II. ACTUARIAL ANALYSIS

A. MEDICARE AMENDMENTS SINCE THE 1999 REPORT

Since the 1999 Annual Report was transmitted to Congress on March 30, 1999, one law affecting the SMI program in a significant way has been enacted. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) of 1999 (as incorporated into Public Law 106-113, the appropriations bill for the District of Columbia for fiscal year 2000, enacted on November 29, 1999) included a number of provisions affecting the SMI program.

As its name implies, the BBRA primarily modified and refined some of the provisions previously enacted in the Balanced Budget Act (BBA) of 1997 (Public Law 105-33). The more important SMI provisions, from an actuarial standpoint, are described in the following paragraphs.

• The BBA required the Secretary of HHS to develop and implement a prospective payment system (PPS) for outpatient hospital services. (It is currently anticipated that the PPS will be implemented July 1, 2000.) The law required that the Secretary determine the aggregate amount payable under the PPS in 1999 (the base period) based on (1) the total amount that would have been paid in the absence of PPS and (2) the total amount of copayments that are estimated to be paid for outpatient services in 1999 under the PPS. This aggregate amount is then used to establish the conversion factor that is used to determine the outpatient fee schedule amounts under the PPS. The BBA specified the coinsurance amounts under the PPS to be 20 percent of the median charges. However, using median rather than mean charges would result in aggregate payments to hospitals being lower than they would be in the absence of the PPS. The BBRA clarified that it was the intent of Congress to have aggregate payments to hospitals be budget-neutral for 1999. Hence, based on the BBRA, the SMI program will make up the difference in hospital payments that occurs when using median charges rather than mean charges in setting coinsurance amounts for the PPS rates.
• The BBA extended through calendar year 1999 two provisions that would have otherwise expired at the end of fiscal year 1998: the 10 percent reduction in payments for hospital outpatient capital, and the 5.8 percent reduction for outpatient services paid on a cost basis. The BBRA extends these reductions beyond 1999, until such time as the outpatient prospective payment system is implemented. (Again, it is currently anticipated that a PPS will be implemented July 1, 2000.)
• The BBA allowed the Secretary to establish adjustments to the outpatient PPS, when implemented, in a budget-neutral manner, as deemed necessary to ensure equitable payments. The BBRA specifically establishes "transitional corridors" until January 1, 2004, for the PPS to limit losses in payment experienced by individual hospitals under the PPS. A formula is established so that hospitals receive additional payments for outpatient services rendered if the amount they receive under the PPS in relation to their costs is less than their 1996 payment-to-cost ratio. (The 1996 ratio is calculated as if the formula-driven overpayment, which was eliminated by the BBA effective October 1, 1997, had been eliminated in 1996.) These transitional payments are to have no effect on beneficiary copayments and are not subject to the budget neutrality constraint. The BBRA then specifies how to determine the transitional payments.
• The BBA directed that under the outpatient PPS, when implemented, the beneficiary copayments were to be 20 percent of national median charges. It froze these rates until such time that the copayments represent 20 percent of the total fee schedule amount. The BBRA caps beneficiary copayments under the outpatient PPS (when implemented) to the dollar amount of the HI inpatient deductible, with the SMI program paying the difference to the hospital between the limited copayment amount and the otherwise applicable copayment amount.
• Prior to the BBRA, direct medical education payments to teaching hospitals had been based on hospital-specific per-resident amounts, based on inflation-adjusted 1984 costs. There have therefore been wide variations in per-resident payment amounts. The BBRA increases per-resident payment amounts for hospitals below 70 percent of a geographically-adjusted national average to 70 percent of that average. For hospitals above 140 percent of a geographically-adjusted national average, payments will be frozen in fiscal years 2001 and 2002, and increased by the Consumer Price Index minus 2 percentage-points in fiscal years 2003 through 2005. Hospitals with per-resident payment amounts between 70 percent and 140 percent of a geographically- adjusted national average will continue to receive current payment amounts.
• The BBA required development and implementation of a prospective payment system for home health services, effective for cost reporting periods beginning on or after October 1, 1999. It also required a 15 percent reduction in home health payment limits, with or without the implementation of a prospective payment system. (Congress realized it might not be possible to develop and implement the system by October 1, 1999. Indeed, such a system was not in place by that date.) An emergency appropriations act prior to BBRA delayed the 15 percent reduction until October 1, 2000, with or without the implementation of a prospective payment system. The BBRA delays the 15 percent reduction further, until one year after implementation of a prospective payment system; requires the Secretary of HHS to report within 6 months of implementation on the need for the 15 percent or other reduction; and eliminates the 15 percent reduction if a prospective payment system is not implemented at all. (It is currently anticipated that a prospective payment system will be implemented October 1, 2000.)
• The BBA established a Sustainable Growth Rate (SGR) mechanism, to balance the need to control total Medicare spending with the need to ensure adequate payment for physicians' services. However, the formula provided by the BBA resulted in wide, unintended fluctuations in payments to physicians from year to year. The BBRA stabilizes the formula used for updating physician payment rates, and moves the SGR target for total physician spending, which is used to adjust inflation updates, from a fiscal year to a calendar year basis, beginning with 2000. It also modifies the calculation of the update adjustment factor, and provides for special adjustments for 2001 through 2005.
• Prior to the BBA, there were two annual per-beneficiary limits of $900 each for physical therapy and occupational therapy furnished by independent practitioners of therapy. The BBA established broader limits, covering all outpatient SMI therapy services, except those furnished in hospital outpatient departments. Specifically, the BBA established a $1500 per-beneficiary annual cap for all outpatient physical therapy and speech pathology services, and a $1500 per-beneficiary annual cap for all outpatient occupational therapy services. The BBA also required the Secretary of HHS to report to Congress by January 1, 2001, recommending a revised policy for therapy services based on classification of individuals by diagnostic category and prior use of services, in place of dollar limitations. The BBRA suspends the annual payment limits imposed by the BBA for calendar years 2000 and 2001. During this suspension, the Secretary is to conduct focused medical reviews of therapy claims. The BBA also adds requirements to the Secretary's report that are to be made by January 1, 2001.
• Prior to the BBRA, composite rates of reimbursement for dialysis services for end-stage renal disease patients were $126 for hospital-based providers and $122 for freestanding facilities. The rate did not increase each year. For services furnished in calendar year 2000, the BBRA increases the composite rates by 1.2 percent over the rates for calendar year 1999, and increases the composite rates for services furnished in calendar year 2001 by 1.2 percent over the rates for calendar year 2000.
• Prior to the BBRA, SMI paid for the lab test component of Pap smears under the clinical laboratory fee schedule. There was no minimum payment amount. The BBRA establishes a minimum payment amount of $14.60 for tests furnished in calendar year 2000, with updates to that amount for subsequent years.
• Prior to the BBRA, SMI covered drugs used to provide immunosuppressive therapy for 36 months following a Medicare- covered organ transplant. The BBRA increases the number of months of coverage by 8 months, from 36 to 44 months, for calendar year 2000, for individuals who exhaust their 36 months of coverage during that year. For individuals who exhaust their 36 months of coverage during calendar year 2001, at least 8 more months will be covered. (The Secretary of HHS must specify what the increase, if any, beyond 8 months will be.) For beneficiaries who exhaust the 36-month period in calendar years 2002, 2003, and 2004, the number of additional covered months may be more or less than 8. Again, the Secretary must specify what the increase will be for each of these years. The Secretary must determine the additional months in such a way that the estimated cost of these months is no more than $150 million.
• Prior to January 1, 2000, Medicare+Choice payments were adjusted using only demographic factors. The BBA required implementation of a new risk adjustment method, based on health status, effective January 1, 2000, and the Secretary of HHS announced a five-year transition to the new method. The payments were to be based on a blend of the old and new methods, with the new method accounting for 10, 30, 55, 80, and 100 percent of the blend for calendar years 2000 through 2004, respectively. The BBRA changes the transition schedule by providing that the new method shall account for 10 percent of the blend in 2000 and 2001 and no more than 20 percent of the blend in 2002.
• The BBRA provides for an increase in the National per capita Medicare+Choice growth percentage for fiscal year 2002, by reducing the update factor for the year by 0.3 percentage-points, rather than the previously scheduled 0.5 percentage-points.

Detailed information regarding these changes and other less significant changes can be found in documents prepared by and for the Congress. The actuarial estimates shown in this report reflect the anticipated effects of these changes.

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