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On Tuesday, April 1st, President Obama signed into law the "Protecting Access to Medicare Act of 2014" (H.R. 4302).[1] This bill is a one year short-term "fix" or "patch" to pending Medicare physician payment cuts under the current physician payment formula called the "sustainable growth rate" or "SGR".  Passed by voice vote in the House of Representatives on March 27th, the Senate passed the bill on March 31st by a vote of 64-35. Due to this flawed payment formula, physicians faced an approximate 24% cut in Medicare payments on April 1st.  In addition, the fate of a number of other Medicare "extenders" was at risk, including the Qualified Individual (QI) program and the exceptions process to the annual outpatient therapy caps.  Instead of fixing SGR and addressing the extenders on a permanent basis, though, through this bill Congress passed the 17th short-term patch since the SGR formula was created in 1997.

Bipartisan, bicameral efforts to permanently reform the way that Medicare pays physicians resulted in policy proposals to restructure payments to reward value over volume.  While there was broad agreement in Congress on how to shape the SGR replacement policy, a permanent repeal of SGR failed because Congress could not agree on how to pay for such a fix.

This one-year "patch" of the SGR, including extenders, prevents steep cuts in physician payments and preserves, at least temporarily, important extenders such as QI and the therapy cap exceptions process.  In addition, despite the desire of some policymakers, no direct increase in beneficiary cost-sharing is being used to pay for this one-year patch.  The offsets used to fund the approximately $21 billion price tag, though, deserve scrutiny.  The bill contains a number of new proposals, some permanent, that have not been associated with SGR in the past.  Ostensibly these new provisions were included as a means to pay for the short-term SGR patch, however there is some debate about whether some of the provisions will actually cost Medicare rather than save money for the program, and may have been protective measures pushed by affected industries to ward off potentially more significant payment changes under consideration by CMS.[2] In addition, though the bill is paid for largely through cuts to health care providers, fully half of the cuts won’t kick in for ten years[3], meaning it is questionable whether such payment reforms will actually be implemented.


The usual Medicare-related "extenders" are included in this one-year patch, including:

  • QI Extended for One Year – Section 201 extends the Qualified Individual (QI) Medicare Savings Program for one year, through March 31, 2015.  The QI program pays the Part B premium for individuals with income between 120 and 135% of the federal poverty level, and who also have very limited resources.[4]
  • Therapy Cap Exceptions Process Extended for One Year – Section 103 extends the current therapy cap exceptions process through March 31, 2015.  Current law imposes a payment cap on the annual amount of Medicare coverage available for beneficiaries receiving outpatient therapy services. Two distinct caps apply to therapy services: for physical therapy (PT) and speech language pathology service (ST) combined, the cap is $1,920 in 2014.  For occupational therapy (OT) services, the cap is also $1,920.  In addition, claims exceeding a threshold of $3,700 (either for PT and ST combined, or separately for OT) are subject to a mandatory manual medical review (MMR) by Medicare contractors.[5] 

We note that the SGR replacement bill that emerged from the Senate Finance Committee in December 2013 would have repealed the therapy caps altogether and replaced them with a more targeted prior authorization process.[6]   Since the therapy caps and the exceptions process remain in place, ongoing concerns with the higher $3,700 cap and MMR remain.  The current MMR process is burdensome for providers, which means that many Medicare beneficiaries, in effect, do not get services beyond the cap.  In addition, Recovery Audit Contractors (RACs) are currently tasked with reviewing MMR requests.  Although CMS has suspended or "paused" the activity of RACs pending the next round of RAC contracts, providers can still provide services beyond the cap, but review of their claims is on hold, and the claims in turn pile up, further reducing incentives to provide services beyond the cap.

  • Outreach and Assistance for Low-Income Programs – Section 110 extends funding for an additional year for outreach and education to State Health Insurance Programs (SHIPs), Area Agencies on Aging (AAA), Aging and Disability Resource Centers (ADRCs) and the National Center for Benefits Outreach and Enrollment.
  • In addition, although not always tied to SGR extenders, authorization for Special Needs Plans (SNPs) has been extended – Section 107 extends the authority for Medicare Advantage Special Needs Plans (SNPs) for an additional year through 2016.[7]  Similarly, Section 108 extends Medicare Cost Contract plans for an additional year, through 2016.

New Provisions

The Protecting Access to Medicare Act of 2014 (H.R. 4302) contains provisions that have not been part of the usual package of SGR "extenders."  Although the SGR patch is short-term, some of these provisions are permanent.   The following summarizes a few of the new provisions:

  • Further delays enforcement of hospital "two-midnight rule" – Section 111 extends the moratorium on enforcement of CMS’ two-midnight policy through March 2015.  This means that Recovery Audit Contractors (RACs) won’t be able to audit inpatient hospital claims for services from October 1, 2013 through March 31, 2015.  In part, CMS intended the two-midnight rule to help with the problems caused by the increased use of observation status by creating a presumption that an inpatient admission is "reasonable and necessary" if the patient stays in the hospital for two-midnights.  To the contrary, though, the "two-midnight rule" has exacerbated the problems caused by observation status.[8]  While it is CMS’ position that the rule is in effect and should be followed, a delay in enforcement of this rule creates additional uncertainty about hospitals’ inpatient vs. outpatient decisions.
  • Delay of Effective Date for Medicaid Amendments Relating to Beneficiary Liability Settlements –  Section 211 changes the effective date of §202 of the Bipartisan Budget Act of 2013 Act from October 1, 2014 to October 1, 2016.  Section 202 gives states the authority to create a conditional payment system, provided it would not impede access to Medicaid-covered services, for the payment of Medicaid claims where third party liability is involved.
  • Delay in transition from ICD-9 to ICD-10 codes – Section 212 provides that the Secretary of Health and Human Services may not, prior to October 1, 2015 adopt "ICD-10 code sets" (International Classification of Diseases) as its standard code set for medical diagnosis and inpatient procedure coding. 
  • Value-based purchasing in skilled nursing facilities (SNFs) – Section 215 creates a Value-Based Purchasing (VBP) program under Medicare for skilled nursing facilities (SNFs).  Beginning October 1, 2018, Medicare will make incentive payments to facilities that reduce hospital readmissions of their residents, using a readmission measures and later, a resource use measure developed by CMS.  In fiscal year 2019 and in subsequent fiscal years, Medicare payments to SNFs will be reduced by 2%.  Payments equaling no more than 70% of these reductions may be used to fund the incentive payments under VBP.  Beginning October 1, 2016, CMS will give SNFs "confidential feedback reports" on their performance on the VBP measure.  CMS will post SNF-specific information on Nursing Home Compare.  The American Health Care Association, the largest trade association of nursing facilities, promoted VBP as part of its "We are the Solution" campaign[9] and has taken credit for the inclusion of §215 in the legislation.[10]

CMS conducted a demonstration of VBP in SNFs between 2009 and 2012.  The Final Evaluation Report of the Nursing Home Value-Based Purchasing Demonstration found that the three-year demonstration "did not directly lower Medicare spending and improve quality for nursing home residents."[11]  Suggesting that design features of the demonstration may have caused its limited impact, the Evaluation identified modifications that could potentially make the program more successful, including "1) simplified payment and reward rules; 2) increased payout pools; 3) relaxation/elimination of budget neutrality restrictions… 4) offering more immediate payouts; 5) real time feedback on performance and quality activity results; and 6) providing increased education and guidance on best practices to providers."[12]  Whether CMS adopts any of these recommendations as it develops the new VBP program remains to be seen.  The Center for Medicare Advocacy first expressed skepticism about VBP in 2007.[13]

  • Changes in Policies for Clinical Diagnostic Lab Tests and Advanced Diagnostic Imaging – Section 216 bases Medicare clinical laboratory payments on private sector payment rates starting in 2017. Section 218 includes a new quality incentive payment policy to improve radiation dosing safety.  It also requires the Secretary of Health and Human Services to establish a program that promotes the use of appropriate use criteria for advanced diagnostic imaging, which, among other things, by 2020, will require outlier ordering physicians to be subject to prior authorization for applicable imaging services.
  • Funding for Mental Health Demonstrations – Section 223 establishes an eight-state demonstration program over a two-year period to incentivize community health providers to offer a broad range of mental health services.[14]  Section 224 authorizes funding from fiscal years 2015-2018 for demonstration grants for local jurisdictions to implement assisted outpatient treatment programs for individuals with serious mental illness. 

In addition, the bill makes a number of other Medicare-related payment changes, including:

  • Increases payment accuracy by improving valuation of services under the physician fee schedule ("mis-valued codes") (Section 220);
  • Revises the end-stage renal disease (ESRD) prospective payment system, including a delay in including oral drugs in the dialysis payment bundle (Section 217);
  • Realigns Medicare "sequester" cuts in the year 2024 – under Medicare sequester cuts, providers currently face a 2% payment reduction (Section 222).

Finally, it should be noted that the bill includes an Exclusion from PAYGO Scorecards – Section 225 provides that budgetary effects of the Protecting Access to Medicare Act of 2014 shall not be entered on any PAYGO scorecard maintained in accordance with the Pay-As-You-Go Act of 2010.[15]


Congress failed, once again, to permanently replace the flawed physician payment formula and address the extenders, including making QI permanent and repealing the therapy caps.  In addition, it passed significant new Medicare payment policies – without adequate vetting and with unknown consequences – as part of a last-minute fix for the unrelated SGR.   

[1] Link to bill: Protecting Access to Medicare Act of 2014.
[2] See, e.g., John Wilkerson, "Some SGR-Patch Offsets May Hike Medicare Spending, Compared to What CMS Would Have Done", Inside Health Policy (April 1, 2014), which begins: "Many of the policies lawmakers used to pay for the $21 billion SGR patch likely will not reduce Medicare spending, health care analysts say, even though the Congressional Budget Office scored them as offsets." The article also notes that the day the House voted on the SGR patch, stock prices of the two primary diagnostic labs (Quest Diagnostics and Laboratory Corp.) rose, as did stock in dialysis chains.
[3] Associated Press, "Obama Gets Bill Giving Docs Temporary Medicare Fix", Washington Post (April 1, 2014).
[4] For more information about the QI program, see, e.g., the Center's Weekly Alert "The QI Program is in Jeopardy: Act Now to Ensure That Low-Income Medicare Beneficiaries are Protected" (February 14, 2014), available at:
[5] For more information about the Medicare therapy caps, see, e.g. the Center's Alert "Medicare Therapy Caps: A Call for Repeal" (January 16, 2014), available at:
[6] See, e.g., the Center's Alert "Replacing the Broken Medicare Physician Payment Formula: At What Cost for People with Medicare?", (December 19, 2013), available at:
[7] For additional information about SNPs for individuals dually eligible for Medicare and Medicaid, see, e.g., the Center's Alert "Dual Eligible Special Needs Plans: Considerations for Reauthorization" (December 6, 2013), available at:
[8] See, e.g., the Center's Weekly Alert "New Study: CMS's New 2-Midnight Rule Increases Hospital's Use of Observation Status" (February 20, 2014), available at:
[9]   "We are the Solution,"; "Reducing Hospital Readmissions,"
[10] Lois A. Bowers, "HR 4302: AHCA, LeadingAge express mixed feelings," Long-Term Living Magazine (April 1, 2014), (quoting AHCA CEO Mark Parkinson: "'We are pleased to see our readmissions proposal serve as the framework for the value-based purchasing program included in this short-term doc fix.'")  Also see Tim Mullaney, "House to Vote on Skilled Nursing Facility Readmission Penalties, ICD-10 Extension", McKnights Long-Term Care News & Assisted Living (March 27, 2014), which includes the following quote: "[The provision] largely reflects a proposal floated on the Hill by the nation's largest long-term care provider group, the American Health Care Association/National Center for Assisted Living.  Essentially, the government would withhold 2% of SNFs' Medicare payments starting in Oct. 2018, and about 70% of those dollars would then by distributed to high-performing providers with reduced hospital readmissions, AHCA/NCAL spokesman Greg Crist told McKnight's. The bill is a victory for AHCA, Crist said, because the organization has been pushing for "substantive policy alternatives" to achieve Medicare savings, as opposed to market basket cuts. He also pointed out that under the SNF readmissions item in the recent White House budget, providers only faced penalties, not incentives. Should this bill pass, a SNF could conceivably recover all of its cut of the withheld 2% of reimbursements, plus earn additional payments."
[11] L&M Policy Research, Evaluation of the Nursing Home Value-Based Purchasing Demonstration, page 50, Contract No. HHSM-500-2006-0009i/TO 7,
[12] Id.
[13] See CMA, "Value-Based Purchasing in Medicare; Just Another Gimmick?" (Weekly Alert, Feb. 8, 2007),
[14] Note that this provision incorporates the Excellence in Mental Health Act Medicaid Pilot Program – see, e.g.,
[15] See 2 U.S. Code §933 – PAYGO estimates and PAYGO scorecards.


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