Medicare: FY2008 Budget Issues

Medicare: FY2008 Budget Issues

Order Code RL33868
Medicare: FY2008 Budget Issues
Updated October 24, 2007
Hinda Chaikind and Gretchen A. Jacobson, Coordinators,
Jim Hahn, Paulette C. Morgan, Jennifer O’Sullivan,
Holly Stockdale, and Julie Stone
Domestic Social Policy Division

Medicare: FY2008 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 2008 budget estimates current law Medicare outlays of $392
billion in FY2008 and $2.213 trillion over the five-year budget window. The budget
also includes Medicare legislative proposals with estimated savings of $4.3 billion
in 2008 and $65.6 billion over the five-year budget window. The President’s budget
also includes one Medicare administrative proposal with estimated savings of $1
billion in FY2008 and $10.2 billion over the five-year budget window, which brings
the estimated savings from the total Medicare budget proposals to $5.3 billion in
FY2008 and $75.9 billion over the five-year budget window.
On March 15, the Senate Budget Committee passed its FY2008 Budget
Resolution (S.Con.Res. 21). The Senate Chairman’s Mark assumes $384.7 billion
in mandatory outlays for Medicare in 2008, with total Medicare outlays of $390
billion. The Senate passed the resolution on March 23, 2007, with three amendments
related to Medicare (S.Amdt. 548, S.Amdt. 636, and S.Amdt. 639). On March 23,
the House Budget Committee reported its FY2008 Budget Resolution (H.Con.Res.
99), and the House passed the bill on March 29. The House Chairman’s Mark
assumes $384.7 billion in mandatory outlays for Medicare in 2008, with total
Medicare outlays of $389.7 billion. On May 17, the House and Senate adopted a
conference agreement on the budget resolution (H.Rept. 110-153 accompanying
S.Con.Res. 21). The conference agreement provides a variety of other deficit-neutral
reserve funds, up to $383 million for health care fraud and abuse control, and two
“sense of the Congress” provisions regarding health care cost growth and affordable
health coverage.
H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act of
2007, contained many provisions that affect the Medicare program and spending.
The bill was passed by the House of Representatives on August 1. This report
describes Medicare provisions in the bill as passed by the House. On August 2, the
Senate passed S. 1893, the Children’s Health Insurance Program Reauthorization Act
of 2007, as an amendment to H.R. 976, which did not include provisions that would
affect the Medicare program and spending. A bicameral agreement on SCHIP
reauthorization passed the House on September 25 and the Senate on September 27
as an amendment to H.R. 976, without the provisions affecting the Medicare
program. Congress also passed two other bills affecting the Medicare program,
which were signed into law.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Inpatient Rehabilitation Facility Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Hospice Payment Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eliminate Indirect Medical Education Payments for Managed
Care Enrollees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Adjust Hospital Payment for Never Events . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Rationalize Post-Acute Hospital Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medicare Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Physicians’ Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Outpatient Hospital Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Ambulatory Surgery Center Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Ambulance Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Competitive Bidding for Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . . 7
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Short-Term Power Wheelchair Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Limit Oxygen Rental Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Medicare Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Home Health Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Establish Federal Data Sharing Clearinghouse for Medicare
Secondary Payer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Extend Medicare Secondary Payer Status for End Stage Renal Disease . . . . 9
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Limit Use of Mandamus Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Medicare Bad Debt Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Value-Based Purchasing and Quality Incentive Payments . . . . . . . . . . . . . 10
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Premiums and Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part B Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Part D Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Interaction with Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Premium Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Forty-Five Percent Rule (The Medicare Trigger) . . . . . . . . . . . . . . . . . . . . . . . . 13
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Medicare Administrative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Medicare Integrity Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CBO Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Congressional Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FY2008 Budget Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Senate Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
House Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Congressional Action on Comprehensive Medicare Reform . . . . . . . . . . . 18

House Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Senate Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Bicameral Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Tables
Table 1. President’s Budget Medicare Proposals . . . . . . . . . . . . . . . . . . . . . . . . 21
Table 2. Staff Medicare Contacts for this Report . . . . . . . . . . . . . . . . . . . . . . . . 22

Medicare: FY2008 Budget Issues
Introduction
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 2008 budget estimates current law Medicare outlays of $392
billion in FY2008 and $2.213 trillion over the five-year budget window. The budget
also includes Medicare legislative proposals with estimated savings of $4.3 billion
in FY2008 and $65.6 billion over the five-year budget window. The President’s
budget also includes one Medicare administrative proposal with estimated savings
of $1 billion in FY2008 and $10.2 billion over the five-year budget window, which
brings the estimated savings from the total Medicare budget proposals to $5.3 billion
in FY2008 and $75.9 billion over the five-year budget window. Proposals include
savings in many of the Medicare payment updates.
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.
Finally, the Program Management Budget account request for 2008 is $3.3
billion, which is an increase of $70 million above the President’s FY2007 estimate.1
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 Centers for Medicare and Medicaid Services (CMS); (3) the cost of
surveys and inspections of facilities; and (4) conducting research. There is a
1 The President’s estimate for FY2007 of $3.2 billion reflects the amounts provided by the
continuing resolution and the Tax Relief and Health Care Act of 2006.

CRS-2
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 re-certification, or a beneficiary complaint.
Following is a brief discussion of current and proposed law for each of the 2008
Medicare program proposals, along with Table 1, which details the Administration’s
and CBO’s estimates of the costs and savings for each proposal. The President’s
budget reflects the passage of the Tax Relief and Health Care Act of 2006 (P.L. 109-
432). 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
IPPS 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 as an update for both inpatient and outpatient services. For FY2007 and
beyond, however, hospitals that submit required quality data will receive the full MB
update for inpatient services. The FY2007 full MB payment increase is 3.4%. Those
that do not submit the data will receive a reduction, so that the inpatient update will
be MB minus 2 percentage points starting in FY2007. 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 for inpatient services, Medicare payments would be updated annually by
MB minus 0.65 percentage points starting in FY2008. Hospitals that do not submit
quality data will receive the additional two-percentage-point reduction. The
President’s budget estimates that the proposal would save $720 million in FY2008
and $13.79 billion over the five-year budget period.
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. Medicare law requires that the
SNF base payments be adjusted each year by the SNF market basket update — that
is the measure of inflation of goods and services used by SNFs. For FY2007, the
SNF payment update is the full market basket increase of 3.1%. The update for
future years, without changes to current law, is also the full market basket increase.

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President’s Proposal. SNF payments would be frozen in 2008 and annually
updated by MB minus 65 percentage points in FY2009 and beyond. The President’s
budget estimates that the proposal would save $1.01 billion in FY2008 and $9.21
billion over the five-year budget period.
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
update for FY2007 is 3.3%. In FY2007, the IRF-PPS includes a one-time reduction
of 2.6% to account for coding changes, for a net increase of 0.6%.
President’s Proposal. IRF payments would be frozen in FY2008 and
increased by MB minus 0.65 percentage points in FY2009 and beyond. The
President’s budget estimates that the proposal would save $230 million in FY2008
and $1.91 billion over the five-year budget period.
Hospice Payment Update
Current Law. Payments for hospice care are 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. The FY2007 payment rates are updated by the market basket
increase of 3.4%. Without changes to Medicare law, the update for the 2008 and
beyond will grow by the market basket.
President’s Proposal. Beginning in 2008, the hospice payment would be
annually updated by the MB minus 0.65 percentage points. The budget includes
estimated savings of $60 million in FY2008 and $1.14 billion over the five-year
budget period, for this proposal.
Eliminate Indirect Medical Education Payments
for Managed Care Enrollees
Current Law. As established by the Balanced Budget Act of 1997 (BBA97),
Medicare makes separate, additional direct graduate medical education and indirect
medical education (IME) payments to teaching hospitals to account for the inpatient
care provided to Medicare’s managed care enrollees.
President’s Proposal. The proposal would eliminate separate IME
payments to teaching hospitals for the Medicare managed care enrollees that they
serve. It would not reduce payments made directly to Medicare Advantage plans.
The budget includes estimated savings of $381 million in FY2008 and $4.37 billion
over the five-year budget period, for this proposal.

CRS-4
Adjust Hospital Payment for Never Events
Current Law. The Tax Relief and Health Care Act of 2006 directs the
Inspector General in the Department of Health and Human Services to study and
report to Congress on (1) the incidences of never events (those listed and endorsed
as serious reportable events by the National Quality Forum [NQF] as of November
16, 2006) for Medicare beneficiaries; (2) the extent to which the Medicare program
paid, denied payment, or recouped payment for services furnished in connection with
such events, and the extent to which beneficiaries paid for them; and (3) the
administrative processes of the CMS to detect such events and to deny or recoup
payments for related services. According to NQF, never events are errors in medical
care that are clearly identifiable, preventable, and serious in their consequences for
patients, and indicate a real problem in the safety and credibility of a health care
facility. Examples of “never events” include surgery on the wrong body part, foreign
body left in a patient after surgery, mismatched blood transfusion; major medication
error, severe “pressure ulcer” acquired in the hospital and preventable post-operative
deaths.
President’s Proposal. The proposal would prohibit Medicare payment for
a never event. Hospitals would also be required to report occurrences of never events
or receive a reduced annual update. The budget includes estimated savings of $30
million in FY2008 and $190 million over the five-year budget period, for this
proposal.
Rationalize Post-Acute Hospital Payments
Current Law. Patients receiving treatment for certain conditions such as hip
and knee replacements can receive rehabilitative care in a variety of post-acute care
settings, including a skilled nursing facility (SNF) and an inpatient rehabilitation
facility (IRF). Generally, care provided in an IRF is paid at a higher rate than care
provided in a SNF.
President’s Proposal. The proposal would encourage development of site-
neutral reimbursement rates for conditions that overlap in the different post-acute
care settings. The proposal would limit payment differentials for the following five
conditions (1) knee replacements, (2) hip replacements, (3) hip fractures, (4) chronic
obstructive pulmonary disease, and (5) other pulmonary diseases. The base IRF
payments for these service would begin with the SNF rate, increased by (1) 25% of
the difference between the SNF and IRF overhead amount and (2) 33% of the
difference between SNF and IRF patient care costs. The budget includes estimated
savings of $470 million in FY2008 and $2.93 billion over the five-year budget
period, for this proposal.

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Medicare Part B
Physicians’ Services
Current Law. Medicare payments for services of physicians and certain
nonphysician practitioners are made on the basis of a fee schedule. The fee schedule
is intended to relate payments for a given service to the actual resources used in
providing that service. The fee schedule assigns relative values to services that
reflect physician work (i.e., the time, skill, and intensity it takes to provide the
service), practice expenses, and malpractice costs. The relative values are adjusted
for geographic variations in costs. The adjusted relative values are then converted
into a dollar payment amount by a conversion factor. The conversion factor for 2007
is $37.8975, the same level as in 2005 and 2006.
The fee schedule places a limit on payment per service but not on overall
volume of services. The formula for calculating the annual update to the conversion
factor responds to changes in volume. If the overall volume of services increases, the
update is lower; if the overall volume is reduced, the update is higher. The intent of
the formula is to place a restraint on overall increases in Medicare spending for
physicians’ services. Several factors enter into the calculation. These include (1) the
Medicare economic index (MEI), which measures inflation in the inputs needed to
produce physicians’ services; (2) the sustainable growth rate (SGR), which is
essentially a target for Medicare spending growth for physicians’ services; and (3) an
adjustment that modifies the update, which would otherwise be allowed by the MEI,
to bring spending in line with the SGR target. The SGR target is not a limit on
expenditures. Rather, the fee schedule update reflects the success or failure in
meeting the target. If expenditures exceed the target, the update for a future year is
reduced. As a result, payments to physicians were reduced in 2002. Physician
payments have been slated for reductions in each year since 2002, but Congressional
actions have prevented these reductions through 2007.
For example, in November 2007, the CMS announced that the 2007 conversion
factor would be cut 5% below the 2006 level. However, the Tax Relief and Health
Care Act of 2006 froze the 2007 conversion factor at the 2006 level. In addition, the
act also provided that, beginning July 1, 2007 and ending December 31, 2007,
physicians who voluntarily report certain quality measures can receive bonus
payments of 1.5%.
In the absence of further legislation, the 2008 conversion factor will be reduced
by over 5% below the 2007 level. Further reductions are anticipated in subsequent
years.
President’s Proposal. The President’s proposal does not address the
physician payment update. Thus, the cut in the 2008 conversion factor would be
allowed to go into effect, with no new budgetary savings or costs.

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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. Starting in CY2009, however, the outpatient update for
hospitals that do not submit required quality data will be the MB minus 2 percentage
points. 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 for outpatient services, Medicare payments would be updated by MB
minus 0.65 percentage points annually starting in FY2008. The budget includes
estimated savings of $120 million in FY2008 and $3.36 billion over the five-year
budget period, for this proposal.
Ambulatory Surgery Center Update
Current Law. Medicare uses a fee schedule to pay for the facility services
related to a surgery provided in an ambulatory surgery center (ASC). The associated
physician services (surgery and anesthesia) are reimbursed under the physician fee
schedule. The ASC fee schedule was periodically increased by the consumer price
index for all urban consumers (CPI-U). The Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (P.L. 108-173, MMA) changed the
update cycle from a fiscal year to a calendar year and eliminated updates for calendar
years 2006 though 2009. MMA also established that a revised payment system for
surgical services furnished in an ASC will be implemented on or after January 1,
2006 and not later than January 1, 2008. As established by the Tax Relief and Health
Care Act of 2006, starting in CY2009, the annual increase for ASCs that do not
submit required quality data may be the required update minus 2 percentage points.

President’s Proposal. Beginning in 2010, the annual update for ASCs
would be reduced by 0.65 percentage points. If applicable, ASCs that do not submit
quality data will receive the additional two-percentage-point reduction. The
President’s budget does not include savings in FY2008, but does include estimated
savings of $90 million over the five-year budget period.
Ambulance Services
Current Law. Ambulance services are paid on the basis of a national fee
schedule, which is being phased in. The fee schedule establishes seven categories of
ground ambulance services and two categories of air ambulance services. The
payment for a service equals a base rate for the level of service plus payment for
mileage. Geographic adjustments are made to a portion of the base rate.
Additionally, the base rate is increased for air ambulance trips originating in rural

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areas and mileage payments are increased for all trips originating in rural areas.
There is a 25% bonus on the mileage rate for trips of 51 miles and more.
The national fee schedule is fully phased in for air ambulance services. For
ground ambulance services, payments through 2009 are equal to the greater of the
national fee schedule or a blend of the national and regional fee schedule amounts.
The portion of the blend based on national rates is 80% for 2007-2009. In 2010 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 for
2007 was 4.3%.
President’s Proposal. Beginning in 2008, payments for ambulance services
would be annually updated by the CPI-U minus 0.65 percentage points. The budget
includes estimated savings of $10 million in FY2008 and $360 million over the
five-year budget period, for this proposal.
Competitive Bidding for Laboratory Services
Current Law. Section 302(b) of the MMA required the CMS to conduct a
demonstration project on the application of competitive acquisition for payment of
most clinical laboratory services that would otherwise be payable under the Medicare
Part B fee schedule. Pap smears and colorectal cancer screening tests are excluded
from this demonstration.
The CMS has outlined how the competitive bidding process is expected to work
when the demonstration program begins operation in 2007. Only those laboratory
firms with $100,000 or more in annual Medicare Part B (fee-for-service) payments
as of calendar year 2005 for demonstration tests provided to beneficiaries residing in
the competitive bidding areas (CBAs), regardless of where the laboratory firm is
located, will be required to bid in the demonstration. These laboratory firms will be
referred to as required bidders. Small laboratories or laboratory firms with less than
$100,000 in annual Medicare Part B (fee-for-service) payments for demonstration
tests provided to beneficiaries residing in the CBAs will not be required to bid in the
demonstration.
Both required and non-required bidders that bid and win will be paid the
laboratory competitive bidding demonstration fee schedule for demonstration tests
provided to beneficiaries residing in the CBAs. Both required and non-required
bidders that bid and do not win will not be paid anything by Medicare for
demonstration tests provided to beneficiaries residing in the CBAs. Similarly,
required bidders that do not bid will not be paid anything by Medicare for
demonstration tests provided to beneficiaries residing in the CBAs. Non-required
bidders that do not bid will be paid the demonstration fee schedule for demonstration
tests provided to beneficiaries residing in the CBAs.
President’s Proposal. The proposal would extend the use of competitive
bidding to all laboratory services. The budget includes estimated savings of $110

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million in FY2008 and $2.38 billion over the five-year budget period, for this
proposal.
Short-Term Power Wheelchair Rentals
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 establish a 13-month rental
period for power wheelchairs to ensure that a chair is not purchased if the period of
medical need is less than 13 months. The budget includes estimated savings of $70
million in FY2008 and $530 million over the five-year budget period, for this
proposal.
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. Additionally, the proposal would reduce the
payment for oxygen equipment by about $77 per month. It would not affect payments
of oxygen tanks. The budget includes estimated savings of $110 million in FY2008
and $2.38 billion over the five-year budget period, for this proposal.
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. For HHAs that
submit the required quality data, the home health MB update is the full 3.3 percent
for FY2007. For HHAs that do not submit this quality data, their increase will be

CRS-9
reduced by 2 percentage points to 1.3 % for CY 2007. Payments for 2008 would
continue to be updated by the market basket.
President’s Proposal. Payments for HHAs would be frozen in 2008 through
2012 and thereafter, annually updated by the MB minus 0.65 percentage points. The
budget includes estimated savings of $410 million in FY2008 and $9.68 billion over
the five-year budget period, for this proposal.
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 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 require all employers 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 Department of Veterans Affairs, the
Federal Employees Health Benefits Program, Indian Health Service and others. The
budget includes estimated savings of $50 million in FY2008 and $640 million over
the five-year budget period, for this proposal.
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. The budget includes estimated

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savings of $160 million in FY2008 and $1.08 billion over the five-year budget
period, for this proposal.
Limit Use of Mandamus Jurisdiction
Current Law. Mandamus jurisdiction involves a plaintiff going to court to
seek injunctive relief in the form of a writ of mandamus to compel a governmental
agency or officer of an agency to comply with a statutory obligation (such as issuing
a fee schedule that is required in a statutory provision). Mandamus is only available
where (1) the plaintiff has a clear right to relief, (2) the defendant has a clear duty to
act, and (3) there is no other adequate remedy available to the plaintiff. The Supreme
Court has stated that “[t]he common law writ of mandamus, as codified in 28 USCS
1361, is intended to provide a remedy for a plaintiff only if he has exhausted all other
avenues of relief and only if the defendant owes him a clear, nondiscretionary duty.”
Heckler v. Ringer, 466 U.S. 602 (U.S. 1984).
President’s Proposal. The President’s budget would limit mandamus
jurisdiction as a basis for obtaining judicial review and clarify the Secretary’s
authority to resolve appeals of Medicare determination. The President’s budget does
not include savings in FY2008, but does include estimated savings of $80 million
over the five-year budget period. These savings are for existing cases only and do
not include projected savings from future cases.
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. SNFs also receive 70% for only those beneficiaries who
are not dually eligible for Medicare and Medicaid. For the 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 all providers over four years (FY2008-FY2011). The budget
includes estimated savings of $180 million in FY2008 and $7.15 billion over the 5-
year budget period, for this proposal.
Value-Based Purchasing and Quality Incentive Payments
Current Law. Section 501(b) of the MMA provided an incentive for eligible
hospitals to submit quality data for ten quality measures known as the “starter set”
in order to avoid a 0.4 percentage point reduction in its annual payment update from
the CMS for FY2005, 2006 and 2007. Section 5001(a) of the Deficit Reduction Act
of 2005 (P.L. 109-171, DRA) requires hospitals to report additional quality measures
to receive the full market basket increase to their payment rates. Payment rates will

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be reduced by 2 percentage points for any hospital that does not submit certain
quality data in a form and manner, and at a time, specified by the Secretary.
The Tax Relief and Health Care Act of 2006 introduced a voluntary bonus
program for physicians who report quality measures to the CMS. For covered
professional services furnished beginning July 1, 2007 and ending December 31,
2007, eligible professionals who furnish services for which there are established
quality measures and satisfactorily submit quality measures would be paid a single
additional bonus payment amount equal to 1.5% of the allowed charges for covered
professional services furnished during the reporting period. These payments would
be paid from the Supplementary Medical Insurance Trust Fund (Part B).
The DRA requires the CMS to develop and implement a method for hospital
value-based purchasing in 2009. The value-based purchasing system must be budget-
neutral while creating incentives for high-quality hospitals and minimum benchmarks
for low-quality hospitals. The CMS will publish a report this year on how such a
program will be implemented. For physician payments, the CMS will expand the
voluntary quality reporting program for physicians and develop an implementation
plan for the quality reporting and bonus incentive program covering the second half
of 2007 created by the Tax Relief and Health Care Act of 2006.
President’s Proposal. The President’s budget discusses value-based
purchasing programs for hospitals and physicians, and CMS plans to implement the
programs as required by law. Therefore, there are no budgetary impacts for this
proposal.
Premiums and Interactions
Part B Premiums
Current Law. Medicare Part B is financed through a combination of
beneficiary premiums and federal general revenues. In general, beneficiary premiums
equal 25% of estimated program costs for the aged. (The disabled pay the same
premium as the aged.) Federal general revenues account for the remaining 75%.
Beginning in 2007, higher-income enrollees pay a higher percentage of Part B
costs. The increase is phased in over three years. In 2007, individuals whose
modified adjusted gross income (AGI) exceeds $80,000, and couples whose modified
AGI exceeds $160,000, are subject to higher premium amounts. In 2007, higher-
income enrollees pay total premiums ranging from 28.3% to 43.3% of the value of
Part B. In 2008, total premiums for these individuals will range from 31.7% to 61.7%
of the program’s value. When fully phased-in in 2009, higher-income individuals will
pay total premiums ranging from 35% to 80% of the value of Part B.
In 2007, the basic Part B premium is $93.50 per month. Individuals with
modified AGI between $80,001 and $100,000 (and couples with incomes between
$160,001 and $200,000) pay $105.80. Individuals with incomes between $100,001
and $150,000 (and couples with incomes between $200,001 and $300,000) pay

CRS-12
$124.40. Individuals with incomes between $150,001 and $200,000 (and couples
with incomes between $300,001 and $400,000) pay $142.90. Individuals with
incomes above $200,000 and couples with incomes above $400,000 pay $161.40.
The CMS estimates that approximately 4% of Part B enrollees will pay a higher
premium in 2007, with less than 1% paying the highest premium amount of $161.40.
Beginning in 2008, the income thresholds for higher Part B premiums are
increased by the percentage increase in the CPI-U.
President’s Proposal. The proposal would eliminate the annual CPI-U
adjustments. Consequently, each year the number of beneficiaries subject to the
higher premium would increase. The budget includes estimated savings of $543
million in FY2008 and $7.135 billion over the five-year budget period, for this
proposal.
Part D Premiums
Current Law. In 2006, Medicare Part D began providing coverage for
outpatient prescription drugs for Medicare beneficiaries. Coverage is provided
through private prescription drug plans (PDPs) or Medicare Advantage prescription
drug (MA-PD) plans. The program relies on these private plans to provide coverage
and to bear some of the financial risk for drug costs; federal subsidies covering the
bulk of the risk is provided to encourage participation. Unlike other Medicare
services, the benefits can only be obtained through private plans. Further, while all
plans have to meet certain minimum requirements, there are significant differences
among them in terms of benefit design, drugs included on plan formularies (i.e., list
of covered drugs) and cost-sharing applicable for particular drugs.
Medicare Part D is financed through a combination of beneficiary premiums and
federal general revenues. In addition, certain transfers are made from the states.
Beneficiaries pay different premiums depending on the plan they have selected. On
average, beneficiary premiums account for 25.5% of expected total Part D costs for
basic coverage. The CMS estimates that the average premium for both PDP and MA-
PD plans is $22 per month in 2007. Except for persons entitled to low-income
subsidies, all persons selecting a particular Part D plan pay the same monthly
premium amount.
President’s Proposal. The proposal would establish income-related
premiums for Part D. Under the proposal, the income thresholds would be the same
as those established for income-relating Part B premiums (see above). Further, as
proposed for Part B, the income thresholds would not be updated in future years.
Consequently, each year the number of beneficiaries subject to the higher premium
would increase. The budget includes estimated savings of $357 million in FY2008
and $3.242 billion over the five-year budget period, for this proposal.
Interaction with Medicaid
Current Law. The BBA97 added another mandatory eligibility group of
low-income Medicare beneficiaries who receive assistance with Medicare premiums

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known as “Qualifying Individuals 1 (QI-1).” The QI-1 group was originally set to
expire in December 2002; however, Congress has subsequently extended the
expiration date, most recently until September 30, 2007 in P.L. 109-91.
Individuals are eligible as a QI-1 if they are entitled to Medicare Part A and their
incomes are at least 120% of the Federal poverty level, but less than 135% and also
have limited assets. The Medicaid benefit for QI-1s consists of payment of the full
Medicare Part B premium. QI-1s are entitled to three months of retroactive coverage
if they were eligible during those months and the retroactive month does not fall
before January of a calendar year.
President’s Proposal. The President’s budget includes a one-year extension
of the Qualified Individuals (QI) program through September 30, 2008. The
Medicare costs reflect program expenditures for this group of individuals. The
budget includes estimated costs of $425 million in FY2008 and $425 million over
the five-year budget period, for this proposal.
Premium Interactions
The savings for the individual proposals listed in Table 1 are the “gross”
savings. However, there is an “offsetting” 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 estimated offsetting costs are shown in the
interaction line of the table; $325 million in FY2008 and $5.605 billion over the 5-
year budget period.
Forty-Five Percent Rule (The Medicare Trigger)
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 or not 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 2006 trustees’ report projected that the 45% trigger
would first be exceeded in 2012 which is included in the required seven-year test
period (i.e., 2006-2012). The 2006 report, therefore, includes a determination of

CRS-14
excess general revenue funding. A second such finding in the 2007 report for both
2012 and 2013 would result in a Medicare funding warning.2
The 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 and
would increase each year by 0.4 percent until general revenue is brought back to
45%. 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
FY2016.
Medicare Administrative Proposals
Medicare Integrity Program
Current Law. The Health Insurance Portability and Accountability Act
(HIPAA) of 1996 established the Medicare Integrity Program (MIP) to carry out
activities related to the investigation and deterrence of health care fraud and abuse
in the Medicare program.3 The Medicare Part A trust fund finances these activities.
The types of fraud prevention activities include 1) medical reviews of claims to
determine if services are medically reasonable and necessary, 2) financial audits, 3)
investigations of potential fraud cases, 4) provider education to inform providers of
Medicare billing procedures, and 5) Medicare secondary payer activities. HIPAA
capped mandatory funding for the MIP program at $720 million for fiscal years 2002
and beyond. In 2006, the DRA appropriated additional funds to MIP for fiscal years’
2006 through 2010 for the establishment of a Medicare-Medicaid data matching
program. These additional MIP appropriations amounted to $24 million in FY2007
and $36 million in FY2008, for a total of $744 million in FY2007 and $756 million
in FY2008.
President’s Proposal. The President’s FY2008 budget includes a
discretionary request of $138 million to assist the MIP program in conducting
oversight activities related to the Medicare prescription drug benefit and Medicare
2 In April 2007, the Trustees did report a second fund warning.
3 The Medicare Integrity Program is only one component of the Secretary’s fraud and abuse
control efforts. HIPAA established the Health Care Fraud and Abuse Control Program
(HCFAC) which also funds fraud-related activities of the Federal Bureau of Investigation,
the Department of Justice, and the HHS Office of the Inspector General.

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Advantage plans. The budget assumes savings would result from new efforts to
improve payment accuracy and to adjust payments to encourage efficiency and
productivity. The President’s budget estimates that these efforts would save $1.0
billion in FY2008 and $10.235 billion over the five-year budget period.
CBO Estimate
The CBO estimates current law Medicare outlays of $390 billion in FY2008 and
$2.224 trillion over the five-year budget window, slightly higher than the President’s
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 the Department of Health and
Human Services (HHS), the Administration incorporated the MA savings into the
individual proposals, making a direct comparison of individual savings, such as
hospital update, difficult. Therefore it is more appropriate to compare overall savings
rather than looking at individual proposals. CBO estimates also do not include an
estimate for the savings of the President’s Medicare Integrity Program administrative
proposal. Looking at only the legislative proposals, for the five-year budget window,
CBO estimates savings of $57.2 billion, compared with the Administration’s estimate
of $65.6 billion, a difference of $8.4 billion. The different estimates may be due to
differing assumptions regarding the Medicare population and other influential
factors. Adding in savings for the administrative proposal increases the difference
between the CBO and the Administration by another $10.2 billion.
Congressional Activity
FY2008 Budget Resolution
Senate Activity. The Senate Budget Committee passed its FY2008 Budget
Resolution (S.Con.Res. 21) on March 15, 2007, and the Senate passed the Resolution
on March 23, 2007. 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 $384.7 billion in mandatory outlays for
Medicare in 2008, an increase of $2.7 billion over 2007, or less than 1%. Total
Medicare outlays for 2008 are $390 billion. The Mark provides $15 billion in
Medicare savings over five years by reducing payments to health care providers.
Additionally, the Mark rejects the President’s proposal for across-the-board provider
payment cuts if general revenue financing exceeds 45% of Medicare costs in the
future.
The Mark also includes a new point of order against long-term deficit increases
in the four decades beyond the next 10 years. The point of order applies to any net

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deficit increase in excess of $5 billion in any of the four 10-year periods (2018-2027,
2028-2037, 2038-2047, and 2048-2057). The provision sunsets at the end of FY2017
and repeals Section 407 of H.Con.Res. 95 from the 2006 budget resolution
conference report. Direct spending proposals will not be subject to points of order
if new spending is offset by changes in spending, receipts, or revenues.
Section 207 of the budget resolution establishes several discretionary spending
limits, including a limit of $383 million in FY2008 for health care fraud and abuse
at the HHS, which oversees Medicare and Medicaid Services. If legislation is
introduced that appropriates up to $383 million in FY2008 for health care fraud and
abuse, then discretionary spending limits, allocations to the Senate Committee on
Appropriations, and aggregates may be adjusted by the amounts necessary.
Section 304 of budget resolution establishes a deficit-neutral reserve fund for
comparative effectiveness research. If legislation is introduced that establishes a new
federal or public-private initiative for comparative effectiveness research, then the
fund allows the Chairman of the Senate Budget Committee to revise committee
allocations, budgetary aggregates, and other levels in the resolution to offset the
spending. The Chairman’s Mark notes that the purpose of such legislation would be
to fund objective, transparent, and rigorous comparative effectiveness research of
technologies, devices, procedures, and pharmaceuticals.
Section 308 establishes a deficit-neutral reserve fund for Medicare. The reserve
fund includes prescription drug price negotiation, Part B physician reimbursement,
and improvements to Medicare Part D. The prescription drug price negotiation
reserve fund allows legislation to repeal the non-interference clause (Section 1860D-
11(i)(1) of the Social Security Act) per H.R. 4, which was passed by the House of
Representatives on January 12, 2007. The prescription drug price negotiation reserve
fund requires all savings from the measure to be used to either improve the Part D
benefit or to reduce the deficit. The Part B physician reimbursement reserve fund
allows the Chairman to change the allocations, aggregates, and other levels in the
resolution for legislation that increases the reimbursement rate for physician services,
provided that the increased spending is offset. The reserve fund for improvements
to Medicare Part D includes $5 billion to be used for improvements, which, as
specified in the Chairman’s Mark, may include such modifications as changing asset
requirements for the low-income subsidy, improving outreach efforts, or providing
coverage for mental health medications currently excluded under the Medicare
Modernization Act. The Chairman’s Mark specifies that the improvements are to aid
beneficiaries who qualify for the low-income subsidy under Medicare Part D. The
reserve fund allows the Chairman to change the allocations, aggregates, and other
levels in the resolution by up to $5 billion, provided that the spending is offset.
The Chairman’s Mark restores the pay-as-you-go, or PAYGO, rule in the
Senate, which requires that new mandatory spending and tax cuts be offset unless the
legislation receives at least 60 votes. The PAYGO rule requires the Senate to not
consider any direct spending or revenue legislation that increases the on-budget
deficit or causes an on-budget deficit for either FY2008, budget year 2008, FY2008-
FY2012, or FY2013-FY2017. The Mark would extend the PAYGO rule through
2017, and assumes that existing balances on the ledger would be eliminated and the
scorecard set to zero for all time periods. All net savings enacted in the reconciliation

CRS-17
are to be dedicated solely to deficit reduction. The PAYGO rule affects Medicare
legislation requiring additional spending to be offset by savings.
During the Senate debate, three amendments related to Medicare were passed
and added to the Senate Budget Resolution — S.Amdt. 548, S.Amdt. 636, and
S.Amdt. 639. The stated purpose of S.Amdt. 548 is to ensure that Medicare
payments to physicians include incentives to improve the quality and efficiency of
care furnished to Medicare beneficiaries through the use of consensus-based quality
measures. S.Amdt. 636 establishes a deficit-neutral reserve fund for improving the
accuracy of Medicare payments for hospitals. If legislation is introduced that (1)
addresses the disparity in Medicare hospital reimbursement, (2) includes provisions
to reform the area wage index used to adjust payments to hospitals, and (3) includes
a transition to the reform, then the fund allows the Chairman of the Senate Budget
Committee to revise committee allocations, budgetary aggregates, and other levels
in the resolution so that the spending is offset. S.Amdt. 639 establishes a deficit-
neutral reserve fund for access to Medicare data. If legislation is introduced that
addresses access to Medicare data for conducting research, public reporting, and
other activities, while also addressing beneficiary privacy, then the Chairman of the
Senate Budget Committee may revise committee allocations, budgetary aggregates,
and other levels in the resolution so that the spending is offset.
House Activity. The House Budget Committee reported its FY2008 Budget
Resolution (H.Con.Res. 99) on March 23, 2007. The House passed the bill on March
29. The House budget resolution makes several assumptions pertaining to the
Medicare program. The resolution assumes the federal government will continue to
provide Medicare premium assistance to low-income individuals who have incomes
between 120 and 135% of the federal poverty level. The resolution assumes the
federal government will provide assistance to hospitals with at least 100 beds that
have faced a reduction in Medicare disproportionate share hospital payments as a
result of assignment to a Micropolitan area. The resolution does not include
reconciliation instructions for the House Ways and Means Committee, which has
jurisdiction over Medicare as well as many other programs, or the House Energy and
Commerce Committee.
The Chairman’s Mark provides $389.7 billion in total outlays for Medicare in
2008, an increase of $19.5 billion over 2007. The resolution includes the PAYGO
rule, but does not include the point of order against long-term deficit increases that
is included in the Senate resolution.
Section 301 of the House budget resolution establishes several discretionary
spending limits for program integrity initiatives, including a limit of $183 million in
FY2008 for health care fraud and abuse. The health care fraud and abuse
discretionary spending limit is broadly defined to include all programs under the
Department of Health and Human Services, including Medicare. The discretionary
spending limit is $200 million less than the corresponding health care fraud and
abuse discretionary spending limit established in the Senate budget resolution
(Section 207). Section 301 also directs all House committees to review the
performance of programs within their respective jurisdictions for waste, fraud, and
abuse, giving particular scrutiny to issues raised by Government Accountability
Office (GAO) reports. The committees are directed to annually report program

CRS-18
performance recommendations resulting from these reviews to the House Committee
on the Budget.
Section 206 establishes a deficit-neutral reserve fund for improvements to the
Medicare program, such as (1) increasing the reimbursement rate for physicians
while protecting beneficiaries from associated premium increases, and (2) making
improvements to the Part D prescription drug program. (Similarly, the Senate
Budget resolution in S.Amdt. 99 mentions increasing the reimbursement rate for
physicians and improvements to Medicare Part D.) The House Committee Report
mentions federal investments in health information technology as another example
of an improvement to the Medicare program. If legislation is introduced for
improving the Medicare program, the reserve fund allows the Chairman to change
the allocations, aggregates, and other levels in the resolution, provided that the
spending is offset.
Conference Report. On May 17, the House and Senate adopted a conference
agreement on the budget resolution (H.Rept. 110-153, accompanying S.Con.Res. 21).
Relevant provisions in the conference report include
! deficit-neutral reserve funds for (1) health information technology;
(2) comparative effectiveness research; (3) the use of Medicare data
to evaluate a variety of health care issues in federal programs and the
private health care system; (4) small business health insurance; (5)
Medicare improvements, including prescription drug price
negotiation, physician payments, improvements to Part D, and
Medicare hospital payments ; and (6) mental health parity;
! up to $383 million in FY2008 discretionary funding for the health
care fraud and abuse control program at HHS; and
! two “sense of the Congress” provisions regarding health care cost
growth and affordable health coverage.
Congressional Action on Comprehensive Medicare Reform
House Activity. H.R. 3162, the Children’s Health and Medicare Protection
Act of 2007, was passed by the House of Representatives on August 1, 2007. The
bill’s Medicare provisions would address a number of issues. Some of the bill’s
provisions are changes to physicians payments, reduction in payments to Medicare
Advantage plans, and elimination of Medicare cost-sharing for certain preventive
benefits. Physician payment changes include a 0.5% increase in Medicare physician
fees for 2008 and 2009, with substantive changes to the calculation of updates to the
Medicare physician fee schedule in future years, establishing bonus payments for
physicians practicing in low Medicare per capita expenditures, requiring the
Secretary to implement a resource use feedback program for physicians to identify
efficient providers, expanding a medical home demonstration project, repealing the
Physician Assistance and Quality Initiative fund, and requiring CMS to modify
physician payment localities, beginning with California.
Among many other provisions, the bill would also repeal the 45% rule (i.e., the
Medicare trigger); eliminate the market basket update for FY2008 for Medicare
payments for skilled nursing facilities, home health agencies, and long-term care

CRS-19
hospitals; reduce the annual update for certain hospitals; establish a bundled
payment system for Medicare renal dialysis services; create a new entity for
comparative effectiveness research; and change the Low-Income Subsidy Program
for Medicare Part D. The Congressional Budget Office estimates 5-year Medicare
savings (2008-2012) of $26.9 billion and 10-year Medicare savings (2008-2012) of
$76.6 billion.
Senate Activity. On August 2, the Senate passed S. 1893, the Children’s
Health Insurance Program Reauthorization Act of 2007, as an amendment to H.R.
976, which did not include provisions that would affect the Medicare program and
spending.
Bicameral Agreement. A bicameral agreement on SCHIP reauthorization
passed the House on September 25 and the Senate on September 27 as an amendment
to H.R. 976, without the provisions affecting the Medicare program. The President
vetoed the bill.
Other Congressional Action
On July 18, 2007, legislation was enacted (S. 1701, P.L. 110-48) that, effective
July 31, 2007, eliminated the limited continuous enrollment provision granting
beneficiaries currently enrolled in traditional Medicare the option to enroll in a
Medicare Advantage Private -fee-for-Service (PFFS) plan or a non-drug MA plan
anytime during the year. The legislation also reduced initial funding for the Medicare
advantage stabilization fund in 2012 from $3.5 billion to $1.6 billion and added
$1.79 billion to be available during 2013.
On September 29, 2007, the “health extenders package” (H.R. 3668, P.L.110-
90), which includes three Medicare provisions, was enacted. One provision would
increase to $325 million the amount available to the Medicare Physician Assistance
and Quality Initiative Fund for expenditures during 2009 and provide for $60 million
to be made available during or after 2013.4 The second provision would provide
$100 million to extend the Medicare’s Qualifying Individual (QI) program through
December, 2007.5
The final provision would halve the payment adjustments scheduled for acute
care hospitals in FY2008 and FY2009. Absent this legislation, Medicare payments
to IPPS hospitals would have been reduced by 1.2% in FY2008 and 1.8% in FY2009
because of anticipated increases in measured severity of illness because of coding
4 The Medicare Physician Assistance and Quality Initiative Fund was established by the Tax
Relief and Health Care Act of 2006 (TRHCA) to provide the Secretary of HHS with monies
that could be used “for physician payment and quality improvement initiatives.” In total,
$1.35 billion are to be made available for the fund; for fiscal years 2007, 2008, and 2009,
TRHCA instructed the Secretary to move $60 million from the Federal Supplementary
Medical Insurance Trust Fund to the Medicare Physician Assistance and Quality Initiative
Fund.
5 This program pays the Part B premium for eligible low-income beneficiaries with incomes
between 120% and 135% of poverty.

CRS-20
changes or documentation improvements (coding creep). The legislation reduces the
adjustment to 0.6% and 0.9%, respectively, but permits offsets to IPPS rate increases
in FY2010, FY2011, and FY2012 to account for coding creep increases in FY2008
and FY2009 above these amounts. The scheduled adjustment of an additional 1.8%
in FY2010 is not addressed. CBO estimates that this change will be budget-neutral
for hospitals but attributes a $190 savings to the program because of its impact on
Medicare Advantage rates.6
6 CBO’s preliminary score shows increased spending of $570 million in FY2008 and $1,855
million in FY2009, offset by decreased spending of $720 million in FY2010 and $1,895
million in FY2011, for a net five-year savings of $190 million. Savings in FY2010 and
FY2011 are attributed to hospital offsets and an expected interaction with Medicare
Advantage.

CRS-21
Table 1. President’s Budget Medicare Proposals
(dollars in millions)
HHS estimates
CBO estimates
Proposals
FY2008 -
FY2008-
FY2008
FY2008
FY2012
FY2012
Legislative Proposals
Medicare Part A
Hospital update
-720
-13,790
-600
-9,300
Skilled nursing facility update
-1,010
-9,210
-400
-4,200
Inpatient rehabilitation facility update
-230
-1,910
-200
-1,500
Hospice payment update
-60
-1,140
-100
-1,200
Eliminate IME payments for managed
-381
-4,370
-500
-5,200
care enrollees
Adjust hospital payments for never
-30
-190
a
-100
events
Rationalize post-acute hospital
-470
-2,930
-500
-2,700
payments
Limit use of mandamus jurisdiction
0
-80
0
100
Medicare Part B
Outpatient hospital update
-120
-3,360
-100
-2,600
Ambulatory Surgical Center update
0
-90
0
-100
Ambulance services
-10
-360
a
-300
Competitive bidding for laboratory
-110
-2,380
0
-1,100
services
Short-term power wheelchair rentals
-70
-530
-300
-600
Limit oxygen rental period
-110
-2,380
-100
-1,900
Medicare Parts A and B (dollars for combined A and B spending)
Home health update
-410
-9,680
-300
-7,500
Establish federal data sharing
clearinghouse for Medicare secondary
-50
-640
a
-500
payer
Extend Medicare secondary payer
-160
-1,080
a
-700
status for ESRD
Medicare bad debt payments
-180
-7,150
-300
-5,400
Required Medicare spending reduction
0
0
0
0
Value-based purchasing and quality
0
0
0
0
incentive payments
Premiums and interactions
Part B premiums
-543
-7,135
-200
-4,300
Part D premiums
-357
-3,242
-100
-2,800
Interaction with Medicaid
425
425
400
500
Medicare Advantage Interactions
N/A
N/A
0
-9,700
Premium Interactions
325
5,605
100
4,000
Total Legislative Proposals
-$4,271
-$65,618
-$3,400
-$57,200
Administrative Proposals
Medicare Integrity Program
-1,000
-10,235
N/A
N/A
Total Administrative Proposals
-$1,000
-$10,235
N/A
N/A
Total, Medicare Budget Proposals
-$5,271
-$75,853
-$3,400
-$57,200
Notes: Total may not add due to rounding.
a. Indicates costs or savings of less than $50 million.
N/A indicates data not available.

CRS-22
Table 2. Staff Medicare Contacts for this Report
Phone
Topic
Staff member
number
Part A
Hospice Care
Julie Stone
7-1386
Inpatient Hospital Services
Sibyl Tilson
7-7368
Inpatient Rehabilitation Facilities
Sibyl Tilson
7-7368
Medical Devices
Gretchen A. Jacobson
7-1686
Skilled Nursing Facilities
Julie Stone
7-1386
Part B
Ambulatory Surgical Center Services
Sibyl Tilson
7-7368
Drugs
Jennifer O’Sullivan
7-7359
Durable Medical Equipment
Paulette C. Morgan
7-7317
Outpatient Hospital Services
Sibyl Tilson
7-7368
Physicians and Other Part B Providers
Jennifer O’Sullivan
7-7359
Premiums
Jennifer O’Sullivan
7-7359
Parts A&B
Beneficiary Issues
Jennifer O’Sullivan
7-7359
End Stage Renal Disease (ESRD)
Hinda Chaikind
7-7569
Home Health Services
Julie Stone
7-1386
Part C
Hinda Chaikind
7-7569
Medicare Advantage
Paulette C. Morgan
7-7317
Holly Stockdale
7-9553
Part D
Jennifer O’Sullivan
7-7359
Benefits & Premiums
Jim Hahn
7-4914
Gretchen A. Jacobson
7-1686
Drug Pricing
Jim Hahn
7-4914
Administration
Integrity (fraud, waste, and abuse)
Holly Stockdale
7-9553
Quality Improvement Organizations
Holly Stockdale
7-9553
Other
Medicare Secondary Payer
Hinda Chaikind
7-7569
Medicare Trigger
Hinda Chaikind
7-7569
Medicare HI & SMI Trust Fund Financing
Jennifer O’Sullivan
7-7359
Pay for Performance
Jim Hahn
7-4914
Price Transparency
Jim Hahn
7-4914
Rural Issues
Sibyl Tilson
7-7368