FY 2006 Budget in Brief

Centers for Medicare & Medicaid Services

On this page:
CMS Summary
Centers for Medicare & Medicaid Services
Medicare Modernization Act Implementation
Medicare
Medicaid
Medicaid Enrollment Table
Medicaid Outlays Table
Schip Outlays Table
Medicaid and SCHIP Proposals Table
Program Management Overview Table
MMA Implementation Table
Program Management

CMS Summary

Centers for Medicare & Medicaid Services

Medicare Modernization Act Implementation

On December 8, 2003, the President signed into law the historic Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). MMA transformed the Medicare program by significantly expanding private health plan options (Part C) and adding a prescription drug benefit (Part D) to traditional fee-for-service hospital insurance (Part A) and supplementary medical insurance (Part B). In 2004, Medicare beneficiaries benefited from improvements to provide modern, prevention-oriented health care to our Nation's elderly and disabled populations. In June, the prescription drug discount card began providing beneficiaries lower prices for their medications, and these discounts will continue until the full drug benefit is implemented. In 2005, beneficiaries will receive new preventive benefits, such as a "Welcome to Medicare" physical. And, in 2006, for the first time in the history of Medicare, beneficiaries will be able to participate in a new benefit that offers outpatient prescription drug coverage. With all the improvements to Medicare, CMS will conduct extensive outreach efforts to help seniors understand their new choices. Expanded efforts through 1-800-Medicare, www.medicare.gov, community-based organizations, and media outreach will ensure that seniors have the information they need to select from the many new options available.

Prescription Drug Discount Card

MMA established a temporary prescription drug discount card program to immediately help Medicare beneficiaries reduce their out-of-pocket spending on drugs until the full Medicare drug benefit begins in January 2006. Enrollment in the discount card program began in May 2004, and discounts and transitional assistance began in June 2004. As of June, CMS had contracted with organizations to make a total of 38 national and 33 regional discount cards available, and amended 83 Medicare Advantage contracts to include exclusive cards for their members. To date, nearly 6.2 million beneficiaries have enrolled in the discount card program, and more are enrolling every day. Included in the 6.2 million are the 1.7 million beneficiaries who are currently receiving the $600 low-income transitional assistance credit in conjunction with their discount cards.

Seniors are seeing real savings on their prescription drug costs. In October 2004, CMS found that beneficiaries were obtaining discounted prices that were about 12 to 21 percent less than the national average prices for commonly used brand name drugs at retail pharmacies. Beneficiaries who use generic drugs obtained even larger savings from 28 to 75 percent below typical prices for commonly used generics. And, low-income beneficiaries who received the $600 transitional assistance credit on their discount cards experienced reductions as much as 90 percent off national average retail pharmacy prices when they used the Medicare discount card together with their transitional assistance. Independent studies have demonstrated similar results; beneficiaries save about 20 percent off the retail cost of brand name drugs and up to 60 percent off the cost of generic drugs as a result of the discount card program.

Voluntary Prescription Drug Benefit

Beginning January 1, 2006, approximately 42.7 million Medicare beneficiaries will be eligible to enroll in a new subsidized prescription drug benefit that helps lower out-of-pocket prescription drug costs. Beneficiaries choose either a new stand-alone private plan that adds prescription drug coverage to their traditional Medicare fee-for-service coverage, or beneficiaries can enroll in a private plan that provides both medical and drug benefits from one source. Success in this effort requires CMS to establish major new information systems, to educate and enroll beneficiaries, and to review and approve drug plan bids.

CMS has been actively preparing to implement this historic new benefit. CMS published proposed rules in August 2004, and in December, issued formulary guidance. On January 3, 2005, the United States Pharmacopia issued model guidelines for drug categories and classes to provide a standard framework for the development of formularies. Plans' formularies are required to provide beneficiaries with a choice of drugs within each category and class that appropriately reflects current medical practice. CMS will review individual formularies to ensure that plans provide access to medically necessary drugs and do not discriminate against any sub-groups of beneficiaries. Also in December, the Secretary announced the establishment of 34 prescription drug plan regions after significant input from stakeholders. These regions represent the new service delivery areas for the prescription drug plans beginning in 2006. Most importantly, CMS has taken every opportunity to receive input from stakeholders about the new drug benefit. In December 2004, CMS held numerous open door forums on sponsor applications, bidding, formularies, and risk-adjustment, and posted materials on the www.cms.hhs.gov website for potential sponsors' use, including a draft plan benefit package, solvency standards, bid instructions, and a pricing tool.

CMS has met, and will continue to meet, many key milestones in 2005 to ensure that the benefit is implemented on time. In January 2005, CMS published the final rule establishing the drug benefit. The new rules ensure the drug benefit will:

• Offer comprehensive help to those who need it most- people with very high prescription drug costs and people with low incomes- and for those with low incomes, comprehensive help at little or no cost;
• Give beneficiaries a choice of at least two drug plans that will cover a comprehensive set of both brand name and generic drugs;
• Ensure beneficiaries have convenient access to pharmacies, generally within just a few miles or less of their homes;
• Guarantee that Medicare beneficiaries living in nursing facilities will be able to enroll in a drug plan and take advantage of the new benefit, since all prescription drug plans will contract with long-term care pharmacies; and,
• Ensure that full benefit dual eligible beneficiaries who have both full Medicaid and Medicare benefits are automatically enrolled in a drug plan effective January 1, 2006, (with an option to change plans) so that they have no gap in coverage during the transition to the Medicare benefit.
• Facilitate enrollment of beneficiaries who have been determined eligible for the low-income subsidy but have not chosen a plan.

In upcoming months, CMS will conduct nationwide conferences for potential sponsors and greatly expand beneficiary education activities. Plans' applications are due in March 2005, formulary information is due in April 2005, and plan bids are due to CMS in June 2005. CMS plans to approve packages by September, and beneficiary enrollment in the new drug plans will begin November 15, 2005 and continue until May 15, 2006.

Drug plans will typically cover about half of beneficiaries' drug costs, and all beneficiaries will have an out-of-pocket limit on how much they pay for their prescription drugs. The proposed beneficiary premium for the new Medicare drug benefit is designed so that, on average, a non-low income beneficiary pays about 25 percent of the drug premium. The remaining 75 percent will be subsidized by the Federal Government.

Medicare will provide additional financial assistance to low-income beneficiaries. Beneficiaries with incomes below 135 percent of poverty will pay no monthly premium, no deductible, and nominal co-payments per prescription. Beneficiaries with incomes between 135 and 150 percent of the Federal Poverty Level will pay reduced premiums, a $50 deductible, and reduced cost-sharing.

Medicare will pay subsidies to employers that continue to offer retiree health benefits to seniors. Medicare will permit employers and unions to continue providing drug coverage to their Medicare-eligible retirees while retaining their current plan designs that are at least equivalent to the standard Part D drug benefit, and allow them to use the retiree drug subsidy to reduce the cost of providing generous coverage. Sponsors of employer and union plans who offer a drug benefit as good as, or better than, Medicare's drug benefit will be able to apply for the subsidy, which is estimated to roughly average $668 per beneficiary in 2006. Plan sponsors will have to incur costs at least equal to the gross value of the Part D benefit (taking into account the effect of beneficiary out-of-pocket spending and beneficiary premiums).

State Effects

Under Part D of MMA, States are relieved of a significant portion of the costs of providing pharmaceutical benefits to individuals eligible for both Medicare and Medicaid. States maintain some percentage of the financial responsibility for providing drugs to these individuals. In 2006, States will be expected to pay 90 percent of this amount. This percentage will be phased down to 75 percent by FY 2015, where it will remain thereafter.

States will also participate in the eligibility determination process for the low-income drug benefit. For the Part D low-income drug benefit, eligibility will be determined by either the State Medicaid agency, with States receiving their regular matching funds for associated administrative costs, or by the Social Security Administration, with additional funds authorized to cover new administrative costs.

Finally, MMA created a new program to assist States with paying for uncompensated medical care for undocumented aliens. The law establishes an annual $250 million fund, which will be allotted among the States each year between FY 2005 and 2008. Two-thirds of this money will be distributed based on the relative percentages of undocumented aliens in each State and the District of Columbia.

One-third will be allotted among the six States with the largest number of undocumented alien apprehensions. The amounts set aside for each State will not be dispersed through the State itself. The law requires the Secretary to directly pay hospitals, doctors, and other providers for their otherwise uncompensated costs of providing emergency health care to undocumented aliens in their respective States.

Medicare Advantage

MMA created the Medicare Advantage (MA) program to offer more choices and better benefits to Medicare beneficiaries through competition among private health insurance plans. In 2006, 16 percent of beneficiaries are expected to be enrolled in private plans, and by 2010, this number is projected to increase to about 25 percent. Currently, five million beneficiaries are enrolled in Medicare Advantage. MMA increased payments to private plans, and plans have been investing these higher payments in improving benefits for Medicare beneficiaries. Recent studies indicate that beneficiaries enrolled in a Medicare Advantage plan have overall savings for their Medicare and non-Medicare benefits of over $700 per year in out-of-pocket costs for the average beneficiary and nearly $2,000 in savings for those beneficiaries in poor health compared to traditional Medicare for beneficiaries without supplemental coverage from an employer or Medicaid.

New regional plans will begin on January 1, 2006, and provide the most significant expansion to private plan options since the Balanced Budget Act of 1997. Regional plans will have a network of doctors and hospitals that contractually agree to provide health care services at a specified rate but also allow enrollees to go outside the network for care. Unlike local plans, which serve individual counties and groups of counties chosen by the plan sponsor, the new regional PPOs will bid to serve one of 26 regions. The goal of these larger regional markets is to bring more plan options to rural areas by grouping States together with similar payment rates and patient care trends, and to achieve a target population size. These factors, coupled with existing organizational relationships and learning from plans about their intentions to participate in the Medicare program in certain areas, were critical in determining the region design.

CMS has been actively preparing throughout 2004 and will continue in 2005 to seamlessly implement this historic new expansion in private plans. In 2004, CMS published the proposed rule and guidance to plans as to how to transition to Medicare Advantage (MA), held open door forums on bidding and the MA application process, and released draft applications. In January 2005, CMS published the final rule, and in upcoming months, CMS will conduct nationwide conferences for potential sponsors, including benefit package seminars. CMS will accept bids through June 6, subsequently review marketing materials, and then approve plans in September. Marketing to beneficiaries can begin in October, and enrollment will begin on November 15, 2005 and continue until May 15, 2006. CMS is working to simplify the application process to make it as efficient and non-duplicative as possible.

Preventive Benefits

MMA introduced a number of provisions that expanded preventive benefits coverage beginning January 1, 2005. Beneficiaries whose Medicare Part B coverage begins on or after January 1, 2005, will be covered for an initial preventive physical examination within six months of enrollment. This examination includes counseling or referral with respect to screening and preventive services such as pneumococcal, influenza, and hepatitis B vaccinations; screening mammography; screening pap smear and pelvic exam; prostate cancer screening; colorectal cancer screening; diabetes outpatient self-management services; bone mass measurement; glaucoma screening; medical nutrition therapy services; cardiovascular screening blood test; and diabetes screening test. The diabetes screening test, only given to beneficiaries at risk for diabetes, includes a fasting plasma glucose test and other such tests approved by the Secretary.

The cardiovascular screening blood test and the diabetes screening test do not have a deductible or co-pays (since Medicare pays 100 percent for clinical laboratory tests), so beneficiaries do not incur any cost. This is an additional incentive for those with limited resources who might not otherwise access these benefits.

CMS is also collaborating on education and outreach with the American Cancer Society, the American Diabetes Association, and the American Heart Association. The campaign will help maximize attention to Medicare's new preventive benefits and help seniors use them.

Contracting Reform

MMA includes provisions that allow the Secretary to introduce greater competitiveness and flexibility to the Medicare contracting process. To ensure a sufficient number of private contractors to administer the program, the original law setting up Medicare 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 new law:

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

CMS is requesting $58.8 million to implement Medicare contracting reform in FY 2006. With this amount, CMS plans to implement an accelerated strategy that features two cycles of contractor conversions from the old Title XVIII contracts to the new Medicare administrative contracts over a period FY 2006 through FY 2008. In FY 2006, CMS will cover the costs of contractor and data center transitions and terminations. This accelerated strategy ensures that expected savings from Medicare contracting reform could come as early as FY 2009.

Fraud and Abuse

MMA includes several provisions to combat health care fraud and abuse in Medicare and other CMS programs. Highlights of these provisions are:

• Revision of average wholesale price (AWP) payments for Medicare's covered outpatient drugs provided in a doctor's office to average sales price (ASP).
• Creation of the Program Advisory and Oversight Committee (PAOC) to review and provide advice on implementation of the competitive bidding program for durable medical equipment (DME), enteral nutrition, and off-the-shelf orthotics.
• Implementation in early FY 2005 of a pilot program to conduct National and State background checks on workers in long-term care settings. The goal of the pilot is to identify efficient, effective, and economical processes for long-term care facilities or providers to conduct background checks on employees with direct access to residents and patients.

Cost Containment/Long Term Financial Security

Section 801 of MMA requires the Medicare Board of Trustees of the Hospital Insurance Trust Fund (Part A) and the Supplementary Medical Insurance Trust Fund (Part B and Part D) to assess whether Medicare's "excess general revenue funding" exceeds 45 percent. As defined in the law, excess general revenue funding is equal to Medicare's total outlays minus dedicated financing (primarily payroll taxes and premiums). Trustees will be required to include the following information in their annual reports starting in 2005:

• General revenue Medicare growth projections as a percentage of the total Medicare outlays;
• Financial analysis of the combined Medicare Part A and Part B trust funds if general Medicare revenue funding were limited to 45 percent of total Medicare outlays;
• A determination as to whether there is projected to be "excess general Medicare revenue funding" for any of the succeeding six fiscal years in their annual reports. If there is an affirmed determination of excess general Medicare revenue funding for two consecutive annual reports, this will be treated as a funding warning for Medicare. In the event of a Medicare funding warning the law provides special legislative conditions for Medicare legislation submitted by the President to Congress;
• Comparisons with growth trends for gross domestic product, private health costs, national health expenditures, and other appropriate measures; and
• Expenditures and trends in expenditures under Part D.

$1 Billion Implementation Funding

MMA authorized and appropriated $1 billion in two-year funding for CMS to implement MMA. CMS is tracking its MMA expenditures by major provision in the bill as well as by several broad activity categories. The tables display our actual spending in FY 2004 and estimated spending in FY 2005 by provision and by activity. In FY 2005, $25 million will be transferred to the Office of the Inspector General.

Health Savings Accounts

MMA establishes Health Savings Accounts (HSAs). HSAs allow individuals with high deductible plans (a deductible of at least $1,000 for individual plans and at least $2,000 for family plans) to contribute up to the lesser of the deductible amount or $2,650 for individuals and $5,250 for families in 2005 to a tax-advantaged account. The maximum contribution amount is indexed and increases each year. Individuals may withdraw money from their HSA on a tax free basis to pay for medical expenses below the deductible, as well as other qualified medical expenses such as prescription drugs, over the counter drugs, long-term care services, and COBRA insurance. Any money used for non-qualified medical expenses is taxable and subject to an additional 10 percent tax.

Medicare

Medicare provides health insurance to 42.7 million individuals who are either 65 or older, disabled, or suffer from end-stage renal disease (ESRD). In FY 2006, spending on Medicare benefits will total $394 billion.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) represents the largest transformation of the Medicare program in a generation, adding a prescription drug benefit and expanded health care choices to the existing program. The four parts of Medicare are summarized below.

Medicare Benefits Spending by Service, 2006

PART A

• Medicare Part A pays for inpatient hospital care, skilled nursing facility care, home health care related to a hospital stay, and hospice care.
• Individuals with 40 quarters of Medicare-covered employment are entitled to Part A without paying a premium.
• Financing comes primarily from a 2.9 percent payroll tax split between employees and employers.
• The most recent Medicare Trustees report projected the Hospital Insurance (HI) Trust Fund's insolvency date at 2019.
• In 2005, beneficiaries will pay a $912 deductible for a hospital stay of 1-60 days, and a $114 daily coinsurance for days 21-100 in a skilled nursing facility.
• The 2005 Part A premium is $206 per month for people with 30-39 quarters of Medicare-covered employment, and $375 per month for people with 29 or fewer quarters of such coverage.

PART B

• Medicare Part B 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.
• Supplementary Medical Insurance (SMI) coverage is voluntary. Approximately 95 percent of Medicare's beneficiaries are enrolled in Part B.
• Approximately 25 percent of Part B costs are financed by beneficiary premiums ($78.20 per month in 2005), with the remaining 75 percent of costs covered by general revenues.

PART C

• Medicare Part C, the Medicare+Choice program, has changed to the Medicare Advantage program under MMA.
• Medicare Advantage offers beneficiaries a variety of coverage options, including traditional HMOs, preferred provider organizations (PPO), and private fee-for-service plans.
• Currently, five million beneficiaries are enrolled in a Medicare Advantage plan.
• Medicare Advantage plans receive a capitated monthly payment to provide all Part A and B services, plus whatever additional benefits and cost sharing arrangements the plan provides.

Part D

Prescription Drug Standard Benefit: In 2006, the standard benefit offers:

• a $250 deductible;
• a modest average monthly premium estimated at less than $37, based on choice of plan; and,
• a 75 percent subsidy for drug costs between $251 and $2,250.
• Once a beneficiary pays $3,600 out-of-pocket ($5,100 in total costs), the Federal Government will pay all costs for covered drugs except for nominal cost-sharing.
• The cost-sharing, once the beneficiary reaches the out-of-pocket limit, is equal to the greater of: (1) a co-payment of $2 for a generic drug or preferred drug / $5 for any other drug, or, (2) 5 percent co-insurance.

Prescription Drug Low-Income Benefit: In 2006, low-income Medicare beneficiaries will receive generous assistance in purchasing their prescription drugs, as follows:

• All Medicaid full-benefit dual eligible beneficiaries will pay no deductible, no premiums, and no co-payments after the out-of-pocket limit is reached.
• Full-benefit dual eligible beneficiaries with incomes at or below 100 percent of poverty will have co-payments of up to $1 for generics and $3 for brand name drugs up to the out-of-pocket limit.
• Full-benefit dual eligible beneficiaries with incomes above 100 percent of poverty will have co-payments of up to $2 for generics and $5 for brand name drugs up to the out-of-pocket limit.
• Institutionalized dual eligibles will pay no premiums, deductibles, or cost-sharing.
• Non-full-benefit dual eligible beneficiaries with incomes below 135 percent of poverty and assets up to $6,000 per individual (or $9,000 per couple) in 2006 will have no deductibles, no premiums, and co-payments of up to $2 for generics and $5 for brand name drugs up to the out-of-pocket limit. They will have no co-payments for drug costs once their total drug costs reach $5,100.
• Non-full benefit dual eligible beneficiaries with incomes below 135 percent of poverty and assets that exceed $6,000 but do not exceed $10,000 per individual (or $9,000 and $20,000 per couple) in 2006 will have no premiums, a $50 deductible, and have nominal cost sharing not to exceed 15 percent co-insurance. They will have co-payments of up to $2 for generics and $5 for brand name drugs once their total drug costs reach $5,100.
• Non-dual eligible beneficiaries with incomes below 150 percent of poverty and assets up to $10,000 per individual (or $20,000 per couple) in 2006 will have a sliding scale premium subsidy that is based on income, a reduced deductible of $50, and cost-sharing not to exceed 15 percent co-insurance for costs up to the out-of-pocket threshold. Once these beneficiaries reach total drug costs of $5,100, they will pay only nominal cost-sharing of up to $2 and $5 co-payments.
• For non-full-benefit dual eligible beneficiaries, low-income subsidy eligibility will be determined by State Medicaid agencies or by the Social Security Administration.

Program Assessment Rating Tool (PART)

The Office of Management and Budget (OMB) developed the Program Assessment Rating Tool (PART) to evaluate programs in a systematic manner, using numeric scores that rate overall program effectiveness and highlight strengths and weaknesses. In FY 2003, the Medicare program was evaluated. Medicare was rated as "Moderately Effective" and found to be strong overall, but needed modernizing to reflect the evolution of health care since its inception in 1965. With enactment of MMA, many of these issues have been addressed and new performance measures were added to reflect these new responsibilities.

The program was not re-evaluated during FY 2004. However, CMS is addressing the following three recommendations from the PART evaluation:

• Agency commitment to timely implementation of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003;
• Greater emphasis on sound program and financial management; and
• More effort to link Medicare payment to provider performance.

Medicare Administrative Improvements

In coming years, HHS will make changes to rationalize several components of Medicare's payment systems. Specialty hospitals, which tend to be physician-owned and focus on patients with specific medical conditions or who need surgical procedures, are a small but growing segment of the health care industry. MedPAC, the Congressional advisory committee for Medicare issues, conducted extensive research and found that there are problems in the physician ownership of hospitals and in the way Medicare pays for hospitals. The Administration will seek to refine the inpatient hospital payment system and related provisions of regulations to ensure a more level playing field between specialty and non-specialty hospitals.

With regard to Medicare Advantage, the Budget will phase in over four years the savings from the full implementation of risk adjustment payments to account for different health status of beneficiaries in Medicare Advantage plans. The phase-in will begin in 2007 and will be completed by 2010, and is projected to produce savings to the extent that Medicare Advantage plans serve healthier beneficiaries, on average, compared to fee-for-service. The Budget also proposes to improve payment accuracy for patients who are transferred from inpatient hospitals to post-discharge acute settings, such as nursing facilities.

Lastly, HHS will refine the Skilled Nursing Facility Prospective Payment System in 2006 to ensure appropriate payments for certain high-cost cases.

Health Care Fraud and Abuse Control Program (HCFAC)

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), established the Health Care Fraud and Abuse Control (HCFAC) Program. For the first time, the FY 2006 budget proposes to fund the HCFAC program through both a mandatory and a discretionary funding stream. Proposed FY 2006 total HCFAC funding is $1.155 billion. Of this amount, $1.075 billion funds the mandatory portion of the program. The HIPAA statute capped HCFAC spending at this level since FY 2003. The remaining $80 million represents new discretionary proposed funding for the program.

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 the modification and establishment of safe harbors 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 $1.075 billion from the Medicare Part A Trust Fund combating health care fraud and abuse. The money is allocated into three major parts: 1) $720 million for the Medicare Integrity Program (MIP); 2) $114 million to Federal Bureau of Investigation (FBI); and, 3) $240.6 million in "wedge" funds that are divided among the Department of Justice (DOJ), the HHS Inspector General, and other HHS agencies, including CMS, AoA, 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 2003, the HCFAC Account has returned approximately $6.2 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 $75 million in discretionary funding to safeguard the Medicare prescription drug benefit and Medicare Advantage. These funds will increase total MIP funding to $795 million in 2006. For the mandatory funding, MIP is expected to save the Medicare Trust Funds $10 billion in FY 2006 through recoveries, claims denials, and accounts receivable, a 14:1 return on investment.

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

The remaining $240.6 million in wedge monies finance a variety of anti-fraud and abuse activities. DOJ uses its portion of the wedge for civil and criminal prosecutions of health care professionals and providers. The HHS Inspector General uses its share to bring about judgements and settlements related to health care fraud and abuse and to work with CMS to develop and implement recommendations to correct systemic vulnerabilities detected during HHS/OIG evaluations and audits. The remaining wedge monies go to HHS and are used primarily for: SCHIP and Medicaid financial management oversight and data analysis projects to detect patterns of fraud, educational activities at AoA, and investigative and litigation support at OGC.

HCFAC Discretionary Funds: As part of the government-wide approach to funding program integrity activities, the budget proposes a $80 million discretionary cap adjustment for HCFAC in FY 2006 and $120 million in FY 2007, for a total of $200 million over two years. The additional HCFAC funds will enhance efforts to safeguard the Medicare prescription drug benefit and Medicare Advantage program ($75 million) and expand efforts for safeguarding the Medicaid and SCHIP programs ($5 million).

Medicare Error Rate

The Medicare fee-for-service error rate for FY 2004 is 9.3 percent. The Medicare Integrity Program is the primary source of funds to lower the Medicare payment error rate. The Department lowered the Medicare payment error rate from 14 percent in FY 1996 to 6.3 percent in FY 2002 (as measured by OIG). FY 2003 was the first year that CMS was responsible for estimating the national Medicare error rate. CMS developed the Comprehensive Error Rate Testing (CERT) Program and the Health Payment Medicare Program (HPMP) to estimate the Medicare payment error rate using a sample size of 140,000-170,000 claims. The OIG used a sample size of approximately 6,000 claims and produced only one statistically significant number (the national error rate). CERT/HPMP provides contractor, provider type, and benefit service-specific error rates at statistically significant levels. CERT allows CMS to see contractor level performance data that the agency can use as a tool to manage and correct payment errors. Reducing the Medicare payment error rate is a major priority in the Department's effort to implement the President's Management Agenda.

The Administration's health care fraud, waste, and abuse control efforts have made remarkable progress in protecting the Medicare Trust Funds. Medicare Trustee's reports have cited our health care fraud, waste, and abuse control efforts as a contributing factor in slowing Medicare spending growth. We hope to bring similar success to the state-administered Medicaid and SCHIP programs as well.

Quality Improvement

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 review.

QIOs are a central player in the 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, and physicians offices. These quality improvement efforts are essential to the Administration's goals to modernize and strengthen the Medicare program.

In November 2002, HHS and CMS launched the national Nursing Home Quality Initiative (NHQI). The initiative provides new comparative information to consumers and resources to facilities all aimed at improving nursing home quality of care. Since 2002, the number of measures has been expanded from 8 to 15, reflecting improvements in quality measurement and endorsement by the National Quality Forum. Over the past two years, significant improvement has been achieved in a number of the publicly reported quality measures. The on-going CMS nursing home survey and certification activities are also part of the NHQI, and have a dedicated funding stream through the Survey and Certification budget (see the Program Management, Survey and Certification sections).

The Nursing Home Quality Initiative was followed in the spring of 2003 with Phase I of Home Health Compare, which provides comparative information on 11 home health quality indicators for beneficiaries in five demonstration States. Following phase I, HHS and CMS launched a national Home Health Quality Initiative in November 2003.

CMS is in the process of completing implementation of the Hospital Quality Alliance, which will provide comparative outcomes data on hospitals. To date, over 3,800 eligible hospitals have voluntarily participated. With incentives built into MMA, nearly all eligible hospitals are participating. The results of these public information programs will be better informed consumers and providers that are better able to identify what they must do to improve quality.

CMS and the Administration continue to encourage excellence in care by exploring provider payment reforms that link quality to Medicare reimbursement in a cost neutral manner. Such payment reforms would be flexible enough to support innovations in health care delivery.

On January 15, 2003, a CMS study published in the Journal of the American Medical Association showed that we are making important progress in improving health care quality. The study shows that from 1998 to 2000, there has been across-the-board improvement in a series of health care quality measures tracked by QIOs. For instance, the study shows that the percentage of diabetic patients screened for cholesterol problems rose from 56 percent to 74 percent and that the percentage of patients receiving beta-blockers at hospital discharge, which reduce complications in patients who have had a heart attack, rose from 72 percent to 79 percent. Despite these improvements, the study reports that more than a quarter of Medicare beneficiaries still do not receive important services that could protect them from disease or prolong life.

MMA expanded QIO responsibilities to include work with Medicare Advantage and Prescription Drug Plans to improve prescription choices and medication therapy management.

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 184,036 laboratories registered with CMS, 21 percent of which are subject to routine inspection (every two years) under the program. The remainder are exempted. Workload projections for the FY 2005-2006 cycle include 20,674 surveys of non-accredited laboratories, 790 State validation surveys of accredited laboratories, and approximately 1,502 follow-up surveys and complaint investigations.

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

Medicaid

Medicaid is a jointly-funded, Federal-State program that provides medical assistance to certain low-income groups. In FY 2006, approximately 46.3 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. Under current law, the Federal share of Medicaid outlays is expected to be about $192.6 billion in FY 2006. This is a $4.3 billion (2.3 percent) increase over projected FY 2005 spending.

Background

Under Medicaid, State expenditures for medical assistance are matched by the Federal government using a formula based on average per capita income in each State relative to national per capita income. Federal matching rates for FY 2006 will range from 50 to 76 percent for medical assistance payments. Overall, the Federal government pays for about 57 percent of total Medicaid expenditures. In addition to medical assistance payments, the Medicaid appropriation funds the Vaccines for Children program and the Federal share of Medicaid State and local administrative costs.

Historically, eligibility for Medicaid has 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 remains tied to AFDC program rules in place as of July 16, 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 the age of 19 living in families with incomes below the poverty level; and 3) all children under age 6 with incomes below 133 percent of the Federal Poverty Level. In 2004, the poverty level for a family of three was $15,670 in most of the United States (for a family of three in Alaska, the poverty level was $19,590 and for a family of three in Hawaii, the poverty level was $18,020).

States have the option to cover some individuals not eligible under AFDC or SSI rules and may cover people at higher incomes by disregarding a portion of their incomes. 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 such as prescription drugs, clinic services, dental care, eyeglasses, and services provided in intermediate care facilities for those with developmental disabilities.

Program Developments

Medicaid Growth: Prescription drug spending, nursing home care, community-based long-term care costs, and payments to health plans are significant contributors to 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 at an accelerated rate.

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. Although demonstrations vary greatly, most employ a similar overall approach: expanding the use of managed care for the Medicaid population.

To date, CMS has approved 30 Statewide comprehensive health care reform demonstrations in 27 States. CMS has also approved two sub-State health reform demonstrations and 15 demonstrations specifically related to family planning.

Health Insurance Flexibility and Accountability: In August 2001, President Bush announced the Health Insurance Flexibility and Accountability (HIFA) demonstration, a new section 1115 initiative. HIFA enables States to use Medicaid and State Children's Health Insurance Program (SCHIP) funds in concert with private insurance options to expand coverage to low-income, uninsured individuals, with a focus on those with incomes at or below 200 percent of the Federal Poverty Level. A more in-depth discussion of HIFA waivers is included in the SCHIP section.

Pharmacy Plus: The introduction of the Medicare prescription drug benefit assumed much of the cost of pharmaceutical benefits otherwise covered by Pharmacy Plus waivers. The Department and CMS continue to work closely with states that have Pharmacy Plus waivers to enable them to provide the same level of coverage under the new Medicare prescription drug program.

Medicaid Legislative Proposals

The following sections contain FY 2006 legislative proposals.

Medicaid and Schip Modernization

The Administration proposes to provide States with additional flexibility in Medicaid to further increase coverage among low-income individuals and families without creating additional costs for the Federal Government. This proposal would build on the success of SCHIP to provide acute care for children and families, as well as current efforts to reduce the number of uninsured individuals.

A modernized Medicaid system will give States greater flexibility without the need for burdensome waiver applications. Principles that are employed in SCHIP and emphasize innovation will be expanded to Medicaid beneficiaries, while long-term care reforms will build on successful programs that use consumer direction and home- and community-based care to improve satisfaction and lower costs. A modernized Medicaid system will continue to grow at a robust rate to accommodate increases in health care spending.

New Freedom Initiative Proposals

The President's Budget includes six policies that promote home and community-based care options for people with disabilities. These policies build on the President's New Freedom Initiative, which is part of a nationwide effort to integrate people with disabilities more fully into society.

Money Follows the Person Rebalancing Demonstration: This proposal is consistent with the Administration's effort to promote the use of at-home care as an alternative to nursing homes for elderly and disabled Americans. Under the "Money Follows the Person" demonstration, at-home care combines cost effective benefits with increased independence and quality of life for the beneficiary.

In this five-year demonstration project, Federal grant funds would pay for home and community-based waiver services for individuals who move from institutions into at-home care. These costs would be funded at a Federal matching rate of 100 percent for the first year of each individual's participation. As a condition of receiving the enhanced match, the participating State would agree to continue care after the first year at the regular Medicaid matching rate and to reduce institutional long-term care. This proposal authorizes $1.75 billion in funding for this demonstration over five years.

Home and Community-Based Care Demonstrations: The Budget includes three demonstrations proposals to encourage home and community-based care for children and adults with disabilities:

• Community Alternative to Children's Residential Treatment Facilities: This demonstration enables States to offer home and community-based services to children who would otherwise be served in psychiatric residential treatment facilities. This 10-year demonstration would permit the delivery of intensive mental health services for children in their homes and communities and allow the Department to evaluate the cost of providing these services outside of institutions. The cost for this proposal in FY 2006 is $5 million and $99 million over five years.
• Respite for Caregivers of Disabled Adults: This proposal creates a demonstration that tests whether respite care, or temporary care, reduces primary caregiver "burn-out" that often leads to institutionalization of individuals with disabilities. The cost for this proposal in FY 2006 is $7 million and $134 million over five years.
• Respite for Caregivers of Children with a Substantial Disability: This demonstration allows States to provide respite care to caregivers of children with substantial disabilities. The demonstration would enable the Department to collect specific data about the cost and utilization of respite services for caregivers of disabled children. The cost for this proposal in FY 2006 is $1 million and $23 million over five years.

Spousal Exemption: This proposal protects Medicaid coverage of an individual married to a disabled individual participating in a work incentive program under 1619(b) of the Social Security Act. Currently, if an individual is Medicaid eligible and the individual's spouse participates in the 1619(b) program, the spouse's earnings could cause the individual to lose his/her Medicaid coverage. This proposal will cost $17 million for FY 2006 and $102 million over five years.

Presumptive Eligibility: Establishes a State Medicaid option allowing presumptive eligibility for institutionally-qualified individuals who are discharged from hospitals into the community. This will increase the number of Medicaid beneficiaries who receive home and community-based services rather than institutional care. This proposal has no cost associated with it.

Other Medicaid Legislative Proposals

Extension and Simplification of Transitional Medical Assistance: 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 earnings from work. This provision was enacted along with welfare reform and was scheduled to sunset in September 2002. Congress has already extended this program through March 31, 2005. This proposal will extend TMA benefits through September of 2006.

In addition to this extension, the 2006 President's Budget includes proposals to simplify eligibility for TMA benefits to the low-income working poor. There are three provisions to the proposal:

• States will be given the option to offer 12 months of continuous coverage to eligible participants.
• States may waive income reporting requirements for beneficiaries.
• States that offer Medicaid eligibility for children and families with incomes up to 185 percent of poverty may waive TMA assistance altogether.

This proposal will cost $560 million in FY 2006 and $560 million over five years.

Partnership for Long Term Care Insurance: Eliminates the legislative prohibition on developing more Partnership programs. The Partnership for Long Term Care (LTC) was formulated to explore alternatives to current long-term care financing by blending public and private insurance. Four States (California, Connecticut, Indiana, and New York) currently have partnerships whereby private insurance is used to cover the initial cost of LTC. Consumers who purchase Partnership-approved insurance policies can become eligible for Medicaid services after their private insurance is utilized, without divesting all their assets as is typically required to meet Medicaid eligibility criteria. This proposal is budget neutral.

Extension of Premium Assistance to Qualified Individuals: Under the Qualified Individuals (QI) program, Medicaid pays Medicare Part B premiums for Medicare beneficiaries with incomes between 120 and 135 percent of poverty. Part B premiums currently cost a beneficiary $78.20 per month - a 17.4 percent increase over 2004. States will continue to be fully reimbursed for the cost of the program. This one-year extension is estimated to cost $230 million in FY 2006.

Improvements to the Vaccines for Children Program: Vaccines for Children (VFC) is a CDC-administered, Medicaid funded program that administers free vaccines to eligible children. The President's Budget would improve the program by allowing under-insured children to receive VFC administered inoculations at State and local health departments in addition to Federally Qualified Health Centers and Rural Health Centers. This proposal will cost an additional $140 million in FY 2006 and $700 million over five years.

Payment Reforms: The Administration proposes to further improve the integrity of the Medicaid matching rate funding mechanism by curbing the use of financing arrangements that States use to avoid the legally determined State match requirement.

Through various mechanisms, government providers return Federal Medicaid funds back to the States. States, in turn, recycle these funds by using them to draw down additional Federal dollars. The Budget proposes to build on current CMS efforts to curb these questionable financing practices by matching only those funds kept by providers as payment for services.

In addition, current law allows States to make Medicaid payments to providers far in excess of the actual costs of services. States use this additional money to leverage Federal reimbursements in excess of their Medicaid matching rate or for other purposes. To avoid this misuse of funds, the President's budget proposes to limit reimbursement levels to no more than the cost of providing services. These proposals save $5.9 billion over five years.

Reforming Provider Taxes: The budget proposes two changes to the current law regulating provider taxes. Under current rules, taxes imposed on providers may not exceed 6 percent of total revenues and must be applied uniformly across all health care providers in the same class. The first change proposes to phase down this allowable tax rate from 6 percent to 3 percent. Second, the Budget proposes that managed care organizations (MCOs) meet the same provider tax requirements as other classes of health providers. This proposal saves $231 million in FY 2006 and $3.17 billion over five years.

Strengthening Medicaid Reimbursement Policies: The President's budget proposes three changes to Medicaid reimbursement policy. First, the budget proposes to clarify which services may be claimed under targeted case management (TCM). Second, the Administration seeks lower reimbursement for TCM services to the administrative matching rate of 50 percent. Currently States are shifting costs into Medicaid that are the obligation of other programs and are using expanded definitions of allowable services. These two proposals save $129 million in FY 2006 and $3.1 billion over five years.

In addition, the Administration proposes to codify Medicaid "free care" policy in regulation. Currently, the Medicaid program asserts that States cannot bill the Federal Medicaid program for any service that would be provided to non-Medicaid eligible individuals free of charge. The most prominent example of this type of service is school nurse care. This regulatory change seeks to codify this policy in regulation to eliminate any legal ambiguity surrounding this topic. This regulatory change has no budget impact.

Reforming Transfer of Assets Requirements: Current law requires individuals applying for Medicaid long-term care services to divest all but a minimum level of assets before becoming eligible. If applicants transfer assets at below market value to avoid these requirements, Medicaid rules hold them subject to delays in eligibility. Despite these sanctions, creative estate planning often allows individuals to garner Medicaid eligibility status without divesting their assets. The budget proposes to curtail this practice by tightening existing rules regarding transfers of assets. This proposal saves $99 million in FY 2006 and $1.48 billion over five years.

Medicaid Administrative Claiming: The President's budget proposes to curtail inefficient Medicaid administrative spending patterns by establishing an allotment for Medicaid administrative claiming. This proposal saves $1.13 billion over five years.

Medicaid and SCHIP Financial Management: The Department plans to continue its efforts to root out erroneous and fraudulent uses of Medicaid and SCHIP funding. Along with an increase in the number of audits and evaluations of State Medicaid programs, the budget proposes to allocate $20 million from the Health Care Fraud and Abuse Account and $5 million in discretionary funding to finance this work.

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 lowest private market price or best price. This figure functions as a price floor, which prohibits manufacturers from negotiating deep discounts with large non-Medicaid purchasers such as hospitals and HMOs. The Administration proposes replacing best price with a budget neutral flat rebate, allowing private purchasers to negotiate lower drug prices. This proposal will have no effect on the Medicaid budget.

Restructure pharmacy reimbursement: In a recent House Energy and Commerce Committee hearing, the members focused their attention on government overpayment for prescription drugs in Medicaid. The President's Budget proposes a system that more closely aligns pharmacy reimbursement to pharmacy acquisition costs. This proposal saves $542 million in FY 2006 and $5.4 billion over five years.

Health Insurance Portability and Accountability Act Proposals: Congress passed the Health Insurance Portability and Accountability Act (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, in turn, verifies the period of time an individual is covered by a specific health insurance policy.

Other Legislative Proposals with Medicaid Impacts

Child Support Enforcement Proposals: The Administration for Children and Families (ACF) has proposed two changes that have an effect on the Medicaid baseline. Both proposals affect the Child Support Enforcement program. The first proposal would allow States to seek medical child support for children from both the custodial and non-custodial parent. States would also be able to enforce these support orders against the custodial parent. ACF expects this change to increase children's access to private sources of health care.

The second legislative change mandates that all States review child support orders for Temporary Assistance for Needy Families (TANF) families every three years. Under current law, States review child support orders every three years if instructed to do so by the custodial parent or at the State's own discretion. This change would mandate that States undertake these reviews. ACF believes that required reviews would result in the discovery of increased levels of private health insurance among non-custodial parents that could be used to extend coverage to their children. This increased access to private health insurance would lead to a decrease in Medicaid costs among TANF families.

These two proposals will be budget neutral in FY 2006, but will save the Federal Government $45 million over five years. Refugee and Asylee Exemption Extension: Under current law, most legal immigrants who entered the country on or after August 22, 1996, and some who entered prior to that date are not eligible for SSI until they have resided in the country for five years or have obtained citizenship. Refugees and asylees on SSI are currently exempted from this ban for the first seven years they reside in the United States. To assure that refugees and asylees have ample time to complete the citizenship process, the President's Budget proposes extending the current seven-year exemption to eight. The proposal will cost the Federal Government $40 million in FY 2006 and $145 million over five years.

SSA Initial State Disability Review: The Social Security Administration has proposed a management improvement initiative that has an impact on the Medicaid program. The proposal establishes a standard for accuracy in SSI disability awards identical to the one that applies to the Social Security Disability Insurance Program. This provision will help ensure that only individuals who are disabled will receive SSI disability benefits and related Medicaid coverage. This program will save the Medicaid program $2 million in FY 2006, and $113 million over five years.

Cover the Kids: This legislative proposal provides $1 billion in grants (in the State Grants and Demonstrations account) over two years to States, schools, and community organizations to enroll and provide coverage to many eligible, but not enrolled, children in Medicaid and SCHIP. CMS estimates that this legislative proposal will cost Medicaid $389 million in FY 2006 and $4.1 billion from FY 2006 through FY 2010.

Medicaid Enrollment Table

Medicaid Outlays Table

State Children's Health Insurance Program

The Balanced Budget Act of 1997 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 the 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.

Title XXI 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, Medicaid-ineligible, uninsured children, who are under 19 years old, in families below 200 percent of the Federal Poverty Level (FPL), can receive SCHIP benefits.

Implementation and Enrollment

Every State, the District of Columbia, and all five Territories have approved SCHIP plans. As of January 2005, States have received approval for 17 Medicaid expansion programs, 18 separate programs, 21 combination programs, and 226 State plan amendments.

Today, 11 States cover children in families with incomes up to 250 percent of the FPL. Of these States, seven cover children above that level. Six of the States cover children up to 300 percent of the FPL, and one State, New Jersey, covers children up to 350 percent of the FPL.

During FY 2003, 5.8 million children enrolled in SCHIP. This represents an increase of half a million, or 9 percent, over FY 2002 enrollment.

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 January 2005, CMS has approved nine SCHIP HIFA demonstrations expanding coverage to 821,750 people. As of November 2004, 289,000 people were enrolled in SCHIP HIFA demonstrations.

Schip Performance

When SCHIP began in 1997, CMS adopted a goal of enrolling five million children by FY 2005. Specifically, CMS has set annual target goals for FYs 2000 through 2003 to enroll at least 1 million new children in SCHIP and Medicaid per year. CMS has exceeded these enrollment goals every year.

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 assessed using the PART tool in the FY 2004 cycle and it received a rating of "Moderately Effective." It was then reassessed in the FY 2005 cycle and received a rating of "Adequate." As a result of the PART findings, CMS developed an SCHIP Action Plan to further strengthen the program.

Schip Reports and Evaluations

Congress required several SCHIP evaluations in statute. Title XXI required States to assess the operation of their SCHIP State plans and report to the Secretary by January 1 of each fiscal year. The statute also directed each State to submit to the Secretary evaluation reports by March 31, 2000. These reports are available on the Centers for Medicare & Medicaid Services website, www.cms.hhs.gov. As required by the statute, the Secretary submitted a report on the States' evaluations, which was made available to Congress and the public in December 2002. In addition to this report to Congress, CMS has planned future evaluations to examine the SCHIP program in greater detail.

The Balanced Budget Refinement Act of 1999 (BBRA) also required HHS to conduct an independent evaluation of 10 States. The interim evaluation report was submitted to Congress in February 2003. A final report is expected to be presented to Congress in early 2005.

BBRA also directed the Secretary, through the Inspector General, to evaluate SCHIP every three years. The Office of the Inspector General (OIG) is instructed to evaluate: 1) State compliance with the requirement that Medicaid-eligible children are not enrolled in SCHIP, and 2) State progress made in reducing the number of uninsured children. The OIG released two reports in February 2001 that fulfill these requirements. To satisfy the requirement to submit these evaluations every three years, the OIG released its evaluation of States' progress in reducing the number of uninsured children in August 2004. In 2005 the OIG will release its second evaluation of States' compliance with the requirement that Medicaid-eligible children are not enrolled in SCHIP.

As directed by BBRA, the Comptroller General submitted a report to Congress monitoring these OIG audits. The Comptroller General's report suggests that the OIG expand the study to include a more diverse sample of States. The scope of the OIG follow-up studies is expanded to more comprehensively assess the SCHIP program by analyzing a broader array of States.

Schip Waivers

The requirements of Federal law and regulations can be waived by the Secretary of the Department of Health and Human Services 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 to SCHIP recipients. Section 1115 waivers provide health insurance to uninsured children, parents, caretaker guardians, pregnant women, and childless adults.

The Administration has promoted a new section 1115 approach, called the Health Insurance Flexibility and Accountability (HIFA) waivers, for States to develop comprehensive insurance coverage for individuals at twice the Federal Poverty Level 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 adults with incomes less than twice the Federal Poverty Level.

As of January 2005, 16 SCHIP Section 1115 waivers were approved for Alaska, Arizona, California, Colorado, Idaho, Illinois, Maryland, Michigan, Minnesota, Missouri, New Jersey, New Mexico (2), Oregon, Rhode Island and Wisconsin. Of these 16 waivers, nine are HIFA demonstration waivers (Arizona, California, Colorado, Idaho, Illinois, Michigan, New Jersey, New Mexico, and Oregon).

Legislative Proposals

Cover the Kids: This legislative proposal provides $1 billion in grants (in the State Grants and Demonstrations account) over two years to States, schools, and community organizations to enroll and provide coverage to many eligible, but not enrolled, children in Medicaid and SCHIP. CMS estimates that this legislative proposal will cost SCHIP $129 million in FY 2006 and $535 million from FY 2006 through FY 2010.

Medicaid and SCHIP Modernization: The Administration proposes modernizing Medicaid and SCHIP by giving States greater flexibility to tailor their programs to meet the needs of their populations without complex waiver applications. This proposal builds on current efforts to reduce the number of uninsured individuals and responds to feedback about current program structure (please see the Medicaid section for further details).

SCHIP Reauthorization and Redistribution: Under current law, SCHIP is authorized and appropriated through FY 2007. This legislative proposal seeks to reauthorize the program early to better target SCHIP funds in a more timely manner. The proposal would reauthorize SCHIP at current law levels.

Please see the Medicaid and State Grants and Demonstrations sections for additional proposals that affect SCHIP.

Schip Outlays Table

Medicaid and SCHIP Proposals Table

State Grants and Demonstrations Table

State Grants and Demonstrations

The Ticket to Work and Work Incentives Improvement Act

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. The demonstration program will evaluate the potential benefits of providing Medicaid services to workers with physical or mental impairments that, without medical intervention, are likely to result in disability.

In FY 2006, the budget authority provided by statute for the two grant programs totals $81.8 million. Medicaid Infrastructure Grants are authorized and appropriated for $40.8 million of non-matched Federal funding. The Demonstration to Maintain Independence and Employment is authorized and appropriated for $41 million. States must match Federal funding for this demonstration program at the normal Federal matching rate.

Through 2004, 49 entities (48 States and the District of Columbia) were approved for funding from the Infrastructure Grant Program Section 203 since its inception. There are 31 States with Medicaid buy-ins and three additional States have plan amendments under review. As of September 30, 2004, there were just over 70,000 workers receiving Medicaid benefits under the buy-in options. Since January 1, 2000, there has been a ten-fold increase in participation. A total of 15 States and the District of Columbia have applied for and will receive continuation awards in FY 2005. In addition, one State, West Virginia, will continue to carry-out employment goals for the working disabled population by spending previous grant awards in FY 2005 through a no-cost extension of funding. Of the $35 million (FY 2004) that has been appropriated for the upcoming grant year, $21.8 million was granted to States. The reason for the large discrepancy in the FY 2004 appropriation and funding amount is that States are enrolling fewer participants in Medicaid buy-in programs than Congress originally anticipated. Higher levels of funding are legislatively related to the yearly amount of Medicaid buy-in service costs expended by a State. States may be hesitant to enroll individuals in the optional buy-in category because of budget shortfalls. The remaining funding rolled over into the FY 2005 appropriation. With this funding, the recipients plan to make systemic changes that will help individuals with disabilities gain employment and retain their health care coverage. These changes are designed to increase Medicaid buy-in programs and enhance State personal assistance service programs.

Six States (Kansas, Louisiana, Minnesota, Mississippi, Rhode Island, and Texas) and the District of Columbia were awarded Demonstration to Maintain Independence and Employment grant funding since the program was started. States implementing demonstration grant programs will provide Medicaid-equivalent services to targeted populations of working individuals with disabilities. The demonstration projects will be used to evaluate the impact of providing Medicaid benefits to a working person with a potentially severe disability. The State demonstration projects approved so far will cover individuals with all types of disabilities including HIV/AIDS and various mental illnesses.

Qualified High-Risk Pools

The Trade Adjustment Assistance Reform Act of 2002 (TAA) established two grant programs for States to provide health insurance coverage through high-risk pools. The first program made available a total of $20 million to States that, as of August 6, 2002, did not already have a qualified high-risk pool. These funds were used for the creation and initial operation of pools. The second program made available $40 million per year for FY 2003 and FY 2004 for grants to States with existing qualified high-risk pools to be used for the operation of their pools.

States that did not have existing qualified high-risk pools were given until March 31, 2004 to apply for up to $1 million each to create and initially operate a qualified high-risk pool. The TAA legislation made available $20 million in FY 2003 for these "seed grants." Six States received a total of $4.2 million in seed grant funding before the authority lapsed at the end of FY 2004.

The TAA also made available $40 million per year for FY 2003 and FY 2004 for the States that already operate qualified pools that meet the requirements of the statute. The FY 2003 money was available until the end of FY 2004 and the FY 2004 money will be available until the end of FY 2005. CMS published a Federal Register Notice on May 2, 2003 announcing the availability of funding and inviting States to apply. All $40 million was awarded for FY 2003, divided among 19 States. To date, $25.5 million of FY 2004 funding has been awarded, divided among fourteen States. We expect that the remaining $14.5 million for FY 2004 funding will be awarded before the deadline at the end of FY 2005.

Federal Reimbursement of Emergency Health Services for Undocumented Aliens

The MMA created a new program to assist States with paying for uncompensated medical care for illegal aliens. The law establishes an annual $250 million fund, which will be allotted among the States each year between FY 2005 and 2008. Two-thirds of this money will be distributed based on the relative percentages of undocumented aliens in each State and the District of Columbia. One third will be allotted among the six States with the largest number of undocumented alien apprehensions. The amounts set aside for each State will not be dispersed through the State itself. The law requires the Secretary to directly pay hospitals, doctors, and other providers for their otherwise uncompensated costs of providing emergency health care to undocumented aliens in their respective States.

Pilot Program for National and State Background Checks on Direct Patient Access Employees of Long-Term Care Facilities or Providers

Section 307 of the MMA creates a $25 million pilot program that runs through the end of FY 2007 to evaluate State and national background checks of direct patient access employees of long-term care facilities or providers. On December 22, 2004, CMS selected seven States to participate in the pilot program: Alaska, Idaho, Michigan, Nevada, New Mexico, South Carolina, and Wisconsin. Subsequently, South Carolina withdrew from the program. CMS extended an offer to Illinois (one of the alternate States) to participate in the pilot and is awaiting their response. 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.

State Pharmaceutical Assistance Program

The State Pharmaceutical Assistance Program provides funds to educate Part D eligible individuals enrolled in the Program about prescription drug coverage available through Part D of the MMA.

Legislative Proposals

Cover the Kids: Despite the availability of health care coverage through Medicaid and SCHIP, millions of children eligible for these programs have not enrolled. This proposal will provide $1 billion in grants over two years to States, schools, and community organizations with the aim of enrolling as many Medicaid- and SCHIP-eligible children as possible.

State Purchasing Pools: To help low-income individuals purchase coverage with the health insurance tax credit, the Administration proposes providing for establishing purchasing pools. By combining the purchasing power of individuals and families, these pools would offer tax-credit recipients an additional affordable health insurance option and would make it easier and faster to shop for coverage. This proposal costs $200 million in FY 2006 and $1.7 billion over five years.

Program Management Overview Table

MMA Implementation Table

Program Management

The comparable CMS FY 2006 Program Management budget request is $3.2 billion in budget authority, an $89 million or 2.7 percent decrease over FY 2005. However, FY 2004 and FY 2005 are transitional years for CMS. In FY 2004 and FY 2005 funding is higher to allow for the start-up activities associated with the MMA. Many of these start-up activities are expected to be substantially complete by FY 2006, and CMS' focus will begin to shift from start-up to oversight and administration. The shift in activities and changes in funding complicate the comparison of the FY 2006 request with prior years. The FY 2006 request does not propose any new user fees.

The FY 2006 budget request includes all funding for CMS operations to support Medicare, Medicaid, and SCHIP related activities. Also, this request now includes funding to administer and implement the new MMA activities as well as the budget, legislative, and management priorities of the Administration, including: educating beneficiaries about their health plan and benefit choices; improving financial management performance through ongoing implementation of the healthcare integrated general ledger accounting system (HIGLAS); and strategically managing human resources.

All comparisons in the following sections are on a comparable basis (e.g., FY 2005 levels include MMA implementation funds).

Medicare Operations: The Medicare Operations budget supports a broad array of activities. The budget is $2.2 billion, a decrease of $42.8 million or 1.9 percent below total FY 2005 resources. The Medicare fee-for-service program is administered by private contractors. Contractor responsibilities include: processing claims and making benefit payments; responding to the needs and inquiries of Medicare beneficiaries and health care providers and suppliers; and developing and implementing management changes to improve program operations. In addition, Medicare Operations funds a variety of mission critical information technology systems. For example, it funds managed care systems, standard processing systems, and maintenance of current contractor systems.

CMS Medicare Operations includes:

• Carriers' and fiscal intermediaries' regular activities, such as processing claims, holding hearings and appeals, answering inquiries, and educating providers and beneficiaries.
• Activities to keep shared claims processing systems current, Common Working File (CWF), and managed care systems maintenance.
• Funding provider services such as toll-free lines and training, and other operational costs.
• Funding for the Consolidated Information Technology Infrastructure Contract (CITIC), the Medicare data communications network, and hardware and software maintenance.
• Funding for implementing legislation such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Balanced Budget Act of 1997 (BBA), the Balanced Budget Refinement Act of 1999 (BBRA), the Benefits Improvement and Protection Act of 2000 (BIPA), the Federal Financial Management Improvement Act of 1996 (FFMIA), the Chief Financial Officers Act of 1990, and the of MMA.

In FY 2006, CMS will process 1.1 billion claims and answer approximately 50 million inquiries. In FY 2006, the unit cost to process a Part A claim will be $0.96, the same as the FY 2005 unit cost projection. Part B unit costs are estimated to remain constant at $0.65 in FY 2006.

Approximately 53 percent of the FY 2006 Medicare operations program level request will be spent on processing claims, on-going appeals (as distinguished from the new appeals process), inquiries, and provider assistance. Medicare contractors expect a 1 percent decrease in total claims volume below the FY 2005 estimate due to beneficiaries shifting from Medicare fee-for-service to Medicare Advantage. Hence, CMS will spend $1.2 billion in FY 2006, a 4.3 percent decrease below FY 2005 estimates.

Legislative mandates comprise 34 percent of the Medicare Operations budget and are funded at $750 million in FY 2006, a 4 percent decrease from the FY 2005 spending level. The FY 2006 request for Medicare Operations MMA activities is $32.2 million below FY 2005 spending levels at $477.6 million. This spending request is consistent with the commencement of the new Medicare drug benefit beginning on January 1, 2006 and the continuing MMA activities such as Medicare contracting reform. Of the remaining spending in Medicare Operations, operations support spending will be $265.6 million in FY 2006, an increase of $37.7 million or 16.5 percent over FY 2005. Enterprise activity spending remains relatively steady at $60.6 million, a decrease of just $1.9 million below FY 2005. Systems maintenance costs will be increasing $56.3 million to $187.9 million in FY 2006. Systems maintenance will now include the maintenance costs for the portions of HIGLAS-- the new health care integrated general ledger accounting system -- that will be on-line at the contractor level in FY 2006.

Finally, CMS will provide $10.1 million towards the Department-wide Information Technology (IT) Enterprise Infrastructure Fund ($7.1 million) and Unified Financial Management System ($3.0 million).

Federal Administration: The President's Budget requests $657.4 million for CMS Federal administrative costs. This is an increase of $16.5 million or 2.6 percent over FY 2005.

The Program Management budget supports a total of 4,843 FTE, of which 3,209 FTE will staff the central office and 1,634 FTE will staff the regional offices. The Federal Administration account supports a staffing level of 4,761 direct FTE, a straight line from FY 2005. Ten additional FTE are funded in Medicare Operations, and the remaining 72 FTE are funded through user fees. The FY 2006 budget assumes 500 of CMS total FTE will be involved in MMA implementation.

This request supports the agency's Government Performance and Results Act (GPRA) goals through the development of a comprehensive workforce planning process and automated system. CMS is implementing a strategic human resources (HR) plan to ensure that the agency has the human capital it needs to accomplish its mission.

CMS requests $13 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 mothers supported by Medicaid. 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 these 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 20.7 million brochures in 24 States and the District of Columbia. Approximately 10 percent of the brochures are in Spanish and 90 percent in English. CMS is also working with the American Hospital Association to target 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 2006 budget requests $45.2 million for the Research, Demonstrations and Evaluation program, $65.0 million less than FY 2005. This request includes $25.5 million to continue and refine projects initiated in previous years and $19.7 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 BBA, BBRA, and BIPA. The remaining $19.7 million of the request will support MMA-related research projects including monitoring beneficiary access to covered drugs and evaluating numerous demonstrations and pilots mandated by MMA.

The budget does not requets continued funding for Real Choice Systems Change Grants. After five years, these grants have largely accomplished ther goals of helping States make improvements to their home and community-based health care delivery service systems. The President's New Freedom Initiative provides $858 million (outlays) to support home and community-based services for individuals with disabilities.

Survey and Certification: The FY 2006 budget request is $260.7 million, $2 million more than the 2005 level. Ensuring the safety of beneficiaries and the quality of care provided in health facilities are two of CMS most critical responsibilities. CMS contracts with State agencies to inspect health facilities providing services to Medicare and Medicaid beneficiaries and to ensure compliance with Federal health, safety, and program standards.

Included in this total is $25.7 million to support and implement activities associated with the Nursing Home Oversight Improvement Program (NHOIP), such as: investigating, processing, and reporting complaints that allege actual harm within 10 days; imposing immediate sanctions on nursing homes found guilty of a second offense that causes actual harm to residents; developing a systematic, more comprehensive survey process to more effectively detect critical quality of care problems; staggering inspection times to include a set amount begun on weekends and evenings; and focusing surveys on repeat offenders with serious violations. NHOIP activities are part of the wider CMS Nursing Home Quality Initiative (NHQI), which receives additional funding from the Quality Improvement Organizations budget (see the Medicare Quality Improvement section).

Of the total request, $244.4 million will allow States to inspect long-term care facilities and home health agencies at their legislatively mandated frequencies, as well as maintain the FY 2005 recertification levels for ESRD facilities, non-accredited hospitals, hospices, rural health clinics, ambulatory surgical centers, outpatient physical therapy, and outpatient rehabilitation facilities. CMS expects to complete over 23,200 initial or recertification inspections. In addition, CMS expects to conduct 52,500 visits in response to beneficiary or family complaints.

The remaining $16.3 million will fund base support contract activities. These activities include maintenance and enhancements to the Online Survey Certification and Reporting (OSCAR) data system, which contains information on nursing home survey results and outcomes; support services for surveying psychiatric hospitals; and curricula development for surveyor training.

Revitalization Plan: The FY 2006 budget request includes $24.2 million in two-year funds to continue funding efforts by CMS to revitalize the Agency's long-term information technology systems. This funding level is the same as the FY 2005 appropriation. The Medicare program has relied on a number of antiquated legacy systems that have been characterized by the Government Accountability Office (GAO) and the Department's Office of the Inspector General (OIG) as inflexible, not secure, and obsolete. MMA will require extensive upgrading of CMS information technology systems.

The Revitalization Plan will continue the process of modernizing the agency's Medicare fee-for-service claims processing systems ($15.2 million), and modernizing CMS information technology data structure ($9.1 million). These modernization efforts improve efficiency, enable e-gov activities, and improve systems security at CMS, and help prepare CMS systems for the increase in claims processing as today's "baby boomers" become eligible for Medicare benefits.

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

Program Management Priorities

Implementing the Prescription Drug Benefit and Regional PPOs: In FY 2006, CMS will implement the new Medicare prescription drug benefit and the new regional Medicare Advantage plans. The first half of FY 2006 encompasses key education and open enrollment periods. Success of this enormous effort depends on CMS implementing major new information technology systems, conducting intelligent and focused outreach, and educating beneficiaries so that they choose the best options to fit their health needs. In FY 2006, CMS requests $560 million for MMA activities, including implementing prescription drug plans, regional PPOs, the new Medicare preventive benefits, numerous fee-for-service improvements, and initiating contracting reform.

The National Medicare & You Education Program: Beneficiary education is a top priority for CMS, especially as CMS implements the new benefit options. CMS must ensure that beneficiaries have the essential information they need to make complex and personal choices. Many beneficiaries have two or more chronic conditions, have less than a high school education, and many have cognitive impairments. It is vital that CMS invest resources in reaching the most vulnerable population.

The total FY 2006 budget request for the NMEP is $318.2 million, a decrease of $22.2 million from the FY 2005 level. In FY 2006, over 54 percent of the NMEP funding covers the 1-800-MEDICARE helpline 24 hours a day, seven days per week. The remaining funds will be used for beneficiary materials, CMS websites, community-based outreach, the national advertising campaign, and program support services.

• The Medicare & You Handbook: In FY 2006, CMS expects to distribute more than 42 million handbooks to beneficiaries and stakeholders, approximately one million more handbooks than in FY 2005. The handbooks are offered in English and Spanish, and in Braille, audiocassette, or large print formats. Each month, approximately 250,000 new beneficiaries receive the handbook as they enroll in Medicare.
• 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 is anticipating approximately 32 million calls in FY 2006, an increase of approximately 8.9 million calls over the FY 2005 current estimate. Costs include telecommunications network management, interactive voice response, personnel and training costs of call center operators, and fulfillment of requests for printed information. CMS is implementing call center technology that will modernize and improve its customer service system.
• 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 that there will be 411 million page views in FY 2006. CMS is investing in FY 2005 to be able to support the enrollment demands that will begin in FY 2006.
• National Multimedia Campaign: Under the new prescription drug benefit, 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 2005 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 and Assistance Programs (SHIPs) grants, Regional Education About Choices in Health (REACH), and Health Outreach Zeroing In On Needs (HORIZONS). 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, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands. 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 2004, an estimated 1,200 counselors at over 1,100 local SHIPs served more than 1.7 million beneficiaries.

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 (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 2006, the President's Budget requests $149.8 million ($79.9 million in two-year money in Medicare Operations and $69.9 million in systems maintenance costs also in Medicare Operations) for HIGLAS. As contractors adopt HIGLAS, systems maintenance costs will increase. The portion of HIGLAS dealing with the agency's administrative accounts has been transferred from Federal Administration to Medicare Operation keeping all HIGLAS funding in one place and as two-year funding.

CMS began developing HIGLAS in FY 2001. Thus far, CMS has demonstrated that the application can support the integrated general ledger and Medicare financial management requirements; conducted performance tests demonstrating that HIGLAS can process 3.5 million transactions per day and support 52 Medicare contractors; and begun implementation of HIGLAS at two pilot contractors in FY 2004 and additional contractors in FY 2005.

In FY 2006, CMS will implement HIGLAS at additional Medicare contractors as well as roll out the administrative accounting module at CMS central office, complete other payment management system interfaces, and attain statutory compliance by accounting for 52 percent of total CMS costs.

Appeals Reform: The budget requests $51.5 million to implement Medicare appeals reform as required by BIPA Sections 521 and 522 and as modified by the MMA. Of this total, CMS requests $44 million for Qualified Independent Contractors (QICs) to process Medicare redeterminations originating from both carriers and fiscal intermediaries (FI). The QICs will begin processing the FI workload in FY 2005. The carrier workload will be phased in to the QICs in 2006. The funding requested allows CMS to fund eight QICs. In addition, the budget also includes $7 million for enhancements to the Medicare appeals system and $0.5 million for national and local coverage determinations.

MMA requires that the Office of the Secretary (DHHS) assume responsibility for processing cases currently handled by the Social Security Administration's (SSA) administrative law judges (ALJ) by FY 2006. By law, SSA will continue hearing Medicare cases until the function transfers to the Office of the Secretary. Thus, funds previously included in the CMS budget request for paying SSA to adjudicate Medicare claims appeals are now included in the Office of the Secretary's budget request. Please refer to the Medicare Hearings and Appeals section of the Budget-in-Brief for additional information.

HIPAA Implementation: The CMS budget request includes $39.5 million for HIPAA implementation activities. CMS was tasked with implementing the non-privacy administrative simplification provisions of HIPAA. In October 2002, CMS was also given the responsibility for enforcing the HIPAA Administrative Simplification security, transactions and code sets, and identifier standards.

The FY 2006 request includes $18.3 million to begin activities related to the National Plan and Provider Enumeration System. Activities include maintaining the enumeration system and enumerating approximately 1.3 million health care providers. The request also includes funding for enforcement of HIPAA transactions and code sets, security, and identifier standards; compliance outreach; implementing local systems changes, new standards, and technical modifications; and operating and maintaining the HIPAA data center.

Legislative Proposal for the Discretionary Budget

As part of a government-wide initiative, the Administration is proposing legislation to add funding in the discretionary budget by increasing budget caps to increase resources for the Health Care Fraud and Abuse Control account and the Medicare Integrity Program. This additional funding will support program integrity efforts for the new activities under MMA as well as Medicaid.

CMS Performance Highlights

The primary CMS mission is to assure health care security for its beneficiaries. To ensure that CMS remains a responsive, dynamic, and relevant government agency that serves its citizens, CMS will continue to focus attention on citizen-centered governance in FY 2006 and beyond.

Consistent with the principles of the Government Performance and Results Act (GPRA), CMS has focused on identifying a set of meaningful, outcome-oriented performance goals that speak to fundamental program purposes and to the Agency's role as a steward of taxpayer dollars. CMS' FY 2006 performance budget reinforces CMS, HHS, and Administration priorities including the HHS Strategic Plan and CMS strategic goals.

Following are some of the CMS performance achievements and advancements that support important Administration priorities:

Program Integrity: CMS program integrity efforts ensure the Medicare program pays the right amount to a legitimate provider for covered, reasonable and necessary services that are provided to an eligible beneficiary. CMS is also committed to assisting interested States in developing methodologies and conducting pilot studies to measure and ultimately reduce Medicaid payment error rates.

In 2003, CMS implemented a new method for measuring improper payments. The new method resulted in a higher rate of provider non-response and a higher error rate of 9.8 percent. The Comprehensive Error Rate Testing (CERT) program was initiated in FY 2003 and has produced a national error rate for each year since its inception. In 2004, CMS began reporting gross error rates in addition to the net error rates previously reported. This change was necessary in order to comply with new Improper Payments Information Act (IPIA) requirements. CMS adjusted its baseline to reflect the change in reporting. The new baseline is 10.1 percent. In the meantime, CMS will continue to work with its partners in conducting everyday business of ensuring Medicare claims are paid properly.

Quality Improvement: Improving the quality of care for Medicare beneficiaries is one of the primary objectives for the Department and CMS. Several of the Quality Improvement Organizations' (QIOs) national quality priorities are reflected in performance goals and represent health conditions that affect a large number of beneficiaries and impose a significant burden on the health care system. A sampling of these conditions are highlighted below:

A key performance goal is to increase the percentage of female Medicare beneficiaries age 65 and older who receive a biennial mammogram. In FY 2003, 51.3 percent (target 51.5 percent) of female beneficiaries received a biennial mammogram. CMS believes this rate may represent under-reporting because of a "technical claims processing issue."

Diabetes is a highly-prevalent condition in the Medicare population. Many complications of the disease, such as blindness, can be prevented or delayed with appropriate monitoring and treatment. While continuing emphasis on diabetic eye exams, CMS is replacing this goal in FY 2006 with a goal to increase the rate of hemoglobin A1c and lipid screening in this highly prevalent population at high risk for cardiovascular complications. For FY 2003, CMS exceeded its target (of 68.9 percent) at 69.3 percent.

One of the QIO goals is to protect the health of Medicare beneficiaries age 65 years and older by increasing the percentage of those who receive an annual vaccination for influenza and a lifetime pneumococcal vaccination. For FY 2003, 70.4 percent (target 72.5 percent) received an influenza vaccination and 66.4 percent (target 67 percent) received a pneumococcal vaccination. Shortages of vaccination were among the reasons for not reaching this target.

Title: Medicare Error Rate

This bar chart illustrates and estimates the FFS Error Rate (in percentage format) for FY 04, FY 05. FY 06, FY 06, FY 07 and FY 08. For FY 04, the Target was 4.8 percent and the Actual was 10.1 percent. For FY 05 the target is 7.9 percent. For FY 06, the target is 6.9 percent. For FY 07 the target is 5.4 percent. And for FY 08, the target is 4.7 percent.

Children's Health Care: The implementation of State Children's Health Insurance Program (SCHIP) has stimulated enormous change in the availability of health care coverage for children and in the way government-sponsored health care is delivered. The energy invested by States and Territories, communities, and the Federal Government has resulted in significant expansions in coverage, as well as new systems for enrolling children in health care coverage.

CMS and States exceeded the FY 2003 goal to increase by 5 percent more children enrolled in SCHIP or Medicaid over the FY 2002 level. In fact, CMS and the States increased enrollment by 2,200,000 children or 7.2 percent. The most recent Bureau of Census' Current Population Survey (CPS) data (three-year rolling average for FY 2001-FY 2003) suggested that there were approximately 5.7 million children who lacked health insurance coverage, down from over 7.5 million in 1997 (FY 1996-FY 1998). In addition, a recent CDC survey found that the percentage of uninsured children dropped from 13.9 percent in 1997 to 10.1 percent in 2003.

CMS continues to collaborate with States to improve health care delivery and quality for Medicaid and SCHIP populations using performance measures. CMS continues to work with States to explore strategies to effectively use performance measures to quantify and stimulate measurable improvement in delivering quality health care.

Beneficiary Education: In order for Medicare beneficiaries to have greater knowledge of Medicare and its benefits, CMS is focusing on a number of educational programs. These programs not only provide information about Medicare but also gauge the beneficiaries' awareness of Medicare benefits.

One performance measure is to improve the effectiveness of disseminating Medicare information to beneficiaries. In order to help beneficiaries make informed health care decisions, CMS employs a variety of strategies through many CMS beneficiary-centered programs to maximize information channels and to ensure that targeted audiences, are reached with the "right information at the right time." In FY 2004, CMS continued to track beneficiary understanding of the Medicare Advantage and Fee-for-Service programs.

To promote beneficiary and public understanding of CMS and its programs, CMS developed a goal to improve and measure beneficiary awareness of (1) the core features of Medicare needed to use the program effectively, and (2) CMS sources from which additional information can be obtained.

FY 2004 CMS Performance Highlights

• 79 percent of the measures were reported.
• Of the 79 percent of goals reported, 88 percent of the measures met or exceeded the target.
• Approximately 40 percent of the measures supported the President's Management Agenda.
• SCHIP has exceeded its enrollment goal every year.
• At 61.1 percent, CMS surpassed its FY 2003 target of 60.5 percent through optimizing the timing of antibiotic administration to reduce the frequency of surgical site infection in Medicare beneficiaries.
• 69.3 percent of diabetic beneficiaries received a biennial eye exam, exceeding the target of 68.9 percent (FY 2003).

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