2007, an increase
of $55 billion over 2006, or 17%. Without legislative changes, Medicare spending
is projected to grow to $518 billion in 2011, an average annual growth rate of 9.7%
and total growth of 59%. However, the Mark assumes savings in Medicare spending
through the repeal of the Stabilization Fund included in the Medicare Modernization
Act, saving $7 billion over five years. The Mark assumes an increase in Medicare

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spending for extending the moratorium on therapy caps (costing $710 million over
five years).
The Mark also includes a new point of order against direct spending legislation
if and when it is determined that within seven years the General Fund contributions
to Medicare funding will exceed 45% of total Medicare outlays, and if a Medicare
funding warning has been submitted to the Senate for two consecutive calendar years.
Direct spending proposals will not be subject to points of order if new spending is
offset by changes in spending, receipts, or revenues. The Chairman may withdraw
the notification when legislation to reduce the general fund contribution to Medicare
is enacted.
The Mark also includes several deficit-neutral reserve funds for legislation that
could affect Medicare, including a reserve fund that provides incentives or other
support for the adoption of health information technology to improve health care
quality, and also provides for performance-based payments, based on an accepted
clinical performance measure that improves the quality in health care. The Chairman
of the Budget Committee may make adjustments in allocations and aggregates so that
such legislation would not increase the deficit in 2007 or for the period of 2007-2011.
Similarly, the Mark includes $1.75 billion in reserve funds for the Centers for
Medicare and Medicaid Services (CMS) to create a demonstration project that
assigns a case manager to coordinate the care of chronically ill and other high-cost
Medicare beneficiaries in traditional fee-for-service Medicare.
The resolution was passed by the Senate, with amendments, on March 19, 2006.
Some of the amendments that passed could affect the Medicare program. S.Amdt.
3004 would ensure that any savings associated with legislation that authorizes the
Secretary of Health and Human Services to use the Medicare’s collective purchasing
power to negotiate prices in fallback plans for Part D prescription drugs, and by
private drug plans (if asked) and in other circumstances — but not permitting a
uniform formulary or price setting — is reserved for deficit reduction or to improve
the Medicare drug benefit.
S.Amdt. 3073 addresses the Medicare Prescription Drug program. If the
Committee on Finance of the Senate reports a bill, an amendment, or a conference
report, that (1) authorizes the Secretary of Health and Human Services to extend the
initial open enrollment period under Part D of Title XVIII of the Social Security Act
beyond May 15, 2006; (2) provides funding to the Centers for Medicare and
Medicaid Services and the Social Security Administration for the purpose of
conducting enrollment activities for the period of any extension of the initial open
enrollment period; (3) waives the application of the late enrollment penalty for the
period of any extension of the initial open enrollment period; and (4) permits
beneficiaries to change their enrollment election in such Part D once during the initial
open enrollment period, including throughout any extension of the initial open
enrollment period; the Chairman of the Committee on the Budget of the Senate may
make the appropriate adjustments in allocations and aggregates to the extent that such
legislation would not increase the deficit for FY2007 and for the period of FY2007-
FY2011.

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S.Amdt. 3110 would establish a reserve fund for a physician payment increase
under Medicare, if: (1) the Committee on Finance Reports a bill, an amendment, or
a conference report that has the effect of increasing the reimbursement rate for
Medicare physician services; and (2) the committee is within its allocation as
provided under Section 302(a) of the Congressional Budget Act of 1974; the
chairman of the Committee on the Budget of the Senate may make the appropriate
adjustments in allocations and aggregates to the extent that such legislation would not
increase the deficit for FY2007 and for the period of FY2007-FY2011.
House Activity
The House Budget Committee reported its budget resolution on March 29.
Action by the full House is expected during the week of April 3. Based on currently
available documents, it is unclear whether the resolution includes any of the
President’ s Medicare proposals or other adjustments to funding for these programs.
It includes reconciliation instructions for the House Ways and Means Committee,
which has jurisdiction over Medicare as well as many other programs. Because the
Committee has jurisdiction over many programs, the reconciliation instructions may
have no impact on Medicare.

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Table 1. President’s Budget Medicare Legislative Proposals
(dollars in billions)
Medicare legislative proposals
HHS estimates
CBO estimates
Years
2007
2007-2011
2007
2007-2011
Medicare Part A
Hospital update
-$0.5
-$6.6
-$0.4
-$5.3
Skilled nursing facility update
-0.7
-5.1
-0.4
-3.1
Inpatient rehabilitation facility update
-0.2
-1.6
-0.1
-0.7
Hospice payment update
**
-0.6
**
-0.6
Adjust payment for hip and knee
-0.4
-2.4
-0.4
-2.4
replacement rehabilitation
Medicare Part B
Outpatient Hospital update
-0.1
-1.5
-0.1
-1.3
Ambulance fee schedule update
**
-0.3
**
-0.2
Clinical Lab: competitive bidding
0
-1.4
0
-1.1
Power wheelchairs: modify payment
-0.1
-0.5
-0.4
-0.7
Limit oxygen rental period
0
-6.6
-0.2
-6.2
Medicare Parts A and B ( dollars for combined A and B spending)
Home health update
-0.4
-3.5
-0.3
-3.2
Medicare secondary payer: establish
**
-0.6
**
-0.6
federal data sharing clearinghouse
Extend Medicare secondary payer for
-0.1
-1.0
**
-0.5
status for ESRD
Phase-out Medicare bad debt payments
-0.2
-6.2
-0.1
-5.0
Premiums and interactions
Net effect of eliminating Part B income
**
-1.9
0
-2.0
related premium indexing threshold
Interaction with Part B benefit savings
0.1
3.8
0.2
3.0
Interaction with Medicare advantage
****
****
-0.4
-5.3
Forty-five percent rule
Required Medicare spending reduction
0
0
0
-1.8
Total
-$2.5
-$35.9
-$2.6
-$37.0
Note: Total may not add due to rounding.
** Less than $50 million.
**** HHS estimate of Interaction with Medicare Advantage included in individual proposals.

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Table 2. Staff Medicare Contacts for this Report
Staff contact
Issue areas
Phone
Medicare Advantage
Hinda Chaikind
ESRD
7-7569
Medicare Secondary Payer
Medicare Advantage
Paulette C. Morgan
7-7317
Durable Medical Equipment
Physicians and Other Providers
Medicare Part B Premiums
Jennifer O’Sullivan
7-7359
Ambulance Services
Laboratory Services
Skilled Nursing Facilities
Julie Stone
Home Health
7-1386
Hospice
Inpatient Hospitals
Inpatient Rehabilitation Facilities
Sibyl Tilson
7-7368
Outpatient Hospitals
Bad Debts