FY 2007 Budget in Brief

Centers for Medicare & Medicaid Services

On this page:
Overview of the CMS Budget
Centers for Medicare & Medicaid Services
Medicare
Medicare Legislative Proposals Table
Medicaid
State Children's Health Insurance Program
Medicaid And SCHIP Proposals
State Grants and Demonstrations Table
State Grants and Demonstrations
Program Management

Overview of the CMS Budget

Centers for Medicare & Medicaid Services

The Centers for Medicare & Medicaid Services assures health care security for beneficiaries.

The Centers for Medicare & Medicaid Services (CMS) is the largest purchaser of health care in the United States, serving about 90 million Medicare, Medicaid, and State Children's Health Insurance Program (SCHIP) beneficiaries. The FY 2007 Budget request for CMS is $598.1 billion in net outlays, a $54.5 billion, or 10 percent increase over FY 2006. This request finances Medicare, Medicaid, SCHIP, the Health Care Fraud and Abuse Control Program (HCFAC), State insurance enforcement, and CMS operating costs. Following are policy highlights from the CMS FY 2007 Budget request.

Medicare

• In conjunction with steps to promote higher quality care, the Budget includes a set of Medicare proposals saving $2.5 billion in FY 2007 and $35.9 billion over five years. These proposals will implement productivity adjustments in provider payment updates; rationalize payments for certain covered services; expand Medicare Secondary Payer provisions; and extend competitive bidding to laboratory services.
• The 2007 proposed legislation builds on Medicare changes in the Deficit Reduction Act of 2005 (DRA). DRA provisions support Administration priorities, such as using payments to support better performance and promoting quality improvement.
• The new Medicare prescription drug benefit took effect on January 1, 2006, and more than 24 million beneficiaries are already participating in the program. Beneficiaries can choose a plan that best meets their needs, and the cost of coverage is much less than projected.

Medicaid and SCHIP

• The Deficit Reduction Act of 2005 (DRA) takes important steps to reform Medicaid and SCHIP by: preserving long-term care for those who need it most by eliminating abuses of asset transfers; reducing payments for Medicaid prescription drugs; giving States more flexibility with regard to program benefits, cost sharing and home and community-based services; and providing new funding sources for program integrity efforts.
• Building on this DRA progress, the Budget proposes Medicaid and SCHIP legislative changes that will save $1.3 billion over five years and administrative changes that will save $12.2 billion over five years.
• The Budget also includes proposals to help the uninsured, including a Cover the Kids initiative to find and enroll Medicaid and SCHIP-eligible children, and changes to Transitional Medical Assistance that will help families transition to work and retain health insurance coverage.

Discretionary Program Management

• The Program Management request includes $147 million to support the Administration's commitment to implement Medicare contracting reform required by MMA on an accelerated time line.
• The discretionary Budget also assumes $133 million in administrative savings from eliminating paper claims, checks, and notices from Medicare contractor operations.

Other Initiatives

• The President's Budget includes a $500 million grant program to promote health insurance coverage of chronically-ill individuals, and a new Medicaid waiver initiative to promote innovative expansions of affordable coverage.

CMS FY 2007 Net Outlay, Proposed Law $598.1 billion [D]

Medicare

Medicare

Medicare Benefit Outlays by Service, 2007 Total Benefits Outlays: $449.2 billion [D]

The Four Parts of Medicare

Part A

• Medicare Part A, or Hospital Insurance (HI), pays for inpatient hospital care, skilled nursing facility care, home health care related to a hospital stay, and hospice care.
• Part A financing comes primarily from a 2.9 percent payroll tax split between employees and employers.
• Individuals with 40 quarters of Medicare-covered employment are entitled to Part A without paying a premium. In 2006, those with 30-39 quarters of Medicare-covered employment pay a Part A monthly premium of $216 and those with less than 30 quarters of covered employment pay a monthly premium of $393.
• In 2006, beneficiaries will pay a $952 deductible for a hospital stay of 1-60 days, and a $119 daily coinsurance for days 21-100 in a skilled nursing facility.
• The 2005 Medicare Trustees report projects the HI Trust Fund's insolvency date at 2020.

Part B

• Medicare Part B, or Supplementary Medical Insurance (SMI), pays for physician services, outpatient hospital services, treatment for ESRD, laboratory services, durable medical equipment, certain home health care, and other medical services and supplies.
• Part B coverage is voluntary, and about 94 percent of Medicare beneficiaries are enrolled in Part B. The 2006 monthly Part B premium is $88.50.
• Approximately 25 percent of Part B costs are financed by beneficiary premiums, with the remaining 75 percent covered by general revenues.

Part C

• Medicare Part C, the Medicare Advantage (MA) program, offers beneficiaries a variety of coverage options including traditional Health Maintenance Organizations (HMOs), preferred provider organizations (PPOs), and private fee-for-service (FFS) plans.
• In 2005, about 13 percent of beneficiaries were enrolled in an MA plan.
• Medicare pays MA plans a capitated monthly payment to provide all Parts A and B services (and Part D if offered by the plan). Plans can also offer additional benefits or vary cost sharing arrangements.
• Beneficiaries pay monthly premiums to MA plans to cover all Medicare services plus any additional benefits. The premium varies depending on the services offered by the plan, therefore, it can be higher or lower than the regular Part B premium. Many beneficiaries have access to zero premium plans.

Part D

• The new prescription drug benefit, Medicare Part D, took effect on January 1, 2006. Part D offers a standard benefit with a $250 deductible, a monthly premium, and a substantial subsidy for drug costs.
• The standard benefit includes a coverage gap, in which beneficiaries are responsible for all of their drug costs. But once out-of-pocket spending reaches $3,600, Medicare covers 95 percent or more of drug costs.
• Beneficiaries have many options for prescription drug coverage, all with benefits as good as or better than the standard benefit. In general, those in a Medicare Advantage plan will receive their prescription drug benefits through their plan.
• For people who are low income, varying degrees of cost sharing are available, with co-payments ranging from $0 to $5 and low or no monthly premiums.

Beneficiary Prescription Drug Spending in 2006 Under Medicare's Standard Drug Benefit

Medicare Advantage Enrollment Increases in 2005 Reversing Downward Trend [D]

Implementing MMA

The Medicare Modernization Act of 2003 (MMA) enacted sweeping changes to transform and modernize the Medicare program. The MMA changes were supported by the Administration in an effort to offer a 21st century benefits package, expand beneficiary choices, introduce competition, and control spending. Timely and effective implementation of MMA reforms is a high priority for the Administration.

Part D Progress: The prescription drug benefit, established by MMA, began on January 1, 2006. Seniors and disabled persons who enroll in the benefit are paying an average monthly premium of about $25 in 2006, well below previous estimates of about $37. Furthermore, beneficiaries have a choice of at least one plan with monthly premiums below $21. In many parts of the country, beneficiaries can enroll in a drug plan for as little as $1.87 per month. Prescription drug plans are available with zero deductibles or deductibles lower than Medicare's standard annual deductible of $250 in every region. CMS and its partners are still promoting the drug benefit and encouraging beneficiaries to sign up by the end of open enrollment in May 2006.

At press time, about 24 million Medicare beneficiaries are participating in the new prescription drug benefit. This figure includes more than six million Medicare-Medicaid dual eligible beneficiaries, over six million in employer-sponsored coverage supported by the retiree drug subsidy, and more than three million beneficiaries who signed up for stand-alone prescription drug coverage. In addition, three million Medicare-eligible Federal retirees will continue to receive drug coverage they already enjoy.

Medicare Advantage: The MMA created the MA program to offer more choices and better benefits to Medicare beneficiaries through competition among private health insurance plans. With the passage of MMA, a downward trend in private Medicare plan enrollment has been reversed, and 5.7 million beneficiaries, or nearly 13 percent, are enrolled in MA plans. The MMA increased payments to private plans, and plans have been investing these higher payments in improving benefits for Medicare beneficiaries. Beneficiaries in MA can now save an average of about $100 in out-of-pocket costs compared to traditional Medicare, and beneficiaries in fair to poor health save even more.

In 2006, CMS has contracts with over 360 private health plans, which will offer more than 1,600 benefit options for seniors and the disabled across the Nation. Approximately 98 percent of Medicare beneficiaries now have access to some kind of local private MA plan. More than 80 percent of beneficiaries have access to regional PPO plans. Of the 3,066 counties in the United States, 3,004 will have a participating local plan.

Competitive Bidding: The MMA introduced market competition into the purchase of medical items used to treat Medicare beneficiaries. CMS will implement a competitive bidding program in July 2006 to enable Medicare providers to purchase certain drugs at market prices. In 2007, CMS will expand the use of competitive bidding to the purchase of durable medical equipment (DME) and supplies.

Under this new DME model, CMS will use competitive bidding in selected markets. The MMA requires that competition occur in ten of the largest metropolitan statistical areas (MSAs) starting in 2007, expanding to 80 of the largest MSAs by 2009. CMS will choose the 10 regions they believe will provide the most competitive environment and will be of a size that will not overwhelm their current capacity to conduct a bidding process.

Under a previous DME demonstration project, competitive bidding achieved Medicare savings and this expanded program is expected to produce similar results.

Contracting Reform: The MMA includes provisions that allow the Secretary to introduce greater competition and accountability to the Medicare contracting process. To ensure a sufficient number of private contractors to administer the program, the original Medicare law provided prospective contractors with a number of beneficial provisions such as limiting the type of contractors, requiring cost contracts, and limiting competition for specific functions. The MMA:

• Removes the distinction between Part A contractors and Part B contractors;
• Removes the restriction that limited claims processing contracts to health insurance companies;
• Allows the Secretary to renew contracts annually for up to five years;
• Requires that all contracts must be re-competed at least every five years;
• Limits contractor liability; and
• Allows incentive payments to improve contractor performance.

In February 2005, CMS announced an accelerated strategy to convert from the current cost contracts to the new Medicare administrative contracts (MACs) over the period FY 2006 through FY 2009. This accelerated strategy ensures that expected benefit savings from Medicare contracting reform could come as early as FY 2009. By then, CMS plans to reduce the overall number of contractors from about 50 to 23 (15 Part A/B MACs, 4 durable medical equipment MACs, and 4 home health MACs).

Part of the accelerated strategy includes introducing durable medical equipment Medicare administrative contractors (DME MACs) in 2006. On January 6, 2006, CMS awarded four DME MACs using the full and open competition model envisioned in MMA. The DME MACs will immediately begin transition activities and assume full responsibility for claims processing on July 1, 2006.

The FY 2007 budget includes $146.8 million to continue the accelerated contracting reform strategy. With this funding, CMS will transition to seven MACs during 2007.

FY 2007 Budget and Legislative Initiatives

In conjunction with Medicare's recently updated benefits, which will promote more effective and prevention-oriented care, the FY 2007 Budget includes a package of Medicare legislative proposals designed to strengthen the long-term financial security of the Medicare program. These proposals build on long-term Administration priorities for Medicare, such as improving quality and preventing medical errors, encouraging efficient and appropriate payment for services, fostering competition, and promoting beneficiary involvement in health care decisions. The net savings from this legislative package is $2.5 billion in FY 2007 and $35.9 billion over 5 years. The following is a summary of the FY 2007 budget and legislative priorities.

Fostering Productivity: To more accurately pay providers for the care furnished to beneficiaries, as well as encourage the adoption of productivity advances, the Budget proposes to include productivity adjustments to providers in the determination of yearly updates.

Specifically, based on the most recent recommendations from the Medicare Payment Advisory Commission (MedPAC) for 2007, the Budget proposes a zero percent payment update for skilled nursing facilities, home health agencies, and inpatient rehabilitation facilities, and an update of the market basket minus 0.45 percent for hospitals. In 2008 and 2009, the payment update for all of these provider categories would be market basket minus 0.4 percent. The Budget also proposes to reduce payment updates for hospice and ambulance services by 0.4 percent for each of the years 2007 through 2009.

Rationalizing Medicare Payments: To ensure that Medicare does not pay health care costs where another insurer is primary, the budget seeks to clarify and expand Medicare secondary payer instances.

In the area of DME, there has been considerable growth in spending, specifically for power wheelchairs and oxygen and oxygen equipment. Moving oxygen and oxygen equipment from continuous rental to the capped rental category would reduce costs for the Medicare program and its beneficiaries. In addition, the budget proposes to reimburse for short-term power wheelchair usage based on actual time used versus paying up front at the full purchase price.

Encouraging Quality and Efficiency: The Administration has undertaken initiatives to hold providers accountable for quality and support care improvements that enhance quality and efficiency. Many of the opportunities to accomplish these goals involve post acute care. Medicare often pays different amounts for post acute care for beneficiaries with similar needs, and often pays more when preventable complications leading to readmissions and other health problems occur in the post acute system. The budget proposes to build on the Administration's quality initiatives by ensuring that patients are served in the most medically appropriate and efficient setting for high quality post acute care.

The Administration supports provider payment reforms that encourage quality, and is considering ways to promote more efficient and high quality physician services. The Administration supports physician payment reforms that do not increase taxpayer, Medicare, or beneficiary costs, such as differential updates initially for physicians that report on quality measures and later for physicians that achieve efficient and high quality care.

Limiting Subsidies to High Income Beneficiaries: MMA requires higher-income beneficiaries to pay a greater share of the Part B premium starting in 2007. Currently, beneficiary premiums cover 25 percent of Part B program costs. Starting 2007, Part B subsidies will be reduced for beneficiaries with an annual income over $80,000 and couples over $160,000.

The budget proposes to build upon the initial steps of MMA by eliminating annual indexing of thresholds for income-related Part B premiums beginning on January 1, 2008. While all beneficiaries would continue to get Medicare subsidies, this change gives beneficiaries increased participation in their health care, while retaining the current growth in subsidies for most beneficiaries.

Medicare Health Savings Accounts: Health Savings Accounts (HSAs) combine a high-deductible health plan with a tax advantaged personal savings account reserved for medical expenses. HSAs give individuals greater ownership over their health care and can be a more economical choice than traditional insurance. More than one million Americans have opted for an HSA since the President signed them into law in December 2003. However, Medicare still does not offer any HSA options. The Administration is developing new Medicare HSA choices for beneficiaries, including allowing people to continue their existing HSAs when they become eligible for Medicare.

Competitive Bidding for Labs: CMS successfully tested a competitive bidding model for DME in Polk County, Florida and San Antonio, Texas. Based on that success, MMA expanded DME competitive bidding nationwide and required a similar competitive process for outpatient drugs. The Budget proposes to build on these successful competition models by extending competitive bidding to Medicare laboratory services.

Expanding Program Integrity Efforts: The Budget proposes to encourage Medicare providers to collect debts from beneficiaries who have not met their obligations to contribute to their medical care costs. Under this proposal, Medicare would phase out bad debt reimbursement to providers between 2007 and 2011. In addition to the $1.1 billion provided in statute for Health Care Fraud and Abuse Control (HCFAC) in 2007, the Budget requests an additional $118 million targeted at efforts to protect the new prescription drug benefit and Medicare Advantage programs against fraud, waste and abuse. These funds are part of a Government-wide proposal to fund program integrity activities through a discretionary cap adjustment.

Building on Contracting Reform: The Administration will build on MMA Contracting Reform by working to improve quality and efficiency and better target resources to Quality Improvement Organizations (QIOs).

Strengthening Medicare's Long-Term Financial Security: To support continuing efforts to enhance Medicare's long-term sustainability, the Budget builds on an MMA requirement that the Medicare Trustees Report include a comprehensive fiscal analysis of the program's financing and issues a warning if general revenues are projected to exceed 45 percent of total Medicare financing. If the 45 percent threshold were met and Congress failed to act on recommendations to sustain Medicare's financing, then a four-tenths of one percent reduction to all Medicare payments would be implemented to slow growth, similar to a reduction in the market basket update. The reduction would grow by four-tenths of one percent every year that the 45 percent threshold is exceeded.

Medicare Highlights from the Deficit Reduction Act of 2005

Linking Payment to Performance: Starting in 2007, hospitals will be required to submit data on specified quality measures or have their annual market basket update reduced by two percentage points. The Secretary will develop a plan to implement a value-based purchasing program for inpatient hospital payments, beginning in 2009. Likewise, starting in 2007, home health agencies will be required to submit data on quality measures specified by the Secretary, or incur a two percentage point reduction in their market basket update.

Promoting Efficiency and Quality: By January 2007, DRA requires the Secretary to implement a hospital-focused gain sharing demonstration project in six sites. The projects will improve Medicare quality and efficiency by testing arrangements between hospitals and physicians to govern utilization of hospital resources and encouraging hospitals to share resulting savings with physicians.

Reducing Bad Debt Payments for Skilled Nursing Facilities: Starting in 2006, Medicare reimbursement for skilled nursing facility bad debt will be reduced to 70 percent, consistent with the rate paid to hospitals, except for the bad debt attributable to dual-eligible beneficiaries.

Rationalizing Provider Payments: Effective 2006, the title for DME capped rental items will be transferred to beneficiaries after 13 months of continuous use, saving money for Medicare and its beneficiaries. Another provision produces savings from paying less for multiple diagnostic images. Finally, DRA freezes home health updates in 2006, based on MedPAC reports showing home health agencies enjoying healthy profit margins.

2006 Physician Update: The physician payment update for 2006 is set at zero percent, instead of the previously scheduled -4.4 percent update.

Accelerating Income-Related Part B Premium: The MMA required phase-in of an income related Part B premium over 5 years, from 2007 to 2011. DRA accelerates this time frame, requiring the income-related premium be fully implemented by 2009.

Promoting Efficient Program Administration: To encourage providers to submit clean electronic claims, DRA extends the time period by which contractors must pay paper claims, from 27-30 days to 29-30 days.

Enhancing Program Integrity: DRA provides an additional $100 million in 2006 for the Medicare Integrity Program, to enhance program integrity oversight of the new prescription drug benefit and Medicare Advantage programs.

Medicare Quality Improvement Efforts

Improving quality of care and reducing medical errors are important goals in modernizing Medicare. The Administration supports greater availability of reliable and consistent quality information. The Medicare website now displays quality data that allows consumers to make informed choices by comparing the performance of hospitals, nursing homes, home health agencies, and dialysis facilities. The Administration also supports provider payment reforms that promote quality and efficiency and discourage increased complications and costs. CMS is working with Medicare providers to identify and test budget-neutral incentives that will stimulate improved performance on quality and efficiency measures. The following are additional CMS activities that support efforts to improve quality of care in Medicare.

Expanding Pay-for-Performance: CMS is working to develop and implement payment systems that support higher quality care - the right care for each person every time. These payment reforms can help providers deliver care that prevents complications, avoids unnecessary medical services, and achieves better outcomes at a lower overall cost. CMS is working on several fronts to expand pay for performance initiatives.

Encouraging Quality Data Reporting: In 2002, CMS initiated a voluntary requirement that hospitals report certain quality measures. This concept was adopted by MMA and expanded under DRA. Hospitals now face reductions to their annual payment updates for failure to report on selected quality measures. In early 2006, CMS is also launching a similar voluntary reporting effort for physicians. CMS will collect information on 16 clinical measures and work with doctors to improve data accuracy and clinical care. Comparative facility quality information, available on the Medicare web site, can help guide consumer choices and drive quality improvements.

Conducting Demonstration Programs: CMS is testing several demonstrations and pilot projects to test P4P principles. Using financial incentives, the Premier Hospital Quality Incentive demonstration adjusts hospital payments up or down depending on how they perform on certain quality outcomes measures. Under this project, top performing hospitals have so far received $8.9 million in bonuses based on performance, with improvements in quality and fewer costly complications. The Physician Group Practice Demonstration is testing pay for performance for large physician groups. Physician groups who achieve benefit savings among their patient population using quality improvement approaches will receive performance payments. A series of demonstrations will test if various disease management models can improve health outcomes and reduce costs in Medicare.

Promoting Health Information Technology: CMS is promoting the adoption of health information technology (IT) tools to improve performance and quality outcomes. For example, CMS is providing technical assistance to physicians' offices on how to adopt health IT tools to improve quality through the Doctor's Office Quality Information Technology (DOQ-IT) project. CMS has also developed regulations on standards for e-prescribing and for promoting interoperable record systems.

Quality Improvement Organizations: QIOs-previously Peer Review Organizations-were established by Title XI, Section 1151 of the Social Security Act, Part B, to serve the following functions:

• Improve the quality of care for beneficiaries by ensuring that professionally recognized standards of care are met;
• Enhance program integrity by ensuring that Medicare only pays for items that are reasonable and medically necessary; and
• Protect beneficiaries by addressing individual beneficiary's complaints, appeals, and case reviews.

QIOs are a central player in this Administration's efforts to improve the quality of care provided to Medicare beneficiaries. QIOs assist providers seeking to improve the quality of care delivered in nursing homes, home health agencies, hospitals, and physicians' offices. These quality improvement efforts are essential to the Administration's goals to modernize and strengthen the Medicare program.

In the 7th cycle of contracts (commonly called a Scope Of Work or SOW), QIOs for the first time provided assistance on both the statewide and provider-specific level to nursing homes and home health agencies to improve quality. They also continued ongoing work with hospitals and physicians' offices. Medicare providers improved their quality of care on 29 of 41 clinical quality measures.

On August 1, 2005, QIOs began a new three-year contract cycle. While continuing many existing quality improvement activities, the 8th contract cycle shifts the focus from targeted quality efforts to more systemic improvements. This cycle of contracts is broken into three major areas of work:

• Clinical Quality Improvement: QIOs will work with providers to improve the quality of care provided to beneficiaries. New activities include: collaborating with nursing homes to increase the stability of nursing homes' workforce; working nationally with physicians' offices to encourage adoption of health IT; and starting work with prescription drug plans and Medicare Advantage care plans to improve prescription drug therapy.
• Public Reporting and Quality Information: QIOs are working with providers to enhance the reporting of quality data and make it more accessible to the public. As part of an increased emphasis on pay for performance activities, QIOs are working with hospitals on the voluntary reporting initiative and will start to work with physicians to improve the data accuracy of reported measures of clinical care.
• Protecting Beneficiaries and the Trust Funds: QIOs continue to monitor the accuracy of Medicare payments to hospitals and respond to beneficiary complaints about the quality of care received.

Health Care Fraud and Abuse Control Program

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), established the Health Care Fraud and Abuse Control (HCFAC) Program. The FY 2007 budget proposes to fund the HCFAC program through both a mandatory and a discretionary funding stream. Proposed FY 2007 total HCFAC funding is $1.2 billion. Of this amount, $1.1 billion funds the mandatory portion of the program. Within the mandatory amount is $24 million provided in DRA for the Medicare-Medicaid data matching program. The remaining $118.4 million represents new discretionary proposed funding.

The HCFAC program was established to:

• Coordinate Federal, State, and Local law enforcement programs;
• Conduct investigations, audits, and evaluations relating to the delivery of and payment for health care;
• Facilitate enforcement of statutes applicable to health care fraud and abuse;
• Provide for clarification on acceptable business arrangements and issue advisory opinions and special fraud alerts; and
• Provide for the reporting and disclosure of final adverse actions against health care providers, suppliers, or practitioners.

HCFAC Mandatory Funds: The HCFAC Program dedicates $1.1 billion from the Medicare Part A Trust Fund toward combating health care fraud and abuse. The FY 2007 money is allocated into three major parts: 1) $744 million for the Medicare Integrity Program (MIP); 2) $114 million to the Federal Bureau of Investigation (FBI); and, 3) $240.6 million allocated among the Department of Justice (DOJ), the HHS Office of the Inspector General (OIG), and other HHS agencies, including for 2006 CMS, the Administration on Aging (AoA), The Health Resources and Services Administration (HRSA), the Office of the National Coordinator for Health Information Technology (ONC), and the Office of General Counsel (OGC). The programs and projects financed by these funding streams are used to detect and prevent fraud, waste, and abuse through investigations and audits, educational activities, and data analysis. From 1997 to 2004, HCFAC activities have returned approximately $7.3 billion to the Medicare Trust Fund.

The MIP activity in HCFAC provides funds for: medical review; benefits integrity work to identify and refer patterns of fraud to law enforcement; provider and HMO audits of cost reports; Medicare secondary payer activities; and provider education and training. The Administration has requested an additional $85.6 million in discretionary funding to safeguard the Medicare prescription drug benefit and Medicare Advantage. These funds will increase the total MIP funding to $829.6 million in 2007.

The FBI uses its $114 million allocation for health care fraud enforcement and investigations. In addition, the FBI provides operational support for national anti-fraud initiatives focusing on pharmacies, chiropractic services, medical clinics, and transportation providers.

The remaining $240.6 million finances a variety of anti-fraud and abuse activities. The HHS OIG uses its share to: a) bring about judgements and settlements related to health care fraud and abuse; and b) develop and implement recommendations, in conjunction with CMS, for correcting systemic vulnerabilities detected during evaluations and audits. The funding not allocated to the OIG is known as the "wedge." DOJ uses its portion of the wedge for civil and criminal prosecutions of health care professionals and providers. The remaining wedge monies go to HHS and are used primarily for: SCHIP and Medicaid financial management oversight; educational activities at AoA; supporting the Healthcare Integrity and Protection Data Bank; fraud prevention research by ONC; and investigative and litigation support at OGC.

HCFAC Cap Adjustment: As part of a Government-wide proposal to fund program integrity activities through a discretionary cap adjustment, the Budget requests discretionary HCFAC funding totaling $118.4 million in FY 2007 and $182.5 million in FY 2008. These amounts will be allocated among DOJ and OIG, as well as the Medicaid and Medicare programs at CMS. These funds are intended to complement the program integrity activities funded with mandatory HCFAC funds. Mandatory HCFAC funds have been capped since FY 2002, while at the same time, the Medicare program has experienced significant transformation and growth in Medicaid has put spending in that program on par with Medicare, thereby elevating the need for enhanced financial management oversight. The two-year, discretionary HCFAC request will be used to safeguard the new Medicare prescription drug benefit and Medicare Advantage plans against fraud, waste, and abuse, as well as to expand program integrity oversight of the Medicaid program.

Reducing Erroneous Medicare Payments

CMS announced in November 2005 that in just one year, aggressive oversight and new efforts to improve payment accuracy have cut the percentage of improper fee-for service Medicare claims payments by half, from 10.1 percent in 2004 to 5.2 percent in 2005, a $9.5 billion reduction in improper payments. As part of its future performance goals, CMS has targeted further reducing the Medicare error rate to 5.1 percent in 2006 and 4.9 percent by 2007.

MIP is the primary source of funding to lower Medicare improper payments and finances the Comprehensive Error Rate Testing (CERT) program. CERT is the primary management tool for reducing the percentage of erroneous Medicare payments. Implemented in 2003, CERT allows CMS to estimate the Medicare error rate using a sample size of approximately 160,000 fee-for-service claims. Further, the program tracks payment accuracy data at the contractor, provider, and service levels, allowing CMS to identify where problems exist and more effectively target improvement efforts to address those problems.

The significant reduction in the Medicare FFS error rate from 2004 to 2005 can be attributed largely to a marked reduction in errors from claims with no documentation and insufficient documentation. These reductions are linked to efforts through CERT to educate providers about problems with medical record documentation and methods to improve their accuracy and completeness. When CERT data reveal a pattern that indicates a payment problem, CMS works with contractors to develop corrective action plans.

In 2005, CMS began an assessment of the risk for improper payments to Medicare Advantage plans and will take a series of steps starting this year to measure the accuracy of these payments in detail and address potential risks. By reviewing monthly managed care payments, CMS will examine whether beneficiaries are eligible for a plan, how payments are made, and what happens when a beneficiary's enrollment is terminated. Likewise, this year CMS will begin work to identify and prevent fraud and abuse of the new prescription drug benefit, through contractors called Medicare Rx Integrity Contractors (MEDICS).

Performance Highlight: Reduce the Medicare Error Rate

Clinical Laboratory Improvement Amendments of 1988

The Clinical Laboratory Improvement Amendments of 1988 (CLIA) expanded survey and certification of clinical laboratories from Medicare-participating and interstate commerce laboratories to all facilities testing human specimens for health purposes. CLIA also introduced user fees to finance survey and certification activities at clinical laboratories. User fees are credited to the Program Management account but are available until expended for CLIA activities. CMS determines the workloads of each State survey agency by taking the total number of laboratories and subtracting waived laboratories, laboratories issued certificates of provider-performed microscopy, State-exempt laboratories, and accredited laboratories.

The CLIA program has 186,360 laboratories registered with CMS, 20 percent of which are subject to routine inspection (every 2 years) under the program. The remainder are exempted. Workload projections for the FY 2006-2007 cycle include 20,582 surveys of nonaccredited laboratories, 826 State validation surveys of accredited laboratories, and approximately 1,441 follow-up surveys and complaint investigations.

Data support the contention that CLIA has improved the overall quality of laboratory testing in the nation. On average, the number of quality deficiencies decreases approximately 40 percent from the first round of laboratory surveys to the second, with further decreases in subsequent surveys.

Medicare Legislative Proposals Table

Medicaid

Distribution of People Served Through Medicaid Payments by Basis of Eligibility, FY 2003

Estimated State and Federal Medicaid Outlays FY 2007-2016

Medicaid is a jointly-funded, Federal-State program that provides medical assistance to certain low-income groups. In FY 2007, approximately 52.9 million individuals, including children, the aged, blind, and/or disabled, and people who meet eligibility criteria under the old Aid to Families with Dependent Children (AFDC) program, will be covered by Medicaid. Additionally, many other individuals will receive Medicaid benefits through waivers and amended State plans with somewhat higher income eligibility limits. The Medicaid current law baseline assumes passage of the Deficit Reduction Act of 2005 (DRA). In FY 2007, the Federal share of current law Medicaid outlays is expected to be $199.45 billion. This is a $7.11 billion (3.7 percent) increase over projected FY 2006 spending.

Background

Under Medicaid, State expenditures for medical assistance are matched by the Federal Government using a formula based on per capita income in each State relative to the national per capita income. The Federal medical assistance percentage (FMAP) rates for FY 2007 will range from 50 to 76 percent for medical assistance payments. Overall, the Federal Government pays for approximately 57 percent of total Medicaid expenditures. In addition to medical assistance payments, the Medicaid appropriation funds the Center for Disease Control and Prevention's Vaccines for Children program and the Federal share of Medicaid State and local administrative costs.

Historically, eligibility for Medicaid had been based on qualifying under the cash assistance programs of AFDC or Supplemental Security Income (SSI). With the creation of the Temporary Assistance for Needy Families (TANF) program in 1996 (which replaced AFDC), eligibility for Medicaid and cash assistance were de-linked. Medicaid eligibility, however, remains tied to AFDC program rules in place in 1996. All those who qualify under the 1996 AFDC rules and most SSI recipients, commonly referred to as the "categorically eligible," must be covered under State Medicaid programs. States must cover three additional groups: 1) pregnant women and infants whose family income does not exceed 133 percent of the Federal poverty level; 2) all children under six living in families with incomes under 133 percent of the Federal poverty level; and 3) children aged six through 18 years living in families with incomes below the poverty line. In 2006, the Federal poverty level for a family of three was $16,600 in the continental United States.

States may also cover "medically needy" individuals. Such individuals meet the categorical eligibility criteria, but have too much income or too many resources to meet the financial criteria.

Generally, States are required to provide a core of 13 mandatory services to eligible needy recipients, including: inpatient and outpatient hospital care; health screening, diagnosis, and treatment for children; family planning; physician services; and nursing facility services to individuals over 21. States may also elect to cover any of over 30 specified optional services, which include prescription drugs, clinic services, dental care, eyeglasses, and services provided in intermediate care facilities for those with developmental disabilities.

Medicaid Highlights from the Deficit Reduction Act of 2005

Expansion of State Long-Term Care Partnership Program: Establishes authority for all States (outside of the original four State demonstrations) to implement long-term care partnership plans that provide dollar-to-dollar disregard of assets or resources equal to the insurance benefit payments on behalf of the individual. The provision provides standards for reciprocity among partnership States unless they notify the Secretary of their decision to exempt themselves. Additionally, the DRA establishes a National Clearinghouse for long-term care information to educate beneficiaries on all types of long-term care insurance.

Money Follows the Person Rebalancing Demonstration: This demonstration, which builds on the President's New Freedom Initiative, will help States rebalance their long-term health care systems between institutional and home and community-based services (HCBS) by awarding selected States with an enhanced matching rate to pay for HCBS for individuals transitioning from institutional care to a setting of their choice.

Family Opportunity Act: The Family Opportunity Act (FOA) was passed as part of the DRA and includes a provision that allows States to offer middle-income families with disabled children the option of buying into Medicaid. FOA includes a demonstration that provides States with the opportunity to offer home and community based alternatives to psychiatric residential treatment facilities for children as part of the New Freedom Initiative first proposed by the President. The FOA also restores Medicaid eligibility for certain SSI beneficiaries.

Expanded Access to Home and Community-Based Services (HCBS) for the Elderly and Disabled: Beginning January 1, 2007, HCBS for elderly and disabled will become an optional benefit for States. $1 million is also appropriated for the period of FY 2006 through FY 2010 for measuring quality in HCBS programs.

Optional Choice of Self-Directed Personal Assistance Services: Beginning January 1, 2007, self-directed personal assistance services for the elderly and disabled would become an optional benefit for States.

Asset Transfer Reform: The DRA includes several provisions to increase penalties or change the rules regarding asset transfers in order to deter individuals from transferring assets so that they may become eligible for Medicaid long-term care services. These changes include lengthening the look-back period from three years to five years and changing the penalty period start date; altering how annuities are treated; modifying the "income first" rule regarding community spouses; disqualifying individuals with substantial home equity from receiving long-term care assistance except where the spouse or minor or disabled child lives in the home or in instance of undue hardship; and requiring residents of Continuing Care Retirement Communities to spend down resources before applying for Medicaid while considering an individual's entrance fees as a resource.

Flexibility in Cost Sharing and Benefits: The DRA allows States to apply limited premiums and cost sharing for certain groups of Medicaid beneficiaries and services, and sets special rules for cost sharing for non-preferred prescription drugs and non-emergency care provided in emergency rooms. Premiums and cost sharing are limited to five percent of family income. Additionally, the DRA allows States to provide Medicaid coverage to certain groups of individuals through enrollment in benchmark benefit packages, similar to those offered in the State Children's Health Insurance Program (SCHIP).

Health Care Fraud and Abuse: The DRA includes several provisions which build on existing efforts to strengthen Medicaid and SCHIP program integrity. These provisions establish a new Medicaid Integrity Program; increase funding for the Medicare-Medicaid data matching program to find abuse patterns; provide incentives for States to enact and enforce false claims acts; prohibit providers from billing Medicaid multiple times for the same drug; enhance third party liability; improve enrollment documentation requirements; and create Medicaid transformation grants for States to use to adopt innovative cost-saving methods.

Prescription Drugs: The DRA contains several provisions that reform Medicaid payment for prescription drugs, including expanding the Federal Upper Limit list and collecting drug surveys and reports; collecting utilization data for physician administered drugs; expanding access to the 340B drug discount program to children's hospitals for inpatient drugs; and specifying how authorized generic drugs sold to another manufacturer are to be reflected when manufacturers report average manufacturer price and best prices.

Changes in Medicaid Funding: The DRA includes five provisions that adjust Medicaid funding to certain States and Territories and provide financing reform to certain services provided by Medicaid. The provisions include managed care organization provider tax reform; clarifications to Medicaid case management and targeted case management benefit reimbursement; an increase in the disproportionate share hospitals allotment for the District of Columbia; enhancement of the match rate for Alaska; and an increase in Medicaid payments to the Territories.

Emergency Services Furnished by Non-contract Providers for Medicaid Managed Care Enrollees: The DRA requires Medicaid providers without Medicaid managed care plan contracts to accept as payment in full no more than the amount otherwise applicable outside of managed care less any payments for indirect costs of medical education and direct costs of graduate medical education.

Other DRA Provisions With Medicaid Impacts

Child Support Enforcement Provisions: Two Child Support Enforcement provisions within the DRA have an effect on the Medicaid baseline. The first provision allows States to seek medical child support for children from both custodial and non-custodial parents. The second provision requires States to review child support orders for TANF cases every three years.

Hurricane Katrina Relief: The DRA appropriates $2 billion to provide care through Hurricane Katrina Waivers. Payments will be made to States for a range of health-care related costs, including some administrative costs.

Recent Program Developments

Medicaid Growth: Nursing home care, community-based long-term care costs, and payments to health plans are significant contributors to the growth in Medicaid outlays. These expenditures are expected to continue to contribute to growth in future years. State programs providing "enhanced payments" to institutional providers have also played a significant role in driving-up Federal Medicaid costs.

Waivers: States have sought waivers under section 1115 of the Social Security Act to expand health care coverage to low-income, uninsured populations that do not otherwise meet Medicaid eligibility criteria and to test innovative approaches in health care service delivery through demonstration programs. Although demonstrations vary greatly, many employ the approach of expanding the use of managed care for the Medicaid population.

To date, CMS has approved 32 Statewide comprehensive health care reform demonstrations in 29 States. CMS has also approved two sub-State health reform demonstrations and 15 demonstrations specifically related to family planning. The DRA legislation provides new opportunities for innovative waivers to improve health care coverage.

Health Insurance Flexibility and Accountability (HIFA): In August 2001, President Bush announced the HIFA demonstration, a new section 1115 initiative. HIFA demonstrations enable States to use Medicaid and SCHIP funds in concert with private insurance options to expand coverage to low-income, uninsured individuals, with a focus on those at or below 200 percent of the Federal poverty level.

A more in-depth discussion of HIFA waivers is included in the SCHIP section.

Extension of Premium Assistance to Qualified Individuals: The qualified individuals (QI),Transistional Medical Assistance (TMA), and Abstinence Programs Extension and Hurricane Katrina Unemployment Relief Act of 2005 (P.L.109-91) extends premium assistance for QI under Medicare through September 30, 2007. The QI extension will continue Federal coverage of Medicare Part B premiums, which are just over $1,052 per beneficiary annually ($87.70 per month) in 2006, a 12.1 percent increase over 2005, and will cost $350 million in FY 2007.

Medicaid and SCHIP Financial Management: The Administration proposes a continuation of activities associated with measurement of improper payments in Medicaid and SCHIP with the goal of reporting error rates for components in both Medicaid and SCHIP in the 2007 Performance and Accountability Report and a final completed error rate by 2008.

FY 2007 Proposed Legislation

The President's Budget includes legislative proposals to expand use of Medicaid benefits and a limited number of savings proposals.

Extension of Transitional Medical Assistance: TMA was created to temporarily extend health coverage for former welfare recipients after they enter the workforce. TMA allows families to remain eligible for Medicaid for up to 12 months after they lose welfare cash benefits due to increased earnings. This provision, enacted with welfare reform, was scheduled to sunset in September 2002 and has been extended several times. The DRA extends TMA through December 31, 2006. This legislative proposal extends TMA through September 30, 2007 and costs $180 million in FY 2007 and $360 million over five years.

Health Insurance Portability and Accountability Act (HIPAA) Proposals: Congress passed HIPAA in 1996 to increase the continuity, portability, and accessibility of health insurance. The President's Budget proposes two legislative changes to ensure that Medicaid and SCHIP beneficiaries receive the benefits of HIPAA-related coverage. The first change establishes the determination of eligibility for Medicaid or SCHIP as a qualifying event to allow access to employer-sponsored insurance (ESI). This change allows families to enroll in ESI through special enrollment even if they have missed their employer's open period for enrollment. The second change requires SCHIP programs to issue certificates of creditable coverage, which promote portable coverage by verifying the period of time an individual is covered by a specific health insurance policy. These proposals are budget neutral.

Cover the Kids: This legislative proposal provides $100 million in annual grants (in the State Grants and Demonstrations account) for States, working with schools and community organizations, to enroll and provide coverage to many eligible children in Medicaid and SCHIP. CMS estimates that this legislative proposal will result in additional Medicaid spending of $203 million in FY 2007 and $2 billion from FY 2007 through FY 2011 (please see the SCHIP and State Grants and Demonstrations chapters for additional cost estimates on this proposal).

Strengthening Third Party Liability: This proposal would allow States to avoid costs for prenatal and preventive pediatric care claims where a third party is responsible through a non-custodial parent's obligation to provide coverage for a limited time while assuring protection for providers and beneficiaries. In addition, legislation would be proposed to explicitly permit States to use liens against liability settlements to recover Federal matching payments. These proposals save $90 million in FY 2007 and $525 million over five years.

Strengthening Medicaid Reimbursement Policies: The Budget proposes to lower reimbursement for targeted case management services to the administrative matching rate of 50 percent. This legislative proposal saves $208 million in FY 2007 and $1.2 billion over five years.

Amending the Medicaid Drug Rebate Formula: The Medicaid program requires all drug manufacturers to pay a rebate for all drugs covered by Medicaid. The calculations for this rebate involve a figure called best price which is the lowest price available to retailers. This figure functions as a price floor, which prohibits manufacturers from negotiating deep discounts with large non-Medicaid purchasers such as hospitals and HMOs. This proposal would also help to administratively simplify drug rebate calculations and allow private purchasers to negotiate lower drug prices. Because this proposal is budget neutral, the States will not be disadvantaged by lower prices, which large volume, private purchasers may get.

Restructure Medicaid Prescription Drug Reimbursement: This proposal builds on DRA changes to the Federal upper limit for multiple source drugs. The Budget proposes to limit reimbursement for multiple source drugs to 150 percent of the average manufacturers' price. This will continue efforts to further reduce Medicaid overpayments for prescription drugs. States would have the flexibility to support innovative approaches to lower drug costs, such as paying pharmacists more when they help patients use less expensive generic drugs. This proposal saves $130 million in FY 2007 and $1.3 billion over five years.

Allowing States to Use Managed Formularies: This legislative proposal will allow States to use private sector management techniques to leverage greater discounts through negotiations with drug manufacturers. This proposal saves $15 million in FY 2007 and $177 million over five years.

Medicaid Administration Cost Allocation: This proposal will reduce duplicate Medicaid payments that were improperly included in TANF block grants and also charged to Medicaid. The 1996 welfare reform law capped Federal funding for administrative costs under TANF and eliminated the open-ended matching structure for administrative costs in AFDC. Under the AFDC structure, States generally allocated most of the common eligibility determination costs for AFDC, Medicaid, and Food Stamps to AFDC/TANF. As a result, administrative costs associated with Medicaid were inappropriately included in the TANF block grant and also charged to Medicaid. This proposal recoups Medicaid administrative costs assumed in the TANF block grant, saving $280 million in FY 2007 and $1.8 billion over five years.

Administrative Proposals

Strengthening Third Party Liability: Requires States to uphold the cost avoidance standard for pharmacy claims, thereby eliminating what is known as "pay and chase." Currently, certain States may pay a claim up front and then seek reimbursement from liable parties. This proposal saves $105 million in FY 2007 and $430 million over five years.

Reforming Provider Taxes: HHS will seek a regulatory change to provider tax policy. Under current rules, taxes imposed on providers may not exceed six percent of total revenues and must be applied uniformly across all health care providers in the same class. The regulatory change will phase down the allowable provider tax rate from six percent to three percent. This proposal does not generate savings in FY 2007 but saves $2.1 billion over five years. Additionally, HHS will release regulations clarifying existing policies used to determine what provider taxes comply with statute and regulations.

Capping Payments to Government Providers: Builds on past CMS efforts to curb questionable financing practices by recovering Federal funds that are diverted from government providers and retained by the State. In addition, this proposal caps payments to government providers to no more than the cost of furnishing services to Medicaid beneficiaries. This proposal saves $384 million in FY 2007 and $3.8 billion over five years.

Medicaid Reimbursement Policies: The Administration plans to clarify, through regulation, provisions related to disproportionate share hospitals. The Budget also proposes to clarify allowable services that can be claimed as rehabilitation services, and to prohibit Federal reimbursement for school-based administration or transportation costs; these administrative changes save $840 million in FY 2007 and $5.9 billion over five years.

State Children's Health Insurance Program

SCHIP Ever Enrolled FY 1998 Through FY 2004

The Balanced Budget Act of 1997 (BBA) created the State Children's Health Insurance Program (SCHIP) under Title XXI of the Social Security Act.

SCHIP is a partnership between Federal and State governments that helps provide children with the health insurance coverage they need. The program improves access to health care and quality of life for millions of vulnerable children under 19 years of age. SCHIP reaches children whose families have incomes too high to qualify for Medicaid, but too low to afford private health insurance.

The BBA appropriated almost $40 billion to the program over 10 years (FY 1998 through FY 2007). States with an approved SCHIP plan are eligible to receive an enhanced Federal matching rate, which ranges from 65 to 85 percent, drawn from a capped allotment.

States have a high degree of flexibility in designing their programs. They can implement SCHIP by:

• Expanding Medicaid;
• Creating a new, non-Medicaid Title XXI separate State program; or
• A combination of both approaches.

Generally, SCHIP benefits can be received by Medicaid-ineligible uninsured children who are under 19 years old and from families below 200 percent of the Federal Poverty Level (FPL).

Implementation and Enrollment

Every State, the District of Columbia, and all five Territories have had approved SCHIP plans since September 1999. As of January 2006, States have received approval for 17 Medicaid expansion programs, 19 separate programs, 20 combination programs, and 251 State plan amendments.

Today, 36 States and the District of Columbia cover children in families with incomes up to and including 200 percent of the FPL. Fourteen States cover children above that level. Of the 14, five States cover children up to and including 300 percent of the FPL, and one State, New Jersey, covers children up to 350 percent of the FPL.

During FY 2004, 6.1 million children were enrolled in SCHIP. This represents an increase of 200,000 children, or three percent, over FY 2003 enrollment.

SCHIP Performance

When SCHIP began in FY 1998, CMS adopted a goal of enrolling five million children by FY 2005. CMS has exceeded this enrollment goal with a total of 6.1 million children. For FY 2007, SCHIP is focusing more on a target goal regarding the number of children who have access to quality health care. The new performance measure involves the improvement of the quality of health care across the SCHIP program and supports HHS Strategic Goal three: Increase the percentage of the Nation's children and adults who have access to health care services, and expand consumer choices.

The Office of Management and Budget developed the Program Assessment Rating Tool (PART) to evaluate programs in a systematic manner, rating program effectiveness and highlighting strengths and weaknesses. SCHIP was rated as Adequate for FY 2005. As a result of the PART process, CMS developed an SCHIP Action Plan to further strengthen the program. Consistent with the Government Performance and Results Act, CMS is working with States to develop long-term SCHIP goals related to national core performance measures as well as providing technical assistance to States to help improve collection of performance measurement data.

SCHIP Reports and Evaluations

States are required to annually assess the operation of their SCHIP State plans and report to the Secretary by January 1 of each fiscal year. The Balanced Budget Refinement Act of 1999 (BBRA) required an independent evaluation of 10 States which was submitted to Congress in October 2005.

BBRA also directed the Secretary, through the Inspector General, to evaluate SCHIP every three years. SCHIP is evaluated in two separate areas: The number of children enrolled in separate SCHIPs that were eligible for Medicaid and SCHIPs progress towards reducing the number of uninsured children across the Nation. The recent report released by the Office of Inspector General (OIG) in the fall of 2005, found that only one percent of children enrolled in separate SCHIPs were eligible for Medicaid. OIG recommended that CMS work closely with States regarding inconsistent calculations and a lack of documentation which could lead to incorrect determinations in the future.

Currently, the OIG is working on an evaluation regarding Program Integrity and Monitoring. This evaluation was started in FY 2005. The next required evaluation of SCHIP will be conducted in FY 2007 and will be reported in FY 2008.

Findings of the Congressionally Mandated SCHIP Evaluation October 2005

• SCHIP is mainly serving low-income children who would otherwise be uninsured (identified target population);
• SCHIP coverage did not lead to widespread crowd-out of private health insurance coverage;
• Once children are enrolled in SCHIP, the majority remain enrolled for at least 12 months; and
• Children's access to primary health care is good under SCHIP.

SCHIP Waivers

The requirements of Federal law and regulations can be waived by the Secretary to give States the programmatic flexibility to increase health insurance coverage and encourage innovation in their SCHIP programs. Waivers allow States to improve coverage and quality of services available to beneficiaries. Using section 1115 of the Social Security Act, States can more effectively tailor their programs to meet local needs and can experiment with new approaches to providing health care services. Section 1115 waivers in the past have provided health insurance to uninsured children, parents, caretaker guardians, pregnant women, and childless adults.

The Administration has promoted a relatively new section 1115 approach, the Health Insurance Flexibility and Accountability (HIFA) waivers, for States to develop comprehensive insurance coverage for individuals at twice the FPL and below, using SCHIP and Medicaid funds. These demonstration waivers target vulnerable, uninsured populations, such as pregnant women, parents and children on Medicaid and SCHIP, and other adult caregiver-relatives with incomes less than twice the FPL. The Administration places a particular emphasis on broad Statewide approaches that maximize both private health insurance coverage and employer sponsored insurance. As of January 2006, CMS has approved 11 HIFA demonstration waivers.

SCHIP Highlights From the Deficit Reduction Act 2005

Eliminate FY 2006 Funding Shortfalls: Appropriates $283,000,000 for FY 2006 to States experiencing SCHIP budget shortfalls to be allotted by the Secretary. Does not redistribute unspent allotments, and any unspent portions of the allotments expire on October 1, 2006.

Prohibition of Coverage of Non-Pregnant Childless Adults with SCHIP Funds: Prohibits the use of Title XXI funds for the coverage of non-pregnant childless adults, other than caretaker relatives. The provision does not apply to any current waivers or to the extension, renewal, or amendment of any existing waivers. The effective date is October 1, 2005.

Use of certain SCHIP funds for Medicaid Expenditures: Extends the ability of certain qualifying States to use up to 20 percent of available allotment amounts for fiscal years 1998, 1999, 2000, 2001, 2004 or 2005 (currently 1998-2001) as Federal matching funds to provide medical assistance under Title XIX for individuals under age 19 who are not eligible for SCHIP and whose family income exceeds 150 percent of the FPL. "Qualifying States" are those States that, prior to the implementation of SCHIP, were providing medical assistance to this population under Title XIX. The 11 qualifying States are: CT, HI, MD, MN, NH, NM, RI, TN, VT, WA, and WI. The effective date is October 1, 2005.

Recent Programs Development

Medicaid and SCHIP Financial Management: The Administration proposes a continuation of activities to measure improper payments in Medicaid and SCHIP with the goal of reporting error rates for components in both Medicaid and SCHIP in the 2007 Performance and Accountability Report with a final completed error rate by 2008.

PROPOSED LEGISLATION

Cover the Kids: This legislative proposal provides $100 million annually in grants (in the State Grants and Demonstrations account) to States, schools, and community organizations to enroll and provide coverage to many eligible, but not enrolled, children in Medicaid and SCHIP. The proposal increases SCHIP spending by $69 million in FY 2007 and $330 million over five years.

Health Insurance Portability and Accountability Act (HIPAA): The Administration proposes two legislative changes to ensure that Medicaid and SCHIP beneficiaries receive the benefits of HIPAA coverage: (1) Eligibility for a Medicaid/SCHIP Employer-Sponsored Insurance (ESI) would be a qualifying event allowing families to enroll in ESI immediately through special enrollment; and (2) SCHIP programs would be required to issue certificates of creditable coverage, which promote portable health coverage by verifying the period of time an individual was covered by SCHIP.

SCHIP Redistribution: The President's Budget proposes to address State shortfalls in FY 2007 that may occur for some States by seeking the authority to better target SCHIP funds in a more timely fashion.

HIFA: Expanding Health Care Coverage

In August 2001, the Administration invited States to participate in the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative. The main goals of the HIFA initiative are:

• to encourage innovation in the Medicaid and SCHIP programs;
• give States the programmatic flexibility to increase health insurance; and
• simplify the waiver process.

States use HIFA demonstrations to expand health care coverage. As of November 2005, CMS has approved HIFA demonstrations that could expand coverage to more than 800,000 people.

Medicaid And SCHIP Proposals

State Grants and Demonstrations Table

State Grants and Demonstrations

The State Grants and Demonstrations budget account represents a diverse group of program activities that impact a variety of intended targets. The Medicare Modernization Act of 2003 (MMA) and the Deficit Reduction Act of 2005 (DRA) added many new program activities to this account. Much of the account focuses on Medicaid-related programs, which are discussed in the Medicaid section. Other program activity highlights follow.

The Ticket to Work and Work Incentives Improvements Act

The Ticket to Work and Work Incentives Improvement Act of 1999 (TWWIIA) authorized two grant programs designed to assist States in developing services and supports to aid the competitive employment of people with disabilities by extending Medicaid coverage to these individuals. Section 203 of the Act provided an appropriation each year from FY 2001 to FY 2011 for Medicaid Infrastructure Grants. These grants provide funding to States to build Medicaid infrastructure and supports, conduct outreach activities, explore new service options, and form partnerships to improve the employment environment for people with disabilities. Section 204 provides for an appropriation of $42 million for each of the fiscal years from 2001 to 2004, and $41 million for both FY 2005 and FY 2006 for Demonstration to Maintain Independence projects.

Through FY 2005, a total of 49 States and the District of Columbia have been approved for funding from the Infrastructure Grant Program (Section 203). There are 31 States with Medicaid buy-ins and one additional State has a plan amendment under review. As of September 30, 2005, there were about 67,000 workers receiving Medicaid benefits under the buy-in options. A total of 28 States applied for and received continuation grant awards in FY 2006. Eleven States received new competitive grant awards in FY 2006. In addition, two States, Kentucky and New York, and the District of Columbia, will continue to carry-out employment goals for the working disabled population by spending previous grant awards in FY 2006 through a no-cost extension of funding.

The Demonstration to Maintain Independence and Employment program (Section 204) has funded grants projects in several States. For FY 2006, six States and the District of Columbia are continuing grant programs targeted to specified populations to support continued work. Unexpended carryover funds can be used to continue these projects through FY 2009.

Qualified High-Risk Pools

Section 6202 of the DRA extends the authority for grants to States for high-risk health insurance pools. The state high-risk pools program was initially created by the Trade Act of 2002, which authorized $20 million in seed grants for the creation and initial operation of high-risk pools and $40 million per year for fiscal years 2003 and 2004 to support existing high-risk pools.

For FY 2006 $15 million is authorized and appropriated for seed grants to assist states in creating and initially funding qualified high-risk pools. An additional $75 million is authorized for FY 2006 for grants to help support existing qualified state high-risk pools.

Thirty-five states currently operate high-risk pools. These programs target individuals who cannot otherwise obtain or afford health insurance in the private market, primarily due to pre-existing health conditions, who are at risk for being uninsured. In general, high-risk pools are operated through state established non-profit organizations, many of whom contract with private insurance companies to collect premiums, administer benefits, and pay claims.

Pilot Program For Background Checks on Nursing Home Employees

Section 307 of the MMA created a $25 million pilot program to identify efficient, effective, and economical procedures for long-term care facilities or providers to conduct background checks on prospective direct patient access employees. Seven States (Alaska, Idaho, Illinois, Michigan, Nevada, New Mexico, and Wisconsin) are participating in the pilot program, which runs through FY 2007. Information gathered from this pilot will inform CMS about the cost associated with conducting background checks, the impact and effectiveness of a background check program, and possible unintended consequences of implementing such a program on a nationwide basis.

Federal Reimbursement of Emergency Health Services Furnished to Undocumented Aliens

The MMA appropriated $250 million per year in FY 2005 through FY 2008 for payments to eligible providers for emergency health services provided to undocumented aliens and some other non-citizens. Two-thirds of these funds ($167 million) will be allotted for paying providers in all 50 States and the District of Columbia, based on their relative percentages of the total number of undocumented aliens. The remaining one-third ($83 million) will be allotted for providers in six States with the largest number of undocumented alien apprehensions.

The Secretary must directly pay hospitals, certain physicians, and ambulance providers, including Indian Health Service and Tribal organizations, for their otherwise unreimbursed costs of providing services required by the emergency service provision of the Social Security Act.

State Pharmaceutical Assistance Program Grants

The MMA provided grants in FY 2005 and FY 2006 to State Pharmaceutical Assistance Programs (SPAPs) to educate Part D eligible individuals, enrolled in the SPAPs, about prescription drug coverage available through the Medicare prescription drug benefit.

Health Care Infrastructure Improvement Program

MMA established the Health Care Infrastructure Improvement Program (HCIIP) to provide loans to qualifying hospitals for projects designed to improve health care infrastructure. Projects may include construction, renovation, or other capital improvements. In order to receive assistance, the qualifying hospital must be engaged in cancer research and be either designated by the National Cancer Institute as a cancer center or designated by the State legislature as the official cancer institute of the State prior to December 8, 2003.

The Secretary is authorized to forgive HCIIP loans if the hospital establishes an outreach program for cancer prevention, early diagnosis and treatment for a substantial majority of the residents of the State, a similar outreach program for multiple Indian tribes, and either unique research resources or an affiliation with an entity that has unique research resources.

CMS published the HCIIP application process, selection criteria, and conditions for loan forgiveness in the Federal Register on September 30, 2005. The public comment period ended on November 29, 2005. The deadline for HCIIP application was December 29, 2005, and CMS expects to award loans in early to mid FY 2006.

HCIIP is authorized for the period between FY 2004 through FY 2008. Funding for the program is $142 million.

Program of All-Inclusive Care for the Elderly

Programs of All-Inclusive Care for the Elderly (PACE) provide comprehensive Medicare and Medicaid services, under a managed care arrangement, to individuals age 55 and over who are eligible for nursing home care. PACE organizations receive a fixed monthly Medicare and Medicaid payment to cover these comprehensive services for participants.

The DRA authorized two new PACE grant programs. The first program provides site development grants for up to 15 new rural PACE sites and establishes a technical assistance program for rural PACE providers. The second grant program establishes a fund for outlier costs for FY 2006 to remain available through FY 2010.

Non-Emergency Medical Transportation Program

The Non-emergency Medical Transportation Fund gives States the option to establish non-emergency medical transportation brokerage programs for Medicaid recipients without access to transportation. Programs may include wheelchair van, taxi, stretcher car, bus passes, and secured transportation.

FY 2007 Legislative Initiatives

Focus on the Chronically Ill: Chronically ill individuals often struggle to secure health insurance coverage. The Administration proposes creating a program whereby States compete to receive funds for implementing innovative policies to promote insurance among the chronically ill. For this effort, $500 million would be available annually.

Cover the Kids: This legislative proposal, which is discussed in the Medicaid and SCHIP sections, will cost $500 million over five years.

Program Management

The CMS FY 2007 Program Management appropriation request is $3.15 billion in budget authority, $68.6 million, or 2.2 percent, above the adjusted FY 2006 appropriated level. When the $74 million DRA administrative funding is added to the FY 2006 appropriation, the FY 2007 request is virtually unchanged from the prior year.

The budget request reflects savings from eliminating paper transactions at Medicare contractors (totaling $133 million) and includes $35 million in collections from a proposed user fee on health care facilities for certain revisit surveys. This fee, if enacted, will offset the CMS appropriation request by $35 million, to a total of $3.11 billion on a proposed law basis.

With the funding requested for FY 2007, CMS will be able to achieve its priority program and management goals. This request will allow CMS to: continue implementing Part D and other Medicare Modernization Act of 2003 (MMA) programs; maintain an accelerated schedule for implementing contracting reform; sustain beneficiary education efforts; survey health facilities at mandated frequencies; make targeted investments in IT; conduct a basic level of research; and cover basic operations.

Budget Account Summaries

Medicare Operations: The Medicare Operations budget request is $2.1 billion, a decrease of $4.3 million, or 0.2 percent, below FY 2006, including Deficit Reduction Act of 2005 (DRA) spending. This level assumes $133 million in savings from eliminating paper from Medicare contractor transactions.

The Medicare Operations portion of the CMS Program Management account funds a variety of activities that support the mission-critical operations necessary to administer the Medicare program, such as:

• Ongoing Contractor Operations and Support: funds day-to-day Medicare contractor activities such as processing claims, handling claims appeals, enrolling providers, and answering provider and beneficiary inquiries. This activity pays for fee-for-service support functions such as provider toll free lines and provider education and training.
• Information Technology: includes maintaining fee-for-service and managed care systems used to pay claims, developing and installing a new accounting system, running the data center and communications network, and developing systems and infrastructure to implement new program requirements.
• Legislative Mandates: funds functions required under seven budget reconciliation and financial management laws enacted in the last ten years, including MMA, such as the new drug benefit, contracting reform, Medicare education, new appeals processes, and Health Insurance Portability and Accountability Act (HIPAA) administrative simplification.

Just over half, or about $1,084 million, of the FY 2007 Medicare Operations request goes toward ongoing contractor operations, about 8.4 percent below the 2006 level. Contractors are projected to process 1.2 billion fee-for-service claims in FY 2007, a modest 0.8 percent increase over FY 2006 that reflects current assumptions that more beneficiaries will shift from Medicare fee-for-service to Medicare Advantage. In addition, contractors will process 66 million inquiries and 6.3 million appeals. Projected Part A claims processing unit costs in 2007 are 96 cents per claim, the same as 2006. Part B unit costs will decline from a projected 65 cents per claim to 53 cents per claim, largely as a result of savings expected from eliminating paper from Medicare operations.

About $283 million, or about 13 percent, of the Operations request supports information technology (IT) activities. Ongoing maintenance of systems that support claims processing and accounting activities account for the majority, or $197 million, of this total - an increase of $26 million over 2006. Another $76 million supports enterprise activities (data center, communications), and $10.2 million supports Department-wide IT priorities, including the Enterprise Information Technology Fund and the Unified Financial Management System.

The remaining $778 million, or 36 percent, of the FY 2007 Operations request will support Medicare activities mandated in various pieces of legislation. Of this amount, nearly $508 million supports MMA implementation. MMA priorities funded in this total include: IT support and oversight and management of the drug benefit and Medicare Advantage programs ($120 million); continuing our accelerated contracting reform time line ($147 million); and support of MMA-mandated education activities, such as 1-800-MEDICARE, the handbook, and Internet ($151 million).

Non-MMA mandates comprise the other $270 million of Operations activities in the legislative mandates category. Important initiatives within this amount include: the transition of four more contractors to the new Healthcare Integrated General Ledger Accounting System or HIGLAS ($49 million); support of new appeals activities, including the first full operational year for the four Qualified Independent Contractors, or QICs ($89 million); ongoing, non-MMA education activities ($93.4 million); and ongoing support of HIPAA administrative simplification activities, including enumeration of plans and providers and enforcement ($24 million).

Federal Administration: For FY 2007, the President's Budget requests $655.4 million for CMS Federal administrative costs. This is an increase of $2.6 million, or 0.4 percent, from FY 2006 including funding for DRA.

The Federal Administration portion of the CMS budget supports a total of 4,531 Full Time Equivalent (FTE) in FY 2007, 29 fewer than in 2006. Of this total, 3,031 FTEs will staff the central office and 1,500 FTEs will staff the regional offices. Agency-wide, CMS will support a total of 4,803 FTE in FY 2007- 48 FTE over 2006 when Health Care Fraud and Abuse Control (HCFAC), new Medicaid program integrity staff, and the Clinical Laboratory Improvement Act of 1988 (CLIA) reimbursable employees are included. This increase is attributable to a DRA requirement that CMS hire another 100 FTE for Medicaid financial management oversight activities.

CMS requests $12.9 million to continue the Healthy Start, Grow Smart program. This will support the printing costs and postage for a series of 13 informational brochures in English and Spanish to new Medicaid mothers. These brochures are distributed at the time of birth and monthly over the first year of the child's life. Each publication focuses on activities that stimulate infant brain development and build skills children need to be successful in school. In addition, each Healthy Start pamphlet includes vital health and safety information for new parents. The Healthy Start, Grow Smart program has disseminated over 21.7 million brochures in 24 States and the District of Columbia. Approximately 11 percent of the brochures are in Spanish and 89 percent are in English. CMS is also working with the American Hospital Association to distribute to small rural hospitals, which may not have the funds to print their own high quality educational materials for new mothers.

Research, Demonstrations and Evaluation: The FY 2007 budget requests $41.5 million for the Research, Demonstrations and Evaluation program, $27.9 million, or 40 percent, less than the FY 2006 level including DRA. Most of this reduction is attributable to eliminating the Real Choice Systems Change Grants. This request includes almost $28 million to continue and refine projects initiated in previous years and $13.6 million for MMA-related activities.

Ongoing research activities include the Medicare Current Beneficiary Survey, beneficiary information campaign evaluations, refinement and monitoring of prospective payment systems, and support for legislative mandates in the Balanced Budget Act of 1997 (BBA), the Balanced Budget Refinement Act of 1999 (BBRA), and the Medicare, Medicaid, and SCHIP Benefits Improvement Act of 2000 (BIPA).

The remaining $13.6 million for MMA-related research supports projects such as monitoring beneficiary access to covered drugs and evaluating numerous demonstrations and pilots mandated by the MMA.

Survey and Certification: The FY 2007 Survey and Certification budget request is $283.5 million. The Medicare Survey and Certification Program works to ensure the safety of beneficiaries and the quality of care provided in health facilities two of CMS' most critical responsibilities. When entering the program, and on a regular basis thereafter, all facilities participating in the Medicare and Medicaid programs must undergo an inspection to ensure compliance with Federal health, safety, and program standards. CMS contracts with State agencies to conduct these inspections.

In order to maintain the survey frequencies set out in statute and policy, CMS requires an increase of $25.4 million, or 9.8 percent over the FY 2006 budget. This request will allow States to inspect long-term care facilities and home health agencies at their legislatively mandated frequencies, and to maintain recertification levels for End Stage Renal Disease (ESRD) facilities, non-accredited hospitals, hospices, rural health clinics, ambulatory surgical centers, outpatient physical therapy facilities, and outpatient rehabilitation facilities at levels included in budget requests for the past few years.

Between FY 2001 and FY 2006, the Medicare Survey and Certification budget increased by 6.6 percent. At the same time, the number of facilities that CMS surveys increased by 12.8 percent, from 44,725 facilities in FY 2001 to 50,468 facilities in FY 2006. Growth is expected to continue through 2007. CMS expects to complete over 24,500 initial and recertification inspections in FY 2007, along with 48,000 visits responding to beneficiary and family complaints.

Recent reports from the Government Accountability Office (GAO) and the Office of the Inspector General (OIG) highlight the need for federal oversight to ensure quality of care. The GAO placed aspects of survey and certification, particularly oversight of nursing homes and ESRD facilities, into a high risk category. Maintaining survey and certification frequencies at or above the levels mandated by policy and statute is critical to protecting the health and well-being of beneficiaries and ensuring that federal dollars support only quality care.

Revitalization: The FY 2007 budget request includes $22.8 million in two-year budget authority to continue modernizing CMS information technology systems. This funding level is a reduction of $1.2 million from the FY 2006 appropriation of $24.0 million. The Medicare program has relied on a number of antiquated legacy systems that have been characterized by the GAO and the Department's OIG as inflexible, not secure, and obsolete. Since the implementation of this fund in FY 2004, CMS has successfully modernized its mid-tier and mainframe computing platform, developed the ability to support health plan and provider services over the Internet, updated legacy systems in conjunction with the Medicare drug benefit, and documented thousands of business requirements to begin redesigning Medicare fee-for-service claims processing systems.

In FY 2007, the Revitalization Plan continues the process of streamlining the agency's Medicare fee-for-service claims processing systems ($12.1 million), modernizing CMS information technology data structure ($8.2 million), and developing and leveraging a mature enterprise architecture ($2.5 million). These modernization efforts improve efficiency, enable e-gov and other new business activities, improve systems security at CMS, and help prepare CMS systems for increases in claims processing as "baby boomers" become eligible for Medicare benefits.

The Revitalization Plan continues the Agency's commitment to provide CMS systems the flexibility and security needed to take on growing Medicare workloads and health care options, while providing future beneficiaries with the information that they need to make informed choices.

Program Manangement Priorities

Contracting Reform: The MMA included provisions that change the way CMS contracts with the entities responsible for receiving, processing, and paying Medicare claims. Replacing the legacy claims processing contracts, MMA establishes Medicare Administrative Contractors (MACs), regional contractors that process both Part A and Part B claims. Unlike legacy contractors, MACs are procured through the competitive Federal Acquisition Regulation process.

The Department has adopted an accelerated schedule that requires all MAC transitions to be complete by FY 2009. In FY 2006, CMS awarded its first MAC contracts to the four contractors that process durable medical equipment claims. Before the year is completed, CMS will also award its first Part A and B MAC. In FY 2007, CMS plans to compete an additional seven MACs and begin transferring Medicare claims workloads to these new contractors.

It is necessary that funding be available in the beginning of FY 2008 to continue implementing this transfer of workload even under a continuing resolution. To ensure funding is available in the first quarter of FY 2008, appropriations language is included to make the $146.8 million in FY 2007 two-year funding. The budget would also include appropriation language that would support CMS's transition plans for FY 2008. This language would ensure a stable and timely transition for the new contractors.

Paperless Initiative: The FY 2007 budget submission also includes savings from our proposal to increase efficiency by greatly reducing paper from Medicare operations. CMS processes 145 million paper claims, mails over 42 million paper checks, and sends 66 million paper remittance advices. This budget submission reflects administrative proposals that will increase electronic transactions in the Medicare program by October 1, 2006. The budget assumes that these actions will result in savings of up to $133 million. These savings are reflected in the FY 2007 Medicare Operations request.

The National Medicare & You Education Program: Beneficiary education is a top priority for CMS, especially as the new benefit options are implemented. CMS must ensure that beneficiaries have the essential information they need to make complex and personal health choices.

The total FY 2007 program level for the National Medicare & You Education Program (NMEP) is $316 million, a decrease of $6 million from FY 2006. In FY 2007, over 58 percent of NMEP funding covers the 1-800-MEDICARE helpline. The balance will be used for beneficiary materials, CMS websites, community based outreach, the National advertising campaign, and program support.

The Medicare & You Handbook: In FY 2007, CMS expects to distribute more than 43 million handbooks to beneficiaries and stakeholders, approximately one million more handbooks than in FY 2006. The handbooks are offered in English and Spanish, and in Braille, audiocasette, or large print formats.

The 1-800-MEDICARE line: This toll-free line provides access to customer service representatives in English and Spanish 24 hours a day, seven days per week. CMS anticipates approximately 33 million calls in FY 2007, a decrease of approximately 14 million calls over the FY 2006 current estimate. Call volume is expected to drop following the initial Part D enrollment period.

The www.medicare.gov Web Site: This beneficiary-centered web site provides beneficiaries and stakeholders a variety of real-time, interactive tools that enable users to receive information on their benefits, plans, and medical options. The website is integrated into the desktop that the 1-800-MEDICARE operators use to respond to calls. CMS expects 500 million page views in FY 2007.

National Multimedia Campaign: The new prescription drug benefit is available to all Medicare beneficiaries, and each beneficiary needs to consider the options that suit his or her needs best. For example, beneficiaries will have to decide whether to enroll in a stand alone drug plan, a Medicare Advantage regional plan that offers a prescription drug benefit, keep their retiree drug coverage, or choose not to enroll now and possibly pay more for the drug benefit if they choose to enroll at a later date. As a result of these complexities, the FY 2007 multimedia campaign will employ techniques to spread messages at the local level, and to tailor messages to meet the needs of specific audiences.

Community-Based Outreach: CMS administers and conducts many outreach programs, including the State Health Insurance Assistance Programs (SHIPs) grants. Research has shown that beneficiaries prefer one-to-one assistance. CMS will continue its successful grant relationship with the SHIPs, which are located in all 50 States and the territories. SHIPs provide one-to-one counseling to beneficiaries on complex Medicare-related topics, including Medicare entitlement and enrollment, health plan options, Medigap and long-term care insurance, Medicaid, and prescription drug assistance. During FY 2006, CMS expanded its partnerships to an estimated 14,000 local networks and coalitions.

HIGLAS: One of the Secretary's top priorities is to centralize the Department's financial accounting process through its Unified Financial Management System (UFMS). UFMS is expected to achieve greater economies of scale, eliminate duplication, mitigate security risks, and provide timely and accurate financial information. A major component of UFMS is the Healthcare Integrated General Ledger Accounting System or HIGLAS, which will perform the accounting for over one billion Medicare claims processed each year as well as the everyday administrative financial dealings of CMS. The development of HIGLAS will also help CMS and the Department to fulfill the financial management portion of the President's Management Agenda.

In FY 2007, the President's Budget requests $139 million ($49 million in two-year money in Medicare Operations and $90.4 million in systems maintenance costs also in Medicare Operations). As CMS implements HIGLAS at additional contractors, systems maintenance costs will increase.

CMS began developing HIGLAS in FY 2001. Thus far, CMS has transitioned five contractors to HIGLAS and plans to transition two more in FY 2006. Implementation of HIGLAS is being coordinated with the implementation of Medicare contracting reform and the conversion from legacy contracts to the new MACs.

In FY 2007, CMS will implement HIGLAS at four additional Medicare contractors, begin rolling out the administrative accounting module at CMS central office, complete other payment management system interfaces, and attain 52 percent of total CMS costs under HIGLAS accounting.

Legislation Supporting the Discretionary Budget

The FY 2007 budget includes a $35 million user fee proposal that, if enacted, could recover from industry the costs associated with corrective action follow-up surveys. The Medicare Survey and Certification program revisit user fee allows the Secretary to assess a fee for follow-up visits to health care facilities cited for deficiencies during either certification/recertification or complaint surveys. This fee will build greater accountability into the survey and certification program and create an incentive for facilities to correct deficiencies and ensure quality of care.

DRA Administrative Funds in FY 2006

For FY 2006 only, the DRA appropriates $74 million in funds that support CMS program management activities. Specifically, Section 6203 of DRA appropriates $60 million for implementation of the act, with $30 million each coming from the Medicare Trust Funds and the General Fund. In addition, Sections 5006-5008 provide a total of $14 million to administer and evaluate three projects.

FY 2007 Budget in Brief Home

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