How Budget Affects Physicians Who See Medicare Patients

The fiscal year (FY) 1998 Balanced Budget Act contains several important changes in the Medicare program that affect physicians, including a go-ahead for provider-sponsored organizations (PSOs) (closed networks run by hospitals, doctors, and other providers instead of insurance companies) and new opportunities for the private sector to compete in the Medicare+Choice plans.

Funding for Medical Education

The Balanced Budget Act of 1997 includes several provisions regarding the medical education of physicians. First, indirect medical education payments are reduced from 7.7% to 7% in 1998, 6.5% in 1999, 6% in 2000, and 5.5% in 2001 and thereafter.

Second, Medicare HMO payments will be paid directly to teaching hospitals serving Medicare managed care enrollees.

Finally, a cap will be placed on the number of medical interns and residents supported by direct medical education payments to teaching hospitals.

Incentives will be offered for reducing the number of residents. Institutions that wish to reduce residency slots by 20% to 25% over five years will receive most of the amount they would have been paid without the reduction for the first years of the phase-down, and a declining amount thereafter. No transition payment would be made on the first 5% of the reduction.

Importantly for physicians and surgeons, the new budget may give nonparticipating physicians a way around Medicare’s balance billing restrictions with patients who agree not to file any claim with Medicare (see box). It also requires the Department of Health and Human Services (HHS) to issue binding advisory opinions on questions concerning physician self-referrals.

Are Balance Billing Restrictions Over?

The Balanced Budget Act of 1997 allows Medicare patients to enter into private contracts with physicians who do not participate in Medicare, provided certain conditions are met.

Specifically, the legislation states that nothing in the law shall prohibit a physician or practitioner from entering into a private contract with a Medicare beneficiary for any item or service for which no claim is submitted to Medicare and the physician receives nothing from Medicare directly or on a capitated basis.

The contract must be in writing and signed when the beneficiary is not facing an emergency or urgent health situation. These physicians will not be able to submit claims to Medicare for two years from the date of signing an affidavit of nonparticipation.

Antifraud measures have been tightened, with permanent exclusion from Medicare participation of anyone convicted of three health care-related crimes, as well as new civil monetary penalties for contracting with an excluded health care provider or for taking kickbacks.

In addition, the costs of Medicare home health care largely will be shifted from Medicare Part A (financed by a payroll tax) to Part B (which pays physicians’ bills and is financed by patient premiums and general revenues). Medicare Part B premiums will increase slightly faster than under current law.

The new bill freezes the hospital prospective payment system (PPS) update for FY 1998, and reduces hospitals’ disproportionate share payments (special payments for hospitals that serve a disproportionate share of low-income patients).

Much of the cost-based reimbursement that remains in Medicare will be eliminated gradually, with skilled nursing facilities switching to a prospective payment system July 1, 1998; outpatient hospital services by Jan 1, 1999; home health services by Oct 1, 1999; and rehabilitation hospitals as of Oct 1, 2000.

Even with the budget’s payment cutbacks for services and procedures, physicians still may be pleased with certain changes and new opportunities that the budget agreement presents.

The budget is likely, for example, to stimulate doctors and hospitals to form their own networks to offer managed care products. PSOs will be able to apply for a federal waiver of state licensure if a state has denied the PSO a license for solvency or discriminatory reasons, or if that state fails to approve the license within 90 days after the PSO’s application. The waivers will be for 36 months only and cannot be renewed.

HHS will be required to report to Congress by December 31, 2001, on whether the waiver process should be continued after December 31, 2002. The PSOs must still abide by a state’s beneficiary protection standards and, significantly, will not be required to enroll non-Medicare patients.

Four ‘Choice’ Plans

The balanced budget creates four types of Medicare+Choice plans, namely:

• Unrestricted private fee-for-service plans.
• Coordinated care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), with or without point-of-service options.
• Provider-sponsored organizations (PSOs).
• Medical savings accounts, a pilot project for certain seniors who will take out high-deductible catastrophic insurance policies and in return will receive Medicare contributions to their own tax-free account to help them pay smaller medical expenses.

The Medicare+Choice plans must cover current Medicare-covered items and services, but they may offer additional benefits in a basic package or charge extra for them. Supplemental benefits in private fee-for-service plans could include payment for some or all balance billing amounts.

The new plans would be prohibited from having “gag clauses” that restrict the advice a provider can give to beneficiaries about medical care or treatment.

Several new antifraud initiatives have been included in the budget. The bill provides permanent exclusion from Medicare for individuals convicted of three health care-related crimes on or after the date of enactment.

Further, HHS will have the authority to refuse to enter into Medicare agreements with a physician or supplier convicted of a felony that HHS determines is “detrimental to the best interests” of the program, and can exclude any entity controlled by a family member of a sanctioned individual.

Civil monetary penalties are authorized for individuals who contract with an excluded individual or entity and for individuals engaging in kickbacks, with the fines set at up to three times the remuneration offered.

When questions arise about the legality of a physician self-referral to a designated health service (other than clinical laboratory services), HHS will be required to issue binding advisory opinions.

To encourage patients to inform officials of illegal activity, the bill authorizes a toll-free number for beneficiaries to report fraud and billing irregularities directly to the HHS Office of the Inspector General.

Medicare providers will now be required to supply employer identification and Social Security numbers, including the numbers of individuals with ownership interests. Diagnostic or other medical information will be required when ordering certain items or services. Suppliers of durable medical equipment must put up surety bond of at least $50,000.

Cost-control measures include replacement of reasonable charge methodology by fee schedules for certain items and services, including home dialysis supplies and parenteral nutrients; application of inherent reasonableness authority to all Part B services other than physicians’ services (where inherent reasonableness already exists); and the use of competitive bidding demonstration projects for certain Part B services.

Other Provider Provisions of the Balanced Budget Act