Thomas W. Coons
Carel T. Hedlund
Leslie Demaree Goldsmith

At a Glance: 

The prescription drug benefit may be the most highly touted aspect of the new Medicare bill, but other provisions have more immediate significance for hospitals. 

To be fully informed about the recently enacted Medicare Prescription Drug, Improvement, and Modernization Act (MMA), you need to look past the marquee issues. While much publicized for its prescription drug coverage and renewed support for managed care organizations, the new Medicare law also made significant changes to certain areas of hospital payment. Some of the most important provisions for hospital financial leaders are those pertaining to the wage index; indirect and graduate medical education (IME and GME); the hospital outpatient PPS; and audits, appeals, and overpayments. Here's a distillation of the key points of those provisions.

Wage Index

Beginning with discharges on or after October 1, 2004, hospitals that have a wage index of less than 1.00 will have the wage index applied to only 62 percent of the standardized amount, instead of 71 percent of that amount. Because this provision is not budget neutral, the adjustment produces only winners. Many rural and small urban hospitals stand to benefit significantly.

Rather than provide "rifle shot" legislation to reclassify specific areas, Congress authorized CMS to establish a one-time wage-index reclassification process for hospitals that do not otherwise qualify for reclassification under the annual procedures of the Medicare Geographic Classification Review Board. Hospitals had to apply by February 15, 2004, and the new rates for the qualifying hospitals took effect April 1, 2004, for three years. Although this provision is not budget neutral, the amount authorized is limited to $900 million. If there is not enough money to provide funding to all hospitals that qualify, there may be challenges to CMS's implementation of this provision.

Also, by October 1, 2004, CMS must implement a wage-index adjustment for outbound commuting, designed to provide a blended wage index to hospitals in counties in which a substantial number of hospital workers commute to nearby metropolitan service areas (MSAs) with higher wage indexes. CMS must set thresholds for qualifying counties and may request hospitals to submit data on their employees' counties of residence. Be on the lookout for application deadlines.


In what could be the most important provision affecting medical education since 1997, the law provides for a redistribution of full-time equivalents (FTEs) from hospitals that are not using all of their "authorized" FTEs to hospitals that need additional FTEs.

To determine this redistribution, CMS will look at a "reference level," which will generally be the resident level in each hospital's most recent cost report for the period ending on or before September 30, 2002, that has been settled (or submitted, subject to audit). With limited exceptions, if during this period a hospital has fewer FTEs than allowed under its historic cap, CMS is directed to reduce the hospital's resident limit by 75 percent of the difference between the cap and the new reference level limit.

Then, starting July 1, 2005, CMS is authorized to redistribute the unused resident slots to other hospitals, with the qualification that no more than 25 FTEs may be transferred to any given hospital. Significantly, payment for FTEs that are redistributed is at a lower rate for both IME and GME than payment for other FTEs at the receiving hospital.

The new law will create winners and losers. The winners will be hospitals that are located primarily in rural and other-than-large urban areas and that are at or above their FTE caps. These hospitals will be eligible to receive up to 25 additional FTEs. This benefit will be somewhat reduced, however, by the lower payment rates associated with the redistributed FTEs.

Conversely, hospitals that have failed to claim all of the FTEs up to their limit could find the new legislation quite troubling as they may face a substantial reduction in their FTE limits.

Several other changes regarding IME and GME are noteworthy.

First, adjustments to the IME multiplier will cause it to increase through 2005, but then drop beginning 2006.

Second, hospitals with geriatric residency training programs that have residency periods extending beyond one year will be permitted to count the residents as FTEs for one additional year.

Third, the law provides limited relief, applicable during 2004, for family practice programs in which the training takes place, in part, in nonhospital locations. For programs existing as of January 1, 2002, CMS must allow a hospital to count each resident receiving such training without regard to the financial arrangement between the hospital and the teaching physician who is practicing in the nonhospital site. This moratorium allows hospitals to count such family practice residents for portions of hospital cost years contained within calendar year 2004, and for cost years whose reports are settled in 2004. CMS, however, still requires that an agreement exist between the hospital and physician at the nonhospital site.

Fourth, the new law extends for 10 years the ceiling on per-resident amounts (PRAs) associated with high-cost programs, first established by the Balanced Budget Refinement Act. Thus, through 2013, hospitals with PRAs above 140 percent of the geographically adjusted national average amount will not receive an increase in their PRAs.

Hospital Outpatient PPS

The law also contains two important outpatient PPS provisions.

First, it extends for two years the hold-harmless provision for rural hospitals with no more than 100 beds and provides new hold-harmless protection to rural sole community hospitals with more than 100 beds.

Second, the new law modifies how drugs are to be paid. It creates separate payment rules for:

  • New drugs (i.e., drugs for which payment is first made on or after January 1, 2003)
  • Drugs that have not been assigned a temporary HCPCS code
  • Orphan drugs
  • Specified covered outpatient drugs (i.e., drugs for which separate APC payment rates have been established and that are radiopharmaceuticals, biologicals, or drugs for which payment was made before January 1, 2003)

Audits, Appeals, and Overpayments

Providers have long challenged the use of statistical sampling and extrapolation by suppliers and intermediaries. Under the MMA, hospitals may experience fewer postpayment audits involving sampling and extrapolation. As of December 8, 2004, Medicare contractors are not permitted to use statistical sampling or extrapolation to calculate an overpayment unless there is a finding of a "sustained or high level of payment error." Similarly, in the area of prepayment review, a finding of a "likelihood of sustained or high level of payment error" is necessary for a Medicare contractor to initiate a nonrandom prepayment review based on a provider's or supplier's identification of an improper billing practice. The effect of these provisions will not be clear until CMS indicates how broadly or narrowly it will define "sustained or high level of payment error."

Regarding claims appeals, the MMA will require hospitals to gather evidence earlier in the process. As of October 1, 2004, providers must introduce all of their evidence at the reconsideration level before a qualified independent contractor (QIC), unless there is good cause to prevent them from doing so. Failure to introduce evidence at the QIC level without good cause will result in barring of the evidence later.

Also, under the MMA, CMS must wait until later in the appeals process than it had previously to recoup Medicare overpayments. Beginning December 8, 2003, if a hospital requests reconsideration of an overpayment determination, the Medicare program may not begin recouping the overpayment until the QIC has conducted an appeal reconsideration-in effect giving hospitals a stay for repayment until they have had an opportunity to have their appeals heard and decided upon by a QIC.


The MMA changes generally result in increased payments over the short term. Hospitals should be aware, however, that Congress may find the MMA too "rich" over the long term and almost certainly will make cost-cutting changes to the law within the next two legislative sessions. Moreover, even as outlined in the current provisions of the law, some of the payment increases are likely to be only temporary. Thus, it would be unwise for hospitals to make long-term financial projections based on the MMA-authorized payment levels.

Thomas W. Coons, JD, is a principal, Ober|Kaler Attorneys at Law, Baltimore.

Carel T. Hedlund, JD, is a principal, Ober|Kaler Attorneys at Law, Baltimore.

Leslie Demaree Goldsmith, JD, is a principal, Ober|Kaler Attorneys at Law, Baltimore.

Key Hospital Provisions of the MMA

Beginning with discharges on or after October 1, 2004, for hospitals whose wage index is less than 1.00, the wage index will be applied to only 62 percent of the standardized amount.

As of July 1, 2005, hospitals that have unused FTE resident slots may have those slots redistributed to other hospitals that have reached or exceeded their FTE caps.

As of December 8, 2004, Medicare contractors may not use statistical sampling or extrapolation to calculate an overpayment unless there is a finding of a "sustained or high level of payment error."

Publication Date: Tuesday, June 01, 2004

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