As was widely expected over the month of December, the Obama Administration and Congress scrambled in the late hours of 2012 and on New Year’s Day devising a legislative package to prevent the United States from going over the “Fiscal Cliff,” a series of across-the-board tax increases and spending cuts that would have automatically implemented without intervening legislative action. Although the compromise they reached was far from the “Grand Bargain” that President Obama and many members of Congress were seeking, Vice President Biden and Senate leadership came to an agreement to avoid the cliff for the early part of 2013. The Senate approved the package, the American Taxpayer Relief Act (H.R. 8), by an overwhelmingly bipartisan vote of 89-8 in the early morning hours of New Year’s Day. Later that day, shortly before midnight, the House voted to approve the Senate package by a vote of 257-167, with 85 Republicans joining 172 Democrats in support.

The legislation contains some significant health policy changes, described in more detail below, although its primary purpose is to prevent steep tax increases for 99% of Americans and to delay the automatic “sequestration” spending cuts that were scheduled to go into effect due to an earlier agreement to raise the debt ceiling. In H.R. 8, which the Congressional Budget Office (CBO) estimates will cost around $4 trillion, the sequester is turned off for two months, allowing Congress more time to focus on a comprehensive deficit reduction solution. In addition, current tax rates are permanently extended for all Americans earning up to $400,000 for individuals and $450,000 for married couples. Several other major tax modifications, including some related to the estate tax and capital gains, were also included. Discussion about other aspects of the legislation, including changes to renewable energy programs, may be found here.

The health policy provisions included in the bill fall into two main categories: (1) extension of various health care programs and reimbursement streams under Medicare and other government initiatives, and (2) “offsets” and changes in other programs and payment methodologies to glean savings to cover the costs of the package. A summary of the major health care provisions are as follows.

Summary of Extensions of Health Care Programs/Reimbursement

The most sought-after extender provision in the Act is the so-called “Doc Fix” or physician payment adjustment for Medicare providers. If Congress had failed to act, as of January 1, 2013, reimbursement rates for physicians under the Medicare program would have dropped by about 26.5% based off of the application of the sustainable growth rate (SGR) formula that adjusts Medicare physician reimbursement annually. The effect of the SGR formula, if it is actually implemented, is to decrease, not increase, physician reimbursement. Although there is widespread support for a “permanent fix” to the SGR, the steep costs of not implementing its cumulative reductions leads Congress every year to seek a short-term solution. H.R. 8 freezes the Medicare physician reimbursement rate at its 2012 level until December 31, 2013 with a price tag of about $25 billion over ten years. (A more permanent, albeit expensive, solution for the Doc Fix may be considered in Congress as part of the upcoming debates starting this spring over the debt ceiling increase and continuing resolution.)

In addition to the Doc Fix, several other payment and program extensions were part of the legislative agreement. Some of the more notable provisions include:

• Ambulance Add-On Payments: This provision continues the base rate payment add-ons for ground ambulance transports through December 31, 2013. Ambulance transports will receive a 2% add-on in urban areas, a 3% add-on for rural areas, and a 22.6% add-on for super-rural areas (a “super-rural area” is defined as a rural county that is among the lowest quartile of all rural counties by population density).
• Payments for Outpatient Therapy Services: Payments for these services will be capped at $1,880 for any therapy services provided by non-hospital providers. The Act continues to use this limit, but also extends the “exceptions case process” by which providers can receive additional reimbursements if more therapy services are deemed to be medically necessary. The extension lasts until December 31, 2013.
• Medicare-Dependent Hospital (MDH) Program: H.R. 8 extends the MDH program, which delivers increased reimbursements to small rural hospitals that depend on Medicare payments for a large share of their revenue. The MDH program also supports the development of rural health infrastructure. The extension lasts through the beginning of the next federal fiscal year on October 1, 2013. The Act also extends a payment add-on for low-volume hospitals, which are defined as having fewer than 1,600 Medicare discharges and being at least 15 miles away from the nearest “like-hospital.”
• Work Geographic Adjustment: Under this provision the existing 1.0 floor on the “physician work” index continues through December 31, 2013, to reflect the geographic differences in cost of resources to provide physician services to Medicare beneficiaries.
• Medicare Advantage Plans for Special Needs Beneficiaries: The Act extends through 2014 the authority of specialized Medicare Advantage plans to target the enrollment of special needs individuals.
• Medicare Reasonable Cost Contracts: H.R. 8 allows Medicare Reasonable Cost Contracts to exist through 2014 in areas in which at least two Medicare Advantage coordinated care plans currently operate.
• Performance Improvement under Medicare: The Act extends funding through 2013 for the Medicare Improvements and Providers Act of 2008 and for outreach and assistance for low-income programs.

Outside of the Medicare program, the Act also has a number of other extensions, including: extending the Qualifying Individual Program, which allows Medicaid to pay Medicare Part B premiums for beneficiaries with incomes between 120% and 135% of the poverty line, until December 31, 2013; extending the Transitional Medical Assistance program, which allows low-income residents to maintain their Medicaid coverage when they start new employment, through December 31, 2013; continuing the Medicaid and CHIP Express Lane option through September 30, 2014; and extending funding for Family-to-Family Health Information Centers and diabetes research, treatment, and prevention programs for American Indians and Alaska Natives.

Summary of Health Care Offsets

In order to offset the projected costs of the extender provisions in the bill, the Act implements cost reductions in Medicare and other government health programs. Most significantly, a provision adjusting the Documentation and Coding of Medicare payments will allow CMS to recoup overpayments that it determines had been made to hospitals, and not yet recovered, as a result of the transition to Medicare Severity Diagnosis Related Groups (DRGs). CMS had been concerned that providers were “over-coding” (providing better documentation and coding of medical records to achieve a higher-weighted DRG) to increase their reimbursements and had instituted a prospective recoupment program covering certain years. This program is now extended. Congress estimates savings of $10.5 billion over ten years. In a separate provision, the Act increases the statute of limitations for recovering overpayments from 3 to 5 years.

Some of the other more notable offsets include the following:

• End Stage Renal Disease (ESRD) Payments: H.R. 8 makes several changes related to payments for ESRD. It is projected to save $4.9 billion by altering the bundled payment to account for behavioral and utilization changes of dialysis drugs. It also is projected to save $300 million by reducing reimbursement rates by 10% for ambulance services to ESRD individuals receiving non-emergency basic life support services.
• Medicare Disproportionate Share Hospitals: To save an estimated $4.2 billion, the Act maintains the 75% reduction in the reimbursement rate for Medicare Disproportionate Share Hospitals contained in the Affordable Care Act, and will determine future allotments from this rebased level.
• Coding Intensity Adjustment: Under current law, Medicare Advantage plans receive a coding intensity adjustment of 3.41%, which reduces those plans’ reimbursement rates so that they more closely match the reimbursement to Medicare fee-for-service plans. This rate factor, determined by the CMS, will be increased to save an estimated $2 billion.
• Consumer Operated and Oriented Plans (CO-OPs): The Act rescinds all unobligated funds for the CO-OP Program and its plans, which are nonprofit health insurance providers, established by section 1332(g) of the Affordable Care Act. The provision does not take away any obligated CO-OP funds, but it does create a contingency fund consisting of 10% of the current unobligated funds. The contingency fund will be used to help currently approved and created co-ops and will result in an estimated savings of $2.3 billion.
• CLASS Repeal: The Act repeals the Community Living Assistance Services and Supports (CLASS) program established by the ACA and championed by the late Sen. Ted Kennedy (D-MA). Although in October 2011 the Obama administration suspended the long-term care insurance program in which workers would have paid monthly premiums during their careers to create a cash-bank in case of disability later in life, many Democrats had hoped to revive the program someday. H.R. 8 repeals the CLASS Act, although doing so provided no savings. In its place, the Act creates a Commission on Long-Term Care to develop a plant for the establishment, implementation and financing of a system to make long-term care services and support available for individuals. The Commission has no scoring effect.
• Medicare Improvement Fund: The Act eliminates the Medicare Improvement Fund for an estimated savings of $1.7 billion.
• Multiple Therapy Procedure Payment Reduction: The Act reduces payments for physical and other therapy services when they are provided in the same day for an estimated savings of $1.8 billion.
• Advanced Imaging Services Adjustment: The Act increases the utilization factor used in the setting of payment for imaging services in Medicare from 75% to 90%, which is projected to save $800 million.
• Competitive Bidding Rates Applicable for all Diabetic Supplies: The Act applies competitive bidding payment rates to diabetic test strips purchased at retail pharmacies for an estimated savings of $600 million.
• Radiology Services Adjustment: The Act reduces payments for stereotactic radiosurgery services paid for under the Medicare hospital outpatient system, which is expected to save $300 million.

Although the American Taxpayer Relief Act has prevented the country from going over the “fiscal cliff,” the 113th Congress will almost certainly continue to focus on health care cost containment and entitlement reform in the coming weeks and months. Mintz Levin and ML Strategies will continue to closely monitor the effect of fiscal policy on health care.